Report: Some U.S. housing markets are moving into rent territory.

Housing markets in several U.S. cities are moving into rent territory, according to the latest data from a national buy versus rent index.

Drivers for the nation’s slight shift from ownership toward renting appear to be slowing rents, relative to costs of ownership, and climbing mortgage rates, according to Ken H. Johnson, Ph.D., one of the authors of the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index.

Johnson, associate dean of graduate programs at Florida Atlantic University in Boca Raton, Fla., and editor of the Journal of Housing Research, is a real estate economist and was a real estate broker before going into academia.

Ken Johnson

Housing market shift

What brokers need to know, he said, is that, “on average, most of the U.S. is still in buy territory,” meaning that the average person buying the average house can accumulate more wealth by buying a home and building equity. However, most markets are moving toward the index’s margin, where more potential owners should favor renting and reinvesting in a portfolio of stocks and bonds as opposed to ownership.

“This shift should slightly lower the demand for ownership and contribute to the slowdown in housing prices around the country,” Johnson said, according to a June 7, 2017 FAU press release.

To create the index, which is meant to provide information on the health of U.S. housing markets, Johnson and colleagues looked at 23 cities: Atlanta, Boston, Chicago, Cincinnati, Cleveland, Dallas, Denver, Detroit, Honolulu, Houston, Kansas City (Kansas), Los Angeles, Miami, Milwaukee, Minneapolis, New York City, Philadelphia, Pittsburgh, Portland, San Diego, San Francisco, Seattle and St. Louis. They calculated the financial benefits of buying an average home versus renting that same “average” property in each of the 23 cities and in the country, as a whole.

“We simply see which (buying or renting) way gathers more wealth after eight, 10 and 12 years,” Johnson said.

To create the index, Johnson and colleagues looked at 23 cities and calculated the financial benefits of buying an average home versus renting that same “average” property in each of those cities and in the country, as a whole.

Where markets are shifting

Right now, 11 of the 23 cities remain marginally in buy territory, according to Johnson. Those are: Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, Minneapolis, Milwaukee, New York City, Philadelphia, San Diego and St. Louis.

Nine cities hover around an index score of zero, suggesting a tossup between buying and renting in terms of wealth accumulation. Included in those: Atlanta, Honolulu, Kansas City (Kansas), Los Angeles, Miami, Pittsburgh, Portland, Seattle and San Francisco.

There are a few outliers. Midwestern metro markets, including Chicago, Cincinnati and Cleveland, stand firmly in favor of home ownership.

On the other hand, Dallas, Denver and Houston favor renting. Those areas are the most concerning, as they’re approaching the possibility of a “pricing event,” according to Johnson.

“In those three cities, the buy vs. rent index is at record levels and prices are still going up significantly in Denver and Dallas. However, in Houston, this past quarter, home prices actually went down,” he said.

What a housing market shift means

A pricing event in the marketplace might only mean a slowdown in how long it takes to sell homes.

“It doesn’t necessarily mean that home prices are going to turn over and go down, like [they] did in ’06 and ’07,” Johnson said. “But you can expect property price increases to pretty much slow down in major metropolitan areas around the country. Midwestern cities, such as Chicago, Cleveland and Cincinnati, all have plenty of room for price growth.”

A pricing event in the marketplace might only mean a slowdown in how long it takes to sell homes.

For those worrying about a repeat of the housing market crash of 2006, there are no strong indications for that to happen again, according to Johnson.

“The percentage of subprime borrowers is lower today than it has been in 20 years. We have a lot of people today with very good credit, income is up, and loan underwriting standards remain high,” he said.

Potential buyers shouldn’t be too swayed by the index’s findings in most cities. They should, however, bargain aggressively and not be afraid to walk away from a deal. In the cities of Dallas, Houston and Denver (all of which are at record levels in the index score), the trend should be towards renting, as the cost of ownership is vastly out pacing the cost of renting, according to Johnson.

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