Rent vs. Buy index: Dallas and Chicago at opposite ends
As the US housing market goes through the coronavirus pandemic, house prices rise, bidding wars break out – and renting becomes more and more attractive in some booming markets. That’s according to an index released Thursday.
Buying in Dallas, Denver, Houston and Kansas City carries significant risk, due to rapidly rising house prices and the potential for future declines, according to the latest Beracha, Hardin & Johnson Buy vs. Rent.
In contrast, it makes sense to buy in Chicago, Cleveland, and New York. And calculating rent or buying is “a virtual draw” in Boston, Detroit, Milwaukee, Minneapolis and St. Louis, says index co-author Ken H. Johnson, Florida real estate economist. Atlantic University.
The index measures whether consumers will create more wealth by buying a home and building equity or by renting and reinvesting the money they would have spent on the property, such as taxes, insurance and maintenance. . The index examines 23 metropolitan areas, taking into account house prices, rents, mortgage rates, returns on investment, property taxes, insurance and home maintenance costs.
The most favorable markets for rental
The figures of the Buy vs. Rent for the first quarter show that house prices are above their long-term average in some markets, including Portland, Pittsburgh and Miami. This means that consumers should rent and reinvest rather than buy and build equity in these markets.
The five markets that favor rental more than buying are places that have seen a strong interest from buyers during the summer:
- Dallas: The reading for this metropolitan area is 0.54 out of a maximum of 1.
- Denver: The index for this region is 0.48.
- Houston: Its index is 0.43.
- Kansas City: The reading for the metropolitan area is 0.33.
- Seattle: Its index is 0.27.
The markets that favor buying the most
- Cleveland: Its index was -0.15 out of a possible -1.22.
- new York: Its index was -0.21.
- Chicago: Its index of -0.23 was the lowest reading.
Housing markets in Chicago and New York have struggled recently. Chicagoland remains a hub for business that is home to dozens of Fortune 500 headquarters, but Illinois has lost population and is showing weak job growth.
Meanwhile, Manhattan’s sales volumes have been hit hard by COVID-19, while surrounding boroughs and suburbs have seen increased demand, according to Jonathan Miller, Manhattan-based appraiser and director of Miller Samuel Inc.
Johnson recognizes that buying in Chicago or New York is not foolproof. The index’s conclusion that the two main metropolitan areas are undervalued is based on historical pricing models. But that ignores the possibility that New York real estate will definitely lose its appeal due to the coronavirus pandemic, high taxes, or for any other reason.
If New York City falls out of favor as an international destination, Johnson says, âAll bets are off on accommodation in New York. If not, the region’s housing market is expected to weather this difficult period fairly well based on the historical housing performance for the region.
The index was created by economists at Florida Atlantic University and Florida International University. Johnson describes the results for New York City as follows: Out of 100 people who buy homes in the New York or Chicago metro areas in the fourth quarter, 70 would accumulate more wealth by owning and creating equity, while the other 30 would acquire rent and reinvest the money that would otherwise be spent on owning a portfolio of stocks and bonds.