The College of Business at Florida Atlantic University has long offered a calculation that seeks to answer a question that’s key to both renters and the real estate investors who are their present and future landlords: Does it make more financial sense to rent or to buy?
A Look at the Numbers
The BH&J Buy vs. Rent Index plots the answer based on current market conditions in 23 metro housing markets—as well as in the nationwide market as a whole. Because it requires projecting fickle future values, their methodology has to be pretty complicated—which is probably why more institutions don’t attempt to come up with a similar answer. The Index issues a single number between -1 (favoring ‘rent’) and +1 (‘buy’). The index number approximates a “horse race” comparison matching an individual’s financial position after having either bought or rented (then reinvested all the monies that would have gone to homeownership).
After several years of favoring renting as “the better way to build wealth,” the latest readings indicate that the cost of owning is declining even as rents increase. According to Dr. Ken Johnson, the Index’s co-author, the latest run “clearly illustrates the benefit of near-record low mortgage rates and how they far outweigh the risk from inflating housing prices.” In other words, the takeaway matches most observers’ common-sense conclusion that today’s very low monthly payments “are going a long way to promote wealth creation.”
The Bottom Line
That conclusion may have been undermined by the recent uptick in home loan interest rates—but last week, industry leader Mortgage News Daily found signs that the trend might be weakening. Its midweek commentary, “Mortgage Rate Outlook May Be Improving,” found evidence for “a supportive shift in the rate environment”—specifically, the 10-year Treasury yields that drive rates. While rates remained more or less steady, the improvement showed in a tilt toward lower upfront costs. And the truth remained that underlying rates were, after all, “still very low historically.”