Real estate index examines whether it’s better to buy or rent a home

The Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index -- named for the three professors who developed it -- is designed to signal whether current market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period in a particular market relative to historical market conditions and alternative investment opportunities.

The BH&J Index, which examines the United States and 23 key cities, somewhat mirrors the Standard & Poor's/Case-Shiller Home Price Indices, which track changes in residential real estate both nationally as well as in 20 metropolitan regions.

According to the latest BH&J Index, as of the end of the fourth quarter of 2014, the U.S. as a whole and seven cities (Atlanta, Boston, Chicago, Cincinnati, Cleveland, Detroit and New York City) are in strong buy territory, with scores that have historically favored wealth accumulation through home ownership.

Eight cities (Kansas City, Los Angeles, Milwaukee, Minneapolis, Philadelphia, San Diego, Seattle and St. Louis) are marginally in buy territory. Five cities (Honolulu, Miami, Pittsburgh, Portland and San Francisco) are at or near the indifference point between ownership and renting. Here the spread between monthly rent payments and ownership payments appears to be at a point that neither ownership nor renting is statistically favored.

Three cities (Dallas, Denver and Houston) are clearly in rent territory, with property pricing clearly out-pacing rents.

"While the nation as a whole and several markets are in a strong buy territory, the BH&J Index suggests that some cities are already renter-friendly," said Ken Johnson, Ph.D., one of the index's authors and an associate dean of graduate programs and professor in FAU's College of Business. "This is not surprising given the recent rise in housing purchase prices, climbing mortgage rates, relatively slower growth in market rents for comparable properties and the expected return on alternative investments."

The index conducts a "horse race" comparison between an individual that is buying a home and an individual that rents a similar quality home and reinvests all monies otherwise invested in homeownership. Johnson's collaborators on this ongoing independent research are Eli Beracha, Ph.D., assistant professor in the T&S Hollo School of Real Estate at FIU, and William G. Hardin III, Ph.D., director of the T&S Hollo School of Real Estate at FIU's College of Business.

The index's results are standardized between 1 and -1, with negative scores favoring ownership and positive scores favoring renting. The BH&J Index provides information on both the direction and health of varying housing markets, as well as collateral information for real estate professional, developers, lenders and housing policy makers.