Rising home prices and the possibility of an increase in mortgage rates could put a damper on home ownership. According to an article by Diana Olick for CNBN, Don’t Put Your Money in a House, Says a New Report, renting just might be a better option.
Most people believed conventional wisdom that owning a home was the best way to build wealth, but that belief is changing. It might prove to be more lucrative to invest one’s the money elsewhere.
With home prices rising quickly along with proposed increases in mortgage rates, the rent versus buy equation appears to be trending toward rent, according to an index from Florida Atlantic University. The index takes into consideration home prices, rents, mortgage rates and alternative investments that create wealth. Basically, it calculates the wealth accumulated when owning a home and compares it to the wealth accumulated when renting the identical property and investing the down payment somewhere else.
Ken Johnson, one of the creators of this index at FAU’s College of Business, states, “on margin, more potential owners should favor renting and investing 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 across the country.”
A total of 23 cities were measured by the index. Eleven of the cities (including New York and Boston) remained in the “buy” category, especially Chicago, Cincinnati and Cleveland. Nine were in the toss-up category, meaning rent or buy was equal. Those cities included Minneapolis, Atlanta, Miami, Philadelphia and Los Angeles. However, Dallas, Denver and Houston were considered to be much better for renting than buying when it came to building wealth.
All of the cities, despite their current levels, are moving steadily toward rent in the FAU index, due to the fact that home prices have risen so steeply in the past few years. After the recent presidential election, mortgage rates moved higher, and they are expected to continue rising through 2017.
Another index, which measures homebuyer sentiment, is the monthly Fannie Mae survey. It found that those believing now is a good time to buy, is at its lowest level ever. Moreover, fewer respondents felt confident about keeping their jobs. Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, said that many consumers have given a clear indication for the ”first time in the National Housing Survey’s seven-year history, that they think it is a seller’s market.”
There is also a lack of housing inventory as potential sellers are unwilling or unable to put their homes on the market due to concerns of finding an affordable replacement. Duncan further states, “prospective homebuyers are likely to face continued home price increases as long as housing supply remains tight.”
Affordability is obviously the major concern weighing on the housing market, especially as more millennials are entering the market for the first time.