Prices on new and existing homes are soaring across Dallas-Fort Worth, and so is the cost of rent, making it a tough choice for folks on the fence between signing a mortgage note or a lease.
But the decision is clear-cut in Dallas-Fort Worth and seven other major metropolitan areas if your goal is to build long-term wealth, according to an analysis by professors at Florida Atlantic University and Florida International University.
In DFW, Denver, Houston, Kansas City and Seattle, people looking to amass wealth are better off renting an apartment or single-family home and reinvesting the money they would have spent on ownership, the researchers say. That’s because the total monthly cost of homeownership in those areas is rising faster than monthly rents, the researchers said.
“In these five metros, home prices have shot up so fast, and the potential for near-term price declines is just too great,” said Ken H. Johnson, a real estate economist and associate dean in FAU’s College of Business. “There is strong evidence that home prices in these markets are significantly higher than their respective long-term pricing trends.”
Renting and reinvesting also is the better option in Miami, Pittsburgh and Portland, Oregon, but the potential for price declines isn’t as severe in those three markets, Johnson and other researchers concluded in the analysis released this week.
Homes in Dallas-Fort Worth are overpriced by more than 36%, making the metro area one of the most overvalued housing markets in the country based on long-term pricing trends, according to another analysis by the professors at the two Florida universities. That’s up from the 33% that DFW homes were overpriced by just three months ago, according to the researchers.
Johnson and FIU’s Eli Berach and and William Hardin are the authors of the Breach, Hardin & Johnson Buy vs. Rent Index. The quarterly analysis examines the entire U.S. housing market but focuses on 23 metro areas, factoring in home prices, rents, mortgage rates, investment returns, home insurance and other costs.
While the third-quarter statistics indicate that renting and reinvesting is the clear better option in the eight above-mentioned markets, consumers in the remaining 15 metro areas shouldn’t agonize over the buy-rent decision, the professors said.
In Atlanta, Boston, Chicago, Cincinnati, Cleveland, Detroit, Honolulu, Los Angeles, Milwaukee, Minneapolis, New York, Philadelphia, San Diego, San Francisco and St. Louis, consumers are just as likely to create more wealth by renting and reinvesting as owning and building equity, said Beracha, director of FIU’s Hollo School of Real Estate.
“People living in any of these areas can hardly go wrong,” Beracha said. “If they find a good home for sale at a fair price and plan on being there more than a few years, then buying certainly makes sense. If they find a better deal in the rental market, they can take that and still be confident in their ability to build wealth over the long term.”
Despite strong demand leading to rising rents, renting typically still costs less per month than owning, after factoring in home maintenance, homeowner association dues and other costs, the professors said in the report. Renters who don’t invest that monthly savings in stocks and bonds might be better off buying because homeownership is a forced savings plan, the researchers said.
Both rents and home prices are rising at or near unprecedented levels, creating an affordability crisis across the country, Johnson said.
Homeownership traditionally was considered the far better option than renting and reinvesting for building wealth, but the housing crash from 2006 to 2011 changed that perception for many Americans, according to Beracha, Hardin and Johnson.
Looking at the relatively near term — the past year — yields different conclusions about whether home prices or rents are climbing faster in DFW, depending on the source and the methodology of the analysis and the specific area studied.
DFW apartment rents rose by more than 16% in November from a year earlier — a record increase, according to the most recent report by Richardson-based RealPage. Another analysis, the November Market Line report from ApartmentData.com, pegs the annualized rent growth rate in the DFW apartment market at 19.6% overall, and an incredible 32.9% in the North Central Expressway/Upper Greenville Avenue apartment submarket of Dallas.
For renters with their heart set on a house, rather than an apartment, single-family rental prices in Dallas-Fort Worth rose 14.1% in the past year — the sixth highest increase in the nation, according to an analysis by CoreLogic. The median rent for single-family homes in DFW is $1,909.
For those who would rather buy, Dallas-area home prices were up by 25% year-over-year in the latest Case-Shiller Home Price Index — the largest gain for the market in the history of the closely watched index. The latest CoreLogic Home Price Index, meanwhile, found DFW-area home prices to be 19.2% higher than they were a year ago.
The median sales price for a single-family home in North Texas is close to an all-time high of $350,000. The average new home price in DFW is roughly $437,000, according to the Dallas-based HomesUSA.com’s New Home Sales Index.
Publication: Dallas Business Journal