(CNBC) - Rising home prices and potentially increasing
mortgage rates could hamper investments.
Renting may be a better option than buying, according to
the report.
If you're planning on house hunting this weekend, you
might want to do a little math first.
Owning a home used to be a great way to build wealth, but that equation is turning. It may, in fact, be more lucrative to invest your money elsewhere.
Owning a home used to be a great way to build wealth, but that equation is turning. It may, in fact, be more lucrative to invest your money elsewhere.
As home prices rise quickly and mortgage rates threaten
to increase, the rent versus buy equation is tipping toward rent, according to
an index from Florida Atlantic University. It factors in home prices, rents,
mortgage rates and alternative investments that create wealth.
Essentially, it
calculates the wealth accumulated when owning a home compared with the wealth
accumulated when renting the same property and investing the down payment
somewhere else.
"The major drivers for this quarter's scores appear
to be slowing rents relative to the costs of ownership and climbing mortgage
rates," said Ken Johnson, a real estate economist and one of the index's
creators at FAU's College of Business.
"Thus, on the margin, more potential owners should favor renting and reinvesting 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 around the country."
"Thus, on the margin, more potential owners should favor renting and reinvesting 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 around the country."
Of the 23 cities the index measures, 11, including New York City and Boston, are still in 'buy' territory — some
very definitively, like Chicago, Cincinnati and Cleveland. Nine, including Minneapolis, Atlanta, Miami, Philadelphia and Los Angeles, hover right around zero, meaning
it is a toss-up between buy and rent. Three cities, Dallas, Denver and Houston, are in historically high
territory for renting being the better option for building wealth.
Despite different levels currently, all of the
cities are steadily moving toward rent in the FAU index, because home prices
have risen so steeply in the past few years and continue to gain. Mortgage
rates bumped higher after the presidential election in November, and although
they have fallen since, they are expected to rise through the end of 2017.
This may be why another index, measuring homebuyer
sentiment, is dropping. The monthly Fannie Mae survey
found those who said now is a good time to buy a home fell to its lowest level
ever. In addition, fewer respondents said they were confident about holding on
to their jobs.
"High home prices have led many consumers to give us
the first clear indication we've seen in the National Housing Survey's
seven-year history that they think it's now a seller's market," said Doug
Duncan, senior vice president and chief economist at Fannie Mae.
"However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective homebuyers are likely to face continued home price increases as long as housing supply remains tight."
"However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective homebuyers are likely to face continued home price increases as long as housing supply remains tight."
Clearly affordability is weighing on the
housing market, especially as more and more younger buyers enter it
for the first time.
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