Buyer or Renter Nation 11-15-2011

8/3/2019 Buyer or Renter Nation 11-15-2011

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Ken H. Johnson, Editor

Journal of Housing Research

Florida International University

College of Business Administration

Department of Finance and Real Estate

11200 SW 8th Street

Miami, FL 33199

Buyer or Renter Nation?

12-8-2011


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RESEARCH TEAM

Eli Beracha,East Carolina University

Hilla Skiba,University of Wyoming

Michael J Seiler,Old Dominion University

Mark Hirschey,University of Kansas

Ken H. Johnson,Florida International University*

*Contact Researcher:Ken H. Johnson, Editor

Journal of Housing Research


Department of Finance and Real Estate

11200 SW 8th Street

Miami, FL [email protected]

Produced by:

Andrew YanezTingjun Chen


Department of Finance and Real EstateResearch Assistants

Additional Information:

[email protected]

http://realestate.fiu.edu/index.html

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mailto:[email protected]:[email protected]://realestate.fiu.edu/index.htmlhttp://realestate.fiu.edu/index.htmlhttp://realestate.fiu.edu/index.htmlmailto:[email protected]:[email protected]


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ISTHE U.S. GOINGTOBECOMEANATIONOFRENTERSRATHER

THANBUYERS?

Real Estate Industry Overview

Prolonged housing slump with no end in sight.

U.S. housing market is down 31% since peak bubble prices.

Forecasted waves of foreclosures are predicted to hit U.S. housing markets.

Great rental opportunities.

Gloomy world financial outlook.

Tight credit markets.

For these and other reasons, many are predicting:

The U.S. will soon become a nation of renters.

The death of the American Dream of home ownership.

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THEFIRSTHORSERACE BETWEENBUYINGANDRENTING

BERACHAAND JOHNSON (2012)*

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Renting Won 91%

Buying Won 9%

United States

Results

Twenty-three major metropolitan areas, four U.S. geographical regions, and the U.S. as a whole were

analyzed over a 31 year period.

The benefits from ownership such as appreciation and interest deductibility and costs from ownership

such as interest, taxes, insurance, and maintenance were summed over eight year cycles and compared to

the rental of a comparable property but with reinvestment of any savings in rent (Mortgage Payment -

Rent) and down payment.

The winner was determined by who (renter or buyer) had the greatest portfolio balance after each 8-year

cycle.

Renters won the vast majority of the races.

*Beracha, Eli and Ken H. Johnson. Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise? Real Estate

Economics. Forthcoming.


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THE SECONDHORSERACE BETWEENBUYINGANDRENTING

BERACHAAND JOHNSON (2012)*

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Renting Won 16%Buying Won 84%

The same race is rerun. However, this time the reinvestment requirement is dropped. In other words, renters

could spend savings on consumption rather than being forced to reinvest which is a more realistic

assumption for most Americans.

Implications:

We have been telling people the right thing to do but for the wrong reason. It is not property appreciation that creates wealth. It

is the fact that ownership is a self-imposed savings plan.

There is an optimal level of home ownership. Not everyone should own a home. Public policy should reflect this position.

Other Points in Horse Race II:

Expected long term stays in property should buy.

Poor savers should buy.

Those that prefer added amenities should buy.

*Beracha, Eli and Ken H. Johnson. Factor Sensitivities in the Making of a Buy vs. Rent Decision: Do Homeowners Make the Right Decision for the

Wrong Reason? Working Paper.

United States

Results


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HURDLERATESANDTHEBUYVERSUSRENTDECISION

BERACHA, SEILER, AND JOHNSON (2012)*

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Hurdles Rates Below Historical

Property Appreciation100%

Hurdle Rates Above Historical

Property Appreciation0%

The values of the sellers portfolio (net proceeds from sale) and the renters portfolio present the opportunity

to calculate rates of appreciation (hurdle rate) that will make an individual indifferent between renting and

owning. If historical rates of appreciation for an area are greater than that areas current hurdle rate, then

strong buying signs exist in that particular housing market.

Markets are presently presenting excellent buying opportunities based on historical property appreciation rates.

*Beracha, Eli, Michael J. Seiler, and Ken H Johnson. The Rent versus Buy Decision: Investigating the Needed Property Appreciation Rates to be

Indifferent between Renting and Buying Property. Working Paper.

Results

Percentage of Areas


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OVERCORRECTIONIN U.S. HOUSING MARKETS

BERACHA, SKIBA, HIRSCHEY, AND JOHNSON (2012)*

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Percentage of States

Below Average Levels ofAffordability 94% 100%

Percentage of States

Above Average Levels of

Affordability

6% 0%

Results

Housing affordability based on property price-to-income and mortgage payment-to-income can shed further

light on the current status of U.S. housing markets. A comparison is performed on a state by state basis.

Smaller ratios indicate greater affordability. See slides 10 through 13 for more detail.

23 states are at record levels of affordability based on Price-to-Income

All 50 states are at records levels of affordability based on Payment-to-Income.

Markets are presently at unprecedented levels of affordability especially when considered in terms of monthly

mortgage payments.

*Beracha, Eli, Hilla Skiba, Mark Hirschey, and Ken H. Johnson. Has There Been an Overcorrection in U.S. Housing Markets? Working Paper.

Payment-to-IncomePrice-to-Income


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OTHEREVIDENCETHATSUPPORTSHOMEOWNERSHIP?

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Collateral Benefits to Ownership:

Homeownership enhances civic pride and improves voter turnout (Rohe, McCarthy, and Van

Zandt, 2002; and Dietz and Haurin, 2003).

Homeownership contributes to better societal outcomes less crime, a better familial

environment, etc. (Haurin, Parcel, and Haurin, 2002).


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CONCLUSIONS

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Summary

In a strict horserace, renting wins the vast majority of the races.

In a more realistic horse race, where individuals can spend on consumption, buying wins the

vast majority of the time.

Ownership is a self-imposed savings vehicle versus a great equity creator through appreciation.

There is an optimal level of homeownership. Everyone should not own a home. Public policy

needs to reflect this position.

Expected long term stays, poor savers, and those that prefer extra amenities should probably buy.

Expected short term stays, excellent savers, and those that prefer the barebones house should

probably rent.

U.S. housing markets, on average, are presently presenting excellent buying opportunities based

on historical property appreciation rates.

U.S. housing markets are currently at record levels of affordability.

There are too many benefits (financial and non-financial) to ownership versus renting for thenation to move away from ownership and into renting as the largely preferred housing status.

The evidence suggests that equilibrium forces (hurdles rates, price-to-income ratios, and payment-

to-income ratios) are presently in place and when combined with the savings vehicle of ownership

will lead to the continuation of the AmericanDream. Yet, not all should own but most should.


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APPENDIX

For more information on housing and brokerage research see:http://kenhjohnson.com/

http://realestate.fiu.edu/

http://www.aresnet.org/

http://aux.zicklin.baruch.cuny.edu/jrer/

http://www.areuea.org/

http://www.springer.com/economics/regional+science/journal/11146#realtime

Creating an aware and thinking market place

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http://kenhjohnson.com/http://realestate.fiu.edu/http://www.aresnet.org/http://aux.zicklin.baruch.cuny.edu/jrer/http://www.areuea.org/http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.springer.com/economics/regional+science/journal/11146http://www.areuea.org/http://www.areuea.org/http://www.areuea.org/http://www.areuea.org/http://www.areuea.org/http://www.areuea.org/http://www.areuea.org/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://aux.zicklin.baruch.cuny.edu/jrer/http://www.aresnet.org/http://www.aresnet.org/http://www.aresnet.org/http://www.aresnet.org/http://www.aresnet.org/http://www.aresnet.org/http://www.aresnet.org/http://realestate.fiu.edu/http://realestate.fiu.edu/http://realestate.fiu.edu/http://realestate.fiu.edu/http://realestate.fiu.edu/http://realestate.fiu.edu/http://realestate.fiu.edu/http://kenhjohnson.com/http://kenhjohnson.com/http://kenhjohnson.com/http://kenhjohnson.com/http://kenhjohnson.com/


11/15

STATE-BY-STATE HPI TO INCOME PER CAPITA RATIOS, Q1:1982 TO Q2:2011

State Avg. Min. Max. S.D. Q2:2011 Peak Current vs. Average

Alabama 3.89 3.27 5.03 0.41 3.27 Q1:83 -15.86%

Alaska 5.17 3.72 6.47 0.58 5.22 Q4:84 0.94%

Arizona 5.32 4.10 7.59 0.82 4.10 Q4:06 -22.85%

Arkansas 3.64 2.92 5.03 0.54 2.92 Q2:83 -19.90%

California 7.82 6.02 12.55 1.74 7.25 Q4:05 -7.36%

Colorado 5.07 4.10 6.05 0.51 4.87 Q4:82 -3.98%

Connecticut 5.06 3.95 7.17 0.82 4.27 Q2:88 -15.57%

Delaware 5.04 4.11 6.38 0.60 5.08 Q4:06 0.73%

Dist. of Columbia 4.87 3.69 7.12 0.88 5.45 Q4:05 11.81%

Florida 4.51 3.66 6.54 0.76 3.66 Q4:06 -18.82%Georgia 4.46 3.68 5.60 0.44 3.68 Q2:82 -17.43%

Hawaii 12.21 8.22 17.20 2.24 12.47 Q1:06 2.19%

Idaho 4.79 4.07 6.12 0.49 4.07 Q2:82 -14.93%

Illinois 4.27 3.75 4.99 0.27 3.75 Q4:05 -12.06%

Indiana 3.67 3.10 4.55 0.26 3.10 Q1:82 -15.39%

Iowa 3.03 2.58 3.72 0.20 2.58 Q2:82 -14.80%

Kansas 3.16 2.64 4.12 0.33 2.64 Q2:83 -16.69%

Kentucky 3.82 3.42 4.57 0.24 3.43 Q1:83 -10.45%

Louisiana 3.92 3.26 5.75 0.69 3.32 Q3:82 -15.42%

Maine 4.54 3.73 5.43 0.51 4.24 Q4:05 -6.58%

Maryland 5.22 4.26 7.08 0.71 4.86 Q4:06 -6.86%

Massachusetts 5.80 4.49 7.58 0.90 5.41 Q2:05 -6.72%

Michigan 3.76 2.95 4.53 0.39 2.95 Q3:05 -21.50%

Minnesota 4.12 3.52 5.06 0.44 3.52 Q4:05 -14.61%Mississippi 3.95 3.14 5.60 0.67 3.14 Q2:83 -20.70%

Missouri 3.57 3.08 4.15 0.25 3.08 Q1:82 -13.55%

Montana 4.41 3.51 5.19 0.44 4.38 Q3:07 -0.54%

Nebraska 3.13 2.53 4.16 0.33 2.53 Q3:82 -18.99%

Nevada 5.46 3.64 7.74 0.88 3.64 Q1:06 -33.31%

New Hampshire 5.00 3.83 6.51 0.79 4.50 Q4:05 -10.01%

New Jersey 5.62 4.45 7.43 0.87 5.41 Q4:05 -3.85%

New Mexico 5.14 4.42 6.99 0.53 4.42 Q3:82 -14.08%

New York 5.13 4.06 6.48 0.69 5.03 Q4:05 -1.97%

North Carolina 4.31 3.86 5.18 0.33 3.87 Q2:82 -10.21%

North Dakota 3.32 2.55 4.62 0.45 2.55 Q1:84 -23.17%

Ohio 3.70 3.00 4.26 0.19 3.00 Q1:82 -18.79%

Oklahoma 3.44 2.72 5.50 0.70 2.76 Q3:83 -19.61%

Oregon 5.39 3.89 7.74 1.02 5.58 Q2:07 3.52%

Pennsylvania 3.70 3.15 4.25 0.30 3.49 Q3:88 -5.82%

Rhode Island 5.63 4.29 7.79 0.99 5.09 Q1:06 -9.60%

South Carolina 4.60 4.06 5.92 0.40 4.06 Q4:82 -11.82%

South Dakota 3.37 2.93 4.85 0.35 2.93 Q2:83 -13.10%

Tennessee 3.97 3.47 5.02 0.39 3.47 Q1:82 -12.66%

Texas 3.54 2.86 5.37 0.73 2.90 Q1:83 -18.19%

United States 4.45 3.94 5.17 0.32 3.94 Q4:05 -11.51%

Utah 6.01 4.79 7.26 0.62 5.63 Q3:07 -6.30%

Vermont 4.93 4.06 5.70 0.47 4.78 Q4:05 -3.14%

Virginia 4.76 3.97 5.98 0.51 4.65 Q4:06 -2.36%

Washington 5.60 4.47 7.48 0.77 5.57 Q1:07 -0.50%

West Virginia 3.65 3.00 5.17 0.41 3.00 Q1:83 -17.94%

Wisconsin 3.89 3.54 4.47 0.23 3.54 Q4:05 -9.01%

Wyoming 3.81 3.16 5.67 0.57 3.53 Q4:82 -7.23%

Low 3.03 2.53 3.72 0.19 2.53 -33.31%High 12.21 8.22 17.20 2.24 12.47 11.81%

Median 4.45 3.69 5.63 0.51 3.81 -11.94%

Average 4.63 3.72 6.11 0.60 4.16 -11.09%


12/15

OVER- OR UNDERVALUATIONIN TERMSOF HOUSING PRICETO

INCOME PER CAPITA

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STATE-BY-STATE MORTGAGE PAYMENTTO INCOME PER CAPITA RATIOS, Q1:1982 TO Q2:2011State Avg. Min. Max. S.D. Q2:2011 Level Peak Current vs. Average

Alabama 0.30 0.16 0.70 0.11 0.16 Q1:83 -45.87%

Alaska 0.39 0.26 0.85 0.13 0.26 Q3:84 -34.08%

Arizona 0.40 0.20 0.84 0.13 0.20 Q4:06 -49.21%

Arkansas 0.28 0.14 0.68 0.12 0.14 Q2:83 -49.01%

California 0.57 0.36 0.96 0.13 0.36 Q4:05 -37.26%

Colorado 0.38 0.24 0.83 0.12 0.24 Q4:82 -36.75%

Connecticut 0.39 0.21 0.68 0.13 0.21 Q2:88 -44.96%

Delaware 0.37 0.25 0.65 0.08 0.25 Q4:06 -32.67%

Dist. of Columbia 0.36 0.24 0.67 0.09 0.27 Q4:05 -24.91%

Florida 0.34 0.18 0.76 0.11 0.18 Q4:06 -46.64%Georgia 0.34 0.18 0.79 0.12 0.18 Q2:82 -46.53%

Hawaii 0.89 0.62 1.59 0.18 0.62 Q1:06 -30.70%

Idaho 0.36 0.20 0.84 0.12 0.20 Q2:82 -44.40%

Illinois 0.32 0.19 0.61 0.08 0.19 Q4:05 -41.70%

Indiana 0.28 0.15 0.64 0.10 0.15 Q1:82 -45.15%

Iowa 0.23 0.13 0.52 0.08 0.13 Q2:82 -44.57%

Kansas 0.24 0.13 0.58 0.09 0.13 Q2:83 -46.38%

Kentucky 0.29 0.17 0.64 0.10 0.17 Q1:83 -41.75%

Louisiana 0.31 0.16 0.80 0.14 0.16 Q3:82 -46.37%

Maine 0.34 0.21 0.68 0.09 0.21 Q4:05 -38.33%

Maryland 0.39 0.24 0.77 0.10 0.24 Q4:06 -37.99%

Massachusetts 0.43 0.27 0.67 0.11 0.27 Q2:05 -37.81%

Michigan 0.28 0.15 0.60 0.07 0.15 Q3:05 -47.76%

Minnesota 0.31 0.17 0.69 0.10 0.17 Q4:05 -43.86%Mississippi 0.31 0.16 0.73 0.14 0.16 Q2:83 -49.71%

Missouri 0.27 0.15 0.58 0.09 0.15 Q1:82 -43.72%

Montana 0.33 0.22 0.69 0.09 0.22 Q3:07 -34.14%

Nebraska 0.24 0.13 0.58 0.09 0.13 Q3:82 -47.88%

Nevada 0.41 0.18 0.94 0.14 0.18 Q1:06 -56.36%

New Hampshire 0.38 0.22 0.67 0.12 0.22 Q4:05 -40.72%

New Jersey 0.42 0.27 0.70 0.11 0.27 Q4:05 -35.92%

New Mexico 0.40 0.22 0.92 0.15 0.22 Q3:82 -44.48%

New York 0.38 0.25 0.62 0.09 0.25 Q4:05 -34.54%

North Carolina 0.33 0.19 0.73 0.11 0.19 Q2:82 -41.71%

North Dakota 0.26 0.13 0.65 0.10 0.13 Q1:84 -50.82%

Ohio 0.28 0.15 0.60 0.08 0.15 Q1:82 -46.89%

Oklahoma 0.27 0.14 0.70 0.14 0.14 Q3:83 -49.40%

Oregon 0.39 0.28 0.77 0.08 0.28 Q2:07 -29.69%

Pennsylvania 0.28 0.17 0.51 0.07 0.17 Q3:88 -37.88%

Rhode Island 0.42 0.25 0.63 0.10 0.25 Q1:06 -39.35%

South Carolina 0.35 0.20 0.83 0.13 0.20 Q4:82 -42.88%

South Dakota 0.26 0.15 0.63 0.10 0.15 Q2:83 -43.86%

Tennessee 0.31 0.17 0.71 0.11 0.17 Q1:82 -43.62%

Texas 0.28 0.14 0.74 0.14 0.14 Q1:83 -48.54%

United States 0.34 0.20 0.69 0.10 0.20 Q4:05 -41.87%

Utah 0.45 0.28 0.94 0.13 0.28 Q3:07 -37.94%

Vermont 0.37 0.24 0.71 0.10 0.24 Q4:05 -36.23%

Virginia 0.36 0.23 0.69 0.10 0.23 Q4:06 -35.43%

Washington 0.41 0.28 0.76 0.08 0.28 Q1:07 -32.90%

West Virginia 0.28 0.15 0.83 0.12 0.15 Q1:83 -47.78%

Wisconsin 0.29 0.18 0.55 0.08 0.18 Q4:05 -39.81%

Wyoming 0.29 0.17 0.76 0.13 0.18 Q4:82 -40.51%

Low 0.23 0.13 0.51 0.07 0.13 -56.36%High 0.89 0.62 1.59 0.18 0.62 -24.91%

Median 0.34 0.19 0.69 0.11 0.19 -42.38%

Average 0.35 0.21 0.73 0.11 0.21 -41.72%


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OVER- OR UNDERVALUATIONIN TERMSOF MORTGAGE

PAYMENTTO INCOME PER CAPITA

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COPYRIGHTANDOTHER INFORMATION

Copyright Ken H. Johnson. This material may be freely duplicated and

republished under the following conditions: (a) the authors name must beclearly visible; (b) the authors journal affiliation must be clearly visible; and (c)

the authors university affiliation must be clearly visible. Otherwise, this

material may not be reproduced in any form without the written consent of the

author.

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Buyer or Renter Nation 11-15-2011