Home purchases became more attractive as crash likelihood faded

Buying a home became slightly more attractive compared to renting in the fourth quarter, as the likelihood of another huge value drop decreased, an index from two Florida universities found.

But right now, it is still slightly more desirable for consumers to rent a home, the latest Beracha, Hardin & Johnson Buy vs. Rent Index report said.

The index is at 0.037; a positive value means it is more attractive to rent, while a negative value shows it is more attractive to purchase.

In the third quarter the index was at 0.054, while in the fourth quarter of 2018, it was at 0.087.

The last time it was more attractive to buy was in the first quarter of 2018.

In the 23 metro areas tracked by the BH&J Index, 21 had a decrease in the score, meaning it became more attractive on a relative basis to buy than rent for the period.

"Ownership and renting are substitutes for one another. Thus, the cost of renting impacts the demand for ownership," Eli Beracha, a real estate professor at Florida International University, said in a press release. "The major cause of the movement in the direction of ownership is the significant increase in the cost of renting relative to the cost of ownership in the 21 metros experiencing a decrease in BH&J scores."

Strong economic conditions, primarily low mortgage rates and low levels of unemployment, combined with lower BH&J scores this time around are leading a slow return of property prices to their long-term average.

"The major concern right now is the potential for an economic downturn, which would increase the risk of a crash significantly," said Ken Johnson, a real estate economist at Florida Atlantic University's College of Business.

Looking at the BH&J scores from the period between 2006 and 2008 in comparison to the current scores suggests that things should be quite different this time around as the country reaches the peak of the current housing cycle.

"Home prices fell dramatically in 2008 through 2010 around the country and so did BH&J scores," Johnson said. "The driver of this fall in prices was the fact that property prices had simply risen too high above the equilibrium balance between owning and renting property."

Because the index comes out two months following the end of the prior quarter, it does not take into account mortgage rate movements since the start of the year, including the recent drop as investors reacted to the coronavirus and other economic news.