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A possible 'Plan B' for people looking to buy a home

Real estate economist offers alternatives that can help hopeful homeowners as they wait out pricey market

JACKSONVILLE, Fla. — The market is always changing. Just a week ago we heard from one real estate economist who said the pace of rising home prices has calmed at least somewhat. Still, prices aren’t coming down and they’re not expected to any time in the foreseeable future, which has many hopeful homeowners resigned to renting for the time being. 

But Ken H. Johnson, real estate economist and professor at Florida Atlantic University, assured in a recent interview that those on the sidelines don’t have to stand still. More to the point, Johnson says they shouldn’t. 

“On average, people are better off renting and reinvesting,” Johnson said of current market conditions. Given circumstances, he said renters generally have three choices: 

1)      Renting and not investing money toward a home purchase 

“We do not recommend that. That is a wealth destroying activity,” he cautioned. 

2)      Renting but “monastically” investing the additional money a person would be spending on home ownership 

“What we find is that people on average, in many parts of the country, are better off to rent a similar property and reinvest the monies that they would otherwise have spent on home ownership into a portfolio of stocks and bonds,” Johnson indicated. 

3)      Buying a home, in some cases stretching one’s resources in a heated market 

Johnson, who with other economists produces an ongoing buy-versus-rent index, emphasized that either of the latter two strategies is desirable, offering a plain explanation why the second is currently best for many. 

“People don’t consider that option, and one of the reasons why renting and reinvesting is winning: Yes, the housing market is doing well, but the equity market is killing the housing market.” 

Johnson, who is associate dean of the graduate program in FAU’s finance department, acknowledged the margin of favorability between choices 2 and 3 is fairly narrow right now, but applicable in most parts of the United States including Florida. 

To determine how much money one ‘should’ invest, Johnson said a person should estimate the property taxes, insurance, maintenance (and HOA fees if applicable), and other routine costs of owning a target home. 

“When you put it all together,” he said, “if you’ll save about five or ten percent more of what you would be paying in rent for the year, throw that in, you should be coming really close to that figure that, ‘Okay, this is what I would have otherwise put in housing’.” 

But he assured that the practice is more important than precise numbers. It’s also important to consider an investment that fits an individual’s risk tolerance and timeframe – for example a mutual fund consisting of strictly small-cap growth stocks is apt to be much more volatile than an investment grade bond fund, but that volatility includes the greater potential for growth. Another way of putting it is, this is not investment advice and there’s no one-size-fits-all strategy. 

Johnson said prices in Florida overall are at a premium of 21 to 22 percent more than historical pricing trends indicate should be the case. In Jacksonville they’re even slightly higher at a 23-percent premium. 

But for any forecast of the market in northeast Florida receding, there just isn’t any – only the expectation that prices can’t sustain the growth pace seen in much of the last year. More specifically, there’s no specter of a major correction like what happened nationwide in 2008 when Johnson says prices exceeded historical pricing trends by about 60 percent. 

“Are we in uncharted territory? No, we’re not near it.”

"A number of real estate economists – I myself among them – definitely think the ingredients just aren’t there for a major crash."

He cited three primary factors supporting continued growth, even if it’s tempered a bit: severe inventory shortage, near-record low interest rates, and the popularity of Florida. 

“Jacksonville in particular is expecting, I believe, roughly a 15 percent increase in population in the next ten years,” Johnson said. “And quite honestly I think that’s a conservative estimate.” 

The only one of those three factors he thinks is likely to change in the foreseeable future is interest rates. 

“That will slow down the demand and we quite honestly need to slow down the demand because some people out there think housing prices grow to the sky. They don’t.” 

But he cautioned that interest rates probably won’t change anywhere near dramatically enough to sway the housing market significantly. 

That said, Johnson pointed out that if enough people turn their attention – and investment dollars – to securities instead, the housing market will take notice. 

“If a significant number of people start to rent and reinvest, this gets us in a position where there’s not as much demand, you start to see prices slow down a little. That’s a good thing.” 

So, what does Johnson think will swing the pendulum back in favor of buying a home instead of investing elsewhere? (Remember, he said it’s already a thin difference presently.) 

“When you start to hear that equity market’s slowing down or contracting, that’s when that ownership is probably … going to be better to kick in and buy.” 

And time might be of the essence. 

“When is that time coming to Florida in general and Jacksonville in particular? I think we’re close.” 

 Click Here to see more about the buy-versus-rent report authored by Johnson and his colleagues.