Excellent reporting from our friends at the National Association of Realtors…
Researchers from several universities have just completed a paper that looks at what they call the hurdle rate.
This is the point at which it’s equally smart to rent or buy if your only criterion is to build wealth. Based on today’s hurdle rate, it’s a better time to buy than to rent, because you can build more wealth owning than renting.
The study looks at what they call an indifferent renter. This is someone who is just as happy renting as buying depending on which choice is better at building wealth over a holding period, in this case eight years. The study assumes the renter puts the savings from renting into an investment to earn a return.
WARNING: Short Sales…love em or hate em…they are here to stay! Go beyond the basic ‘expert’ short sale designation. Watch the FREE 2012 Agent Short Sale Secrets video and download the FREE Short Sale training guide.NOTICE: Free book guaranteed for the first 100 agents only
The hurdle rate is the point of equilibrium: it’s a wash in terms of wealth building whether you rent or buy. If the rate of return you can get on owning is below the hurdle rate, then it makes sense to buy, because appreciation is underperforming and is likely to go up in the years ahead; if it’s above the hurdle rate, it probably makes sense to rent, at least in the short term, because appreciation is over-performing and likely to head down.
“It’s not a perfect reason to buy, it’s just a test,” says Ken. H. Johnson of Florida International University in Miami, the lead author of the study, called “The Rent vs. Buy Decision,” released about two weeks ago. “But it’s a good sign that the market’s turning.”
The paper is part of a series Johnson and some other researchers have been doing on the rent vs. buy decision. This paper just looks at the narrow topic of the hurdle rate; other papers look more broadly at whether it makes sense to rent or buy based on financial considerations. In one earlier paper, renting can make more sense in some instances, at least in the short run, if renters invest all of their savings over a period of time in an instrument that generates a yield comparable to what they would earn in appreciation on a house in their market. But since few renters could realistically invest all of their savings from renting, it’s more appropriate to assume renters don’t invest all of their savings. And in these cases, owning is the overwhelmingly better investment over the holding period.
Recent Comments