This index shows where you should buy a home, and where you’re better off renting

1

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Which bank should I choose?

Get personalized bank recommendations in 3 easy steps.

As the U.S. housing market powers through the coronavirus pandemic, home prices are rising, bidding wars are erupting — and renting is growing more attractive in some booming markets. That’s according to an index released Thursday.

Buying in Dallas, Denver, Houston and Kansas City carries significant risk, because of fast-rising home prices and the potential for future declines, according to the latest Beracha, Hardin & Johnson Buy vs. Rent Index.

On the other hand, it makes sense to buy in Chicago, Cleveland and New York City. And the rent-or-buy calculus is “a virtual toss-up” in Boston, Honolulu, Milwaukee, Minneapolis and St. Louis, says index co-author Ken H. Johnson, a real estate economist at Florida Atlantic University.

The index measures whether consumers will create greater wealth by buying a home and building equity or renting and reinvesting the money they would have spent on ownership, such as taxes, insurance and maintenance. The index looks at 23 metro areas, factoring in home prices, rents, mortgage rates, investment returns, property taxes, insurance and home maintenance costs.

The markets that most favor renting

The Buy vs. Rent Index’s figures for the second quarter show that home prices are above their long-term average in 13 markets, including Atlanta, Los Angeles and Philadelphia. That means consumers should rent and reinvest rather than buy and build equity in those markets.

The five markets that most favor renting rather than buying are places that experienced strong buyer interest during the spring:

  • Dallas: This metro area’s reading is 0.73 out of a maximum of 1.
  • Denver: This region’s index is 0.65.
  • Houston: Its index is 0.62.
  • Kansas City: The metro area’s reading is 0.39.
  • Seattle: Its index is 0.35.

The markets that most favor buying

  • Cleveland: Its index was -0.14 of a possible -1.22.
  • Chicago: Its index was -0.18.
  • New York City: Its index of -0.21 was the lowest reading.

Manhattan sales volumes have been hit hard by COVID-19, while the surrounding boroughs and suburbs have seen an uptick in demand, according to Jonathan Miller, a Manhattan-based appraiser and head of Miller Samuel Inc.

Johnson acknowledges that New York City’s housing market isn’t foolproof. The index’s conclusion that New York is underpriced is based on historic pricing patterns. But it doesn’t factor in the possibility that New York real estate could permanently lose its appeal because of the coronavirus pandemic, high taxes or some other reason.

If New York City falls from favor as an international destination, Johnson says, “all bets are off on New York housing. If not, the housing market in the area should ride out this rough patch quite well based on the historical performance of housing for the area.”

New York had the worst reading on Bankrate’s Housing Hardship Index for July. The state unemployment rate was 15.9 percent in July, up from 15.7 percent in June and 14.5 percent in May. New York’s delinquency rate fell to 8.38 percent, down from 9.65 percent in June.

Johnson acknowledges that the index, created by economists at Florida Atlantic University and Florida International University, is “pretty wonky.” He describes the findings for New York City this way: Of 100 people who bought homes in the New York metro area in the second quarter, 70 would amass more wealth from owning and building equity, while the other 30 would acquire more wealth by renting and reinvesting the cash that would otherwise be spent on ownership in a portfolio of stocks and bonds.

Learn more: