Can the BH&J Buy vs. Rent Index Anticipate Housing Price Movements?

Abstract

This paper investigates whether and to what extent the Beracha, Hardin, and Johnson Buy vs. Rent Index (BH&J Index) is able to anticipate future housing price movements. The BH&J Index is based on a model introduced by Beracha and Johnson (2012) in which a low index value is associated with a buy recommendation and a high index value is associated with a rent recommendation. The results of our analysis reveal a negative relation between the BH&J Index value and future housing price changes at the metropolitan level, which is consistent with the buy or rent recommendation of the index. The negative relation between the BH&J Index value and future housing price changes is statistically significant, economically meaningful, and is particularly relevant for medium-term holding periods.

Keywords:

• BH&J Index
• rent vs. buy
• real estate
• housing price predictability

Notes

1 William G. Hardin, III has contributed to the BH&J Index since 2014.

2 In this paper, we often refer to a preference between buy and rent for expediency and to limit wordiness. This always refers to the alternative between buying and building equity and renting and reinvesting in a well-diversified portfolio of stock and bonds. The alternative of renting and not reinvesting is an inferior alternative and not considered.

3 (2015). Understanding recent trends in house prices and home ownership. National Bureau of Economic Research (NBER) The State of Nation’s Housing [Conference]. Joint Center of Housing Studies of Harvard University.

4 The index values are available at http://business.fau.edu/departments/finance/real-estate-initiative/bhj-buy-vs-rent-index/index.aspx#.WPSrm4jyuM9.

5 According to data provided by Davis et al. (2008) home prices in the United States are nearly twice as volatile as rent prices during the 1975 to 2007 time period.

6 For brevity, these results are excluded from the paper.