Which Makes More Sense in 2022?

Dave:
Hello, everyone. Welcome back to on the market. I am your host, Dave Meyer. And today, we are going to talk about an issue that is on the minds of many and is plastered across the news constantly. Is it better to rent or to buy in this super crazy economic time? To do this, we have an incredible guest, Ken Johnson, who will be joining us and sharing all of his academic research into this topic. And then we will be joined by James Henry and Jamil to add some context for investors about what to make of Ken’s information and how they should be thinking about whether they should be buying, renting, house hacking, maybe just renting and investing in rental properties. We’ll get into all of that. But first, let’s hear from Ken Johnson.
Ken currently serves as the Associate Dean of Graduate Programs at Florida Atlantic Universities College of Business. Additionally, he is the President of the American Real Estate Society. If you haven’t heard of Ken or want to look into him, we’ll definitely link to some information and some of his academic research because he has some incredible data about this topic that you’re going to want to dig into yourself, but let’s hear directly from Ken himself. Ken Johnson, welcome to On The Market.
Ken, can we start by having you fill us in about what exactly you do and what your background is with real estate economics and data analysis?

Ken:
Sure, sure. My very, very beginning background was I was a real estate broker for a dozen years. Had a small business in my old hometown. Eventually, I went back to school and got a PhD in finance, but all my work is in housing economics. So the best way to describe me is I’m a housing economist. I’m also the associate dean here in our graduate programs at AFU and the College of Business, but that’s the administrative side of what I do. All of my research is related to housing markets and price cycles. Where are we now? Buy versus rent? What’s better to do in terms of wealth creation? Where are housing markets in terms of price right now? What’s going on in the rental market?
And we do have three indices. And when I say we, I work with a couple of different professors at different universities. We have a buy versus rent index called the BH&J for Beracha, Hardin & Johnson Buy vs. Rent. We also have a pricing index for the top 100 US markets by size, and a rental index for the top 100 markets by size. They’re not exactly the same because not every one of the markets have the necessary data. So we might have go down to pop center 105. And then the rental markets, we actually got down to roughly population size 300 or so, I think. So we got pretty deep into that one. Getting the data was not as easy there as it was with the other index.

Dave:
I came upon your work because someone shared with me the rent versus buy index, and that peaks my interest because with inflation, and housing prices, and rental prices accelerating so rapidly over the last few years. It’s on the top of minds of not just real estate investors, but everyday Americans, what is better for the average person? Should they be renting or buying? So can we start there, and can you tell us a little bit about, first, just briefly, for those of us who don’t have PhDs, what your methodology is for determining whether it’s better to buy versus rent? And maybe share with us some of the key insights of your research.

Ken:
Sure. What we do is we want to have what we call a horse race between ownership, and building equity, and renting, and creating wealth through investing those monies that you would’ve otherwise put into ownership, that down payment, your monthly taxes, insurance, maintenance, etc. And then we simply take that money and invest it into a portfolio of stocks and bonds, and we have a way of being able to make, whatever city you’re in, that portfolio as risky as your housing market. And then we just go forward and see, on average, in windows of eight, 10 and 12 years, and see which way, on average, wins. And believe it or not, renting and reinvesting on average wins. But the real big takeaway from that is it wins on average, but not buy that much. Both, on average, are really good at creating wealth. One of the difficulties with the rent and reinvest is many people want, and then they’ll simply rent and spend the difference on beer and cookies, consumption. That’s wealth destroying. You don’t want that third option. You should choose one of the first two.

Dave:
So just to make sure I understand correctly, you’re taking the housing, a traditional buying a house, using, let’s assume, 20% down as the down payment?

Ken:
We do.

Dave:
Okay. So you put 20% down and then you factor in all the associated home ownership’s costs. And then, on the renter’s side, you’re saying, this hypothetical person, in any given city, rather than using that money for a down payment, invests it into a different asset class, like the stock market. And then you have a horse race between those two scenarios?

Ken:
That’s exactly correct.

Dave:
Okay. That seems like a very good methodology. And you said that renting wins, has that always been the case, or is that the most recent analysis of this index?

Ken:
Sure. When we look back in some total, renting wins, on average, but there are stretches of time where it’s better to rent and reinvest. And there are other times when it’s better to own the and build equity. So when you look at our index, again, if you just Google BH&J Buy vs. Rent Index, you’ll see each city has a graph where it’s zero to one and zero to minus one. If you’re below zero, you’re better off owning and building equity. If you’re above zero and approaching one, you’re better off renting and reinvesting. So there are times when you see our graphs and when you see that below zero, that’s when it was better to own and build equity. When you see where you are at some point in time, that’s when it was better to rent and reinvest. And then you simply look at the last data point and see where your metro is at that point in time.

Dave:
And I’m looking at these graphs right now. They’re super easy to read. And we’ll share in the show notes, at the end, where you can find this data for anyone listening to this. But it looks like, if I’m understanding this data correctly, that not only is it better to rent, but in every market that you analyzed, it’s better to rent than to buy. Is that correct?

Ken:
Well, when you look at the US as a whole, right now, it is.

Dave:
Is that true of every market you’ve analyzed at this point in 2022? Or are there some markets where it’s still better to buy?

Ken:
No, there are a few that are in buy territory. Most are in rent territory right now. I’m trying to do them off the top of my head. One that was surprising, and I’m so sorry I don’t have it in front of me, and we’re juggling as many as two cities, but Honolulu, Hawaii was one of those that I do believe is in buy territory, but that’s because of a historic average. We’re not saying it’s incredibly inexpensive to live in Hawaii. It’s just between those two, in Honolulu, between those two, owning and building equity is just marginally better.
But when you see those points, Dave, cluster around zero, it’s pretty much a toss up. Even when you see them slightly into rent territory, what’s taken us a decade to figure out is that house just isn’t an investment good. It’s both investment, it’s consumption. In some ways, it’s also necessary good in terms of shelter. So a lot of people, the house is where they’re going to raise their family. They want to be close to certain parts of a city, shopping, entertainment, etc. It’s more stylized to what they want. And so it’s not unusual to see just above zero. And you don’t see really changes in prices. You don’t see markets respond to that.
Now, when you get dramatically away from zero in any one of those two, like if you look back through time, roughly 2007 in markets like LA, Chicago, Atlanta, Miami, and numerous others, you can see our metric got really close to one, if not two, one. And right after that, the markets bottomed. The housing collapsed, it crashed. And basically, what you were seeing at a measurement of one, not to get too wonky, but your three standard deviations away from that tie, is highly unlikely. Roughly speaking, you had about a one in 100 chance of owning, and building equity, and creating more wealth than you did through renting and reinvesting. So you had virtually no chance to win, and markets collapsed, and stopped buying or stopped owning at that time. And we saw the dramatic fall in prices.

Dave:
Thank you for explaining that. I think that, not to get too wonky, but it shows the depth of the statistics and analysis that’s going into this. When you look at the impact of the pandemic on this analysis, it seems that housing prices having risen so quickly, have really tilted the market in favor of renting as you’ve said. Do you see anything in the housing market right now that may change this dynamic? Or do you think the reality that renting for the average homeowner is better than buying right now is going to remain that way for the foreseeable future?

Ken:
Renting one way, you can look at renting as if it were a put option. Buying at this point in time, with relatively high rents, why would someone want to do that? And the answer is, you don’t want to necessarily lock in at a really high price at the peak of a current housing cycle. And all signs are around the nation right now that we’re at the current peak of varying housing cycles around the market. So maybe you’re paying a little bit higher in rent, and that’s not a good thing, but you’re paying a little bit of a premium to avoid locking in a price, where if you will look at pricing cycles, and we do have a couple other indices that I mentioned, but if we look at pricing, sometimes it could take 10 years between this peak and the next peak, which it did last time around in many parts of the country.
Set another way, the price that you bought at 10, 12 years ago is the price that you sell at today. So you have to wait a really long time. So you might want to be paying a premium and reinvesting. And on average, you’d be a little bit better off. I understand why people are out there buying right now. And part of the pricing impact, though, is also that there’s such a severe shortage, both across rental units and units available for home ownership. So everything is high right now, but renting still gives you that option to avoid the peak of a housing cycle.

Dave:
That’s really interesting. So basically, you’re paying a little bit more in rent than you normally would in order to buy time with the assumption or a thought that housing market prices are going to go down. Now, that makes sense to me, but there’s also a presumption in there that the housing market is going to go down. So it sounds like you think, since we are at a peak, you are expecting prices to go down in the US in the, let’s say, next year or so?

Ken:
The strategy also works if markets only go flat. They don’t have to fall. They just have to stop going up so rapidly. The average property appreciation rate has to become slower than the long-term pricing trend, which that’s all it really is going to take for that strategy to have worked for you in terms of wealth creation as a renter. But yes, there are some markets around the country, which I expect that you’ll see tremendous price declines. There are other markets around the country where you’re probably not going to see a crash like we did last time around. And what you’ll get instead will be a prolonged period of housing unaffordability.
We are significantly separated from long-term fundamental prices and rent rates around the country, that we can’t have gotten this far away without there being a reckoning, some price to pay for that. And it’s going to come in two forms, I think, this time around, which will be a decline in prices in some markets, and not necessarily a decline in prices, but a flattening of housing prices, and then a prolonged period of unaffordable housing in a given market.

Dave:
That sounds a little scary, I think, for those of us who are real estate investors who own real estate. If you’re saying in some markets, and I’m not necessarily disagreeing, I just wanted to clarify, that in those markets that you say might have tremendous drops in prices, what scale are we talking about here?

Ken:
Well, the magnitude could be quite big. And these metros have characteristics that stand out from those that are going to see this prolonged period of unaffordability, high rents, high home prices. So if you’re looking at a market where you’re seeing less of an inventory problem, and you’re seeing population, either go stagnant or actually decline, then those markets are going to be tremendously exposed to significant downturns in prices.
Now, their housing affordability issue will go away overnight. And a market that really stands out right now is Detroit. Michigan, Detroit, Michigan is roughly, by our metric, in the top 100 IS housing markets in the second index. It’s a roughly 50% above where its long-term pricing trends should be. And plus, their population, if I remember correctly, is actually going to go down 1% over the next 10 years. That’s the expectation. That market’s highly priced tremendously above where it should be. There’s not as much of an inventory problem. People are not moving in. The city’s not growing. So you’re going to see a significant decline in prices there in Detroit, so I would be very worried.
Now, does that mean that there’s going to be good buy and resale opportunities? I’m not so sure of that, but I’ve seen this before. And when markets do this, what happens, typically, you see, while their prices either go flat or go down significantly, their rents don’t change that much. So you get a good rent flow, if you will, but you’re not going to probably pick up much in capital gain for quite a while.

Dave:
Got it. That makes sense. And again, if anyone listening to this wants to see this top 100 US housing market index that Ken and his colleagues have created, we’ll put a link to it in the show notes. Or if you’re watching on YouTube, you can check it out in the description below.
Ken, you’ve mentioned a few things about housing affordability in the US, and I’d like to dig into that a little bit because this just seems like a large societal problem, where we’re reaching a point where purchasing is extremely expensive and renting is extremely expensive, regardless of which one’s better. For some folks, both feel unachievable. What do you see as the source of this problem? And is there anything that can be done about it?

Ken:
Sure. It’s easy to find the culprit, and the culprit is just a lack of inventory. There’s a shortage in units to own, or that are subject to being owned, and there’s a shortage in units to rent. And that is true across the country to varying degrees, but in areas where people are moving to, mostly into the Sun Belt and parts of the Northwest, you see this rapid influx of population, and we’re way short of inventory. You have less inventory issues as you get into the Midwest, and Northeast, and a few other parts of the country. So inventory is always something that’s really hard to measure, though.
I would hazard a guess, if I ask 100% of mayors, either city, county, 100% of municipal leaders around the country, what are the total number of housing units in municipality? Less than 1% could tell you what it is. I’d be surprised if 1% could tell you that number. They could tell you that they have an inventory shortage or they don’t, but when you ask them, can they describe the magnitude of it? They don’t know. They notice prices are changing rapidly, or in this particular case, shooting up. And they’re being told, “We’ve got an inventory shortage,” and they almost certainly do.
But I’m amazed that we talk about inventory shortage all the time, but no one can actually count the total number of units. As an investor, that’s the first thing I would be trying to get in a market, is what’s the total number of units, how many people are expected to move in, and those opportunities will start to stand out. You really want to look for that shortage right now, that’s probably there in most places, or pick out a shortage before others can, and see the people moving in. And those are going to probably be the best opportunities going forward for real estate investment.

Dave:
That’s a great piece of advice there. Is there anywhere you recommend that people listening to this can find some of that data?

Ken:
Sure, sure. One of my favorite little tools, and it’s really easy, it’s from Stats America. It’ at the Kelly School at the University of Indiana, but it’s easy to Google. It’s Big Radius Tool. And then a third grader can use it. Big Radius Tool, you put in the metro that you’re interested in. You tell it to look in certain radii, I guess, would be the correct way, pick a radius. And it’s not a perfect circle because sometimes you’re up against a water, or sometimes it’s wanting to pick up bordering counties and there’s a methodology for it, but it gives you a really good idea how many people are going to be moving into that area in the next 10 years, is the span on it. And the population estimate gives you the current unemployment in the area, the average salaries in the area. It’s a great little demographic, quick and easy, not the absolute premium data, but you can get quick and dirty estimates, very, very quickly.
Inventory, that’s a toughie. It usually just means you’ve got to dig into the US Census Bureau data, find building permit survey, find housing starts, and then just dig, and dig, and dig through the minutia. And they will. You can find, and it’s usually by metro area, the housing starts every month. Then the big problem is finding that base number, which is pretty easy to get through Google, but I don’t know how accurate it is. So if you Google the total number of housing units in Miami-Dade County, it’ll tell you. You can find it. Now, I don’t know how much I trust that number because I’ve never been able to replicate it from the US Census Bureau data, but they say it comes from there. And I’ve spent a lot of time on this, and we just haven’t replicated it exactly. So it’s always going to be a bit of an estimate, Dave, but you really want to put those things together and see if you really do have an inventory shortage.
And not to take up too much time on this, but I would tell you, we’re told we have an inventory shortage here in Southeast Florida, that’s Miami-Dade Broward Palm Beach County, that we have an inventory shortage. The national occupancy rate of the typical unit, owned or rented, is 2.5 people. Yet, here in Southeast Florida, every time I do this estimate, it usually comes up around 2.35, 2.36, somewhere less than 2.5. So if we have a housing shortage here, why do we have less density?
So there’s a couple of reasons why, and you have to work through that such as here. It’s pretty clear. There’s a lot of second homes, excuse me, where people, they live in the Midwest and the Northeast, and they winter here. We also have a lot of Airbnb type stuff that’s here because people want to come in vacation. All of these are registering zero of occupancy, year round, so that’s bringing down that average. And lastly, we’re seeing this COVID influx of temporary people that are coming in and working from their office, might as well be doing it in Fort Lauderdale or West Palm beach, as opposed to Chicago, where I have to stay inside and it’s cold and I’ve got to work from home.

Dave:
Got it. That makes sense. And I love that advice, Ken, because so many people, you read these headlines about inventory shortages. And the reality is that every individual housing market is going to be different, and that the depth and scale of each inventory situation is going to be different. And I know, if you’re listening to this, you may be thinking, “Oh, digging into that data is complicated and it’s hard,” but it’s not really that hard. If you’re able to Google it and look at some census data, you will get an advantage that most real estate investors are not willing to do. They’re not going to put in that legwork. And you can do that. You just got some great advice on data that you should be looking at to understand the long-term trajectory and long-term dynamics of supply and demand in each individual housing market.
Ken, I do want to return to the idea that rent is better than buying right now because as a real estate investor, I look at the rapid rent price growth over the last two years. In certain markets, it’s hit 30% year-over-year. I’ve seen, I think, in Portland, they said it was almost 40% year-over-year, at least asking rents. And I think that’s unsustainable things have to slow down. But when I hear you say that it is a better financial decision for the average person to rent rather than buy, do you think that means that the will be continued upward pressure on rents going forward?

Ken:
Not really because there is, ultimately, this big pool back towards home ownership, family, not only just a roof to live under, but developing a home. And we see this time and again, and I always get really amazed at how we talk about, wow, the nation’s going to become a renter nation, or it’s going to become a 100% home ownership. We’ve always stayed somewhere between plus or minus 65% home ownership rate. That just doesn’t change that much. I do expect there to be a more and more bit of a migration towards renting and reinvesting because Wall Street’s coming into the marketplace now, and you’re seeing these bill to rent developments that are coming along. They’re being professionally managed, and they’re built, and set up for young working professionals to be working in Atlanta, Georgia today. But if I have to move to Houston, Texas for a better job, I’m going to be able to do that. When I own that home, it’s a far more difficult thing to do.
I think all of these things… Corporate America getting involved in the market, all in all, is a really good thing. But especially on the rental side, they’re going to provide a greater variety, more professionally handled, if you will, because they’ll have to scale to be able to do that. And you’ll see people more willing to rent, and they’ll understand that they need to be reinvesting. Again, it’s not a big win, but renting and reinvesting does give you certain advantages. The cost of sale could be, on average, 10 or 12% now just to sell and move. By the time you pay the movers, and buy your new home, and sell your old home, you’re out 10, 12 plus percent where it’s much easier to leave that rental unit and move to another city. Or maybe you’ve gotten a job in a different county and you’re not really that far away, still you’re going to have to move and you’re going to have to incur all those costs. There’s a lot of reasons why you want to rent and reinvest.
Now, for example, though, as a potential buyer or renter, and you feel like I don’t have that monastic discipline to put aside that money every month, you had to estimate the property taxes, the property insurance, the homeowner’s association fee, and you think I don’t have that just strict discipline to put that money aside every month, then perhaps you want to own because, at its heart, ownership is a forced savings plan.

Dave:
That’s excellent advice. I mean, you see across all sorts of economics, that people don’t always behave rationally. So that’s a perfect example. And if you know yourself and you know that having that money sitting in your bank account is not going into the stock market, then maybe you should buy, force yourself to own. And there are some other intangibles about home ownership that I think are really beneficial. You listed some of them earlier, like being close to family or being part of a community, some things like that. Ken, we do have to wrap this up in a little bit, but I have to ask you about something you just said, which I’m very curious about. You said that, overall, corporate America getting involved in the housing market is a good thing. I’d love to hear your opinion on that.

Ken:
I’m an economist. I study markets. You love markets that are efficient. And by efficient, I mean informationally efficient. So you have price discovery that’s easy to do, and rather instantaneously. And when you have markets that are very efficient, you can sell things quickly and at earn your price. It makes markets more liquid. And we want that in our housing market. We’ve never really had it. We talk about typical time to sell in weeks or months. You never hear anybody talking about the typical time to sell a stock. It’s a highly efficient market. And that means you can look at that stock prices, and within a very narrow margin, know whatever price you see is the true value of that asset at that moment in time.
Now, stock prices tend to go up and down quite a bit. Home prices tend to be quite a bit more stable, but still, there’s more volatility in them than you think, but that’s not the point. The point of efficiency is, if I need to sell my home today and the market’s very efficient because we have all of these Wall Street types that are now scouring through the market, looking for deals, will drive a very efficient pricing process. Price discovery will be rather instantaneous. And when you go to sell, you’re going to be able to sell at or near your price rather instantaneously. You’ll see a lot of things go down, all the costs associated with that selling, brokerage fees, closing costs, other finance fees. Those things are all going to become less. So we want to see a very efficient market. I know most people are saying, “Oh, this is somehow Wall Street, corporate America is part of the problem in the housing market right now.” They’re not, they’re just an easy scapegoat. Long-run, this is exactly what we want.

Dave:
That’s a fascinating take, ken. I would love to have you back to talk more about that because we are running out of time. But that, I know, as a real estate investor, relatively small one and representing our audience, which is composed of people who are aspiring investors up to big time investors, see the Wall Street entrance into the market as serious competition and could be making housing more unaffordable. But I love your unique opinion about this, and maybe we’ll have you back some time to discuss that. Before we go, though, you’ve obviously done a huge amount of research, have so much experience in the housing market. For the audience I just described, do you have any advice on how they can best utilize your research to further their own financial goals?

Ken:
Sure. I guess, Dave, I’d start with the fact that I actually, again, I was a broker for 12 years. And the primary reason I was in the business was, not so much to sell properties to and four people, but I was there… I knew the deals would come across my desk. And by my estimation, plus or minus, I’ve bought and sold roughly 60 properties in my life, most of which when I was practicing, not so much now. It’s more a hobby and it’s fun for me. I go looking at homes on Sunday afternoon and my wife thinks I should be playing golf, but I get excited riding around looking for deals, which there are very few out there right now, obviously. So I’m playing more golf now, though, on Sunday afternoons. But certain things always hold true from an investment standpoint.
And I don’t care if Wall Street’s there or not. And I just think you have a little bit of an advantage if you’re aggressive, and you’re out there, and you’re constantly looking. This is sad to say, but this is very true, and I don’t think it’ll ever go away. There will always be financial distress caused by job loss, divorce, other issues in your life that will cause financial distress. And there are always properties that aren’t necessarily in the best condition. They’re they’re structurally sound, but aesthetically a bomb.
The next thing I would tell you, so you’re looking for distress, you’re looking for structurally sound, but doesn’t really look the best, but that’s paint. That’s a new set of tile, and you can do that superficial stuff, and it’s relatively inexpensive. And the other thing that you’re really looking for is you want to take away uncertainty for people. People hate uncertainty. It’s a basic economic Axiom that people cannot stand uncertainty, and they will pay to get away from uncertainty. They will. It’s the same thing.
When you look at the roof on a home, and I used to see this all the time when I was in the business. This is a long time ago. That roof should cost you about 5,000. You’re going to buy the house. I think it’s going to cost you about 5,000. Well, let’s take 10 off the price just to be safe. That uncertainty drives and creates a problem. So if you, as a potential buyer, can take away uncertainty from those people that have that aesthetically, not so nice house, but structurally sound, but are in financial distress, and you’re standing ready with a cash offer and a large earnest money deposit that says, “I will make all this go away in the next very short period of time,” and this large earnest money deposit is to show you that I’m going to do what I’m going to say. And I always bought with large earnest money deposits. The only contingency I put in the agreement was that they passed clear and marketable title to me. I assumed quite a bit of risk, but if I was doing enough volume, I got pretty good at spotting, some structural issues and other things that I just knew would be a problem from experience.
So I would tell people that old fashioned way of finding properties is never really going to go away. If you’re trying to buy on the upside and you’re just going to ride your way to a profit, that’s always very, very possible. We all know you make the money on the buy, not on the sell. So all of the research is one thing, but I think that basic strategy for buying is never going to change. And then, sometimes this buy and hold. I hate flipping. I don’t think I’ve ever flipped a property in my life, but sometimes you buy and hold and you rent in the interim, and sometimes you buy and resell, but I like the buy and hold because you’re usually going to be buying at the bottom of the market. You can get a good tenant and ride the market up a little bit.

Dave:
Ken, it sounds like we have a very similar philosophy. I’ve also never flipped a house. Love buy and hold. Also, love looking at deals even when I’m not necessarily in the market. But I really appreciate that advice because I think, especially in this market, where it is difficult to find deals, that advice about finding distress properties and adding value, taking a house that is not aesthetically pleasing or is not going to be habitable for the average home buyer, and you could be the person to go, and add value to that property, and rehabilitate it, and add inventory to the market, and create places for people to live, that is a surefire way that works in pretty much any type of market conditions. Ken, thank you so much for joining us today. We really appreciate your insight and expertise here. Where can people learn more about you or interact with you if they want to?

Ken:
Sure. The three indices that I work on right now, and we put out, two of them are monthly, and that’s the Top 100 US Housing Markets. That’s the easiest thing to Google, Top 100 US Housing Markets, and it’ll pop up, and the graphs are interactive. The next one would be the Waller, W-A-L-L-E-R, Weeks, W-E-E-K-S, & Johnson, my name, J-O-H-N-S-O-N, Rental Index. And then you can go in, and you can pick your city, and there’s little dropdown boxes, and you can see what premium, if any, you’re paying, year-over-year rate of change, etc. So that’s there as well for investors.
And then the index that we originally started talking about was the Buy vs. Rent Index, which we’ve been doing for about a decade plus, a little over a decade. And that allows you to see, should you be renting or buying. But unfortunately, that index is only in 23 cities, where the other is up to a hundred markets. So those others are a little broader. But we’re looking to, quite honestly, sunset the Buy vs. Rent Index in the next year. We’re working on a price to rent ratio, and looking more of trends, and being able to analyze more markets rather than quarterly, like the Buy vs. Rent Index data is, and only for 23 markets. We think we might lose a little academic punch, a little explanatory punch, but we get stuff that’s timely that people can access every 30 days. And watching that price to rent ratio is very much like watching a PE ratio. And it tends to signal when markets are more prone to find deals in and when they’re not as well.

Dave:
Great, thank you so much, Ken. We will link to all of those sources in the show notes and in the description of the show. Ken, thank you so much for joining us on, on the market. We’d love to have you back sometime

Ken:
Enjoyed it. Dave, have a great day.

Dave:
You too.
Thanks once again, to Kenneth Johnson for joining us and sharing all of his original research about renting versus buying in the US. To further shed light on this question, we have James [inaudible 00:36:11], Jamil [inaudible 00:36:12], and Henry Washington join us to make sense of all this. Jamil, would love to start with you. What was your biggest takeaway from the conversation I had with Ken?

Jamil:
I mean, there was a ton, but I think the biggest takeaway that I had is, of course, renting, the way that he describes it is proving to be a better option for many people than home ownership. But I want to see what this is going to look like once we take into consideration the different types of buyers we have in the marketplace right now. We’ve got institutional buyers that are continuing to hit the gas. And I don’t know that that absorption rate is not going to have a positive impact on home ownership and values over time. I mean, over time, we’re definitely in a frothy part of the market right now, but what happens to all those homes? They’re not going to be magically coming back on the market. The intention of buying all these properties for these Wall Street buyers is to hold them. So I don’t know that we really have accurate data to digest this thesis, that renting is better than buying, because I don’t know what the impacts of this massive absorption rate is truly going to be on the housing market.

Dave:
Yeah. Well, there’s a couple important things there. First and foremost, as Ken states, and you can see in the graphs, if you look at them below, this is just a point in time. What he’s talking about renting better than buying, that’s right now, frothy market, high interest rates. So that can also shift. But it seems like, I don’t know, don’t want to put words in your mouth, but you’re buying into this idea of we’re becoming more of a renter nation, or we could be because Ken saying that, historically, we’ve had a home ownership rate in the US that’s hovered in the mid ’60s. And right now, that’s true, but a lot of that data lags a little bit. And so it seems like you’re concerned or thinking that that might actually start ticking up, even though we haven’t seen that reflected in some of the census data yet.

Jamil:
Absolutely. I think that’s exactly what we’re going to find happening. And that has to have an impact on value. What did Taylor Mar said? 18.6%, I believe, I hope I’m not misquoting him, but 18.6% of all absorption right now is from the institutional buyer. That is a huge amount. It’s not small. It’s not 2% or 1%, it’s 18.6%. There has to be an impact from that. And we don’t know what that impact looks like. And I think, in five, 10 years, we’re going to look back at this and say, “Oh, this created a huge vacuum in the housing market, and we never really recovered, inventory wise, to accommodate it. ”

Dave:
Yeah. Just to clarify with Taylor, I’m pretty sure what he said is that 18.6% is all investors.

Jamil:
Yes.

Dave:
But it’s hard to know who’s an institutional investor and who is real. And that is, honestly, one of the hardest data points to track down. I’ve tried to a lot. And anecdotally, we hear, from experienced investors like all of you and in the broader media, that institutional investment has picked up, but it’s really difficult to nail down that number, which furthers your point Jamil, that we don’t really know exactly what the impact of this is going to be because it’s extremely hard to get data about what’s happening.
Henry, let’s move on to you. What did you take away from the conversation with Ken?

Henry:
Yeah, man, that was a super insightful conversation to hear. Again, we keep bringing people that bring this actual data points to the themes that we’ve been talking about since the inception of this show. And so it’s super cool to hear some of that. I understand his analysis of renting versus owning and how right now renting could be a better option. And I think the caveat there is, if you do it in the way that he explains. So he’s essentially saying, if you rent and then you take your additional expenses that you would have as an owner, your maintenance, taxes, insurance, and your down payments, and then you reinvest that money into a vehicle like the stock market, over time, that proves to be better at generating wealth.
And that’s probably true, but most people aren’t going to do that. I would say 99% of people aren’t going to do that, or aren’t going to do that in the way that he’s saying. Maybe they take a little bit of that money and they reinvest it, but most people aren’t going to take every bit of that money. They’re not even good enough at… People aren’t even good enough at budgeting their daily expenses, nonetheless taking what they would be spending in ownership. And most people don’t even know what they would be spending in ownership because a lot of people haven’t owned yet. And so the idea that you make more money if you invest that, is probably true, but most aren’t going to do it. And then, that’s also assuming that you’re a savvy enough stock market investor that you’re going to invest in things that are going to trend in the right direction. Jamil’s a trader. He throws it in the stock market, he’s going to be flipping it the next day.

Jamil:
I won’t be able to help myself.

Henry:
So it makes some assumptions there that you’re going to pick savvy investments that are going to stand the test of time. And then, we don’t know how long that time is. Right now, the stock market’s taking a big ding. And so that might not be the best move in this very moment. I just want to put that caveat out there that, if that’s something you’re thinking about doing because the buying scares you right now, and especially when you heard all the data points that were talked about in this interview, just understand that that method is going to take way more discipline on your behalf, and it’s going to take way more education and research because you need to know what you’re going to be putting that investment into, and then have a plan to hold it long term.
Buy the things you think are going to go up and then delete the app from your phone so you’re not looking at it every day because right now I’m getting my butt kicked in the stock market, but I know it’s a long term play for me. And so you just have to understand what it’s truly going to take to reach those numbers, and don’t just take that advice and go, “Oh I should rent.” you should rent and be disciplined with the money so that you’re going to get the wealth long term that he’s talking about.

Jamil:
He’s he called it monk like discipline in order to be able to accommodate saving that money and allocating it correctly.

James:
That doesn’t sound that fun. I’m all for discipline, but monk style discipline? That’s a little aggressive.

Henry:
Yeah. But I just wanted to mention that with the scenario of buying, you have done the investment when you bought it. You are now invested, and you get the benefits of not just potentially cash flow, but tax benefits, depreciation, debt pay down by somebody else. You are investing. And so with the other strategy, you have to be a disciplined investor continuously. And that’s just not most people. And a disciplined investor continuously in something that’s not real estate, so it’s also been a required education. So yes. And he said, the difference between the two isn’t very big. And so if I have to choose one over the other, and one I get to invest and almost set it in, forget it, and one, I have to be super monk like discipline every day, I’m going the other route.

Dave:
That makes sense. And what Ken is saying too is a scenario where it’s a home buyer or renter. It’s not someone who’s necessarily an investor. And again, this research really just talks about primary residents. So I think there’s also a question here is if you had, let’s say you had 50 grand to invest, and if you’re going to be a homeowner, could you invest that into a rental property and continue renting? So again, this is just one scenario that Ken is talking about, and I do want to come back to this topic of using that money to invest rather than buying your primary. But James, first wanted to hear what your take on the conversation with Ken was?

James:
Yeah. I definitely like what Henry said. It depends on how you can reinvest your money. I thought that was interesting that he said that, “Hey, if you rented and then reinvest in the stock market, you could do better.” But again, it comes down to what you’re good at doing. The thing that’s not included in this data point is that walk in sweat equity, the bird style properties. If you’re buying at that discount, and you’re creating instant margin day one, buying your home’s going to outperform the stocks automatically because I can’t go buy that stock for 20% off just by doing some extra hard work right now, but I can do it with a house, where I can create that margin.
And the other interesting point that I got out the whole thing is just all the data, it’s amazing. On the show, we’ve been exposed to all this different data sources and different types and ways to interpret it. And this is a great way to do it, but they all point to just being overinflated right now. Every time we do this, it’s always that everything is overinflated. And these are just additional tools that you can use now, like how he cuts up this data with how high are rents juiced up, what markets are appreciating fast enough. We can use all this. As we go into a transitioning market, all these data points help us pivot, and they help us move in the right direction. And just by getting this extra data points, you really can look at how do I want to buy in this market?
If it’s really high on the appreciation factor, like Boise, if it went up 54%, I’m going to factor none of that appreciation into my… When I’m looking at that deal, I’m going to look at, “Hey, what’s the true cash flow” because what he’s talking about and what this whole data says is… Because he goes on later to talk about, if you buy at the peak and it drops dramatically, invest in a stock market. It’s going to be way, way better. But at the end of the day, if you’re just looking at on a cash flow standpoint, it doesn’t really matter. You want to chase that return. If my cash flow return’s higher than my stock market return, I’m going to go that way all day long because I get a hard asset, it pays me every month rather than just gets compounded back into the deal, and it just tells you how to buy in that certain market.

Dave:
James, when you are advising primary home buyers as a real estate agent, do you give them that advice to look for things that are under market value, and put in sweat equity, and refinance? Or do you find that most home buyers are driven by comfort lifestyle that they’re looking for rather than making it an investment?

James:
It depends on the price point. So I only sell discounted property. If someone comes to me and says, “Hey, I want to go buy a turnkey property.” I can’t sell it to them. It’s just not how I operate. I get why people want to do it. It’s easy. You move right in. You can run your budget, but that’s just not… Fundamentally, I’m so against that, that we just don’t sell it. So I think no matter what, if you’re looking at that… Buying your primary residents can be one of the best tax savings that you can do. You can buy it, you can live in it two to three years. If you’re married, you get the $500,000 tax free appreciation and bonus. And so when you make that strategic right buy, you can increase your wealth in your position in life so dramatically if you make that first buy. And then you take that first buy and you roll it into the second buy, and you can compound your equity.
I mean, we took… Back when I was a primary, my first primary bought as a married person, we just got married, we went and bought the cheapest, ugliest house for sale, and nobody wanted it. It was the ugliest thing I could find, but by doing that, we made 300 to $400,000 on that house. And then we rolled it into another house. And on a four year basis, we picked up over $2 million in equity position because you’re buying right. And so that’s what these data points don’t tell you, is the full story of what the potential is. And that’s why real estate is so beautiful, is you can manipulate it and you can look at it all different ways, and you can buy whatever type of asset you want, but it depends on how hard you want to work for it. It is not convenient. And if you want to put in the work, you will 10x the stock market all day long, in my opinion, but you got to put in the work and you got to have the right systems in play.

Dave:
That’s a great point because people… Again, I’m not really criticizing Ken. He’s not an investor. That’s not who this audience is for. What we’re trying to do here for everyone listening is to contextualize Ken’s research for people who are either active or considering real estate investments. But what I love about what you just said, James, is that buying your primary residence could be a great learning opportunity in getting your foot into the door if you want to be an investor. And it’s impossible to know who’s listening to this and what situation they are in life, but some people out there, I imagine people I talk to think this, it’s a trade off between buying my primary residents or becoming an investor. And as you said, James, there are ways to hedge between those two. And if you are willing to put in work, you can turn your primary residence into a good investment. And obviously, in the media and in these academic scenarios, you have to create this dichotomy where it’s either rent or buy, but there are other options out there. So really interested in and love that point you just made.
Another part of this research that I think is really interesting is that the alternative to home buying is renting and then investing in the stock market. I kept thinking, what about renting and using the money to buy a rental property, not your home or another investment? Jamil, do you ever see investors who do that, or do you ever recommend something like that?

Jamil:
I’ve done it myself.

Dave:
Really?

Jamil:
Yes. In my early stages of real estate investing, I never really could afford to own the house that I wanted to live in. So I would typically rent them. But what I would do with the surplus money that I would make from wholesaling is I would buy rentals. And so rather than buying my primary residence, I was continuing to buy rentals until I ultimately sold them, and then ended up in this house that I’m in right now. But again, I think that it’s an incredible strategy if you are trying to build wealth. And again, to James’ point, and I think Ken made it at the end of his interview as well is, the fundamentals of buying are still there. And you can always game real estate by understanding the fundamentals of underwriting and knowing what a good deal is.
You buy a good deal, you make your money when you buy. And regardless of what’s happening in the housing market, if you are sticking to those fundamentals and you’re buying assets that you force appreciation on and then turn into rentals, I think that you absolutely can create for yourself greater opportunity, greater returns, and then decide whether or not home ownership is the way to go. I mean, there is nothing wrong with owning 10 rentals and renting your primary residence. I think that’s an absolute, fantastic strategy for the right person.

Dave:
Totally. I mean, I rent right now also. I mean, that’s partially because I live in another country right now, but I would do the same thing. Before I picked this home, I ran an analysis and decided, was it better to invest my money into a primary residence or to continue to invest it elsewhere? And that can be a continuous thing. You don’t have to make that decision right away and stick with that forever. I’m curious, Jamil, do you think it’s… There is this culture in the United States where home ownership is seen as the vehicle with which to build long term wealth. Do you think that’s still true?

Jamil:
I think paradigms are changing all around because that was that whole concept of buy a home, you’re going to college, you’re going to buy a home, and you’re going to be set up for life. I think we’re reevaluating the utility of college for a lot of families. We’re reevaluating the utility of home ownership. We saw, in 2008, what happened to so many households that got crushed, that had to lose their primary residence and had to walk away and reset their finances. And so I think that the paradigms are absolutely shifting. And I think that we may decide in 10, 20 years that, no, it didn’t make sense to own a home. It made more sense to invest my money in other things, like rentals. It’s not that it’s not real estate, it just might not be your primary residence.

Dave:
That makes a ton of sense. Henry, one thing that you’ve talked a lot, we’ve talked a lot about house hacking on this show. And I think that, again, we’re talking about this dichotomy, home ownership versus renting, and maybe they’re being gray area. Do you think house hacking is a third option here?

Henry:
100%, absolute. House hacking, rent hacking. Just think of the concept. I was thinking as Jamil was talking, I had a roommate in college I rented a place that I could afford on my own. And then found out that if I got a roommate to rent the extra room that I didn’t use, but for storing stuff in, that I could cut my rent in half. And so I did that. I just wasn’t smart enough to take that surplus of money that I had coming in and then use it to invest. And so you don’t even have the house hack, you can rent hack. As long as you rent someplace you can afford if you didn’t have a roommate, then get the roommate and then take the surplus and use that to invest in real estate. That gives you a huge advantage, wealth advantage.
But yeah, man, house hacking is still one of my favorite strategies to build wealth, especially if you house hack and buy a multifamily, two to four units. That is such a cheat code to building wealth in general. And so that would allow you to do both of these strategies because you could buy a property, get all the benefits of investing in that property, rent it out, get the benefits of cash flow, and then maybe use that cash flow to either go buy more rentals, or even, like he says, invest in the stock market. And so you could diversify your investing portfolio with just one purchase of a multifamily that you live in. And I think that what a cheat code of building wealth.

Dave:
Absolutely. People always ask me on Instagram all the time, they’re like, “Do you think house hacking in this market, or this condition, or this makes sense?” And I always just say, “I think house hacking works in any market for anyone in any economic conditions.” It just makes so much sense. There’s almost no scenario in which you won’t decrease your cost of living. In almost every type of scenario, you’re going to… Even if you’re not cash flowing, you’re spending less money. And as Henry just said, you can use that money with which to make other investments. Right before we got on here, we were all just chatting, and it sounds like, Henry, you used some of the tools Ken recommended already. Can you tell us a little bit about that?

Henry:
Yeah, man. What does he call it? It’s called the Big Radius Tool. I thought was a super cool data analysis tool to allow you to put in a city, a city of your choosing, and you get to see population size, you get to see population growth percentage. And so I just put in my market just to take a look at it, and it immediately tells you the population of the city. We’re at a 23.2% growth, a 10-year growth. And then it takes all the counties and cities surrounding because you can pick a mile radius. So it takes all the counties and cities in that mile radius and gives you what their growth percentage is. And then what I really like is it takes the economic industries and gives you employment numbers, and what percentage of the total that is, and what the average earnings are. And so you can see what are the economies in that market that are driving it.
And so that’s super cool data, especially if you’re looking to invest out of state and you’re wanting to analyze a market, especially as times are changing right now. So you can essentially put in the markets you’re thinking about and see what economies are driving that market and see if that market is growing. So if you’re interested in investing somewhere, like for me, I would be looking at what are the economies in that area that are as recession proof as you can get. So I’m looking for things like healthcare. I’m looking for things like the tech industry. And I’m looking less at manufacturing, things that are either being shipped overseas or that automation is taking over. And so it can allow you to really do some quick… Literally, took seconds. So you can really analyze multiple markets pretty quickly at some of the most critical factors that we would use, as real estate investors, to determine, is this an area should I invest my money? Are people continuing to go there? And then what industries are drawing those people there? And are those industries long lasting or recession proof? That’s gold.

Dave:
So this tool that Ken mentioned, which is, again, called Big Radius Tool, provides all sorts of incredible economic information. And one of the things that Ken hit on related to this data was markets that might start to see a downturn. And he relayed this back to markets that have excess inventory. James, is this something you’ve ever tracked or ever heard of? Or how would you recommend people use this type of information to try and inform their own investing, or home ownership, or rental decisions?

James:
Yeah, we’ve been tracking inventory since 2006. That’s the biggest thing that I actually look at because that’s going to dictate a lot of things. If you have a lot of inventory in the market and you’re flipper, that means your property’s going to sit on market longer. That’s longer hold times. Those are things that you have to take into account. But the typical rule of thumb is that the market starts depreciating after you have five to six months worth of inventory in the market. And so that’s why I’m always watching that too because the closer we get to that amount of supply in the market, that’s where you’re going to see the slower appreciation, and then you’re also going to see the depreciation at some point. So we’re always tracking that.
And same with rental absorption rates. You want to know, how many people are coming to market? How quickly can it absorb? And then, one part that he also talked about in that radius tool was what the population growth because he said that… And it’s a no brainer. Low inventory with high population growth is going to give you the best economic conditions, which makes total sense. But you have to watch that data on what market that you’re also in because in Washington or Seattle, King County’s our best market. It’s our biggest, it’s our largest. And it actually had a reduction in population last year, but high appreciation because I think the reduction had to do more with affordability factors, where people that historically have lived here for their whole lives just decided to move out of the market. And then that’s what’s caused the population decrease, but then the median household income went up 20%. And so more people with money are coming to market, so there’s some other extra points that you also want to look at inside of these data.

Dave:
Yeah, that’s a great point. Again, people, if you want to take a look at what James, and Henry, and Ken just said all about tracking this information, you could do that on Big Radius Tool. There will be a link in the show notes and the description below. Redfin also has some pretty good data there as well, so you can definitely check out that information.
Jamil, before we go, I just want to come back to you for one last question here. What would your recommendation be for the average person who’s just trying to decide if they should rent or buy? How would you go about making that decision?

Jamil:
Well, first and foremost, I think self-awareness is key. Let’s really hammer home what Henry said and what Ken was saying there, do you have the discipline it takes to reinvest the money that you’re saving? And if you can honestly answer that question as yes, then possibly, renting and reinvesting that money might be a better way to go. But if you are like 99% of the people in the world, and that monastic discipline isn’t the way that you’ve been brought up or the way that you operate, then you absolutely should take advantage of using your primary home as a forced savings, and use the second really incredible point there to buy right.
If you talk to James, James will never buy a retail property. He’ll never live in a retail property. He’s always going to buy a home with the fundamentals of making sure he’s buying at distress, he’s buying discounts, he’s making sure he’s paying 70 cents on the dollar for his acquisitions. If you take those approaches and you apply that to your primary residence, I think that you’re putting yourself in a much greater situation than you would be if you just took all that money, and plopped it in the stock market, and prayed and wished.

Dave:
That’s great advice. I actually, I… No, I just said that was the last question, but I had one more question that I really wanted to ask and forgot. James, do you think if Ken’s analysis is correct, and again, we’ve had a lot of caveats, but just for the average person, if they’re listening to this and thinking, “Oh, you know what? I’m going to rent for now,” what do you think that means for long-term rents in the United States? Do you think that it’s going to… If it stays like it is now, does that mean rents could continue to go up at the rate that we’ve seen today or just continue going up faster than they have in the past?

James:
I think the gap between home ownership and rent costs is so large right now that I do think rents are going to keep going up. I mean, at the end of the day, we still have a very low supply in rentals. And if no one’s buying that’s is going to require a higher absorption rate in the rental market, which is going to cause the pricing to go up. And I think people are going to Ken’s principles. They’re getting smart about what they want to do in life. Buying and renting, that fundamental question always comes down to what market are you in.
We have two homes. I have one in Newport Beach and I have one up in Bellevue, Washington. I live in Bellevue, and then I’m in Newport part-time. The cost of housing makes zero sense in Newport Beach. I don’t know why you would even buy there. We rent this house for 12 grand a month, which is a ton of money, but I would have to put down $4 million, no, $4.5 million on this house to get my mortgage cost down to that same number. If I’m making 10% on my money, that’s $45,000 a month that by not buying that house, I’m making $45,000 a month. And after taxes, I’m doubling my income every time on that.
And so you just have to look at what the market is that you’re in. Use time, value, money. How much money do I have to put down to get it down to the cost of rent? What can I make on that money? Look at the Delta, and that will help guide your decision at the end of the day. I’m actually a person that doesn’t really like to rent. I like to own my property, but the math is the math. And using time value, money, and doing it that way will keep it very simple, and it guides you on whether you should buy or not.

Dave:
That’s an excellent example, James, and a perfect way to round out this discussion. So thank you. And 12 grand in rent is quite a [inaudible 01:06:09]

James:
But my money’s paying for it. It’s actually free because I didn’t put the money down.

Dave:
No, no. I totally get it.

James:
It’s absurd.

Dave:
Probably just a sweet house is what I’m trying to say.

Henry:
I just want James [inaudible 01:06:21] problems. That’s all. James [inaudible 01:06:24] problems, that’s the problems I need.

Dave:
Yeah. That just seems like a great house. So we’re going to record there next time.

James:
Whenever that comes out of my mouth, it does make me sick to my stomach. [inaudible 01:06:34]

Dave:
Well, for everyone out there who is trying to decide whether to rent or buy or wants some more information about this, we actually have a tool to give away to you, which we will give away right after this.
All right, welcome back. We now are going to go onto our crowd source section for today. And we have a data drop for the first time in a while. Actually, I guess it’s not necessarily a data drop, but it is a data tool. I, alongside the CEO of BiggerPockets, Scott Trench, created a calculator that helps people analyze, not just buying versus renting because there are a lot of great tools out there, but it’s actually a buy versus rent versus house hack tool, which lets you look at three different scenarios based on your market. So you can actually go in there, and we have data for the median rent and the medium home price for, I think it’s like the top couple hundred markets. So you can look those up or you can use other tools in BiggerPockets to look at rent for a specific property, something like that.
And you can input in there and it will tell you how much more money you’ll be making by rented versus buying versus house hacking, what your break even points. You’ll have all sorts of graphs for you to break that down. It is a super cool tool. I guess I can say that even though I created it, but I do think it’s really cool. If you want to check out this tool that we created for you, you can find it in the show notes or the description below, or you can go directly to BiggerPockets. The URL is biggerpockets.com/rentorbuytool. That’s biggerpockets.com/rentorbuytool. It’s completely free and you can download it there, and tons of other really helpful information from the BiggerPockets website.
James, Henry, Jamil, thank you all so much for being here. Appreciate all of your insights and information today. Can’t wait to see you guys again real soon.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, copywriting by [inaudible 01:08:53]. And a very special thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.