As the debate between renting and owning intensifies, Sun Belt cities emerge as hotspots for potential housing market corrections. The latest analysis by Florida Atlantic University's Real Estate Initiative, captured in January data, shows markets such as McAllen, Texas and San Jose, California, sporting the highest price-to-rent premiums at 22.7% and 22.5%, respectively. This suggests that in these locations, tenants may get more bang for their buck compared to buyers. According to a report from the FAU Price-to-Rent Index, a higher ratio indicates a more favorable rental market, while a lower ratio points to ownership being a more advised choice.
This trend is influenced by the high influx of people into the Sun Belt metros, not matched by sufficient new housing. "Supply is inelastic in the short term — it takes a while [to build homes]," Ken Johnson, a real estate economist at FAU's College of Business, told The National Observer: Real Estate Edition which was obtained by the Phoenix Business Journal. The gradual shift in housing supply is forcing prices to overshoot rents, signaling the possibility of a future market correction.
In contrast, some regions like Nashville and Charlotte are seeing a surge in rental housing construction which may alleviate the premium in the long run. Apartment rents nationwide edged up by just 0.2% year over year in February, but cities with the most aggressive apartment development saw significant rent decreases for the month. Nearly 962,000 apartments were under construction across the U.S. by the end of last year, with about 672,000 expected to be completed in 2024, as reported by RealPage Inc.
Despite these numbers, a separate analysis by CBRE Group Inc. revealed that at the end of 2023, average mortgage payments were 38% higher than average apartment rents. Explaining this disparity, Matt Vance, Americas head of multifamily research at CBRE, said, "The sharp increase in the cost of buying a home has made it increasingly difficult for individuals and families to make a transition from renting to owning." This substantial gap presents a significant hurdle for potential homeowners, which may boil down to a strategic decision to rent rather than purchase, as reported by the Phoenix Business Journal.
Moreover, researchers from Florida Atlantic University and Florida International University have pinpointed the riskiest markets based on price-to-rent premiums. "In the majority of the metros located in the Sunbelt states, housing prices have gotten more out of line with rents than in other parts of the country," Ken H. Johnson, Ph.D., of FAU’s College of Business, stated. Markets like McAllen and San Jose top that list; the higher-than-average price-to-rent ratios in these areas are strong indicators that renting may prevail over buying until the scales can balance back to historic norms. For data on all 100 metros studied, interested parties are advised to visit the FAU site for comprehensive details.
