PhotoHome prices in major U.S. housing markets have risen so much that one market barometer says it could signal potential distress in the overall housing market.

According to the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index, compiled jointly by Florida Atlantic University (FAU) and Florida International University (FIU), 19 of the 23 measured markets are showing the price of housing as well above their long-term pricing trends. 

But the latest index shows the higher prices have led to a decrease in demand for homeownership that now makes renting more attractive in terms of building wealth.

"This is quite worrisome," said Eli Beracha, real estate economist at FIU. "However, the trend towards lower BH&J scores is a good sign that the nation's housing markets are pulling back from the edge of potential disaster."

The market last faced a potential disaster a decade ago when plunging home sales led to drastically lower prices and a wave of foreclosures. At that time, home prices had inflated because it was so easy to get mortgages.

Supply and demand imbalance

This time it’s a little different. Mortgages still aren’t that easy to get, but there aren’t enough homes to meet demand, which is pushing prices higher. In recent months, home sales have slowed as affordability has become a bigger issue and renting has become a better option.

The good news is that the imbalance between buying and renting appears to be lessening in recent months. High BH&J Index scores indicate extreme downward pressure on the demand for homeownership, making it less desirable than renting and reinvesting and more likely that housing prices will fall. The market has appeared to have dodged that bullet for the moment.

Index scores at the high end are most often driven by some combination of fundamentally overpriced housing, rising mortgage rates, and high performing alternative investments. Scores on the low end of the scale suggest just the opposite and indicate a higher demand for home purchases.

Latest sales numbers

In its latest report, the National Association of Realtors (NAR) said pending home sales fell 2.5 percent in July from June, suggesting a slowdown in the market for homes. But NAR’s chief economist Lawrence Yun said sales would likely have been much stronger if there were more moderately priced entry-level homes for sale.

The creators of the BH&J Index say all indicators suggest the current housing cycle is about to end, and they see the housing market going one of two ways.

"Housing markets will either soon experience a slow reversion to a long-term pricing trend or experience a rapid fall in prices below this same trend with a slow reversion," said Ken H. Johnson, a real estate economist at FAU. "We hope for the former and fear the latter."


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