Wondering what to do with your savings? A new study says ‘renting and investing’ is smarter than home buying in Philly metro

The study found that housing prices in the Philadelphia metro are about 10% higher than what the long-term cost trends suggest they should be.

(Lindsay Lazarski/WHYY)

(Lindsay Lazarski/WHYY)

Thinking about buying a home in the Philly metro area? The smart financial bet may be to rent and invest your extra money in the stock market instead, according to a study released Monday by the Real Estate Initiative at Florida Atlantic University.

The university’s ‘Buy vs. Rent Index’ compares returns from home equity and the stock market in 23 metro areas annually. It found that Philadelphia-area residents looking to invest their savings at this moment are likely to see a bigger windfall buying stocks and bonds than purchasing and maintaining a home.

“About 55% of all folks who would rent and reinvest will outperform those who bought at this time [in the Philly metro],” said Ken H. Johnson, real estate economics professor at Florida Atlantic.

The study found that housing prices in the Philadelphia metro — a census-defined region that includes parts of South Jersey, Maryland, and Delaware — are about 10% higher than what the long-term cost trends suggest they should be. It looked at projected gains eight years out.

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(Ken H. Johnson)

Housing sales in the Philly region have roared during the pandemic, driven by ultra-low interest rates, a shortage of housing stock, and people seeking more space during the pandemic. Prices are up by more than 8% year over year in the city, and the average time a home spends on the market is at a near-record setting low.

But Wall Street has also been reaching record highs in recent months. And the cost of renting in Philadelphia has remained relatively low, according to the study.

However, Johnson said that making the renting strategy pay off requires a whole lot of financial discipline.

“They would [have to] reinvest everything they would otherwise put into home ownership… maintenance, property taxes, insurance, homeowners association fees,” he said. “In some ways this is atypical, because most people just do not save every single penny every month and put it back into some form of investment.”

Kevin Gillen, a real estate economist at Drexel University, says the study’s topline finding glosses over the high performance of the housing market in some select Philadelphia neighborhoods.

“If you have a home within say a two-and-a-half miles of Center City, your home has shown well above market appreciation,” he said. “If you are in far Northeast Philly, or Roxborough or Eastwick, that’s a different story.”

The pandemic has caused a shift in the housing market, placing a premium on space and sending home prices in farther-out city neighborhoods and some suburbs soaring. Year over year, though, housing prices in the city have far outpaced the suburbs. 

Gillen also warned against considering a home purchase to be purely a financial decision, noting that unreasonable price growth expectations were a major factor leading to the 2008 housing crisis.

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“First and foremost, a home is typically a place to live … second it’s a preserver and grower of wealth,” Gillen said. “Don’t get that relationship inverted.”

Broke in PhillyWHYY is one of over 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push towards economic justice. Follow us at @BrokeInPhilly.

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