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.