WHY RENTERS BUY?
in HARRISBURG, PENNSYLVANIA

W. Greg Rothman

Real Estate Research Project

June 19, 2004

Johns Hopkins University

767.601.81 Real Estate Research Seminar

Professor Michael A. Anikeeff, Ph.D.

Overview and Statement of Problem

This research project investigates a fundamental real estate conundrum: the decision-making process of renters when contemplating purchasing homes.   The “rent versus own” analysis has taken place since the beginning of time.  As interest rates and financing barriers drop, questions about what motivates renters to buy continues to arise.    This research seeks to determine why people rent and what factors influence decisions to buy, such as interest rates, availability of down-payment and closing costs, supply, and education.    Have historic low interest rates driven the housing boom or is it the increased availability of mortgage financing?  As government continues to invest precious resources into further increasing homeownership[1], it is important to understand what factors influence renters to become homeowners.   As private investors look to develop in residential markets with mostly renters it is crucial to know how many of the renters can and will be converted to homeowners.

Specifically, the downtown Harrisburg, Pennsylvania market will be studied.   Three major high-rise apartment complexes will be analyzed and their residents interviewed through focus groups and surveyed through mail surveys and an internet survey[2].  

Literature Review

Previous studies on the decision-making process of renting versus buying have been sponsored by pro-renting organizations like the National Multi Housing Council and pro-ownership organizations like the National Association of REALTORS®.   There have also been a number of articles in the Journal of Real Estate Research, the Journal of Urban Economics, and the Journal of the American Real Estate and Urban Economics Association.   A Donald Jud, et al article on apartments was written “with the intent of providing an overview of academic studies of the apartment market and to outline directions for future research.”[3]     Kan[4] developed a model on housing choices and McFadden[5] created a model for choice in location.  Painter[6] examined the difference among samples in tenure choice.   Gyourko and Linneman[7] explored the changing influences on homeownership patterns.  Weicher[8] studied new home affordability and analyzed data that revealed that young families are better off in the housing market than their older counterparts.  Bibby[9] details three major new homeownership initiatives and identifies reasons the homeownership rate may or may not increase.  Using demographic and other data, he explains why the homeownership rhetoric far exceeds its likely impact on apartment firms.  Obrinsky[10], the Chief Economist of the NMHC says that  “the key factors driving recent homeownership increases are not interest rates and government incentives; they are structural changes in mortgage finance that make home loans easier to obtain and a weak stock market that makes single-family housing a favorable investment.”  A 2002 national study was done by Canter and Lentz[11] studying median home values, median income levels, and rents by market.  Specific studies on the City of Harrisburg and its housing market include the Rusk[12] report finding of population decline and the Mostert[13] study finding gentrification in certain Harrisburg census tracts.

Purpose of Theorectical Base

Why do people rent?  Why do they buy?    What factors would encourage a renter to purchase a home?   Specifically, in Harrisburg, Pennsylvania, what factors would cause a renter to become a homeowner?   How do interest rates, available financing, supply and education influence decision-making processes?  The abstract concept is “why people rent instead of buying.”  The main concepts to link in this research project are:  financing and homeownership; education about opportunity and homeownership; supply availability and homeownership.   The well defined purpose is “What factors influence renters?”  Specifically, how do the following influence decisions by renters to purchase:  1) interest rates; 2) down-payment assistance/financing incentives; 3) supply; 4) education about homeownership.

The conceptualization (refinement & specification of abstract concepts) of this research project includes sorting out renters who will become buyers if proper factors are evident.  For instance not all renters want to or are able to buy homes.  Other renters intend to buy and want to buy, irrespective of the enticements to buying.  The first group will not be influenced by interest rates, financing availability, supply or education.  The second group may not be influenced by those variables in terms of decision, but more likely in terms of timing.   The exact meanings for all concepts can be found in the Appendix.

A change in interest rates or supply of affordable housing may speed up renters’ decision.  A decrease in supply of housing or a spike upward of interest rates may delay the decision.  The indicators that will be signs of the presence or absence of the concept we are studying are those renters who purchase in the next year.    Indicators will be the vacancy and occupancy rates in area apartment complexes and the number of sales in the market.  Historical interest rates can be compared to units sold and volume.  A break-even interest rate can be quantified in a model showing at what interest rates will the average renter become a buyer and at what rate will the average renter chose not to buy.    

Sales data was collected by use of the Central Pennsylvania Multiple Listing Service (MLS), Geographic Information System (GIS) data, and the Real Estate Data Service on real estate sold in the Harrisburg, PA market.  Sales data was confirmed through courthouse records.  Binary variables were developed based on whether the property was new construction or resale.  The absorption rates of the only three new construction projects in the city (Capital Heights, Bellevue Park, and Emerald Court).  The three major apartment complexes were monitored for rental rates and occupancy rates.  

An additional grouping of data used for analysis was information showing renters versus ownership throughout the city of Harrisburg.  The United States census data shows percentage of ownership versus renters; time period of occupation; income statistics; age and household information.  Interviews and surveys will be conducted with real estate professionals, property managers, mortgage brokers and bankers, and title agents to determine trends in factors influencing renters who chose to buy.  The validity will be strong as the interviews will be conducted with the professionals.  The reliability will be marginal as the results of the interviews will mostly be anecdotal. 

Finally, a Likert Scale survey of renters in the three major apartment complexes in Harrisburg, Pennsylvania, will produce the opinions and attitudes of renters in reference to factors influencing their decisions.   A multivariate analysis will be done by comparing the age, gender and housing tenure to the decisions to buy.   For instance, younger renters may be more likely aspire to purchase than older renters who have previously owned.  The longer a person rents a property (tenure) the less likely they are to purchase.  The Likert Scale will measure answers in terms of percentage of respondents who chose each possible answer.   The absorption rates in new home developments will be measured by homes per month sold.  The variables can be measured by past decision making by renters who chose to purchase.

Research Hypotheses

 A hypothesis is “an expectation about the nature of things, derived from a theory.[14]”  Renters will purchase homes if the supply is available, financing is attractive and information is dispensed.   My hypotheses are:  1) that if “you build them, they will buy them.”   2)  renters in Harrisburg will purchase homes if they are available.  3) lower interest rates will increase the demand for homes.   4) down-payment assistance and financing incentives will increase the demand for homeownership.  5) educating renters about homeownership opportunities will increase demand for homes.

In general terms, the hypotheses are supported by empirical data found in the local real estate market.

1)      The current supply in the Harrisburg Market is at record low levels, according to the Central Penn Multi-List data.  

2)      The three new home developments that have been built in the last four years have sold at higher absorption levels than the surrounding suburban developments.

3)      Monthly sales have increased during lower interest rate months (seasonally adjusted) and have decreased during months when the interest rates rose.

4)      Down-payment programs and financing incentives have increased the number of homeowners in the United States to all-time highs.  Counties that have implemented the down-payment assistance programs have seen increased homeownership.

5)      Knowledge is power.  Renters will information about the readily available financing and affordable housing opportunities are more likely to purchase homes.

The knowledge of homeownership opportunity plus low interest rates, plus low down-payment requirements plus financing availability equals increased homeownership.

Methodology

In this research project the dependent variable is renters making the decision to buy a home.  The independent variables are the residential interest rates; the supply of housing; the financing incentives available; and housing education.  Independent variable (presumed to cause of determine a dependent variable) and dependent variable (assumed to depend on or is caused by another variable):   An example of an independent variable would be interest rates.   The dependent variable would be the number of homes sold, the number of days the home is on the market, the average sale price and the total sales volume.

Each variable will be measured in different ways.  Interest rates can be measured by the monthly (30 day) average for the last three years and the annual average for the last ten years.  Financing programs in the market area will be measured by availability and source of financing incentives.  The number of sales will be measured in terms of sales units, sales volume, and marketing time.  The historical interest rates will be taken from www.bankrate.com and the data regarding sales volume, marketing time, etc. will be researched using the Central Pennsylvania Multi-List.  Renters’ attitudes towards homeownership will be measured through internet surveys.   

Reliability is getting consistent results from the same measure.  Validity is getting results that accurately reflect the concept being measured.   An innumerable amount of factors influence the renter to become or not become a homeowner.   However, this research project seeks to measure how interest rates, supply, financing incentives and education influence the timing and ultimate decision by the renter to become a homeowner.   The measurements of interest rates to sales should have a high level of both reliability and validity.  The interviews with real estate professionals would be strong on validity but not on reliability, since the personalities will have different prospective.  Reliability and validity will be assessed using by testing and retesting the results.

The Research Design used in this research project will be surveys, focus groups, telephone interviews, mail surveys.  The purpose of this research project is the exploration of the decision-making process of renters while considering buying and the explanation of the relationship between variables influencing those decisions.   Surveys will be used to collect data on renters’ attitudes about homeownership and the variables.  The advantage is the control over data collection, but the disadvantage is that the response to the survey may be influenced by those who proactively respond to the questionnaire.

The “population”[15] for this research project is the group of renters in the three major apartment complexes in the downtown of Harrisburg, Pennsylvania.   The population should exclude those renters who are not eligible to purchase homes (recent bankruptcy, unemployed, students, commuters, short-term transient residents.[16]   The sampling[17] of this population would be obtained through our direct email survey, direct mail survey, telephone interviews and personal interviews with renters.   Real estate professionals such as REALTORS®, title agents and mortgage bankers and brokers will also be surveyed about their clients’ behavior.   For the research project non-probability sampling with reliance on available subjects will be used. Tenants will be qualified by asking questions about their tenure and basic attitudes toward renting or owning.   Real estate professionals will be chosen and qualified by market experience.   Data collection will be done through the internet survey service and collection of interviews.    U.S. census data will be observed in the downtown.    The United States Census and its American Housing Survey 2001[18] provides information on reasons people list for housing decision-making.   The census data also presents insight into rent versus own statistics; first-time homebuyers; amount of down-payment during purchase; and housing tenure.

Analysis of Data

The results of the survey and data collection provide an insight into how renters are motivated by the four factors discussed in our research project: 1) interest rates; 2) down-payment assistance/financing incentives; 3) supply; 4) education about homeownership.

Sales Data will be charted using the data taken from the Central Penn Multi List.  The sales can be grouped based on year or month and then compared to interest rates taken from the same time period.  Sales can be further broken down into monthly groupings and then compared to monthly interest rates.  These charts can be seen below using mock data.

            Quantitative analysis is also known as statistical analysis. Data from the surveys can be easily quantified by coding responses with numeric values and then entering them into databases.  These databases are valuable in that they can be entered into analytical computer software to evaluate the responses.

Mock tables

Surveying and analysis of renters who purchased homes with or without financing incentives would add the control that would help measure the dependent variable of financing incentives.  Analyzing the sales at the three new home developments and comparing the absorption rates of new homes versus marketing time for resale properties.  The control will be the number of sales, supply, and interest rates.  Readily available financing is measured by the  number of mortgage companies advertising in the Sunday real estate section of the Patriot-News, compared to past editions.

The desired survey sample is composed on tenants renting in the four downtown Harrisburg high-rise apartment buildings.  An ethical consideration is how to get the tenants to answer questions about buying without them knowing that the survey sponsors want to sell them a home.   Market surveys and feasibility studies can be biased toward the subject project of the study.  Questions can be asked that are biased toward the desired answer.  For instance, “if you could own your own home for the same monthly cost as you are paying in rent, would you be interested in buying?”   This question, while neutral on its face, fails to identify the additional “costs” of homeownership including maintenance, closing costs, real estate taxes, and increased insurance and liability.   Another ethical consideration is semantics of the words contained within the questioning.  For instance, using the word “home” instead of “house” or “real estate” or “real property” creates a warm feeling rather than a sterile response associated with legal terms.   The word “purchase” is less likely to evoke a positive feeling as the word “own.”

Special problems or issues that might be experienced while conducting this research project include convincing the subjects of the study (tenants) to cooperate and participate in the study.  Tenants who do not have to financial wherewithal or sufficient credit to purchase a home may be unwilling to admit that their own financial situation is the reason for not purchasing a house, thereby affecting the reliability of their answers.   In order to determine if the tenants have the financial ability to purchase a home, the monthly rent versus debt service on a mortgage are compared.

Summary/Conclusions

            The factors that influence renters to become homeowners are important to public and private interests alike.  Advocates of multi-housing interests have as much interest in the subject has homebuilders and real estate brokers.   Until post World War II, homeownership was beyond the reach of most Americans.  The Veterans Administration and GI benefits provided to soldiers returning from the war, coupled with the economic prosperity of the 1950’s and the availability of affordable housing (ie: Levittown) options pushed homeownership to over half of the households in America.   Other financing programs and the secondary mortgage market (FNMA and GNMC) led the second wave of homeownership in America with home ownership reaching 65% in the mid-1980’s.  Record low interest rates and a stable economy have driven homeownership to all-time high levels of 68% in 2003. 

            Will low interest rates continue to move renters into the ranks of homeowners?  Will government financing programs provide the impetus for renters to fulfill the American Dream of homeownership?  If developers build homes that look like and are equal to apartments in terms of monthly housing expense and maintenance requirements, will apartment dwellers make the move.  Finally, will the renters of Harrisburg, PA buy homes if these factors are present.  The research results will demonstrate a predictable pattern to help landlords, renters and developers prepare for the future.

            Low interest rates allow the homeowner to borrow more money, but is not as important a factor as financing availability and the supply of affordable housing.  The percentage of homeowners has only grown from 65% to 68% in the last twenty years.