During the recession, home ownership went from being the “American Dream” to the American Nightmare especially for those who lost their jobs and/or their homes. More Americans continued to rent, became renters because they lost their home, or moved in with relatives.
The economy is slowly improving and home values are still at all time lows in most areas of the country. Zillow, a real estate information firm, introduced their “breakeven horizon” which computes a metric to the buy versus rent decision. This metric reflects the number of years in which buying a home versus renting is financially even. Obviously, the shorter the time frame is, the more advantageous it is to buy.
To determine this metric, Zillow included the down payment, purchase costs, mortgage payments, property taxes, utility costs, maintenance costs, tax benefits and all the costs associated with renting the same home. They also included home value and rental price appreciation. The ‘breakeven horizon” is identified when the net costs of buying the house compared to the costs of renting the same house are equal or less. The year this occurs is measured as the break even year.
Zillow analyzed the “breakeven horizon” in 224 metropolitan areas and 7,500 U.S. cities. In more than 75 percent of the metropolitan markets analyzed, a homeowner would break even after three years or less of owning a home. The range was from 1 year to 27.2 years. In seven percent of the 224 metropolitan areas, it takes over five years to reach the break even point. The metropolitan areas with the longest breakeven horizons were San Jose, California (8.3 years); Oak Harbor, Washington (7.2 years); Santa Cruz, California (7.1 years); San Luis Obispo, California (6.3 years) and Salinas, California (6.3 years). The metropolitan areas with the shortest breakeven horizons were Memphis, Tennessee; Miami-Ft. Lauderdale, Florida; Salisbury, Maryland; Red Bluff, California; Mobile, Alabama; Tampa, Florida and Fernley, Nevada (all tied at 1.6 years).
“Across most of the country, historic levels of affordability make buying a home a better decision than ever, especially considering rents have risen more than 5 percent over the past year,” said Stan Humphries, Zillow Chief Economist. “This is the first analysis of metros and cities that presents the buy versus rent decision in an intuitive way, by telling consumers how long they must live in the home before buying breaks even with renting financially.”
This measurement includes the most factors in evaluating renting versus buying. The average time frame can vary per city within a metropolitan area. This is very helpful information. To find out the “breakeven horizon” in your area, go to Zillow.com. You also need to consider your own financial situation, when you making the decision to buy or rent.
With the average breakeven point being 3 years or less nationwide, being able to buy your own home may come sooner than you think.