• Strong expected home value growth, low mortgage rates and high rents are helping to keep the Breakeven Horizon very low in many areas.
• Breakeven Horizons are expected to lengthen as mortgage interest rates rise, home value growth slows.

Sustained low mortgage interest rates, forecasts for continued strong home value appreciation and high rental demand that keeps pushing rents higher are all contributing to Breakeven Horizons that are continuing to stay very low.

The Zillow Breakeven Horizon estimates the typical time it takes for the accruing costs of renting a home in a given area to exceed the costs of having purchased that same home, and it is calculated down to the neighborhood and ZIP code level.

Even as the expected pace of overall home value appreciation begins to fall, the Zillow Home Value Forecast is still calling for robust growth in many markets (see the bar graph below). Strong appreciation allows growing home equity to offset the often substantial costs of purchasing and owning a home, including closing costs, property taxes, maintenance and renovations, insurance and the opportunity cost as a result of spending one’s savings on a home rather than investing it.

Growing equity through home value appreciation is an important driver of the Breakeven Horizon, but it is not the only one. Persistently low mortgage rates, and increasing rents, make mortgages a relative bargain. Rents, unlike home values, largely did not fall much during the housing bubble bust. Likewise, renters cannot benefit from low mortgage rates influenced by Federal Reserve policies meant to reduce the cost of home purchases and stimulate the housing market. High rents, coupled with cheap mortgages, means it takes less time for the costs of renting a given home to exceed the costs of having purchased it in the first place, despite the large upfront costs of purchasing.

High rents reduce the price-to-rent ratio, which also weighs heavily on the Breakeven Horizon, as illustrated below. The higher that rents are relative to home prices, the smaller the price-to-rent ratio, and the shorter the breakeven (upward slope to the graph). For a given price-to-rent ratio, the Breakeven Horizon is made shorter still by faster anticipated growth in both rents and home values.

Over time, we expect the Breakeven Horizons will lengthen as mortgage rates increase and forecasts turn more sedate.