• As of Q4 2014, the U.S. Breakeven Horizon is 1.9 years, up by 1.5 months from Q2 2014.
• Among large metros, Los Angeles (5 years), Washington, D.C. (4 years and two months), San Diego (3 years and 10 months) and Boston (3 years and 5 months) have the longest Breakeven Horizons.
• Large metros with the shortest Breakeven Horizons include Dallas-Fort Worth (a little over one year two months), Indianapolis (1 year and 3 months), Detroit (one year and 4 months) and Riverside (almost one and a half years).

With spring comes change. Time to change your wardrobe, your flower beds and, potentially, the way you live. As the home shopping season heats up, we’re again compelled to tackle the classic housing question: To buy or to rent? Ultimately, the answer depends on how long you think it will be until you want (or in bad times, need) to move again.

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 the same home. Renting and buying have long-established pros and cons: After large upfront costs, the out-of-pocket expenses associated with owning stabilize before being increasingly offset by growing equity. Renting allows you to potentially invest those same large upfront costs in stocks and bonds, but there’s no guarantee your rent won’t rise, and no share of your rental payments will return to you as equity.

As of Q4 2014, the U.S. Breakeven Horizon is 1.9 years (slightly less than one year and 11 months). But real estate is local, and nobody seeks to move to “the United States” – we move to neighborhoods in cities within metro areas, so we calculate the Breakeven Horizon at those levels too.

Among the largest 35 metros analyzed, the longest are in Los Angeles (5 years), Washington, D.C. (4 years and two months), San Diego (3 years and 10 months) and Boston (3 years and 5 months). The shortest horizons can be found in Dallas-Fort Worth (a little over one year two months), Indianapolis (1 year and 3 months), Detroit (one year and 4 months) and Riverside (almost one and a half years).

Changes on the Horizon

In the second half of 2014, the U.S. Breakeven Horizon grew by a month and a half. Echoing the national trend, Breakeven Horizons lengthened in almost two thirds of the nation’s top 50 metros. Breakeven Horizons lengthened by a year or more in three large metros (Los Angeles, San Diego and San Jose). But home buyers in some areas will break even more quickly by buying at the end of last year than they would have in the second quarter. The Breakeven Horizons in Denver, St. Louis and Minneapolis-St. Paul have all shortened by 6 to 9 months.

Several factors influence the Breakeven Horizon. In many markets, including those mentioned above with lengthening Horizons, expectations for slower home value growth going forward are driving the changes. Slower home value growth means it will take longer for growing equity to offset the often substantial costs of purchasing and owning a home, including closing costs, property taxes, maintenance and renovations, and insurance. On the other hand, in areas where home value forecasts are stronger, such as those with shrinking Horizons mentioned above, we would expect equity to more quickly overtake these costs (figure 2).

Growing equity through home value appreciation is an important driver of the Breakeven Horizon, but it’s not the only one. After all, breaking even is not just about covering the large upfront costs associated with buying a home. It’s also about the alternative to buying: Renting the property. The slowdown in home value growth has not always been met with a slowdown in the pace of rent increases. The higher the rent is relative to a home’s value, and the faster rents are expected to grow over the next several years, the faster the accumulating costs of renting a home will outpace the cost of buying the property in the first place (figure 2). In some areas, rents have become cheaper relative to home values, so local Breakeven Horizons have lengthened, making renting seem like a better option – even, in some cases, despite stronger forecasts for home value growth.

As time goes on and housing markets (and expected home value growth) nationwide stabilize, changes in the rental market and our ability to meet housing demand in growing cities will hold greater sway in the buy or rent question. Where rental affordability is a growing concern, we may continue to see short Breakeven Horizons, even without strong home value appreciation. And don’t forget about mortgage rates, which are currently incredibly low and which likely have nowhere to realistically go but up, even modestly, which may lengthen Breakeven Horizons by inflating monthly mortgage payments.

Housing markets are an interconnected system. The Breakeven Horizon is affected by many related variables, some offsetting, some reinforcing. Ultimately, the decision to buy or rent is a personal one and subject to currently available inventory, your personal willingness to accept risk, your credit and ability to nail down a low interest rate and many (many) other factors.

Methodology

For a graphic explanation of what determines differences in the Breakeven Horizon between regions, see Figure 3 below. Figure 3 below uses data from the most recent release. For a discussion of this graphic and a methodological[1] discussion of the Breakeven Algorithm, see our previous Breakeven posts.

[1] Recent changes to the Buy-Rent Breakeven Methodology: Expected growth in rent over the first year for a given property is now the average year-over-year growth in rental value over the past two years for the smallest region available.