In previous quarters, we have produced the breakeven horizon – a meaningful and useful metric to enable consumers and professionals in the real estate industry to make the buy versus rent decision for metros and cities in the United States. We decided to expand geographically this quarter and compute the breakeven horizon for all regions (metros, counties, cities, neighborhoods and ZIP codes) using our 2013 Q1 data. The breakeven numbers are primarily influenced by home appreciation rates and to large extent by home values, rental prices and rent appreciation rates. Because there is large variability in home appreciation rates across ZIPs and neighborhoods within the same city in a metro, the breakeven horizon is a more valuable metric at granular regional levels when people decide to buy or rent in specific ZIPs or neighborhoods. For example, according to the 2013 Q1 Zillow Home Value Index, the median home value in the New York metro is $343,700, up 1.2% from 2012 Q1; however within the New York metro, Manhattan had a year-over-year ZHVI change of 5% compared with -1% in Suffolk County. The volatility in annual home appreciation rates increases as we drill down to neighborhoods (-7% to 11%) and ZIPs (-9% to 25%) within New York City.

We compute the breakeven horizon at the property level for all ZIP codes covered by Zillow and properties that have a Zestimate and Rent Zestimate.  We randomly select 3,000 homes in each ZIP and compare the net costs of owning a home with renting the same home over a 30-year horizon assuming a 30-year fixed mortgage to finance the home purchase. To figure out the rate of return from owning a home for the first year, we use the ZIP-level Zillow Home Value Index Forecasts (ZHVIF), if available, and bubble up to higher regions (city, county or metro that the ZIP belongs to) in case the ZIP forecast is not available.  From year 2 to year 4, we interpolate to the historical home appreciation rate at the metro that the ZIP is located in and use this historical metro appreciation rate from year 5 onward. We use ZIP-level median year-over-year change in Zillow Rent Index to account for the variance in rent appreciation rates at lower region levels.  The breakeven horizon is computed using the methodology explained in detail here. Once we compute the property-level breakeven horizon, we compute the average breakeven horizon for each region by aggregating properties within that region.

We compute average breakeven numbers for 266 metros, and 64% of the metros (170) have a breakeven horizon of 3 years or less as shown in the heat map below (figure 1). Among the largest metros, New York has the highest breakeven horizon (5.2 years) followed by Boston (4.1 years) and San Jose (3.7 years). The metros with the lowest breakeven numbers are Detroit (2 years), Miami (2 years) and Phoenix (2 .1 years). Home values and home appreciation rates primarily affect the net costs of buying a home and hence the breakeven horizon. While high home values increase the cost of owning a home, a high appreciation rate fetches a high rate of return on the home and hence reduces the net buying costs. For example, even though the 2013 Q1 ZHVI in New York is $343,700 and San Jose’s is almost twice that at $676,100, the breakeven horizon for New York (5.2 years) is higher than that of San Jose (3.7 years) because the home values are forecasted to grow a lot slower next year in the New York metro (-2.2%) compared with that in San Jose (4.3%). The historical home appreciation rate in the San Jose metro (7%) compared with that in New York (5.3%) also makes homes a much more lucrative financial asset in San Jose.

We find considerable variability in the breakeven numbers as we drill down to cities within a metro and neighborhoods within a city as shown in figure 2. Within the New York metro, the breakeven horizon ranges from 2.8 years to 7.1 years for cities. In New York City, among the largest neighborhoods, it takes 9.8 years in Gravesend for the costs of buying a home to overtake the rental costs, whereas only 5.2 years in the neighborhood of Astoria.

Among ZIPs in New York City, ZIP code 11223 in Brooklyn has an average breakeven horizon of 9.3 years whereas ZIP code 11213 has a breakeven horizon of 5.1 years. This difference arises due to higher homes values (ZHVI of $575,500 in the former ZIP versus $481,700 in the latter ZIP) and due to an expected depreciation in home values of -2.2% in ZIP code 11223 compared with an expected appreciation of 1.3% in ZIP code 11213. The fact that a ZIP can have twice the breakeven horizon of another ZIP in the same borough of Brooklyn underscores the impact of ZIP-level differences in home values and home appreciation rates on the number of years it takes for a home purchase to be financially worthwhile.

The geographical drill-down of breakeven horizon is hence a more reliable and accurate comparison of buy versus rent costs. In addition, it is much more gratifying for potential home buyers to be able to have the breakeven horizon at the ZIP codes or neighborhoods where they search for homes as opposed to at higher regional levels.

In 2013 Q1, we compute breakeven numbers for zips and neighborhoods with at least 30 properties and cities with at least 100 properties for which we have Zestimates and Rent Zestimates. In all, we produce the average breakeven horizon metric for 11,616 zips, 7702 neighborhoods, 8546 cities, 495 counties and 266 metropolitan areas across the nation. Nationwide, we find it takes 3.1 years for a home purchase to turn into a profitable investment compared to renting. Breakeven horizon 2013 Q1 for zips, neighborhoods, cities, counties and metros are available online at zillow.com/research/data.