Breakeven Horizon for Metro Areas
The decision to buy or rent your home may appear simple on the surface—a process of comparing monthly rent to a mortgage payment. In truth, there are many moving parts: the future asset value of the home, the potential for rents to rise in the future, the alternatives to using up your savings on a down payment, taxes, maintenance, insurance—the list goes on.
We attempt to simplify this question. Let’s say you have two choices: (1) buy your home after putting 20 percent down on a 30-year fixed rate mortgage with the prevailing interest rate of 4.47 percent [1] or (2) rent your home, making a commitment to put all those avoided purchase costs into an account earning 5 percent annually.
To clarify these options, we make reasonable assumptions over purchase and selling costs, insurance expenses and all those other moving parts. We then apply our expectations for home values and rents in local markets all over the U.S.
The map and table below demonstrate these results for metropolitan areas across the country for 2014 Q1. In the areas where home values and rents are expected to continue increasing aggressively, the amount of time it takes for the costs of renting (offset by the interest growing on your savings) to exceed the costs of buying (offset by your growing equity) is very short. Case-in-point: the metro of Riverside, California. Home values grew 23.3 percent from the first quarter of 2013 to the first quarter of 2014. We expect them to grow aggressively over the next year as well. The median ZHVI forecast for the sample of 395,025 homes drawn from the metro area is 12.11 percent, leading to a breakeven horizon of a bit less than 11 months.
Keep in mind that there is more to it than expected appreciation rates. See our more detailed Breakeven post for a discussion of the major drivers of the Breakeven Horizon, the Breakeven algorithm and the assumptions used.
[1] Dec. 30, 2013 national average quoted for a credit rating between 680 and 740 on Zillow Mortgage Marketplace.