Q4 2015 Breakeven Horizon: Buying a Home Pays Off for Most – But Not All – After Just Two Years
- The U.S. Breakeven Horizon was 1.9 years as of the end of 2015, unchanged from Q4 2014.
- Home buyers break even on a home purchase in less than two years in 70 percent of housing markets, compared to renting the same home.
- Among the largest 35 markets, the longest Breakeven Horizon is in Washington, D.C.: 4.5 years. The shortest is in Dallas: 1.3 years.
A persistent combination of healthy home value growth and low mortgage interest rates, combined with robust growth in rents, is helping to keep the buy vs. rent equation tilted heavily towards buying in most areas for those planning on staying in their homes for longer than just a few years. But local markets vary, and that equation is shifting – if even slightly – in some notable areas.
Zillow’s Breakeven Horizon estimates the number of years you would have to live in a home before buying it would become more financially advantageous than renting it. Nationwide, the Breakeven Horizon as of the end of 2015 was a scant 1.9 years – unchanged from a year ago.
To calculate the Breakeven Horizon, we make some basic assumptions[1] and bake in common costs associated with renting and buying, including down payments, security deposits, taxes and fees. The result is a comprehensive look at how long you’ll need to stay in a home in a given area before the total costs of renting, offset by investments in stocks or bonds, surpass the costs of owning as equity builds.
Among the nation’s largest 35 metro markets, those with the longest Breakeven Horizon as of Q4 2015 were Washington, D.C. (4.5 years), Los Angeles (4.1 years) and San Diego (3.4 years). Large markets with the shortest Breakeven Horizon included Dallas-Fort Worth (1.3 years), Indianapolis (1.3 years) and Detroit (1.4 years).
Broadly speaking, markets in the densely populated Northeast Corridor and along the West Coast tend to have longer Breakeven Horizons, while markets in the Southeast and Midwest have shorter Breakeven Horizons (figure 1).
A Changing Horizon
But the Breakeven Horizon is shifting somewhat in some areas as local housing conditions change. The Breakeven Horizon in most Florida markets, for example, got a bit longer in 2015 – even as Breakeven Horizons overall remain quite short in the Sunshine State. In most markets in the northern portion of the Northeastern Corridor, roughly from the New York metro area through Boston – a longstanding bastion of relatively high Breakeven Horizons – the Breakeven Horizon is getting somewhat shorter (figure 2).
Local market dynamics, including the pace of rental and home value growth, have an important impact on the Breakeven Horizon and how it changes over time. General rules of thumb say that if you’ll only live in a home for a short time, it’s cheaper to rent. And in many cases – but not all – those rules hold true (depending on your definition of a “short” time frame). Buying a home often requires very large upfront costs in a down payment and closing costs, and significant investments over time in taxes and maintenance.
In general, rents are flattening across the country and are expected to continue to stabilize, a factor that could lengthen the Breakeven Horizon somewhat as home values continue to grow. And condominiums – a common choice for young home buyers, especially in urban neighborhoods – have a longer Breakeven Horizon because of the added costs of condo association fees.
The local Breakeven Horizon is an important data point to consider when weighing the decision to rent or buy – doubly so because the Breakeven Horizon in a given ZIP code may be much longer or shorter than the broader region overall (Figure 3). Use the tool below to explore the Breakeven Horizon by ZIP codes within a given county to help inform your decision.
[1] These assumptions include a home buyer purchasing a home with a 30-year, fixed-rate mortgage and a 20 percent down payment; and a renters earning 5 percent annually on investments in the stock market.