Q4 2016 Breakeven Horizon: Why it May Start Taking Longer to Profit on a Home Purchase in Pricey Markets
- As of Q4 2016, the U.S. Breakeven Horizon – the number of years one needs to live in a home before buying it makes more financial sense than renting it – was 1 year and 11 months, roughly 20 days longer than at the same time in 2015.
- Areas with the longest Breakeven Horizons tend to be concentrated in expensive markets along both coasts.
- Driven by both a slowdown in home value growth over the past year and by continued slowdowns to come, the Breakeven Horizon has lengthened in many of the nation’s most expensive markets.
An expected slowdown in the pace of home value growth in a number of pricey, fast-moving markets means it may take longer going forward to break even financially when buying a home in those areas compared to renting it.
Zillow’s Breakeven Horizon estimates the number of years you would have to live in your home for buying it to have been more cost effective than renting it. Factors including expected growth in rents and home values, price-to-rent ratios and mortgage interest rates can all have a significant impact on the costs and benefits of renting versus buying. The U.S. Breakeven Horizon as of Q4 2016 was 1 year and 11 months, about 20 days longer than at the same time in 2015. And as in prior quarters, areas with the longest Breakeven Horizons tend to be concentrated in expensive markets along both coasts (figure 1). But that relative stability nationwide and over time overshadows some significant changes locally.
Driven in large part by both a slowdown in home value growth over the past year and by continued slowdowns to come, the Breakeven Horizon has lengthened in many of the nation’s most expensive markets (figure 2). In pricey San Jose, for example, home values are expected to grow just 0.4 percent through the end of 2017, a far slower pace than current annual home value growth of 4 percent and annual growth rates of more than 10 percent as recently as May. Because home values are growing more slowly, it will naturally take longer to earn enough equity in a home to offset the very large upfront costs necessary to purchase a home in a market as expensive as Silicon Valley. San Jose has a current Breakeven Horizon of 5 years and 2 months, longer by almost 2 years compared to the end of 2015. Similarly, the breakeven in nearby San Francisco has grown by 1.5 years compared to a year ago, to roughly 4.5 years.
But while many areas are slowing down, not all are. Previously expected to remain flat, home values in and around Washington, D.C., for example, are now expected to grow by 3 percent through the end of 2017. This renewed vigor in home value appreciation has actually shortened the time it takes to break even in this metro by one full year compared to Q4 2015, to 3.5 years.
Within metro areas, Breakeven Horizons are generally lengthening in expensive cities and shortening in more affordable cities, as home value appreciation continues to slow down more in more expensive locales (figure 3).
Home values have rebounded strongly over the past several years, and in some areas are higher than they’ve ever been, so the question of whether or not it’s a good time to buy is becoming less obvious to many households as home affordability itself suffers. Thankfully, for most households, buying a home is not – and should not be – about timing the market and making a financial killing. It’s about deciding where and how to live, and knowing how long you’ll need to wait before making those decisions again.