Everyone knows that if you’re going to spend a short time someplace, it makes no sense to buy a house there. Short stints are for renting. When you’re putting down roots for the long haul — say, your children’s growing-up years or retirement — that’s when you buy, if you can afford to. By the time you sell the house, years later, much of the money you would have spent on rent will have become equity instead, assuming you maintained the house and the real estate market was steady.
That’s what conventional wisdom says. In reality, buying or renting a home is an intensely personal decision, with emotional and even financial considerations that go beyond whether to invest in this one (admittedly large) asset. Looking strictly at housing market numbers, there is a concrete point at which buying a home makes more financial sense than renting it. We call it the Buy-Rent Breakeven Horizon, and it balances the financial pluses and minuses of renting and owning.
The idea is that, in a healthy market, your home will grow in value, eventually offsetting the additional costs that come with owning – including the hefty transaction costs of buying and then selling a home in order to realize gains. That advantage is weighed against the savings and investment gains you could make as a renter by putting that down payment towards some other venture and avoiding homeownership expenses like real estate agent commissions and property taxes.
The Breakeven Horizon varies across markets and as mortgage interest rates fluctuate. In general, the higher rents are compared to home prices and the faster homes are appreciating in value, the shorter the Breakeven Horizon will be – which is not to say that homes are necessarily affordable in areas with short Breakeven Horizons. In some pricey markets, both renting and owning are out of reach for much of the population – rent can be too steep without roommates and a sufficient down payment might never be possible.
It’s also just one factor in a decision that’s highly personal – even in a financial sense. People who are great at saving and investing might make more money as renters than they would as homeowners long past their area’s Breakeven Horizon.
Here’s a look at Zillow’s second quarter 2017 Breakeven Horizon, by metro area:
Here’s how Zillow calculates its Breakeven Horizon:
Zillow estimates a unique Breakeven Horizon for up to 3,000 individual homes pulled randomly from each ZIP code and uses the Zestimate and Rental Zestimate on the same houses, so we’re able to consider the costs of buying a house against the costs of renting that same house.
For buying, we assume:
- A 20 percent down payment
- Monthly payments on a 30-year fixed rate mortgage at the current interest rate for people with credit ratings between 680 and 740
- Property taxes
- Homeowner’s insurance
- 3 percent purchase costs
- 8 percent selling costs (because that’s how owners realize the gains)
- Annual maintenance costs equal to 1 percent of the home’s value
- For condos, 1.2 percent a year in HOA fees
- Home appreciation forecasts
- Federal tax deductions
For renting, we assume:
- A deposit equal to one month’s rent
- Rent payments
- Renter’s insurance
- 5 percent annual investment gains on money that would have been used as a down payment or gone towards other homeowner expenses the renter avoids