Real Estate

Zillow: Rent vs. buy break-even point falls by a month in Q1

The average time it takes to make homeowning make sense fell a bit in Q1

According to a report by Zillow, the average time it takes for owning a typical U.S. home to make more financial sense than renting that same home is down by about one month over last quarter. The new average is 1.96 years. That means it would take roughly one year and 11 months for it to make more sense to own a home in the U.S. than to rent that same home.

Not surprisingly, break-even horizons are longest in expensive coastal markets like Los Angeles, Portland and Washington D.C. This translates to a roughly two to three-year break-even horizon. Los Angeles has the longest breakeven horizon at 3.7 years.

The shortest break-even horizons are in the Southeast, with Memphis taking first place at 1.32 years. Birmingham, Tampa and Orlando are other markets with notably short break-even horizons.

Obviously, the main factor in determining the break-even point is home prices in any given area. Hence Los Angeles’ long horizon, and Memphis’ short horizon. However, there are other complicating factors such as the state of the local rental market and interest rates, so keep that in mind as you take a look at the interactive report.

Also, Zillow’s report is based on a number of assumptions that are important to note. Here they are:

For buying the report assumes:

  • A 20% 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% purchase costs
  • 8% selling costs (because that’s how owners realize the gains)
  • Annual maintenance costs equal to 1% of the home’s value
  • For condos, 1.2% a year in HOA fees
  • Home appreciation forecasts
  • Federal tax deductions

For renting the report assumes:

  • A deposit equal to one month’s rent
  • Rent payments
  • Renter’s insurance
  • 5% annual investment gains on money that would have been used as a down payment or gone towards other homeowner expenses the renter avoids

 

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