According to an analysis performed by the real estate listing website Zillow, the average person who intends to remain in a home for 2 to 3 years, would come out better financially buying versus renting. The survey examined data from 200 metropolitan areas. According to the findings, 75% of homeowners would reach a “breakeven point” in three or fewer years.
Stan Humphries, Zillow’s chief economist commented that from a historical perspective, “levels of affordability make buying a home a better decision than ever, especially considering rents have risen more than 5% over the past year.”
In Zillow’s first buy-versus-rent analysis, economists reviewed data that included down payment amounts, closing costs, mortgage refinance, utilities, monthly mortgage payments, real estate taxes and maintenance expenses.
These costs where compare to rental costs. In addition, the survey considered projected home price appreciation, rent increases, tax deductions and inflation.
Breakeven Point Depends on City
The actual time it takes for a homeowner to break even varies from city to city. For example, Miami and Tampa, Florida -- at 1.6 years, have the shortest period that homeowners would have to stay put in order to recoup their costs and make the purchase worthwhile.
Home prices in Miami have fallen 45% of their peak of five years ago. However, RentJungle’s data shows rents have increased 20% over the past three years. Phoenix, AZ, Detroit, MI, Orlando, FL and Las Vegas, NV all have an average of 1.7 years.
The following five cities have the longest recovery times measured by the survey:
- San Jose, CA – 8.3%
- San Francisco, CA – 5.9%
- New York, NY – 5.2%
- Los Angeles, CA – 4.3%
- Boston, MA – 4.3%
The Zillow survey echoes the results of other analyses and indicators, which show that escalating rents, historic low interest rates and home prices (down more 34%) make buying a home financially superior to renting.
Trulia’s Analysis
In a survey conducted in May, the real estate firm Trulia’s rent vs. buy index also indicated that buying a home was more affordable than renting in 98 of the 100 largest cities, including Boston, New York and Los Angeles. The index considers asking prices for rental units and homes listed for sale in its own database between December 1, 2011 and February 29, 2012.
According to the chief economist of Trulia Jed Kolko, rising rent prices and depressed housing values have made home homeownership “more affordable,” but rising rents creates a dilemma for people who can’t afford to buy yet.”
Some households must continue renting because they cannot save enough for a down payment – the biggest obstacle most potential homebuyers face when it comes to buying a home. These potential homebuyers suffer another hit because as they continue to rent and place demand on the nation’s rental stock, rent prices continue to climb. Consequently, they have a hard time saving the down payment to buy a home.
Future Rent Increases
A senior economist at the global economic research consultancy firm Capital Economic Paul Dales says the U.S. has a median rent of $712 per month compared to the average monthly mortgage payment of $647. Falling vacancy rates could push the average rent increase 3 to 5% by early 2013. Starting in 2014, a recovering economy can cause annual rent price increases of 4 percent a year.
As a result, the numbers of households that can qualify to buy a home declines approximately 850,000 households each year.
Dales says cities like San Francisco and Honolulu make better financial sense for renters. Trulia’s index shows that homeowners who intend to stay put for five years or more should take advantage of the mortgage interest rate deduction allowed homeowners. Renters in Boston and other high rent locations can benefit from buying versus renting if they plan to settle in for a while.
Renters looking to analyze their own circumstances and determine if they should rent or buy should use our infographic for additional information and guidance on making a decision.
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Mortgage Refinance