A new analysis by Zillow.com now shows that for the first time in several years, owning beats renting after just 3 years in most of the US. This is very different from the news reports over the years that showed that renting may be a more cost effective option for most people. Though that still may be the case, most people may be better off buying a home and are able to break-even in 3 short years.
The analysis not only looked at the price/rent ratio (which is essentially the price of the home divided by the annual rent payments), but it also took other data such as taxes, tax deductions, down payments, utilities, appreciation, maintenance, opportunity costs, and fluctuations in the rental market. With a hot rental market, rising rent prices, and a falling real estate market, the ratio gets smaller mathematically. I have been able to successfully increase rent on my rental properties because the demand for rental properties have increased after the housing bubble burst in 2008.
The shortest break-even point? No surprise, but its Miami/Fort Lauderdale/Tampa. The advantages to homeownership in that area kick-in in just 1.6 years. Just a few years ago, that number stood at 8.0. However, move to San Jose, CA and it will take you 8.3 years to break even. Here is a sample of 30 metro areas and their breakeven horizon:
Miami-Fort-Lauderdale, Tampa 1.6
Detroit 1.7
Phoenix 1.7
Orlando, Fla. 1.7
Las Vegas 1.7
Riverside, Calif. 2.0
Dallas-Ft. Worth 2.1
Pittsburgh 2.1
Cincinnati 2.1
Cleveland 2.4
Columbus 2.4
Atlanta 2.5
St. Louis 2.5
Denver 2.5
Minneapolis-St. Paul 2.7
Charlotte, N.C. 2.7
Chicago 2.8
Baltimore 2.8
Philadelphia 3.0
Sacramento, Calif. 3.1
Washington 3.5
Portland, Ore. 3.5
San Diego 3.6
Seattle 4.0
Los Angeles 4.3
Boston 4.3
New York 5.1
San Francisco 5.9
San Jose, Calif. 8.3
The authors are quick to point out that one should not conclude that buying is always the better option. The decision depends on a variety of factors including length of stay and metro area. But for those who are looking to live in markets with depressed real estate values for more than 3 years, consider buying your own property if you can.
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Nice article, buying has been one of the best decisions I have made.
Before you buy you have to also think about the cost and work of maintaining a home. Then homeowner’s insurance can have a large deductible you better be ready to cover after an unfortunate event.
I think this analysis took maintenance into consideration, but I have to look at their methodology again. I increased my deductible to $1k and haven’t had the need to use it yet (knock on wood).
I need to just double check, but my deductible is higher than $1k.
I believe it is because I am in a high risk area (hurricanes), but at least my house is not even on the 500 year flood plane (bought in this location on purpose). I already had to deal with a house that had a foot of water in it. It’s not fun at all.
Great stats. As usual, when buying a home think about the “hidden” costs. It’s not only about the mortgage payments. What I like I about your piece today is that it provides a positive view on buying real estate.
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I don’t own a home yet, but I hope to be there in a few years. Our area is probably closer to 5.0 on the scale as we are in the Orange County area of CA. We are in the process of saving for a down payment.
One interesting discussion point in the debate of rent vs buy is the mortgage interest deduction on taxes. Interest rates are at record lows so one should run some numbers before assuming that that tax break is going to be significant. I know lots of people use this as one of the major justifications for a house purchase. Low interest translates into a lower monthly payment, but less of a tax deduction.
I would also be interested in other’s opinions of whether putting down 20% vs 10% (with mortgage insurance) is a good idea.
Good points. Another point one should consider is if they will hit AMT. We hit AMT every year so we can’t take full advantage of the mortgage tax deduction.
The good ole days were when you were able to put down 10%, take a a 10% HELOC/HEL, and an 80% mortgage. I don’t think that’s possible anymore unless you have perfect credit….even then it may not be possible.
I think you can still get a FHA loan for as low as 5% down. I know someone at my work, who was 24 at the time, got one 2 years ago. I think it’s crazy, but it’s their finances, not mine.
FHA loans can be 3.5%, but the PMI is a monster, and IIRC, mandatory for 5 years.
Also, FHA is REALLY picky. I once got denied an FHA refi because of peeling paint on a porch.
Depending on the size of the loan and the interest rate, you may not even hit the standard deduction with just the loan interest. And the that interest just goes down the more you pay into the loan so it might not even be a justification for some.
It seems like they took a lot into consideration. I think the biggest factor is what you want out of a shelter. If you aren’t going to maintain a house you buy you are better off renting so that your landlord can keep your shelter from falling apart!
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Average out San Francisco and San Jose for me – the South Bay is an expensive place, but we bought our home. No regrets here, although we’d love if the houses around here were cheaper, haha.
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We both own rental properties but rent where we live (we lived in NYC for five years and the last 3 in Hoboken NJ). It turns out renting over the last seven or eight years worked out for us with the decline in prices, especially because we were pretty conservative with our rentals. But we’re looking to buy. That 5.1-year break-even doesn’t look too bad. We’re going to be pretty conservative with our house purchase, too, so our projections are actually to save money on a monthly basis not adjusting for a portion of it going into principal and the tax treatment of the mortgage interest. If we can get there – or even close. We’re hoping to accelerate the savings. Closing costs, however, in NY state are pretty outrageous, so we may end up in CT.
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Go Detroit! Interesting info. If anyone was interesting in picking up a few rentals, it seems like now would be the time …
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You’re exactly right. Good read on stats my friend., Paul
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While the stats speak for themselves, I would assume these are applicable for most countries. Buying a home not only gives you some financial security, but can also be used for passive income down the line.
And at the same time, this data shows why its a savvy time to be an investor in property. When I was in my senior yr of college in 1982, the only why I could afford to go forward was to buy in the summer, fix it up, and have roommates that paid my housing costs for my senior year. That property made money every month for 11 yrs, and an equity build profit when I sold it. I’d still have it in my portfolio had I not moved away. Paul
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