Zillow recently published several interesting articles that provide valuable perspective on the age-old question of the wisdom of buying a home versus renting. Of course, there are lifestyle and psychic benefits to home ownership, but it turns out that the question of whether it is a smart financial decision is quite nuanced.
The Zillow analysis is based on a large number of inputs including many assumptions and forecasts. Based on saving 10% of median income, their analysts first calculated the number of years required to save the 20% downpayment necessary to purchase the median priced home. Nationally, that averages out at 8.5 years. Next, they estimated that an additional 6.2 years would be required for ownership to break even vis-a-vis renting. This latter calculation necessitates assumptions regarding, among others, the cost of home ownership, home price appreciation, current and future rents, and the return on the cash that a renter can invest rather than allocating to a downpayment. Zillow uses a consistent methodology, but different assumptions could certainly generate different outcomes. An additional caveat is that their analysis ignores Federal Income Tax considerations which tend to favor ownership versus renting. In any case, combing the two figures, the average buyer can expect a 14.7-year timeline to purchase and then reach breakeven which would take a recent college graduate into his or her mid-to-late 30’s.
The more interesting component of the Zillow analysis is the comparison of breakeven periods in various housing markets which vary widely. On the high end, the most notable outliers are concentrated in coastal cities with very high home prices. In contrast, the cities with the shortest breakeven periods are generally found in the Mid-West and South where home prices are relatively low (although still challenging for first-time buyers).
Cities with shorter breakeven periods include: (number of years)
| Memphis | 10.9 | Pittsburgh | 11.1 |
| Detroit | 11.4 | Indianapolis | 11.5 |
| Birmingham | 11.7 | Louisville | 11.9 |
| Cincinnati | 12.2 | Cleveland | 13.1 |
Those numbers are not dramatically different than the national average of 14.7 years, but the breakeven periods are truly extreme for some cities:
| Portland | 26.9 | Boston | 27.4 |
| New York | 29.4 | Seattle | 31.4 |
| Los Angeles | 37.7 | San Diego | 40.4 |
| San Francisco | 46.9 | San Jose | 49.2 |
High rents are generally associated with high home prices. However, in these cities, home prices are not only high in absolute terms, but high in relation to rents. This gap occurs primarily due to a shortage of housing which is attributable to zoning laws, regulatory bottlenecks, and a shortage of land available for development.
While long breakeven periods certainly seem daunting, a key point is that buying in one of these cities is not necessarily a poor choice. However, that decision requires heavy emphasis on the lifestyle benefits of ownership and becomes a question of time horizon. In the same vein, purchasing in a city with a short breakeven may or may not be a bargain.
Ultimately, the rent-versus-buy decision is not solely a financial calculation. The longer a family expects to remain in a home, the more likely ownership becomes both financially rewarding and personally fulfilling.