Buying vs. Renting: A Financial Perspective

I wish I read this a long time ago.

In a little under two years, owning a home becomes more financially viable than renting an identical home, according to the latest Zillow Buy-Rent Breakeven Horizon. It takes just under 1 year and 11 months for homeownership to be more beneficial than renting in the first quarter of the year, which is just over a month less than in the previous quarter.

Zillow compares the cost of owning versus the cost of renting the same home, considering a 20 percent down payment, a monthly payment on a 30-year mortgage loan, current property taxeshomeowner’s insurance, 3 percent purchase costs, 8 percent selling costs, home maintenance estimates, and federal tax deductions.

Zillow compares these costs to renting the same home with a deposit of one month’s rent, monthly rental payment, renter’s insurance, and 5 percent annual investment gains on the sum that would have gone toward a down payment or other homeownership expenses.

It generally takes the least amount of time for homeownership to make more financial sense than renting in Southeastern markets and the longest amount of time in “pricey coastal markets,” according to Zillow.

Comparing the largest U.S. markets, it takes the least amount of time to break even in Memphis, Tennessee, where it takes just 1.32 years.

This compares to 3.7 years to break even on owning a home in Los Angeles, the longest time of any major U.S. metro.

Portland, Oregon (3.07 years); San Francisco, California (2.98 years); Washington, D.C. (2.96 years); and San Diego, California (2.94 years), also had long break-even timelines. These markets also have high median home values.

Other markets with short break-even points tend to be in the Southeast, including Birmingham, Alabama (1.39 years); Tampa, Florida (1.40 years); Orlando, Florida (1.44 years); and Atlanta, Georgia (1.45 years). In contrast to the high median home values and long break-even points on the West Coast, these Southeastern markets tend to have low median home values. All except Orlando have median home values below the national median.

However, as Zillow explains, the factors contributing to the break-even point “can be complex,” ranging from purchasing transaction costs to the potential savings and investment gains that could be earned by investing the cost of a down payment.

While many markets with high home values have long break-even timelines and many markets with low home values have shorter ones, there are some outliers. Hartford, Connecticut; Virginia Beach, Virginia; and Milwaukee, Wisconsin, all have home values near the national median. However, their break-even points range between 2.8 years and 3.23 years.

Also, while the major U.S. metros tend to have break-even points between Memphis’s 1.32-years and Los Angeles’ 3.7-years, there are some smaller markets with break-even points outside of this norm. There are several smaller markets, mostly in the eastern half of the U.S., where the break-even point for owning a home is less than one year.

On the other hand, it takes 7.5 years to break even on owning a home in Idaho Falls, Idaho, and just over six years to break even in Riverton, Wyoming.

About Author: David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@DSNews.com.

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