Home purchase breakeven point continues to rise
It takes about 15 years to save for a down payment and benefit financially from buying vs. renting, up from 11 years in 2019, according to a recent report.
Key points:
- A Zillow analysis found that the breakeven point for would-be homebuyers has increased, which it attributes to a national housing shortage.
- In some markets, particularly expensive West Cost metros, it can decades before buying offers financial benefits.
- While the breakeven point for starter homes is far shorter, cash-strapped buyers seem hesitant to choose homes that may need costly repairs or renovations.
While the decision to buy or rent a home depends heavily on a household's financial situation and goals, a recent Zillow analysis shows that location can make a huge difference in the time it takes for a purchase to pay off.
Zillow estimated the number of years it would take a typical household to save for a down payment in different markets, then calculated how long it would take to come out ahead financially compared to renting a single-family home. The best-case scenario is about 11 years. The worst? Almost 50.
Nearly 15 years to save and break even
On a national basis, a household that is able to set aside 10% of the area's median income can save for a 20% down payment on a typical single-family home in about 8.5 years. It would then take an additional 6.2 years for the investment to pay off compared to renting, putting the breakeven point at 14.7 years, up from 11 years before the pandemic — an increase Zillow attributes to the national housing shortage.
The breakeven point varies widely by market, however. Cities in the Rust Belt region have the shortest overall timelines, led by Memphis at 10.9 years, Pittsburgh, Detroit and Indianapolis all in the 11-year range.
In pricey West Coast metros, on the other hand, it can take decades to break even. Hopeful San Jose buyers would have to spend a combined 49.2 years saving for a down payment and living in their home to break even. San Francisco wasn't far behind at nearly 47 years, followed by San Diego (40.4), Los Angeles (37.7) and Seattle (31.4).
Weighing affordability, commitment, benefits
The breakeven number tells a potential homebuyer something about the market that goes beyond just the price, according to Zillow Senior Economist Kara Ng.
"The common wisdom is that saving early to buy a home is the smart financial move, but the reality is more nuanced," Ng said in a news release accompanying the report.
"Buyers should think about not just when they can afford to buy, but how long they'd need to stay before owning makes more financial sense than renting. Homeownership comes with equity and stability, while renting offers flexibility and freedom from maintenance bills and emergencies," Ng noted.
Time to save vs. time to break even
The factors behind the breakeven point are also different for each market. In Austin, for example, households can save for down payment in less time than the national average, but it takes longer to break even because rents have fallen and are fairly affordable.
"A long timeline in one market may reflect affordability challenges across the board, while in a market like Austin it represents a more significant financial tradeoff when jumping into homeownership while the rental market is friendly," according to the report.
A starter-home solution?
Zillow noted that prospective buyers can break even in about half the time — 7.2 years — if they opt for a starter home, which the report defines as the average home within the lowest third of home values for a given area.
Would-be buyers seem less interested in this route, however, given the already-high costs of homeownership and increased likelihood of having to spend money on repairs, according to Zillow, whose data shows that move-in-ready homes tend to sell for nearly 3% more than expected, while fixer-uppers sell for 14% less.
Additionally, even a starter home remains out of reach in many expensive metros. A previous report found that starter homes now cost at least $1 million in 242 U.S. cities, up from 80 cities in 2020.