In 64% of cities in the United States buying a home is a better financial decision than renting for those intending to stay in their home for at least three years, according to a new analysis. The analysis from online real estate marketplace Zillow incorporates all possible costs associated with buying and renting, including upfront payments, closing costs, anticipated monthly rent and mortgage payments, insurance, taxes, utilities and maintenance costs.
It then factors in historic and anticipated home value appreciation rates, rental prices and rental appreciation rates to help calculate the point, in years, at which buying becomes less expensive than renting. Among the 30 largest metro areas analysed by Zillow in the first quarter of 2013, those with the shortest breakeven horizon were Miami and Detroit at two years and Phoenix at 2.1 years.
Large metros with the longest breakeven horizon in the first quarter included New York at 5.2 years, Boston at 4.1 years and San Jose at 3.7 years. Within metro areas, the breakeven horizon will vary in individual counties, cities, neighbourhoods and ZIP codes.
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For the first time, the breakeven horizon was applied to the ZIP code and neighbourhood levels within individual cities. As neighbourhood selection is such a critical part of the home shopping process, the breakeven tool can be more valuable at these smaller geographic levels, the firm pointed out.
For example, the breakeven horizon for New York City as a whole is 6.1 years. However, at the neighbourhood level, the breakeven horizon ranges from a low of 2.5 years in the Parkchester area in the Bronx, to a high of 11.9 years in the Carnegie Hill section of Manhattan. Nationwide, the neighbourhood with the lowest breakeven horizon is the Shelby Forest-Frayser area in Memphis at just one year. The neighbourhood with the longest breakeven horizon is the Sandbridge area of Virginia Beach at 20.3 years.
‘Locally high home value appreciation in many areas, combined with historically low mortgage rates and low home prices relative to recent peaks, has made buying a home a more advantageous financial decision than renting for many would be buyers,’ said Zillow chief economist Stan Humphries. ‘The decision to buy or rent should always take into account a number of factors, one of which is how long a buyer or renter plans to stay in a property. Even in areas with relatively low breakeven horizons, buyers should resist the temptation to buy and sell properties based only on short term goals. And renters in these areas should never feel compelled to stretch themselves to buy if it is currently beyond their means,’ he added.
He explained that the breakeven horizon is primarily impacted by the expected rate of home value appreciation in a given area. In areas where home values are expected to appreciate more quickly in coming years, the time it takes to recoup upfront costs will be lower and thus the breakeven period will be shorter. In areas where home values are expected to rise more slowly, or even fall, the breakeven horizon will be longer.