US home value appreciation is expected to slow in many of the country’s most expensive markets in 2017. As a result, it will now take homebuyers in these markets longer to break even on buying a home when compared to renting, according to a new report by the online listing site Zillow.
The Zillow National Breakeven Horizon measures the amount of time it will take after purchasing a home for the decision to make better financial sense than renting. At the end of the fourth quarter of 2016, the Zillow National Breakeven Horizon was just under 2 years — three weeks longer than it was in the fourth quarter of 2015.
Home growth accelerated in the country as 2016 closed, ending at just under an appreciation rate of 7 percent annually. But, during the same time, rent appreciation grew only at 1.5 percent annually. As a result, in many markets this shift made it less obvious whether buying or renting was the more financially sound choice.
Rapidly increasing home values allow homebuyers to accumulate equity at a quicker pace, and recoup the larger up-front costs of buying. As home values take longer to appreciate, the longer it will take for homebuyers to accumulate that equity and the Breakeven Horizon Forecast increases.
Of the largest US metros, homebuyers in several hot California markets have the longest Breakeven Horizon — at least four years in San Jose, San Francisco, Los Angeles and San Diego.
However, homebuyers will break even the fastest in the South and Midwest. Here, in markets like Detroit, MI, Atlanta, GA, and Indianapolis, IN it will take take homebuyers less than 1 and a half years to break even when buying a home compared to renting.
But home value appreciation isn’t necessarily showing signs of slowing everywhere in the country. For example, in the Washington, DC metro area, home values are expected to grow more rapidly this year after remaining mostly flat in 2016. This rapid increase will result in a shorter Breakeven Horizon for homebuyers — about 3 and a half years in the fourth quarter of 2016, down from almost four and a half years last year.
“There are many factors that go into the decision on whether to rent or buy,” said Zillow Chief Economist Dr. Svenja Gudell.
Gudell said the Breakeven Horizon can help homebuyers better comprehend the long-term calculation of buying over renting. “It’s helpful for buyers to understand that as home value appreciation moderates, it will take them longer to break even than in past years. San Jose buyers, for example, will have to stay in a home for at least five years to offset the high upfront costs necessary to make that purchase,” said Gudell.
Click here to read the entire report.