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Some have argued that housing has bottomed already. Though recent home sales numbers came in weak, talk of a recovery has piqued homebuyers’ interest.When purchasing a home many considert the price-to-rent ratio, but a new report from Zillow says this metric leaves out crucial factors that prospective homebuyers need to consider.
The price-to-rent ratio is calculated by looking at the ratio of the median listing price of homes, to the median annual rental price of available rentals. However, this doesn’t offer an adequate sample of homes in the area since it only considers those that are available to buy or rent. Moreover, it fails to include many of the costs involved in purchasing a home like property taxes, transactional costs, maintenance, mortgage interest deductions etc.
To counter this Zillow has introduced the “breakeven horizon” a new metric to help prospective homebuyers to gauge whether they should purchase or rent a home. From Zillow:
“The breakeven horizon is the number of years after which buying is more financially advantageous than renting (at the precise breakeven horizon one can be indifferent between buying and renting). When living in a home for a shorter period of time than the breakeven horizon, renting is more advantageous than buying.
We compute this number at the home level and then calculate the average and median breakeven horizons at the city and metro levels. We incorporate all possible costs and benefits associated with buying and owning a home such as the down payment, purchase costs, mortgage payments, property taxes, utilities costs, maintenance costs, tax benefit etc. as well as all the costs associated with renting the same home. We also include home value and rental price appreciation.
The breakeven horizon for the house is identified by comparing the net costs of buying the house with the costs of renting the same house – it is the year when the buy costs become less than or equal to the rent costs.”
At the metro level, the breakeven period ranges from 1.6 years to 8.3 years i.e. it would take homeowners 1.6 years to 8.3 years to break even on their purchases. But within a metro, cities could have extremely varied breakeven horizons.
For instance, the New York metro has a breakeven horizon of 5.1 years. At the city level though the city of Rossmoor, New Jersey has a breakeven horizon of 1.4 years, while Mantoloking, New Jersey has a breakeven horizon of 24.1 years.
For now it appears to be the easiest to break even in Florida and certain cities in California and Arizona, this is probably because home prices tumbled dramatically during the housing bubble. Of course homebuyers need to look beyond just these metrics before they choose to invest.
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This story was originally published by Zillow.The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.