For Millennials, Reasons to Buy…and to Rent
Most homeowners recognize a huge advantage to purchasing a home: the “Breakeven Horizon” in which they break even on a home purchase.
For most home buyers in the U.S., that “Breakeven Horizon” is 1.9 years, according to Zillow Inc., Seattle. But for potential home buyers under age 35, including the emerging Millennial generation, the Breakout Horizon can be much longer, which means that for now, renting might be the best option.
Zillow Chief Economist Svenja Gudell said for young workers, who change jobs every few years on average, the local Breakeven Horizon is a crucial consideration. “The Breakeven Horizon in some of the nation’s most popular job markets is between two and three years, making it a crucial consideration for millennials, who typically spend about three years at a time with a single employer,” she said.
Zillow said among the largest 35 U.S. markets, the longest Breakeven Horizon is in Washington, D.C., 4.5 years. The shortest is in Dallas, 1.3 years. Zillow said home buyers in Boston, New York, and Washington, D.C. have to stay in a home for at least three years to break even on a home purchase, while buyers in the Bay Area would have to stay nearly that long to make buying financially advantageous.
“Those under 35 stay employed at the same place for an average of three years, so buying may not make sense for them, from a financial standpoint, even if paying a mortgage would be more affordable,” Gudell said.
Zillow said in general, Americans can break even on a home purchase in less than two years in 70 percent of U.S. metros, thanks to low interest rates, healthy home value forecasts and the relatively fast pace of rents in recent years.
Zillow said around the country over the past year, the Breakeven Horizon quickened in most of the Midwest and Southeast as well as in the Northeast corridor from New York to Boston. The Horizon stretched longer in Florida, northern California and in the Northeast from Virginia Beach to Philadelphia.
However, Zillow said the decision to buy may not be so simple for millennials, whose first jobs often take them to job centers with relatively high Breakeven Horizons. Boston, one of the nation’s youngest cities, has a Breakeven Horizon of just over three years. San Francisco’s Breakeven Horizon is 2.9 years, up from 2.6 years in fourth quarter 2014. Both markets are attracting young people following jobs, and many of those remain renters despite record-high rental costs.
“Even with record-high rents in job centers like San Jose, Boston and Washington, D.C., putting off a home purchase might be the best financial decision for a young person who has saved enough for a down payment, depending on how long they intend to stay in their jobs and homes,” Gudell said. “Young workers face a lot of hurdles on the way to homeownership, including saving for a down payment in the first place and deciding where and when to settle down.
Zillow said rents are flattening across the country and expected to continue to stabilize, a factor that could lengthen the Breakeven Horizon as homes continue to appreciate. It noted condominiums–a common choice for young home buyers in urban neighborhoods–have a longer Breakeven Horizon because of condo association fees.
