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Homeowner Break-Even Period Shrinks, but That Doesn't Change the Rules

NEW YORK (TheStreet) -- Though millions of homeowners are effectively stuck in their homes because they owe more than the properties are worth, prospective homeowners face a much more pleasing condition: In half of U.S. metropolitan areas, buying now beats renting after a mere two years.

"Rents keep rising, and mortgage interest rates remain very low, which is helping to skew the rent vs. buy decision toward buying for those who can afford it," said Stan Humphries, chief economist for, the housing and mortgage firm behind a rent-versus-own study.

Many renters may ask themselves why renew a lease, when you can break even on the same home in less time in many areas.

Two years is a surprisingly short time to make a home purchase pay off. For many years, the rule of thumb was that you must own a home for four or five years to break even. It takes that long for the home's rising value to offset the various costs, including title insurance and realtor's commission, incurred in the purchase and sale. Renting makes more sense for anyone who does not expect to stay in the home beyond the break-even period.

After the housing crunch several years ago, tens of millions of homeowners found that falling home values had left them with properties worth far less than they owed their mortgage lender. Even after several years of solid price gains, the typical home is worth about 15% less today than at its peak about eight years ago. That extended the break-even period for many homeowners to many, many years.

But prospective buyers benefit from the lower prices. And low mortgage rates allow them to keep their monthly costs down. At the same time, high demand has pushed rents up very fast in many communities. The higher the rent, the sooner owning pays off. Finally, low-interest earnings on safe savings such as bank accounts reduce the gains renters can enjoy on cash that is saved instead of being put into a down payment on a home.

"Among the 35 largest metro areas analyzed by Zillow in the first quarter, those with the shortest breakeven horizon were Riverside (less than 1 year), Orlando (1 year), Tampa (1.1 years) and Miami-Fort Lauderdale (1.2 years)," Zillow said, referring to locations in California and Florida. "Large metros with the longest breakeven horizon included Washington, D.C. (4.2 years), Boston (4 years), Phoenix (3.3 years), San Diego (3.2 years), Minneapolis and Baltimore (both 3.1 years)."

Zillow cautions that break-even periods can vary considerably within any given city.

Nothing is guaranteed. Break-even estimates rely on best judgments about uncertain factors such as future interest rates and rents and the pace of home-price appreciation.

Buying involves a long-term commitment that could sour if the new homeowner loses a job or has some other financial setback, or needs to move unexpectedly.

So although the Zillow study is encouraging for prospective buyers, it probably makes sense to rent if you don't plan to stay put for that traditional break-even period of four or five years. Use the Rent vs. Buy Calculator for insight into your own situation.

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