Real estate technology company Zillow has a warning for Americans about the time it takes to save for a down payment on a home and plan for high mortgage rates in a difficult housing market.
“Buying a home is a financial commitment measured not just in dollars, but in years,” Zillow wrote. “Whether to buy or rent is a complex question that depends on where you want to live and your lifestyle preferences, in addition to your financial situation.”
“Nationwide, a median-income household can save for a down payment and break even on their purchase in less than 15 years.”
To calculate the financial breakeven point for homeownership versus renting, Zillow measured two phases, including saving for a down payment and recovering the upfront costs.
On a national level, a household setting aside 10% of the median income needs 8.5 years to reach a 20% down payment on a typical single-family home, followed by another 6.2 years for buying to become more cost-effective than renting, according to Zillow.
“The common wisdom is that saving early to buy a home is the smart financial move, but the reality is more nuanced,” said Kara Ng, senior economist at Zillow. “The breakeven number tells you something about a market that a price tag alone doesn’t.”
“Buyers should think about not just when they can afford to buy, but how long they’d need to stay before owning makes more financial sense than renting,” Ng continued. “Homeownership comes with equity and stability, while renting offers flexibility and freedom from maintenance bills and emergencies.”
Freddie Mac clarifies high mortgage rate homebuyer strategy
The weekly 30-year fixed-rate mortgage (FRM) averaged 6.65%, slightly down from the previous week when it was 6.67%, Freddie Mac reported on August 20.
“The 30-year fixed-rate mortgage declined this week averaging 6.65%,” said Sam Khater, Freddie Mac’s chief economist.
“With a dip in rates providing modest relief for homebuyers, it’s important to remember borrowers can potentially save thousands by shopping around for the best mortgage rate,” Freddie Mac emphasized.
The daily 30-year FRM was 6.77% on August 21, according to Mortgage News Daily (MND).
“While many news outlets continue focusing on the mid-week announcement regarding Treasury’s bond buyback program, today’s bond market volatility was unrelated,” wrote MND’s Matthew Graham.
“Current levels are close to where they were before Wednesday’s announcement and that makes sense to anyone who [viewed] Wednesday’s market reaction as ‘overdone.'”
Economic data picks up significantly this coming week, alongside anticipated remarks from Fed Chair Kevin Warsh at the Federal Reserve’s annual symposium in Jackson Hole, Wyo.
Zillow explains major homebuyer dilemma
Homebuying timelines vary drastically by city, according to Zillow.
In Austin, Texas, a household saving for a down payment reaches the 20% mark in about eight years — faster than the national pace — but faces a massive 18-year wait to break even against local renting costs, which have dropped recently.
Conversely, Miami buyers spend five extra years saving up, but break even in half the time once they purchase. Consequently, Miami home buyers ultimately come out ahead three years sooner than those in Austin.
Buyers can speed up the process by opting for a starter home — defined by Zillow as a property in the bottom third of regional home values.
More on mortgage rates:
- Americans face 3 major takeaways after mortgage rate news
- Cooler PCE inflation data can’t fix today’s mortgage rates
- Mortgage rate forecast resets after Fed decision
Zillow emphasizes an important dilemma people face.
On a national level, purchasing an entry-level home instead of renting a typical apartment cuts the total timeline in half, taking just 7.2 years to save for and break even.
“However, with the cost of homeownership this high, buyers have signaled they do not want an expensive project,” Zillow wrote. “Turnkey homes sell for 2.9% more than expected, according to Zillow research, while remodeled homes sell for 2.2% more than similar homes without renovations noted in the listing description.”
“Meanwhile, fixer-upper homes sell for 14% less. Not all starter homes need renovations, but buyers who go this route should account for the full cost of ownership, including the possibility of repairs.”
Zillow says housing shortage drives affordability crisis
Compared to pre-pandemic levels in July 2019, today’s national timeline is nearly four years longer than the 11-year wait homebuyers experienced back then.
“At the root of the housing affordability crisis is a shortage that stands at 4.7 million homes,” Zillow wrote. “The metros with the largest shortages tend to also have the longest break-even timelines.”
“Los Angeles, for example, has the second-largest deficit at nearly 345,000 homes, and a break-even timeline of nearly 38 years.”
Shrinking a disparity of this size requires taking action from multiple angles.
Policy changes designed to lower construction costs and boost development are among the ideas Zillow advocates, such as updating zoning laws for higher density, simplifying the permit approval process, and broadening access to financing for manufactured homes.
Related: Redfin warns homebuyers on mortgage rates, housing market