Saving for, Breaking Even on a Home May Cut Into Americans’ Retirement Savings

A new Zillow analysis indicates that the prevailing belief is that beginning to save early for a home purchase is a wise financial decision; however, the situation is more complex. And further, prospective buyers should consider not only their ability to afford a home but also the duration they would need to reside in it before ownership becomes more financially advantageous than renting.

Across the nation, a household that saves 10% of the median income can accumulate enough for a down payment and ultimately benefit financially compared to renting in under 15 years. This timeframe includes 8.5 years to save for a 20% down payment on a typical single-family residence, followed by an additional 6.2 years before the financial benefits of ownership surpass those of renting a single-family home.

Consequently, a graduate with a four-year degree is likely to reach this financial milestone by their late 30s. And in the most costly markets, such as the major metro areas in California, this timeline may extend into the years of retirement. For example, in major metropolitan areas, the duration varies significantly, spanning approximately 11 years in Memphis, TN, to almost 50 years in San Jose, CA.

Among the major metro regions where buyers achieve the break-even point the quickest, most are located in the Midwest and South. In Memphis and Pittsburgh, the time required to save and reach the break-even point on a single-family home is around 11 years. Additionally, it takes less than 12 years in cities such as Detroit, Indianapolis, Birmingham, AL, and Louisville, KY. These markets are characterized by relatively affordable home prices.

Conversely, the markets with the longest timelines are primarily situated along the coasts, particularly in California. In San Jose, the total timeline approaches nearly 50 years. San Francisco follows closely at 47 years, with San Diego at 41 years and Los Angeles at nearly 38 years. In each of these regions, years of insufficient construction have driven home prices beyond the capacity of median local incomes, thereby prolonging both the savings period and the time necessary for homeownership to become the more advantageous financial option.

Top 10 Cities w/ the Longest Projected Time to Break Even by Savings (Single-family home):

1. Los Angeles: (19.8 years to save)
2. San Jose, CA: (19.2)
3. San Diego: (17)
4. San Fransisco: (16.9)
5. New York: (14.3)
6. Miami: (13.2)
7. Seattle, WA: (13)
8. Boston/Riverside, CA: (12.3)
9. Sacramento: (11.2)
10. Portland, OR: (10.6)

Prospective buyers should also weigh the lifestyle benefits associated with either owning or renting. Homeownership provides equity and stability, whereas renting offers advantages such as flexibility and relief from daunting maintenance expenses.

Not every timeline adheres to the same trajectory. For instance, a typical household in Austin can accumulate savings for a down payment in approximately eight years—a quicker pace than the average household across the nation. However, due to the decrease in rents in the area, which are relatively affordable, it would require that an Austin, Texas, buyer an additional 18 years to reach a break-even point compared to renting, nearly tripling the duration needed nationwide. Conversely, a typical household in Miami would take five years longer to save for that down payment, yet would achieve break-even in about half the time. When comparing the two, a Miami buyer ultimately benefits by three years sooner than an Austin buyer, despite the longer duration required to purchase a home.

This distinction is significant for how prospective buyers should analyze the data. A prolonged timeline in one market may indicate widespread affordability issues, whereas in a market like Austin, it signifies a more considerable financial trade-off when entering homeownership while the rental market remains favorable.

In essence, for buyers aspiring to own a home in Austin, this data suggests ensuring that the home is one you can inhabit for the long term. While the initial entry point may appear relatively attainable, it is likely to be a considerable period before the investment in buying yields advantages over the option of renting.

Starter Homes Offering Buyers Alternatives

Zillow analysts suggest that one method to reduce the time required to save and break even is to focus on a starter home, which Zillow defines as the average property within the lowest third of home values in a specific area. Across the nation, it takes an average of 7.2 years to save for and ultimately benefit from purchasing a starter home, in contrast to renting a standard multifamily unit.

Nevertheless, due to the high costs associated with homeownership, buyers have indicated a preference against undertaking expensive projects. According to Zillow research, turnkey homes are sold at a premium of 2.9% over expectations, while remodeled properties fetch 2.2% more than comparable homes that lack renovations mentioned in their listings. In contrast, fixer-upper homes are sold at a discount of 14%. While not all starter homes require renovations, buyers opting for this path should consider the total cost of ownership, which includes potential repair expenses.

In July 2019, prior to the onset of the pandemic, the national save and breakeven timeline was 11 years, which is almost four years quicker than the current situation. The underlying cause of the affordability crisis is a housing deficit that is estimated to be 4.7 million homes, as per Zillow’s most recent assessment. Metropolitan areas experiencing the most significant shortages also tend to have the longest breakeven timelines. For instance, Los Angeles has the second-largest shortfall, with nearly 345,000 homes, and a breakeven timeline approaching 38 years.

In conclusion, purchasing a home remains more advantageous than renting on a national scale under the present market conditions, but not immediately. A buyer acquiring the average U.S. home will find themselves in a favorable position after approximately 5.9 years with a 5% down payment and 6.0 years with a 20% down payment. Among the 50 largest metro areas, Columbus, Ohio, Memphis, TN, and Buffalo, NY, are the quickest to reach the buy-versus-rent breakeven point, which occurs in about 3.5 to 4.2 years, depending on the down payment amount.

Conversely, San Francisco, San Jose, and New Orleans exemplify markets where current prices and rental rates favor renting, even over a complete 30-year period. Typically, a larger down payment enhances the long-term financial outcome. However, it does not necessarily lead to a quicker breakeven point for buyers.

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