Should you buy or rent? To answer that question, ask yourself where you will be in 28 months.
Zillow Chief Economist Stan Humphries tells CNBC’ that home ownership is a good bet when “buying is more advantageous than renting.” On a national level right now, he says, that number is on average just 2.3 years.
“Everyone understands if you’re going to be in a house 20 years, you should buy a house,” Humphries says. “And if you’re going to be in a house for six months, you should rent it.”
Still, there is a caveat: “What they don’t understand is when those two lines cross,” Humphries said, calling that the “Breakeven Horizon.” That is the gray area in which consumers should make the decision whether to rent or purchase, when the accumulated costs of renting exceed those of buying.
With mortgage rates so low, “nationally you don’t have to be in a house very long to make that decision,” he says. Although the average “break-even” point across the country is just over two years, there’s a big variation depending on where you live, Humphries added.
According to Zillow research, in New York City (Manhattan), the “break-even horizon” can be five to seven years. In Miami or Detroit, however, that number is closer to one year.
“So if you’re going to stay overnight in Detroit, you should think about maybe buying a house.” Humphries joked.
Humphries is co-author of a new book, “Zillow Talk: The New Rules of Real Estate.” He writes that before the real estate bubble crashed, conventional wisdom was heavily tilted in one direction. He explains that in 2005 there was “hysteria, and people didn’t do the math.”
With home values constantly rising, “appreciation was so high people didn’t even think buying versus renting, like they should have. Everyone thought the default decision was always buy the house.”
That, however, turned out to be the wrong assumption. Shortly thereafter, the housing crisis sent the global economy into a tailspin, and sent foreclosure rates skyrocketing.
Historically, four to five years is the normal break-even number, Humphries says, especially when buying is a better deal. Even in markets where home prices are high, he says his data shows that it still looks better to buy than rent, because mortgage rates are so low.
According to Freddie Mac, lenders are offering conventional 30-year mortgages at an average rate of 3.78 percent, down from 3.86 percent a week ago. But Humphries warns, once mortgage rates rise, the break-even horizon will rise, too.
Humphries says another new rule of real estate applies to renovations. “Every year I read surveys about the home improvements you should do, and kitchen is always at the top of the list,” he said.
Zillow researched home sales over the past seven years and found which home renovations had the best return on investment (ROI) to the final resale value. The data yielded a surprising result, the economist said.
“Conventional wisdom says the kitchen, but we actually crunched the data [and] we found out it’s the bathroom,” he said. He adds that one reason is because kitchen improvements are often very specific, and tastes vary. Future buyers may not like the color of your backsplash, or the granite you picked.
A mid-range bathroom upgrade resulted in the best ROI for sellers. He explained the best ROI for sellers.
Is what’s called a mid-range bathroom upgrade. “Which is basically taking a barely functional toilet and turning it into a bathroom you could use for guests,” Humphries said.
Credit : Trent Gillies | @trentCNBC