Today’s housing market is the least affordable and least accessible it’s been in decades as mortgage rates reached 8% this fall and home prices continue to rise. Yet every day homes are still sold as new buyers shell out tens of thousands of dollars for a down payment and lock into historically high mortgage payments. So just how bad is affordability? Zillow crunched some numbers and says it will take you a remarkably long time to break even if you buy a house under these market conditions.
Many do this not because they’re thrilled at the prospect to buy into such unaffordable conditions, but to bolster their financial stability for the future. In other words, the sooner they can become a homeowner and start building equity in their starter home, the sooner they can break even on that investment and eventually afford something better. But Zillow’s analysis shows that things have gotten so out of whack in the housing market, it’s taking much longer than normal for owners to be able to sell their homes for a profit.
New homebuyers can expect to spend about 13.5 years in their house before breaking even on their investment, Nicole Bachaud, a senior economist at Zillow, wrote in the report released Monday. Zillow’s analysis took into account typical and forecast home value increases based on the Zillow Home Value Index, assumptions for closing costs, agent fees at the time of sale, maintenance costs, and interest payments. Zillow’s estimates are based on market conditions as of July, when mortgage rates were over 7%.
“As mortgage rates near 8% and home prices level off, it now takes longer to break even on a home purchase when considering the cost of interest,” Bachaud wrote.
While Zillow doesn’t have historical data on breakeven durations, the timeline for homeowners to break even on their property is, typically, around four to six years, according to several real estate experts and resources. To see this timeline extend to well more than a decade could be a shock to future homeowners.
“Breaking even on a home purchase holds significant importance for homeowners, serving as a crucial milestone that signifies financial stability, home equity accumulation, and the creation of financial flexibility to pursue future financial goals,” Matt Dunbar, senior vice president of the Southeast region for national mortgage company Churchill Mortgage, tells Fortune.
Not all markets and not all buyers will face decade-plus breakeven thresholds
Several factors go into determining how long it’ll take for a homeowner to break even on a house, including her mortgage rate, down payment amount, closing costs, insurance, property taxes, and annual appreciation rate.
Location of the home also plays a large role: Metro areas with high home values have “considerably shorter” breakeven points, according to Zillow. With a 5% down payment, San Francisco’s sits at seven years and six months, per Zillow’s calculation, while San Jose’s is six years and 11 months.
“These metros have a strong history of consistent growth, allowing homeowners to recoup their initial investment in a relatively shorter period of time if home values rise at the same rate they have risen historically,” Bachaud explains.
There’s a much longer runway to breaking even on a home in more “affordable” markets, however. In fact, it could take new homebuyers in Cleveland, Baton Rouge, El Paso, Akron, and Indianapolis at least 20 years. In these areas there has historically been slower growth rates, meaning that it will take more time for home values to increase enough to build equity, Bachaud wrote.
Some real estate investors have a different take on where home values will appreciate the most. Contrary to Zillow’s standpoint that higher-priced markets will show more growth, more affordable markets with “robust job and population growth” will have the highest home appreciation values in the near future, Kurt Carlton, cofounder and president of national private residential investment property firm New Western, tells Fortune.
The breakeven point is not the only deciding factor in selling a home
Among the many reasons why people decide to sell their home is to upgrade to a larger or more expensive home. When it comes time to do this, it’s helpful to have at least reached a breakeven point on the original home so that they can make a profit or at least not incur a loss.
In its report, Zillow designed a dashboard to see how factors such as down payment percentages and interest payments affect breakeven durations. The higher the down payment, for example, the less time the duration tends to take.
That said, every homeowner’s situation will differ.
“The time it takes to recover your initial investment in a home can be extended and depends on various factors, including the current real estate market and your personal situation,” Bachaud wrote. “Deciding when to buy or sell a home is a personal choice, and it involves assessing your long-term financial goals, the potential for your property’s value to increase, and your ability to manage mortgage payments.”
Plus, the calculation for buying versus renting has changed in recent months due to higher mortgage rates. For now, rent payments trail mortgage payments, causing homeownership to not make financial sense for some buyers. However, homeownership is still a way to build long-term wealth.
“In the longer term, buying still beats renting,” Bachaud tells Fortune. “The increased equity and appreciation translate to higher household wealth.”
A major implication for a longer breakeven duration is needing to keep a home for a longer time, Ben Bowen, a global advisor with Premier Sotheby’s International Realty, tells Fortune. Sellers aren’t likely to give up their home “if they have to bring a check to the closing table,” says Bowen. “Nobody wants to lose money on a home purchase.”
That said, there are plenty of nonfinancial reasons to sell.
“It is important for homeowners to break even or make a profit on a home purchase, but at the end of the day, it’s not the most important criteria for most people,” he says.
