It's a question that's been on the minds of many prospective home buyers: How long will it take to make a profit on your home purchase? The answer, according to Zillow, might surprise you. If you buy now, it can take 13.5 years to make a profit on your home sale.
The current state of the housing market has led to an affordability crisis that could extend the time it takes to break even on a home purchase.
The Housing Market Affordability Challenge
The cost of buying a home has skyrocketed in recent years, with home values reaching record highs and mortgage rates at their highest in two decades. For new home buyers, this means a longer wait to see a profit on their investment. Zillow's analysis takes into account various factors, including typical home values, forecasted home value increases, closing costs, agent fees, maintenance costs, and interest payments. All of these factors contribute to the time it takes to make a profit on a home purchase.
Estimates are based on the current market conditions as of July 2023, and different down payment percentages and maintenance costs lead to varying profit timelines. Here's a breakdown:
- 3% down payment: 13 years and six months to make a profit.
- 5% down payment: 13 years and three months to make a profit.
- 10% down payment: 12 years and seven months to make a profit.
- 20% down payment: 11 years and three months to make a profit.
Location plays a significant role in the timeline to make a profit on a home purchase. In high-value metro areas like San Jose and San Francisco, California, the timeline is considerably shorter, with homeowners recouping their investment in around 7 years. These areas have a history of consistent growth, allowing homeowners to build equity relatively quickly.
On the other hand, more affordable markets, such as Cleveland, Baton Rouge, El Paso, Akron, and Indianapolis, require a longer wait. It can take at least 20 years for new home buyers in these areas to reach the profit point. Slower historical growth rates in these regions indicate that it will take more time for home values to increase significantly.
The Impact of Mortgage Rates
Mortgage rates are another factor affecting the time it takes to make a profit on a home purchase. As rates near 8%, and home prices level off, it takes longer to recover the initial investment due to interest costs. However, homeownership offers lasting financial benefits, including the ability to lock in a fixed mortgage payment, unlike renting, where costs typically rise each year.
The decision of when to buy or sell a home is a personal one and involves assessing long-term financial goals, property value potential, and your ability to manage mortgage payments.
Financing and Affordability
Getting financing for your home is a crucial step in the home buying process. Even small fluctuations in interest rates can significantly impact affordability. For example, a $400,000 loan with a 5% mortgage rate compared to a 7% mortgage rate can lead to a $500 monthly difference. Zillow Home Loans provides tools to assess affordability, explore financing options, and connect with qualified loan officers to identify the best loan for your financial situation.
The Bottom Line
In a housing market marked by soaring prices and rising mortgage rates, the time it takes to make a profit on a home purchase is extending. Zillow's analysis shows that it can take more than a decade for some buyers to break even. Location, down payment percentage, and maintenance costs are all factors that influence this timeline. While mortgage rates impact affordability, homeownership still offers long-term financial benefits.
So, if you're considering a home purchase, be prepared for a potentially extended wait to see a profit. It's a personal decision that involves evaluating your financial goals and the real estate market's current conditions.
The housing market is in a state of flux, and it's important to make informed decisions when it comes to buying a home. For more information, you can visit Zillow's research on housing market trends.