I have already written that now is not the best time to buy a home, at least from a pure investment perspective.
In short, home prices are expensive relative to incomes, mortgage rates have more than doubled, and there is very little quality inventory.
And now we can determine how long it takes to bring a home up to par, according to a new analysis from Zillow.
Hint: That’s a long, long time, even if you’re able to muster a big 20% down payment.
So if you are thinking of buying a home today, be prepared for the long term.
How long does it take to put the brakes on a house these days?
– 3% advance payment: 13 years and six months to make profit.
– 5% advance payment: 13 years and three months to make profit.
– 10% advance payment: 12 years and seven months to make profit.
– 20% advance payment: 11 years and three months to make profit.
A new Zillow analysis attempted to determine how long you’d have to own your home before you could sell it for a profit.
It takes into account the closing costs associated with the purchase of a home, mortgage interest paid, home maintenance costs, and selling costs when it comes time to list the property.
Specifically, they assume 3% closing costs at purchase, a 1% home maintenance fee, and 6% closing costs at the time of sale, all plus mortgage interest.
In fact, it may be even higher. It is not unusual for real estate agents to charge 5-6% of the sales price.
So if you’re only putting 3% down, you’re already at a loss, especially when you also consider those closing costs.
To cover all those expenses, you have to make regular payments of principal every month and hope that the value of the property also increases over the years.
The rule of thumb says it typically takes about 3-7 years to build up the balance on a home purchase, with the average probably five years.
But that number has risen sharply recently due to a combination of skyrocketing asking prices and equally expensive mortgage rates.
For how long you ask? According to Zillow, home buyers today can expect to spend about 13.5 years in their home before being able to sell it at a profit!
In other words, you really like your home better unless you want to sell at a loss, or worse, are forced to make a short sale.
It takes longer to turn a profit in affordable housing markets
And here’s the irony. It actually takes longer to turn a profit in more affordable housing markets.
Homebuyers in places like Cleveland, Baton Rouge, El Paso, Akron, or Indianapolis may need wait at least 20 years To reach this critical profit point.
As far as the reason for this is concerned, it is due to the slow historical growth rates in these more affordable areas.
Without appreciation in home value, it takes much longer to build home equity.
Simply put, principal payments are much less impactful than increases in property values, especially on high-rate mortgages where most of the payment goes toward interest.
It’s worst in Cleveland, where Zillow says it could take 22 years and 10 months to turn a profit.
Similar time frames can be seen in the other metros mentioned, which means it is not advisable to buy a home just because it is cheap.
The fastest way to profit in expensive housing markets
Again, although it seems counterintuitive, it’s actually easier to make a profit if you buy a home in an expensive metro.
Of course, the barriers to entry will be high, but this is another one of those stories of the rich getting richer.
For example, in extremely expensive Bay Area metropolises like San Jose or San Francisco, California, the break-even timeframe for profitability is much shorter, 7 to 7.5 years.
Historically that’s still a long time, but it’s significantly less than those “cheap” housing markets.
Similar short buy-to-sell profit timeframes can be found in San Diego, Los Angeles, and Miami.
As you can see, these are highly sought-after cities where demand is always strong and supply is always low. And because of that, home prices are often increasing.
But there’s a big barrier to entry, whether it’s a high asking price or requiring a large upfront payment.
Either way, this data tells us that right now may not be the best time to buy a home, even if you can afford a 20% down payment.
It may be beneficial to wait for a better combination of lower asking prices, cheaper mortgage rates, and better inventory.
Of course, there are other reasons to buy a home besides investment. But you still have to be prepared to stick around for a while.
Read more: Advantages and Disadvantages of Renting vs Buying a Home