Renting vs. Buying in 2026 with Zillow Economist Orphe Divounguy

There's a heated debate if it's better to buy or rent in 2026. Today we're bringing on Zillow's senior economist to discuss his research on which is more advantageous. I'm Kathy Fetke and welcome to The Real Well Show. In this episode we're bringing back Orfe de Vangai to discuss renting versus buying. We'll talk about which is better financially, why this is market driven, and how investors can use the data to find the right markets to invest in today. But before we get started, if you want to see how far your investment dollars can go in today's market, just download our free PDF. It's called affordable real estate markets. How to make your money go further. You can get that at realwealth.com/aforworld. When you get that, you'll learn which markets offer the best opportunities for the highest cash flow, growth, and long-term wealth building. Well, let's get on with this show. Orfe, welcome back to The Real Well Show. Thanks for having me. So your team at Zillow just came out with new data on renting versus buying. And this is always interesting to dive into. So what are some of the things that you discovered from this latest research? Yeah, I think this is the question I guess I get most often. People always wonder, should I buy? Should I rent? And the answer is it depends. Right? Buying. Always. Yeah. Exactly. Buying only starts to make financial sense once the household stays long enough to recover the upfront and ongoing cost of home ownership. Right? And I cost markets. It takes longer to make the math make sense. Right? You're taking some of that cash away from another asset. Maybe with savings that were invested in the stock market or something. And then you have to go ahead and spend it on a down payment and closing costs. That money could have stayed invested and generated returns in the stock market. So you have to stay put long enough for it to start to make sense. It starts to make sense after six years. So if you're a person that you're thinking, hey, I'm not going to be staying put for very long. Well, it doesn't really make sense to go ahead and tie up the cash and buy home. If you're a young family and you have kids in school and you're going to be in that house for a long time, then in many markets, almost every market in the country still makes sense to go ahead and buy home. When you say it takes six years to make sense, that's a long time. Not everybody stays in their home for six years. And I imagine it depends on the area. If it's a high appreciating market, then maybe one year you'll make money at it. It just depends on the market, right? It depends on the market, but it doesn't really work out that way. Six years, most people stay in their homes longer than six years. Yeah. So the map just doesn't work out if you're going to be in the house for one year. So you've got to take a number of factors into account. It's what you pay rent, of course, the monthly savings from renting. The fact that rents continue to increase. Historically, the appreciate rent increases have been about three to five percent every single year. Take the money out of the stock market to go ahead and buy a home. You're going to, for go, some of those returns, but the house is going to eventually pay off because you're going to build equity. And that appreciation is very often in most markets going to make up for the sunk cash upfront, but it's going to take time. It's very rare there. You're able to make up that big difference in the returns you would have gotten in other assets in a single year. Let me give you a very concrete example. Over 30 years, a homeowner has about $1.3 million out of pocket cost and gets about $2 million in benefit from monthly cost savings versus renting, but also from appreciation. The renter spends about $1.5 million in rent over 30 years and earns just $313,000 from investing the foregone down payment at the risk-free rate. And if you assume like the 10% stock market, historical stock market returns that and you're a little bit more optimistic that foregone down payment grows to only about $1.2 million still not enough to overcome the total cost of renting over 30 years. So that's the national picture. And so you could see when you do the math and take into account all of these factors that it would pay off to actually become a homeowner, it's just that it's not going to pay off right away. It's going to take a little bit of time. And what's these calculations? Are you saying that down payment would be about 20%. That's right. I'm assuming a 20% down payment. So if somebody did the FHA loan, maybe 3% down, they might get a bigger return in the end. Yeah, it really depends on the market. Because you know you have 3% down and you get to keep some of the cash and you keep it invested, right. But the total interest you pay for that fore. It's more. It also increases, right. So this illustrates the trade-offs that are going to such an important decision for most families. And what about when you include tax benefits? Yes, our analysis does not include tax benefits. But again, of course, tax benefits, right. The mortgage interest deduction, all of that actually tilts the math in favor of owning, right. And so that's the other part that most people ignore it. And for why really, owning still makes sense at least nationally, right. There are just a handful of markets on the West Coast where the disconnect between ownership costs and rents is so high that it just never pays to actually become a homeowner. Interesting. Okay, so what about say San Francisco versus Austin versus Tampa? I mean, are there different numbers when you look at those cities? Absolutely. If you look at, you know, you do a breakdown at the metro level, you know, Columbus, Ohio is one of the cleanest markets, right. Where real estate really wins, right. It's a strong example. The break even is about four years and one month. Over 30 years, the homeowner has about, you know, $1.1 million in out of pocket cost, right. If they stay put for 30 years. But gets a $3.1 million in benefit from monthly cost savings, the rent thing plus appreciation. The renter would spend about $1.4 million in rent and earn just $296,000 if invested. You know, the investment return was, you know, the risk-free rate, which you know, roughly 5%. If on the other hand, the money was invested at the historical 10% stock market gains, then the investment would grow to $1.2 million still not enough to overcome the $1.4 million spent on renting over 30 years. Columbus is one of those markets where, you know, the math makes sense. Of course, you know, as a real estate investor, I start with the market and then I go, you know, the house, the unit, you know, I also, it becomes very critical, right. But if you're just looking at the market level, you know, Columbus is one of those markets where rents are high, right. So a real estate investor will very often be able to cash flow and the appreciation in that market makes it a clear winner. And when you compare that, of course, the markets like San Francisco or other markets in California, right, those are markets where the cost of owning is so high, the initial hurdle is so high that you have to basically tie up so much cash upfront that you're losing out so much in terms of investment returns, right. That just doesn't make sense. Yeah. Unless you're staying for the long term or you just need to own something there because you have a family and don't want to have to move, you know, that then perhaps it makes sense. I'm from the San Francisco Bay Area. So I've seen people make a tremendous amount of money and equity, but it's hard to get in. It's hard to get in. I often say you're for going so much to get through the door, right. And so that is, that's a big hurdle. And of course, this type of analysis really illustrates, you know, the tradeoffs, all of the factors that you have to consider, whether it's, you know, a home for yourself, as, you know, as, you know, you're trying your renting and you want to buy your first home, or even as a real estate investor where, you know, capital allocation is, you know, is the real question here, right. It's not just is buying cheaper than renting. It's if I put capital to work in this market, right, down payment, closing costs, carrying costs, maintenance, and eventually selling costs, right. Do the cash flows appreciation and appreciation compensate me sufficiently, or would that capital have done better somewhere else, like in the stock market? Yeah, anywhere else. This is what I've told people for 25 years now, if you're in the San Francisco Bay Area, just rent. You can get the same house for much cheaper rent to get than owning it or apartment and investing. somewhere else where it does make sense. Take your money, you could invest in this dog market or just by real estate in a different market where the rents would cover the costs of that home plus cash flow plus some extra. Yeah, and it's not surprising that when you cut the data by you look at home ownership rates across the country, right? Those markets where the math doesn't quite make sense, also markets with really low home ownership rates relative to everywhere else. So I think most people become, I'll be coming more and more aware of that and they take really great care of their finances and they start to really do the math. And so that's part of why we do this at Zilla. We want to help people, we want to turn on the lights and help people get the numbers and try to make sense, right? Of their own finances and whether or not buying makes sense or renting and in some places renting is the better financial decision. Yeah, and that's coming from Zilla. You all, you know, people think, oh, you're just going to be leaning always toward just like every real estate agent, you know, it's always a good time to buy anywhere. And I get those kind of comments sometimes, well, you know, your guest is from Zilla. Of course they're going to say it's a good time to buy, but you're being really unbiased here. And this is, you know, the fact of the matter, you got to look at the numbers. Numbers will tell the story. All right, well, with affordability being such a major issue, I think what I'm hearing you say is that you don't have to only invest in owning your own home. In fact, I think Robert Kiyosaki says it's not an asset, you know, you know, you should be investing in other things, but that as long as you're investing, I mean, that's really what I'm the core of this is if you rent and invest elsewhere, you will still be ahead of the game in 30 years. If you rent and don't invest and you don't own a home, then you're going to be just kind of stuck without a retirement. So you got to do one of the other. That's right. You know, if you're invest, if you're renting your saving, comparing to owning, and you put the money to work, you're going to do great, right? Regardless of whether or not you ever become a homeowner, I think that is, that is important. A lot of people think that, you know, the path, you know, home ownership is the only way it is not, right? But in some markets, it clearly makes sense that you should be a homeowner because you're going to lose out by renting over long, long periods of time where basically rents, rent increases continue, right? They don't wait for you. They keep going up and up. The rent is going up almost in every market. We got some markets in the sun belts where rents have continued to decline in the past few years. But that was because of a massive surge in home building that we saw during the pandemic. The norm is, you know, a three to five percent rent increase every year. That's an almost, that's a guarantee for most renters. So bringing it back to lifestyle, if you're moving to an area to try out a new job, you don't know if you're going to keep it. You don't know if you're going to like the area. Maybe just rent for a while because the key is longevity, right? You've got to stay at least four years, probably more like six. I think what did you say for San Francisco? How many years do you stay? Ever since, right? Under the current market conditions, you know, you look at appreciation, you look at rents, you look at the total cost of owning, it just doesn't make sense, right? And so, you know, that's the way the math kind of shakes out. Very interesting, especially now with San Francisco kind of just being an AI bubble, you know, you're paying top dollar right now. It's going to take even longer to break even. But you know, some people just don't care. They're not looking at their home as an investment. They just want a home. Would you say, that's a different, that's a different lens. The lens you're looking through and with this report, it's below, it's really where, how far your investment dollar is going to go in owning your own home or investing in equities or this stock market. And you're absolutely right. You're absolutely right. It's a personal decision. And sometimes it's just, hey, I want the flexibility to do whatever I want to the house. Yes. And I am going, and usually people who want that flexibility are people who want to stay put, right? They want to stay in place for a long time. And very often, what our math shows is that when you want to stay in place for a very long time, it's also, it's also usually a good financial decision to actually go ahead and buy the house. Yeah. Yeah. So go try out an area, rent for a little while, see if you like it. And then if you plan to stay, then consider buying. All right. Any final thoughts for our audience? Of course, they're looking at it from the lens of real estate as an investment. Yeah. I think ultimately is due to math, right? Do the math and come up with realistic assumptions before you make a decision. I think, you know, even myself as a real estate investor, it's very tempting to get carried away and to not do the math seriously and to not test your assumptions, right? And to go ahead and kind of jump and do and do do the thing. It's exciting, right? To look at housing. I love looking at housing. It's exciting to get in and to get a new deal, but but it's important. So important to go ahead and sit down, crunch the numbers before you make that decision. Absolutely. The numbers tell the story. Yeah. All right. Or if I thank you so much for being here on the Real Well Show and thank you, Zillow and your team for bringing us this data. It's pleasure to be on. And thank you for joining me here on the Real Well Show. As a reminder, you can go to realwealth.com/affordablemarkets to get your free PDF full of data and information that pertains to how to get the best return on your investor dollars when choosing real estate. Again, that's realwealth.com forward slash affordable markets. I'm Kathy Fedky. Thanks for joining me here on the Real Well Show. See you on the next episode. The views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to realwellshow.com.