Homes have become so expensive in the Bay Area that renting is now a better deal than buying
- Is it a better deal to rent or buy?
- In San Francisco and San Jose, renters save more money than buyers, a new Trulia study found.
- That’s because over the last year rents have remained constant or fallen in those metros, while home values have surged.
- While the financial advantage of buying over renting is at a six-year low nationally, homeownership is still a more affordable long-term option in most US cities.
The rent or buy debate has come to a head in the ever-expensive Bay Area.
That’s because the gap has widened between rents and home values there. While the median rent remained constant over the last year in San Jose, home values surged by 29% to a median of $1.28 million. In San Francisco, rents dipped 3% and home values increased by 14.2% to a median of $1.4 million.
“Prospective homebuyers everywhere are facing fierce headwinds — inventory is at near historical lows, mortgage rates are ticking up, and home prices are rising,” Trulia senior economist Cheryl Young told Business Insider.
“It’s especially tough for home seekers in San Jose and San Francisco where buying doesn’t pencil over renting,” she said. Renting in San Jose is 12.2% cheaper than buying, Trulia found, and 5.5% cheaper than buying in San Francisco. However, “cheaper” doesn’t denote cheap. Median rents for July 2018 in San Jose and San Francisco are up to $3,500 and $4,095, respectively, according to Trulia — the highest in the country.
To calculate the cost of renting vs. buying, Trulia assumed homebuyers put 20% down with a 30-year fixed rate mortgage and keep the home for seven years. Trulia accounted for recurring costs including maintenance, insurance, and taxes, as well as one-time costs and profits, like closing costs, down payments, sale proceeds, and security deposits.
To be sure, Silicon Valley is an outlier. It’s still a better deal to buy a home than to rent in most cities in the US, Young says, though the steady increase in home prices across the country has weakened the financial advantage of buying over renting in the current market.
As home prices continue to rise nationally, a least one other city is closing in on the same conclusion as the Bay Area: In Honolulu, buying is only 2% cheaper than renting. The next city with the smallest savings margin between renting and buying is Seattle, at 10%.
Trulia began calculating its rent versus buy index in 2013. A year ago, owning a home was 35.7% cheaper than renting, on a national scale. As of July 2018, homeownership is 26.3% cheaper than renting.
Though the data show buying a home is usually cheaper than renting in the long-term, homeownership isn’t for everyone.
Renting offers mobility, predictable monthly payments, and frees up cash to invest, writes Eric Roberge, a certified financial planner and the founder of Beyond Your Hammock, in an article for Business Insider. “The problem with homeownership is that it throws a lot of extra expenses into your cash flow. It also leaves you vulnerable to unpredictable expenses and distractions that eat away at what’s available to invest,” he wrote.
“With renting,” he continued, “you have an expected, predictable expense from year to year that you can plan around which makes it easier to capture the difference between your income and expenses and invest that amount.”
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