Bay Area Housing: Lease vs. Buy

The original owners bought this Foster City house for
under $200K in 1978. It sold for $3.3 MM in 2021.
And it needs work! (photo February 2022)

Using current data, the Chronicle reports on the results of rent vs. buy analysis for three cities in the Bay Area:

For the three largest Bay Area cities (San Jose, San Francisco and Oakland), these data points were factored in:

Median household income from the U.S. Census.

Typical two-bedroom home value from real estate listings site Zillow from February, 2022.

Estimate of two-bedroom apartment rent from Apartment List from February 2022...

We entered these values into a rent vs. buy calculator, adjusted home appreciation to 5%, set mortgage interest rate to 5.1%, which was the national average as of Sunday, and assumed a 20% down payment on a house.

In all three cities, it’s less costly to rent in the shorter term — no surprise, given the upfront costs necessary for homeownership. But the break-even point occurs at a different moment for the three cities, and later than the national average, especially in San Francisco.

The "break-even point", as defined in the NerdWallet model, is the number of years the prospective buyer would have to live in the home to make it worthwhile to own instead of rent it. The results, using the basic assumptions set forth above, were:

San Jose - 9 years;

Oakland - 11 years;

San Francisco - 26 years.

The NerdWallet model is fairly sophisticated because it takes into account the tax-deductibility of mortgage interest and property taxes, as well as the hypothetical capital gain from the sale of the home. However, I don't think (because we can't see under the hood) it includes the $10,000 SALT cap or the $750,000-mortgage-limit under the Tax Cuts and Jobs Act of 2017. The model results are indicators that purchasing is a better value in the East and South Bay, and not in San Francisco or the mid-Peninsula.

If you are thinking about buying a house, you should really use a customized analysis because individual circumstances are so different. And because a home is the largest purchase you are likely to make, you should take the time to build the model or get an accountant or financial analyst to build it for you.

Another unrealistic assumption in almost all lease vs. buy models is that the monthly savings from renting over ownership are assumed to be invested rather than spent. Speaking from personal experience, I know that very few renters have that discipline, and that the lifestyle of new homeowners is less luxurious than if they had continued to rent. The forced-savings aspect of home ownership is often underestimated.

Finally, most models haven't adapted to the newest trends in real-estate, e.g., the ability to live farther away from the office because of the increased possibility of remote work, the changes in the rental market because of corporate ownership and eviction moratoria, the trend towards lower-density housing, etc.

When decisions have so many variables, I'd talk to friends and relatives, play with the numbers, but finally go with my gut. Frankly, if I were 30 years younger, I'd strongly doubt that I would stay in the Bay Area for more than 10 years, and I definitely would not be a buyer.