Buying a Home 44% Cheaper than Renting Despite Rising Home Prices

Buying a Home 44% Cheaper than Renting Despite Rising Home Prices

Buying a Home 44% Cheaper than Renting Despite Rising Home Prices

San Francisco Remains 19 Percent Cheaper Than Renting

The real estate market seeing low inventory and higher asking prices, the question for buyers remains – rent or buy? Even with local Bay Area real estate prices surging, the rental prices have by and large kept pace. So for the most part, the gap between buying and renting remains relatively slight.

According to recent study by Trulia, buying a home in San Francisco remains 19 percent cheaper than renting. (See below for the Trulia determination).  Down in San Jose, the numbers display that buying a home shows a 24 percent benefit versus renting. Nationally the number rests at 44 percent. Over the past year, the gap between renting and buying narrowed most in the Bay Area.

One year ago, buying in San Francisco saw numbers 35 percent cheaper than renting and 38 percent cheaper than renting in San Jose. A noted above, the different now sits at 19% and 24%, respectively. Both San Jose and San Francisco have seen strong price increases in the past year.

One key for the affordability being so close in the Bay Area remains that falling mortgage rates have kept buying almost as affordable as renting. Freddie Mac reported that between February 2012 and February 2013 the 30-year fixed rate dropped from 3.9% to 3.5%.

Some people think that we continue to head for another housing bubble which would well be the case. Interest rates will most likely remain low for the remainder of the year but after that who knows?

Renting Versus Buying Formula

See below for Trulia’s renting versus buying formula:

  1. Calculate the average rent and for-sale prices for an identical set of properties. For this report we looked at all the homes listed for sale and for rent on Trulia from December 2012 to February 2013. We estimate prices and rents for the similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are 47% bigger, on average, than rentals.
  2. Calculate initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
  3. Calculate future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.
  4. Factor in one-time costs and proceeds, like closing costs, down payments, sales proceeds, and security deposits.
  5. Calculate net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people will get a 3.5% mortgage rate, reside in the 25% tax bracket and itemize their federal tax deductions, and will stay in their home for seven years. We also assume buyers get a 30-year fixed-rate mortgage and put 20% down.


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Filed under California, San Francisco, San Jose

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