Has the maths modified within the Bay Space?

Spring is a popular time to buy and sell homes. But with a recent report out showing renting is still cheaper than buying across most of the U.S. — including in the notoriously expensive Bay Area — is taking the plunge into homeownership the right move right now?

Mortgage rates have come down from the highs set last fall, but are still more than double the 3% rates of 2021. Meanwhile, in the past year, rents have been continuing to decline while home values in the Bay Area have been rising. Real estate experts say they expect the real estate market to keep heating up from here, with interest growing in not only single-family homes but also condos and townhomes that took a big hit during the pandemic. 

With all of that as a backdrop, where does the math stand on renting versus buying in the Bay Area?

Welcome to Hella Expensive, a column designed to help readers navigate the financial aspects of living in the Bay Area. I’ll be keeping an eye on current issues, trends and what’s going on with the overall economic outlook — but I also want to hear from you. Send your financial questions and concerns to me through the survey below, or email me at kellie.hwang@sfchronicle.com.

The primary consideration on renting versus buying is an individual’s personal and financial situation. There are many factors and variables to consider, including income and debt, assets, credit score, down-payment funds and the location and type of property. 

Generally speaking, homeownership is the way to go for long-term investment and equity, if a person has the wherewithal to get into the market. But if you’re not sure you’ll stay in your next home for decades, and want to make a head-to-head financial comparison between renting and buying in the near term, then you may want to start looking more closely at the data.

A recent report from Realtor.com looked at whether it’s more affordable to rent or buy a starter home by comparing the monthly cost of owning a home versus the median rent in the top 50 U.S. metro areas. 

It found that in all of these regions, renting a starter home is more affordable than buying when it comes to monthly costs. This was especially the case in the San Francisco and San Jose metro areas, which had some of the highest cost differentials: In San Francisco, their data showed you’ll pay nearly 96% more to own versus rent.

Yet because the report compares only monthly costs, it doesn’t shed light on the financial implications of rent versus buy over time. 

For many in the Bay Area, the real question is not what one’s monthly payment would be but how homeownership might change your finances over the longer term. With a fixed mortgage, your costs are less likely to rise compared with rent; plus, owning a home comes with equity that you can use to borrow against, and eventually, you’d own the home outright.

As Rob Warnock, senior research associate at Apartment List, says, “This has always been one of the fundamental components of the ‘rent v. buy’ decision. Buyers today are locking in high housing costs relative to rents. But over time, those rent costs have the opportunity to accelerate while buyer costs are much less likely to.”

We did our own analysis by plugging common variables for the Bay Area’s biggest cities into NerdWallet’s rent-vs.-buy calculator. Such calculators are by no means perfect; for one thing, they utilize fixed values for economic factors including inflation and home appreciation rates that, in the real world, can fluctuate. But they offer a starting point to understand how the cost to own versus rent works out in the long term.

The calculator shows that with home prices, rents and mortgage rates at their current average levels, buying in San Francisco becomes cheaper than renting at the 20-year mark.  This assumes someone would be buying a home at the current median home value ($1.16 million for a two-bedroom, according to Zillow) or renting a similar home at average prices (just over $3,100 for a two-bedroom, according to Apartment List).

You’d break even on buying versus renting much quicker in other Bay Area cities, assuming you’re paying the median home value or average rent there. In San Jose, the break-even point would be 10 years; in Fremont, eight years; while in Oakland, the turning point would come at seven years.

Looking at how these break-even points have changed in past years makes clear that mortgage rates can have a sizable impact on this math. 

Two years ago, home values were higher in San Francisco ($1.34 million) and rents were lower ($2,700) but the break-even point where buying became cheaper was 16 years instead of today’s 20 years. The key factor: Mortgage rates were at 4.42% at that time, versus 6.87% now.

But Patrick Carlisle, chief market analyst at Compass, said he does not expect interest rates to stay at 6.87% and, though rent versus buy calculators don’t take this into account, there is always the option to refinance.

“If one buys a home near the bottom of the market, refinances their home loan when interest rates drop … and holds for the longer term, doing so will typically have an enormously greater positive effect on one’s household wealth than renting,” he said.

Still, David Stark, a spokesperson for the Bay East Association of Realtors, stressed that given every person comes to the decision with a different set of variables, it’s very difficult to make any blanket statements. 

“Purchasing a home is not only a huge decision but also a very individual decision.”

For our analysis, we looked at the latest data from February 2024. We plugged Zillow’s typical two-bedroom home values and Apartment List’s two-bedroom apartment rent estimates for each Bay Area city into the calculator, and adjusted for a 6.87% mortgage rate, 20% down payment and 5% home appreciation.