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It's Still Better to Buy Than Rent in the Bay Area

But just barely.

If you can put together the down payment and qualify for a decent loan, buying a home is one of the best economic decisions you can make. In the long run, thanks to tax breaks, equity appreciation, and relatively low mortgage rates, buying is almost always cheaper than renting. In fact, a new study by real estate site Trulia found that in all of the 100 largest cities in America, you come out ahead by buying. But there's a few spots in which that margin is slim. Can you guess where those might be?

If you said Honolulu, you're right. There, the long-term costs of buying are 5% cheaper than those associated with renting. Buying in San Jose is 9% cheaper than renting. Coming in third place was San Francisco at 13%. Number six was Oakland at 24%. So in all of those Bay Area markets, you'll save money in the long term by buying a house—but only barely. Nationally, the average savings were 38%.

Compare that to the largest differentials in the country, many of which are clustered in the Rust Belt. Detroit tops the list at a hefty 66% cost reduction over the long term, followed by Gary, IN at 61%; Birmingham, AL at 58%; Toledo, OH at 58%, and Kansas City, MO-KS at 58%. 

Trulia constructed their model by calculating the average rent and for-sale prices on similar properties, then including the associated costs of owning and rents, the future costs of each (rent increases, for instance), one-time costs like down payments or security deposits, and the net present value to account for the opportunity cost of money. They assumed that buyers could get a 4.5% mortgage rate (this is important) on a 30-year fixed-rate loan with a 20% down payment, and that they would stay in their homes for seven years.

The mortgage rate matters a great deal, because as it increases, the costs of owning also increase. The point at which buying and renting would be equal were 5.4% in San Jose, 5.8% in SF, and 7.2% in Oakland. That means that if a mortgage rate were above that number, all else being equal, renting would be a better deal.

The other important factor to consider is home appreciation values, since when you sell a home, you'd like to receive as high an offer as possible. Trulia looked at the worst case home appreciation scenarios (which they defined as the worst seven-year stretch in the last twenty years for a metro region), and found that under those conditions, San Jose's cost of buying vs. renting would be 79% (that makes renting a better deal), Oakland's would be 75%, and San Francisco's 71%. (There are other scenarios in which the value of various parameters makes it better for a Bay Arean to rent, rather than buy. Length of time in a home matters, as does whether or not you take tax itemization, for instance.)

So, even though buying is still a better deal than renting, why is the San Francisco Bay Area's housing market so skewed towards parity? The Trulia report doesn't offer an answer, but rent control might play a factor in the city, keeping rents lower over time. More of a factor, probably, is our region's higher home prices, which drive up the down payments. 

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