Rent or buy — which is a better deal in San Francisco and San Jose?

Renting is 5.5% cheaper
than buying in San Francisco.
Justin
Sullivan/Getty Images

• 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.

A new study
by Trulia found that for the first time in at least six
years, you can save more money renting than buying a home in America’s two
most expensive metros, San Francisco and San Jose.

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.

Trulia

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.

Trulia

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.”