SF: Rent or Buy? More Confusing than Ever

superior_long_island.jpgRealtor speak says: “Now’s the time to buy. Renting is nothing but wasted money.” Cautious first time buyers, meanwhile, hear whispers that the market hasn’t bottomed out, or that qualifying for a jumbo-loan is harder than ever, so they wait, convinced that the time to buy is not in fact now, and that renting is the best economical descision.  Ironically, such fence-sitting drives rent up.

The Chronicle puts the situation this way:

Matthew Hackett, underwriting manager for Equity Now, a Manhattan mortgage lender, said buyers who need jumbo loans – those above $417,000 – must typically have enough savings after the purchase to carry them through at least six months of mortgage payments. “And if you want a good rate,” Hackett said, “it’s more like 12 months.” That could change in July, depending on how the lending market reacts to mortgage-related elements of the economic stimulus package signed last month, when the jumbo threshold is expected to rise to about $600,000 – the exact figure still must be set by the Department of Housing and Urban Development.

We aren’t too sure on that relief, as fellow blogger David Gordon has pointed out. Meanwhile, “Housing Council, a trade group in Washington, said rents could rise, given the growing demand among people who cannot qualify for mortgages or those waiting out the declining market.”

So how do we know what to do? Old fashioned math is one place to start (though I readily admit : not my favorite place, since I suck at math). One rescource you can access is Submedian’s ownership expenses calculator, or plug your figures into the New York Times’ rent vs. buy calculator.

You can also compare rents to mortages in a more side-by-side style. For instance, here is a 3/2 single family at 1862 39th Ave. for $799,000. With 10% down and interest of 6.5% on a 30-yr fixed loan, you would pay $5733.05 per month including an estimated property tax and the PMI since you only put down 10%.

The same property, at the same interest rate, with 20% down= $4832.55. You save a lot with 20% but that assumes you have almost 160K saved to put down. Most renters I know do not.

Meanwhile, a similar house, a 3 bedroom on Lake St. in the Richmond, rents for $3800.

Let’s take another example. Here’s a 2/1 TIC at 2916 Taraval, #1  that has been on the market awhile for $425,000. Obviously more affordable, with the same parameters as the above home, but this time with 10% down on 425K, you pay $3049.49.  With 20% down, you’d pay $2570.49- but you’d have to have 90K free to take advantange of that savings.

Renting a similar unit (a 2 bedroom flat/apartment in the Outer Sunset) will run you from $1750 to $2125 or more. You will pay utilities, most likely, on rentals, which adds to the monthly, but keep in mind you also pay utilties on your owned home, as well as insurance, and in the case of a TIC or condo, an HOA.

Thus even with rents shooting up these days, the idea of breaking into actual home ownership seems just as much a fantasy for many would-be first time buyers as it ever has. But that’s just one person’s read on the figures. What’s yours?

  • david gordon

    Nice post, Anna.

    I really like the NTY rent-buy calc. It’s the best one I have found.

    Any way you slice it, if you don’t already own, continue to rent for awhile. You cannot assume continuous appreciation in this market, so stay on the sidelines awhile longer and see what happens.

    Yes, rent growth has been strong in recent years but it must continue to grow at a strong clip while depreciation occurs in order for the calc to signal “buy.”

    Granted, adjusting your rent growth and price appreciation assumptions just slightly has severe effects on the calc’s “Buying is better than renting in X years” number.

    I for one am predicting local rent growth does not continue at its torrid clip in the coming years. This is a generalization as some segments will do well, and in certain areas/hoods, just as the RE sale market is segmented.

  • anna

    Thanks, David. Looking at these fgures I have to agree. Rent here or move somewhere like Portland, OR and buy; but buying in SF is just too difficult, and as you point out, iffy for middle incomes like mine.

  • David

    Rent’s gone up, but if you live in SF (or Berkeley), your personal rent will stay pretty much the same with rent control. which of course is why the price/rent calculation will continue to skew toward renting. Rent control preserves the landed gentry.

    So you can be a happy renter with money left over to save in varied investments, or you can bet, and use the California ATM method of saving through your house, because you likely won’t have any money left over after buying a house to save in any other vehicle.

    Your choice. Flexibility or hitching your life to the idea that CA R.E. “always goes up.” Using your comparison, you have to assume that your home price will go up over 4% annualized to have any chance of beating a reasonable investment alternative with the money you save by renting (and investing your down payment).

    As to CA R.E. always going up, well, I’m sure there were plenty of people using that argument in Detroit in the 1950′s or Florida in the 1920′s or Chicago in the 1840′s.

  • F

    David’s argument is belied by the fact that he has bought and sold property here is SF. Historically, prices have always gone up, and if you can wait it out, you will appreciate the investment one way or the other. Rent offers zero return for your dollar.

  • david gordon

    F- what does that fact that someone has bought and sold RE in SF have to do with this? It is about fundamentals and timing.

    Sure, if you can wait it out you should be okay long-term (although much analysis shows after inflation it is not that great of a return). But why not wait out the correction? And continue to rent until you can buy the same place for even cheaper?

    Buying at the top of a cycle (no matter what the asset) is a HELLUVA lot worse than renting (and as you say getting “zero return for your dollar”) and buying when prices are at or near the bottom.

  • F

    that’s what we are seeing now. SF prices will not dip much more than they have, outside of District 10. Period.

  • David

    What kind of return do you get paying the bank a boatload of interest, paying thousands of $$ in property taxes and insurance?

    SF really only started deviating from long-term inflation after 2000.

    So, really, unless you think SF will grow faster than inflation over the next 30 years (at which case all the R.E. in SF will probably be “worth” more than NYC, or Tokyo, or all of Greece, or some similarly patently ridiculous assumption), you have a long time of out-right nominal price declines ahead, or sub-inflation growth.

    Therefore, since renting is so much cheaper than buying, and you can invest your down payment (and rent savings) in alternative investments, it’s a reasonable bet that the renter will have more assets after 30 years. Might not turn out that way, but it’s certainly not irrational to run the numbers and come to that conclusion.

  • David

    Here’s an instructive graph on SF area house prices compared to inflation. Check out the size of deviation after 2000:


  • David

    PS. As I pointed out, I’m sure people assumed that Detroit R.E. would always go up.

    It may “always go up” in the long-run here, but in the long run we’re all dead. People who bought lots in Chicago during the canal craze NEVER saw a return on their money, because after that crash in the 1840s, the lots didn’t go up to that same value until the 1890′s. Same with land in Florida in the 1920′s. Luxury houses were going for prices in the MILLIONS in Florida in the ’20′s. You’d be lucky to get the same price in nominal dollars now, 90 years later, never mind adjusting for inflation. You care to wait 90 years for a return on your investment? Then you have a lot more faith in the biotech industry than I do.

    The fact is that there is rarely a good “investment thesis” to be made with buying a house for personal use. It might be a reasonable way to spend your money, given the added utility you have from owning (painting the walls polka dots) etc, but if you buy now, with the market still somewhat inflated, you’re basically stating that painting the walls polka dots is “worth more” to you than a X% return on your down payment money etc.

    If that’s true, then fine, buy. But do so realizing you’re likely to get a subpar return on your money after it’s all said and done.

  • Michelle

    David said,

    I see comments like this posted often, and it is mathematically flawed. The return you need from Real estate to counterbalance an alternative investment is based on the amount of money you put down on the house, and/or any additional monies you are paying to own that home vs. what you would pay renting.

    So for example 10% down on a 500K house, with an additional $1K per month paid to own vs rent. Your outlay is $62K over a 1 year period, if that house really did appreciate 4% you would see 20K in appreciation or a 32% return on your investment!!! The leverage you receive with real estate is unparalled except for some hedge fund investments. Of course, leverage works both ways. Also when you first buy, there is some rationale to initializing your asset at -6% of purchase price to account for the commission required at the sale.

  • Anna

    See now, all of you have valid points with evidence to back you, but you all make different points. The result: I am more confused than when I wrote the post about being confused!

    Still, thanks for the erudite contributions because I know many a renter-wanting-to-be-a-buyer who is asking the same questions.

  • David

    Michelle, your counter is SERIOUSLY flawed.

    let’s break it down simply:

    $2000, down payment $50,000.
    Home price $500,000. Mortgage interest: 6.375% (a typical quote for a 30 year FRM with 10% down), return on invested capital (down payment if you were renting your whole life): 8%

    Tax rate, combined: 31%.
    Closing costs, including transfer taxes: 2.5%
    Sales costs: 5% of sales price
    Insurance 0.33% of home price
    Property tax: 1.12%
    Annual maintenance: $2500

    Now that’s a lot to keep track of, but what does it boil down to?

    Renter pays $2,000/month and invests his $50,000, AND the savings from not having to fork out a larger monthly payment (in this case, $1029/month).

    After 7 years, the typical time one stays in a house, the renter has $109,899 from his down payment, $110,130 from his monthly investing, and has paid out $168,000 in rent.

    The renter therefore has just over $220,000 in liquid assets.

    Ok, great. Now what does the buyer have?
    Well, he pays out $3620/month on average (of course maintenance is somewhat random), less his tax benefit of $591, for a monthly payment of $3029 after tax.
    Let’s say there is 3.9% appreciation over those 7 years. Curiously enough, this is the long-term average home appreciation.

    Ok, so what does he have at the end of it?

    Well, he sells the house for $653,550. Subtract the broker costs of $32678, and the remaining mortgage balance of $404,342, and voila’ he has total assets remaining of $216,530.

    Buyer LOSES.

    And remember, you’re exposed to the risk you’ll have to sell in less than 7 years (which only make the numbers worse), or you’ll need some major maintenance job (new roof, etc).

    If you buy with these kinds of numbers, you’re speculating that homes will appreciate at greater than the historical average after a historic boom.

    You can speculate on that; I fear it’s a problematic assumption for most.

  • David

    In other words, the key flaw to most people’s buy/rent assumptions is that they don’t figure that owning a house is like owning a very very expensive mutual fund, where it costs you about 2.-2.5% front-end (closing costs) and 5% back-end (R.E. selling costs) AND about 2-3%/year (property taxes, added utilities-most renters don’t pay for water&garbage, and most importantly, repairs&insurance). Those costs are a real drag on your investment. A renter can buy a reasonable mix of index funds for a $50 initial outlay (say, 5 ETFs at E*Trade), or 0.1% buying and selling costs, with barely 0.2% holding costs in the interim.

  • anna

    Okay, so my vote: David’s arguments are the most convincing as he really breaks it down to easily digested facts. Appreciate the time you put in here, David.

  • julie

    David, I take issue with this because you can in fact count on appreciation for your investment in the Bay Area- at least in San Francisco. I agree you need to be willing to wait but the city has not let anyone down who has done so. Carol Lloyd has a very interesting article on why SF is really bubble proof – it’s not the same old reasoning- you should read it.

  • anna


  • David

    Julie, I suggest you look back on history. Read a chapter about the Chicago canal land boom in 1840, Florida R.E. boom in 1920, and again, I’m sure plenty of people thought Detroit R.E. was a solid investment in the 1950′s.

    There’s absolutely nothing that prevents SF from collapsing like any other bubble. Even NYC has seen bad times in its R.E. market (’70′s, early ’90′s).

    I would also welcome you to look at the graph I posted. Look at what happened from 1989-1997. SF home prices went absolutely nowhere, which of course means you lost significant money to inflation.

    “being willing to wait” is problematic when real life intrudes. Even if you believe (which I do not) that SF is immune to enormous bubbles like those that afflicted Florida in the ’20′s, R.E. is not portable like your cash and stock portfolio.

    If you need more than 7 years to break even, I can pretty much guarantee you that you will:
    1) get married/divorced
    2) have/want more kids
    3) lose/change jobs

    And any of the above will force you to move and lose money, if your assumption is that you will “wait it out.”

  • david gordon

    Here we go again… another “San Francisco is special, San Francisco is different” attempt. Carol Lloyd’s article doesn’t even say SF is bubble-proof – unless you read a different article than I did.


    I agree with Michelle that leverage is truly the key to making money in RE — IF you have a good sense of timing and are flexible in your transaction/holding periods. As David suggests, if you have any life events that force you to sell outside your ideal timeframe, you could lose big-time.

    I can’t believe people don’t think an early 90s scenario can’t happen again in SF. And it can easily be worse this time!

    If people cannot comprehend and see the rationale in David’s many detailed explanations, I don’t know what anyone else can say about this.

    Buy when blood is running in the streets, not at the top of the market.

  • julien

    david, by that logic, then you might need to dip into the money you have locked up in investment anyway, so would be penalized for early withdrawal. if you are so sure real estate is a bad investment, why did you – as f points out above- buy and sell yourself? and from your own account, you did well doing so.

  • David

    Julie, your down payment isn’t coming from your retirement account (or it shouldn’t be).

    I think you’re missing my points. To summarize again:

    1) R.E. does not always go up. You can lose money “outright” (nominal dollars-happening now to a lot of people/banks), and you can lose money to inflation (happened from 1989-1997 in California).

    2) R.E. is not a liquid investment. I can buy/sell my stocks in a fraction of a second. It can take 6 months to sell a house. While you can’t live in your stocks, neither does the roof on my stock start leaking and need a $8000 fix. Nor does my stock portfolio need $1500/year in insurance, nor does it cost me 2-5% to buy/sell my stock.

    3) If you do the calculations, and it will take you more than 5-7 years to break-even buying a house, you are likely a) overpaying and b) exposing yourself to moving&losing money when compared to renting.

    4) There are non-economic reasons to buy (or rather, you are attaching premia to intangibles associated with owning), but they are precisely that, intangible, and do not equate with investment returns.

    Yes, I bought and sold myself. I did fine, by which I mean I was about break-even when compared to renting over the same period (maybe made a few percentage points). I didn’t really profit much except by living in a decent house (point #4). I did, however, suffer from the inflexibility (interfering with job searching, etc), and that is a real potential problem. I also bought the smallest, cheapest house on the block (literally) and the only one that made sense on a price/rent basis.

    I also regularly short stocks, trade in options, including complex spreads and straddles. Does that mean you should too? Do you know what risk you’re taking; what you’re getting into? I also probably drink too much and don’t keep my blood pressure as well controlled as I should. Again, probably not the best choice. Buying a house now could also be hazardous to your financial health. Or maybe you can find a great bargain, or a dream home. But don’t go into it without quantifying your risk.

  • Bad Advice

    The fact that folks can’t comprehend David’s math is why the bubble happened in the first place.

    Your renting and investment income is a separate category from your 401(k) or IRA.

    Come on this is basic economic common sense regarding opportunity costs for NOT putting down a down payment and saving the difference between a rental and a mortgage. The chances of significant real estate appreciation after an extended bubble is the risk factor that people here need to weigh. There is no “right” answer and folks will analyze things differently. My own take (with a decent 6 figure income) is that a $700k starter home for 1200 square feet is not worth the cost and I’ll invest elsewhere instead of trying to raise a family in a expensive shack. I currently rent a decent 3/2 townhome for $2300 and I’m investing the difference in rentals in Texas. To each his own.

  • Peter

    I’m trying to come tyo terms with renting. I think if I could learn to love it, I would see that it is really the most economical way to live in SF unless one can pay cash for his home, which I cannot. The only thing is that as a renter you have to follow the rules of some “owner” which grows old as we age, but still….we get to live in a fantastic city- and we’re not out a down payment!

  • TC

    I would not buy now unless you are getting into MAYBE a TIC in a 2 unit that you can live in long enough to convert without lottery. I’d not get a fractional loan since they are rip offs- find solid partners and invest. Otherwise, nothing is for sure going to be worth that much more when you sell it.

  • Nova Blackwood

    From the figures you lay out, Anna, I’d say it still looks like you get more for your money renting. Though rents are going up and up, housing prices are not falling, so…

  • Salarywoman

    Selfish, selfish, selfish!

    There you are. You can afford to buy but you do not. Because it doesn’t make economic sense? Because you don’t want to live in a smaller place in a less good neighborhood? What kind of a reasons are those?

    Don’t you know that you are raising rents for everybody else? Someone not as well off as you deserves that rental. And at a much lower rent. By sucking up supply and thereby increasing demand you are denying it to them.

    It’s all your fault and you ought to be ashamed of yourself!

  • Anna

    Hah hah! (?)

  • yeastbeast

    I like the idea, but the link to the tool in the text appears to be broken (clicking on the image works, however).

  • Chris Grubb

    For my home, the tool is spot on when using the proper comps.

    • Joel Ballezza, Redfin

      @chrisgrubb:disqus Great to hear!

  • http://www.realestatesalesnyc.com/ Kelsey Uh

    On my website I also uses home calculator and of course mortgage calculator.

  • Jen

    Why no Scottsdale? Or Phoenix?