Higher interest rates, skyrocketing home prices in Bay Area make renting a better option for some

SAN FRANCISCO (KPIX) — With mortgage interest rates rising and home sale prices at record highs, some experts say renting may be a better option for some people, in certain scenarios, if they want to save money.

“The Bay Area is the most expensive major metro area to live in in the country. It is extraordinarily expensive to buy a house there, and it’s almost as extraordinarily expensive to rent a home in the Bay Area,” said Jeff Tucker, a senior economist with Zillow. “For any short-term horizon, yes, it’s cheaper to rent a home than to own one in the Bay Area.”

Tucker provided KPIX 5 with data that shows the month-to-month cost difference between buying and renting:

In the San Francisco metro: 

  • The typical home value is $1,500,189, up 18.5% year over year and 33.6% since 2019
  • Mortgage payments on a typical home are $8,117 a month. That’s up 52.8% compared to May 2021 and 5.4% over April
  • Typical rents are $3,214, up 10.3% since May 2021

In the San Jose metro: 

  • The typical home value is $1,706,565, up 22.4% year over year and 37.6% since 2019
  • Mortgage payments on a typical home are $9,136 a month. That’s up 57.1% compared to May 2021 and 5.4% over April
  • Typical rents are $3,295, up 12.1% since May 2021

“The Bay Area and California in general have some of the most lopsided higher ownership costs in the country compared to the cost of renting in that area,” he said. “What has really tipped the scales so much recently is that increase in mortgage rates, which just has this huge multiplier effect on the cost of ownership.”

There is a potential upside to buying, despite higher cost, says Tucker. However, it’s tough to predict.

“When you own that home, you’re also getting that potential home price appreciation,” he said. “That’s the part that’s a lot more speculative.”

Jordan Levine, the Vice President & Chief Economist of the California Association of Realtors, agrees people will save money in the short-term under these market conditions by renting.

“Not only are you paying more for those homes as a buyer, but they’re costing you more to carry that mortgage around on a monthly basis,” he said. “That does kind of tend to chip away or impact the comparison that you do when it comes to renting and owning.”

However, Levine says people likely won’t save as much as they think in the long-run, and could lose out on substantial wealth accumulation if they choose to rent long-term.

“When you get 5, 6, 10 years down the road in a rental, it hasn’t done anything to your net worth even if you are saving on a monthly basis. The statistics show that you don’t typically go out and make a bunch of whiz bang financial investments and end up as well off as you would have been had you purchased a home,” he said. “It’s more expensive now to buy a home than it ever has been before. Rates are higher. That doesn’t detract from the ability of those assets to generate wealth in the future. But, there is just a genuine income hurdle that folks have to clear to be able to afford these prices, too.”

Levine notes a mortgage will likely be a locked in rate, and won’t fluctuate like rent will.

“Your rents are likely to continue going up whether we get inflation in check over the near term or not,” he said. “Rents are generally trending up whereas you lock in a mortgage, your costs are fixed, assuming you get a fixed rate loan.”

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