Bay Area residents pay biggest premium for buying vs renting a home

Monthly ownership costs in San Jose, SF and Oakland more than double rents

San Francisco, Oakland, and San Jose

(Illustration by The Real Deal with Getty)

Bay Area buyers pay by far the biggest premium for home ownership in the nation, with residents shouldering more than double the monthly costs to rent versus owning a house, according to a new Redfin report. 

San Jose has the largest own-to-rent premium among the country’s 50 most populous metro markets. The premium works out to 165 percent. That means a hypothetical consumer could pay $11,000 a month to buy a house, or spend $4,200 to rent a similar home, according to Redfin’s estimates. 

San Francisco placed second with a nearly 140 percent ownership premium, and Oakland was third at 99 percent. 

Outside the Bay Area, Anaheim had a 91 percent ownership premium and Seattle came in at 88 percent to round out the top five markets. The nationwide average was a 25 percent homeownership premium, the highest since the 2006 housing bubble.

West Coast owners pay the biggest premium in part because an uptick in mortgage rates on the area’s “jumbo” mortgages can mean thousands of dollars in additional monthly payments. It’s one reason why housing prices have dropped so quickly in the Bay Area when mortgage rates jumped up last year, pushing affordability even further out of reach

Even if renting is vastly less expensive, people keep buying in the Bay Area, if they can, because they expect the wealth building-potential to be largest in the places where home prices have gone up so much historically, Redfin Deputy Chief Economist Taylor Marr said in the report. 

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Additionally, many Bay Area buyers likely pay far less than the Redfin estimated monthly averages because Redfin assumed a 5 percent down payment and a significant number of buyers cash out stock to buy their homes and put down much more. A rising number are also buying all-cash

The analysis also assumed a 6.5 percent interest rate — the average in March — homeowner’s insurance at 0.5 percent of the purchase price and 1.25 percent annual property tax rate if no tax records were available when calculating a homebuyer’s monthly housing payments. Redfin used its internal tools to determine values for single-family homes, condos/co-ops and townhouses both on and off the market in March, and to estimate what it would cost to rent the same property. 

With no homes in the Bay Area cheaper to buy than rent, prospective home buyers turned to surrounding markets when work went remote during the pandemic. That jacked up prices in markets such as Sacramento, Las Vegas and Austin, according to the report. In Sacramento and Las Vegas, less than 1 percent of homes are now cheaper to buy than rent. In Austin, it’s 5 percent. 

Nationwide, about 20 percent of homes carry lower monthly costs than renting, which Redfin said could go up if interest rates fall. Mortgage rates will likely dip below 6 percent by the end of the year, Marr said, but they’re unlikely to return to the 3-percent levels required to make owning a better deal than renting for the average consumer. Only four cities in the analysis had renters paying more than owners, on average: Detroit, Philadelphia, Cleveland and Houston.

Even with higher monthly payments, owning a home often makes more long-term financial sense than renting because the buyer is building equity, Marr said, assuming they can afford the downpayment and monthly mortgage. 

“I wouldn’t encourage people to squeeze their budgets in order to buy a home when prices are falling and we’re teetering on a recession,” Marr said. “In the years leading up to the pandemic, it made sense for some homebuyers to break the rule that says not to spend more than 30 percent of your income on monthly housing costs, but these times are more risky, so it makes sense to be a little more conservative.”

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