patrick.net

"The results generally show that more expensive neighborhoods remain very overpriced, since annual rents are running at 2% or 3% of asking prices for the same size and type of house in the same location."

Patrick, I appreciate this site for its intent to use facts and reason as a basis for discussion. Your statement here shows a bias toward renting. I'm not sure what you mean by "more expensive neighborhoods" but the data suggests to me that annual rents in such areas are running at 3% or 4% of asking prices. Admittedly, as a resident of San Francisco, I might be showing my bias.

Even 4% is a horrible deal for the owner. You're not going to get any mortgage at 4%, so you immediately pay more there. And then there's property tax, maintenance, insurance, etc. So the buyer gets royally screwed because the price is just way too high compared to the rent.

I'm biased against losing huge amounts of money.

Try the calculator for pretty much any nice neighborhood in the Bay Area and you'll see what I mean:

http://patrick.net/housing/calculator.php

Even 4% is a horrible deal for the owner. You’re not going to get any mortgage at 4%, so you immediately pay more there.

I agree completely. I just wanted to point out that 3% and 4% numbers seem to agree more with your list. Other people who read here might think the numbers not matching is an indication of bias and might miss all the helpful information here which will help them lead lives free of financial stress caused by lifetime debt commitments.

uni6jon2 says

Other people who read here might think the numbers not matching is an indication of bias and might miss all the helpful information here which will help them lead lives free of financial stress caused by lifetime debt commitments.

I understand not wanting to overspend on housing, but you've got it all wrong here. If you buy, you have 30 (or 15) years of debt payments. If you rent, then you truly have a lifetime of payments.

Additionally, when you buy (with a fixed rate) you establish some stability in your housing cost. When you rent, you are subject to more uncertainty in rental costs.

tatupu70 says

uni6jon2 says

Other people who read here might think the numbers not matching is an indication of bias and might miss all the helpful information here which will help them lead lives free of financial stress caused by lifetime debt commitments.

I understand not wanting to overspend on housing, but you’ve got it all wrong here. If you buy, you have 30 (or 15) years of debt payments. If you rent, then you truly have a lifetime of payments.
Additionally, when you buy (with a fixed rate) you establish some stability in your housing cost. When you rent, you are subject to more uncertainty in rental costs.

Oh for God sake. That 30 year timeline again. It just sounds desperate, really. I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years. They advocate for not buying unless it makes fiscal sense on a reasonable timeline, like 5 years, the old standard. Why 5 years? Because more likely than not, you'll move within 5 years. If you buy an overpriced house and can't sell it - you are screwed.

Or not. Just walk away like the rest of the jackasses who gambled and lost, and now cry "foul".

Rent is much closer to a fixed cost than mortgage debt. There are almost no repair and maintenance costs. No taxes. No home associations. Rent can go up, but almost never has during the time I've rented apartments and houses in Portland, OR and San Francisco.

I just know that I'm glad I've not had to absorb the cost of all the repairs/maintenance needed during the time I've rented.

The main reason to buy is recognizing that you are unable to save money any other way. People find it so difficult to save money, that they accept the tiny amounts of money that can be saved by buying a house and paying incredible amounts of money to the lender. It sets up a regular payment system for them, of which they get a tiny amount back near the end of their life. If you're going to live a lifetime of debt, might as well do it all in one big chunk where, at least, you'll get a little back.

Up to you whether you consider thirty years "a lifetime." That's a good chunk. Fifteen years is definitely a much more reasonable balance of how a person spends their life versus how much interest they pay to lenders. I'm happy to have lived, so far, exactly where I want to live and spend my time.

Thankfully, I've always found it easier than others to budget my actual money/income and save some of it. So I'll rent until I know there's a house for sale exactly where I want to live for a price that does not mean spending a multiple of my income in interest.

pkowen says

Oh for God sake. That 30 year timeline again. It just sounds desperate, really. I have yet to see a “bear” here ever advocate for renting “forever” or for 30 years. They advocate for not buying unless it makes fiscal sense on a reasonable timeline, like 5 years, the old standard. Why 5 years? Because more likely than not, you’ll move within 5 years. If you buy an overpriced house and can’t sell it - you are screwed.

Did you read the post I was answering?

My favorite zip code is Concord 94520 @ 9.1%
I have to admit I've got my eye on Richmond 94804 @ 8.4%. Either the Richmond Annex or Marina Bay for buying a rental if I can get one to pencil out.

OO says

Morgan Hill is one of the few places in the Bay Area where white middle class are displacing Hispanic illegal workers, who now have to commute from Gilroy or Hollister.

You could have said the same some 20 years ago as well when many left for Central CA.
But home builders didnt build mansion back than. The last 10-12 years was an anomoly,
build on bubble mentality, which is being reset due to more realistic economic enviroment.

uni6jon2 says

The main reason to buy is recognizing that you are unable to save money any other way

That is NOT the main reason to buy. That is about the dumbest reason to buy I have ever heard.

uni6jon2 says

I just know that I’m glad I’ve not had to absorb the cost of all the repairs/maintenance needed during the time I’ve rented.

True, that is an advantage of renting. I don't think the maintenance costs are all that high, but they do exist. Probably less than the tax benefit, actually. But that's a different discussion.

uni6jon2 says

Rent can go up, but almost never has during the time I’ve rented apartments and houses in Portland, OR and San Francisco.

You're very fortunate then, because rents do go up. I guarantee you that your rent will be much higher 30 years from now.

Anyways--my main point was that if you buy, there will be a time in the future where you will have no housing payment (save taxes) while if you rent, you will always be paying. So, I would consider renter more of a slave than a buyer.

congrats SMR, are you buying in Pleasanton or Danville? I have seen lots of friends and colleagues migrating that way since 2009. Except for commute, I have nothing negative to say about that area.

thomas.wong1986 says

OO says

Morgan Hill is one of the few places in the Bay Area where white middle class are displacing Hispanic illegal workers, who now have to commute from Gilroy or Hollister.

You could have said the same some 20 years ago as well when many left for Central CA.

But home builders didnt build mansion back than. The last 10-12 years was an anomoly,

build on bubble mentality, which is being reset due to more realistic economic enviroment.

I am not talking about a general area. I am talking about the making of certain more upscale communities, and in the Bay Area, it has always been along the western foothills. If you will, the first critical mass of mansions in Atherton, Hillsborough, Los Altos Hills gotta start somewhere. The world is not all doom and gloom, no matter what kind of shit or reset that will come this way, there will always be affluent people.

I don't believe that Silicon Valley will turn into Detroit, and if you think that is the future, you shouldn't be lurking around here anyway.

EBGuy says

My favorite zip code is Concord 94520 @ 9.1%

I have to admit I’ve got my eye on Richmond 94804 @ 8.4%. Either the Richmond Annex or Marina Bay for buying a rental if I can get one to pencil out.

The good news is, you don't need escort to collect rent in Marina Bay. What is the dividing line between Marina Bay and the rest of Richmond?

OO says

I don’t believe that Silicon Valley will turn into Detroit, and if you think that is the future, you shouldn’t be lurking around here anyway.

Larry Ellison was the first to coin that phrase..."SV is becoming Detroit". Like many founders of well known companies in SV over the past decades they see the high costs of homes as deterent from hiring in the Bay Area and rather set up shop elsewhere. You can call them Doom and Gloom but they call the shots who works for them, where, and how much. To them it is a numbers game and the bottom line.

OO says

congrats SMR, are you buying in Pleasanton or Danville? I have seen lots of friends and colleagues migrating that way since 2009. Except for commute, I have nothing negative to say about that area.

Nailed it - Pleasanton. Can commute to Silicon Valley from there. You know, I can drive a little more to save some $90k/year in mortgage/tax expenses!! After watching the market closely the past several years, I can say with confidence that you pay about 50-55% less out there compared to a like property in Palo Alto. Seriously.

tatupu70 says

Anyways–my main point was that if you buy, there will be a time in the future where you will have no housing payment (save taxes) while if you rent, you will always be paying. So, I would consider renter more of a slave than a buyer.

The tricky part, thinking of the simple math involved, is your "time in the future." Compound interest has time in the exponent. So if you want a lot of money, getting the time part as big as possible is the most advantageous goal for a bigger number.

Unfortunately, buying a home with debt(mortgage) means that you'll be, instead, paying that interest over time to someone else.

By saving your own money, there can be a time in your future where you're the one loaning money to other people.

Of course, if you can buy a house and save money, that could lead to a great level of financial independence too. That's been a tough picture to paint while home prices are at their current levels. Plus since the price/debt is only the beginning of house ownership cost, you're looking at a future of unknown financial planning. Mostly the lenders making money these days.

tatupu70 says

True, that is an advantage of renting. I don’t think the maintenance costs are all that high, but they do exist. Probably less than the tax benefit, actually. But that’s a different discussion.

Yeah, the mental state and planning this allows is probably the bigger benefit. Fixed costs are easy for finanical planning. Very few unexpected, big costs. Patrick also points out that you're also unlikely to sit around dreaming about how much bigger your house could be and then go spend more.

Still, in almost four years of renting a house in San Francisco it's been painted, the downstairs laundry area has flooded twice, once just leading to a need for industrial driers and a bunch of (my landlord's)time spent pulling back carpet, pulling/replacing floor boards, the second time because of a hot water heater failure so the hot water heater was replaced, all downstairs carpet replaced, more industrial heaters, paying the difference in my electricity bill, an arborist, a gardener, recently repairing the gas heater($500), cleaning gutters and a bunch of other little stuff.

Definitely only a few thousand dollars, but...what's next?

tatupu70 says

I understand not wanting to overspend on housing, but you’ve got it all wrong here. If you buy, you have 30 (or 15) years of debt payments. If you rent, then you truly have a lifetime of payments.
Additionally, when you buy (with a fixed rate) you establish some stability in your housing cost. When you rent, you are subject to more uncertainty in rental costs.

I can buy into what you are saying if your monthly outlay for buying and renting was the same, but if you are paying 2, or 3 times more (not unusual at the current house prices) for housing each month renting is a much better option.

Image if your rent was $1000, but to buy the same place was $2000 for a 30 year mortgage. Assuming that you could invest and stay even with inflation; by renting you would have $1,560,000 in today’s dollars saved at the end of 30 years of renting.

I am guessing that the renter could throw down cash on a house that is quite a bit nicer than the one the “owner” just finished paying off.

SanMateoRenter says

You know, I can drive a little more to save some $90k/year in mortgage/tax expenses!!

I think these are the kinds of reasons that really make buying sensible. They're just not reasons that settle in my mind.

I live a mile from the office where I work. I walked to work both of the last two days. The weather really has been nice in the Bay Area! I admit that I find this benefit much more valuable that most people.

uni6jon2 says

tatupu70 says

True, that is an advantage of renting. I don’t think the maintenance costs are all that high, but they do exist. Probably less than the tax benefit, actually. But that’s a different discussion.

Correct me if I am wrong, but I think the rule of thumb is planning on an average of 1% a year to maintain a house.

You could get several years of nothing then *boom* $20K for a new roof.

uni6jon2 says

I live a mile from the office where I work. I walked to work both of the last two days. The weather really has been nice in the Bay Area! I admit that I find this benefit much more valuable that most people.

I live almost 2 miles from work, and I love my walking commute. However, if it is raining really bad I will bus it.

SanMateoRenter says

Nailed it - Pleasanton. Can commute to Silicon Valley from there. You know, I can drive a little more to save some $90k/year in mortgage/tax expenses!!

You may find your employer also moving to Pleasanton. It does happen.

Patelco moves HQ to Pleasanton
Clorox to move hundreds of workers to Pleasanton
Software firm Callidus moves from San Jose to Pleasanton
Aggressor Moves Headquarters to Pleasanton, CA
Concord's Xradia is just the latest company planning to make the move to Pleasanton
SynchroNet Marine, Inc. Moves Corporate Headquarters to Pleasanton
Alloptic Completes $3.7 Million First Round and Moves to Pleasanton
Ross Stores to Move Corporate Headquarters to Pleasanton
Law Offices of Leon Mezzetti Moves to New Office Space in San Jose and Pleasanton

SF ace says

1% of 100,000 is not the same as 1% of 1M, especially when the roof area is the same, one kitchen 2-3 bathrooms. There’s more to maintain in a Sacramento mansion than a Palo Alto SFH.

True, true I stand corrected, but I still don't think that the maintenance is an insignificant cost. Especially when it occasionally can hit you with large one time bills.

thomas.wong1986 says

You may find your employer also moving to Pleasanton. It does happen.

Funny you should mention that... I'm expecting it too, and will probably work in the area for my next job. Employers are starting to realize that they get access to the same Bay Area quality of employee at a better cost out there. Cheaper land/office expenses and lower wages (since people out there are very likely to take a little less pay than the same job in Cupertino if they don't have to drive out there... all things equal, I would.

And then you have the impending flooding of the bay front... if just one of the two massive glaciers that are starting to break off into the ocean were to do so, they say sea levels could rise some 10-12 feet. That would take out a lot of the sea-level homes and business in the area. Check out this simulation: http://geology.com/sea-level-rise/san-francisco.shtml

The tri-valley area is at about 400-450 feet ASL. :-) That's where all the south bay companies will re-locate when their offices are under water.

SanMateoRenter says

And then you have the impending flooding of the bay front… if just one of the two massive glaciers that are starting to break off into the ocean were to do so, they say sea levels could rise some 10-12 feet. That would take out a lot of the sea-level homes and business in the area. Check out this simulation: http://geology.com/sea-level-rise/san-francisco.shtml

The tri-valley area is at about 400-450 feet ASL. :-) That’s where all the south bay companies will re-locate when their offices are under water.

Nah, no worries, they will just build a massive lock at the Golden Gate to save all the land lost with sea level rise.

uni6jon2 says

Unfortunately, buying a home with debt(mortgage) means that you’ll be, instead, paying that interest over time to someone else.
By saving your own money, there can be a time in your future where you’re the one loaning money to other people.

Sure--mortgagees pay interest to the bank. Just as renters pay rent to the homeowner.

Saving money is good whether you rent or own. Not sure where you are going with this--unless you are assuming that it is much cheaper to rent than own. If that is the case, then I agree, one should rent. I would never argue otherwise.

leoj707 says

I can buy into what you are saying if your monthly outlay for buying and renting was the same, but if you are paying 2, or 3 times more (not unusual at the current house prices) for housing each month renting is a much better option.

Yep--no argument from me. I rented during the bubble years for that exact reason.

leoj707 says

Correct me if I am wrong, but I think the rule of thumb is planning on an average of 1% a year to maintain a house.
You could get several years of nothing then *boom* $20K for a new roof.

That sounds a little high--but as others say, it depends on the value of your home. I just put on a new roof with 50 yr architectural shingles for $5K.. Maybe if you include insurance then it's closer to 1%.

Patrick, I'm wondering if you've had a chance to re calculate those ratios, say from Jan 1st, 2012 to March 31st, 2012?

It would be very interesting to put the two time columns next to eachother to see how things have changed in the past two years.

BayArea

pkowen says

Oh for God sake. That 30 year timeline again. It just sounds desperate, really. I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Well most of the bears on this site claim we are in a bubble since early 90s.. or before. The most conservative bears say 1997 was the start of the bubble in SF/LA areas.

In that case, tatu, makes a VERY valid statement in comparing 30 year fixed mortgage to lifetime rent payments. If someone bought a house in 1997 they are 15 years into paying off their mortgage. They could have EASILY refinanced into a 15 year fixed or less at 3% interest rate by now also.

Anyone that bought between 1997-2002 is doing JUST FINE.. Their mortgage is halfway paid off or BETTER.. and they are set! Real estate was a fine investment for them...

Ask any of them if they wished they would have rented back in 1997-2002? They would all say no.. Sure, some probably wish they would have sold in 2005-2006 I'm sure!

In another 15 years... I think 2012-2017 could easily resemble the 1997-2002 years... (definitely not as DRAMATIC of a boom.. but i don't think either buyer will be regretting their purchase in the long run).

You realize your post reinforces the fact that the BA is still in a bubble right?

No, you probably don't.

Oh and 12-17 resemble 97-02? lol. This failing economy isn't going to support that in the slightest.

ugh, the same tired arguments.

FunTime says

Rent can go up, but almost never has during the time I've rented apartments and houses in Portland, OR and San Francisco.

That's crazy talk. I've lived in SF for 25 years, rented the whole time, and lived in 6 different places.

My rent has gone up, significantly, every time I've moved.

pkowen says

I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Some of us have been renting this long and we are getting old. And still renting. And kind of bitter about it, actually.

orbitron says

You're right, housing is going to zero...

Yes that's exactly what I was saying.

Just stop posting.

It should probably be noted that the assumptions that Patrick has baked in to the rent vs buy calculator are subject to considerable debate.

For instance, the default assumption is that house prices will decline 1% per year over the long term future. Note that this is not an inflation adjusted decline but rather an assumption that if you wait another year, you will be able to buy the same house for a price 1% less. Wait 10 years, and it will be 10% less.

Personally, I don't think that is realistic. Overall, I don't see any reason to believe that house prices should not mostly track an inflation index such as the CPI or PPI, which would mean that one might expect prices to go up (along with your salary) at 2-3% per year.

And I would argue that the same should be anticipated for rent inflation.

If you recalculate with these (reasonable, imho) assumptions then you end up with wildly different results.

fizbin says

It should probably be noted that the assumptions that Patrick has baked in to the rent vs buy calculator are subject to considerable debate.

For instance, the default assumption is that house prices will decline 1% per year over the long term future. Note that this is not an inflation adjusted decline but rather an assumption that if you wait another year, you will be able to buy the same house for a price 1% less. Wait 10 years, and it will be 10% less.

Personally, I don't think that is realistic.

I think he is too conservative. I put in at least 2% depreciation each year. That would be a change from the 4-6% we have been experiencing. My rent cost right now is less than in 1997, so I don't see the rent inflation. If anything, my landlord is afraid I will be buying soon. The last thing he wants is try is increase my rent.

You can get different results with different assumptions, but you would then be fooling yourself. House prices in California have a downward momentum. There needs to be reasons for it to stay flat or start going upwards and there is not even one. Then there are many reasons to see it continue down.

orbitron says

You're right, housing is going to zero...

Wow, great counter argument. So, you are saying BUY NOW because house prices cannot go to zero. Haven't heard that one before. It is great to see the Realtards senseless chants become obvious to all now. Most people used to believe them before.

I figured out when I was old enough to think that smoking was a bad idea for your health. It took a while for the smokers to believe it, but they finally did. I never believed the realtards stories and it is great to finally see the rest of the population recognize the wolf in sheep's clothing. Realtards are not good for your health.

orbitron says

they are not building anymore SF homes

They are also not making anymore good paying jobs and the current ones are disappearing. There is actually less money out there than you think. And the people that have the money, the last thing they are doing is putting it into overpriced houses. Down we go. If you already have a house and are trying to pump it up, good for you. However, keep that job of yours cause things are going to get a lot worse in SF before they get better IMHO.

1sfrenter says

pkowen says

I have yet to see a "bear" here ever advocate for renting "forever" or for 30 years.

Some of us have been renting this long and we are getting old. And still renting. And kind of bitter about it, actually.

Just like the support beams in the house you could have bought a long time ago. Consider yourself lucky you don't have to rebuild the place you are renting. I love it when I move around renting and go into a newer home. Instant upgrade. I drive by some of my previous rentals and can see the deterioration over time. Roofs, siding, property shifting, etc. They felt fine when I was there, but time does do a number on crappy building materials and practices.