Rent vs. Buying a home
Dan Levy, Chronicle Staff Writer
Sunday, May 22, 2005 San Francisco Chronicle
Why buy a home when you can rent for half the cost?
That might seem like heresy in the Bay Area, where real estate is not only a craze, but sometimes feels like a cult.
Yet with home prices soaring and rents staying flat -- and with the Federal Reserve expressing concern last week over signs of a national housing bubble -- there may be some good economic reasons to consider renting instead of buying.
A recent survey by Torto Wheaton Research found that the cost of renting an apartment in the San Francisco metropolitan area is only 45 percent of the cost of owning a home.
Only the San Diego metro area's housing market, which some economists consider to be a bubble, has a lower rent-to-buy cost ratio among the 21 metropolitan areas studied in the survey.
Meanwhile, a first-quarter report by RealFacts, a Novato research firm, found that rents in large Bay Area residential complexes are essentially unchanged from a year ago and significantly below their dot-com-era highs.
All these signs, coupled with the frenzied behavior of home buyers and the psychic costs of landing a house, suggest advantages to renting, some housing experts say.
"Rents are down 25 to 30 percent from their peak in 2000, so right now you can do much better renting than buying," said John McWeeny, owner of the Metro Rent listings service in San Francisco.
An average two-bedroom apartment in Pacific Heights rents for about $2, 800, McWeeny said, while the total cost of owning a similar unit (assuming a purchase price of $880,000, 10-percent down payment and 30-year fixed loan) would be about $2,000 more a month.
For the potential buyer, that's a hit of nearly $5,000 a month in mortgage payments, taxes and insurance -- a hefty tab no matter which way you slice it.
But as everyone knows, many people are jumping into the home-buying market anyway, betting that rapid appreciation in home prices will continue.
Bay Area home prices rose 3 percent from March to April and jumped a stunning 19.6 percent from April of last year, according to La Jolla (San Diego County) research firm DataQuick.
The hypothetical Pacific Heights home mentioned above would need to appreciate by at least 5 percent a year for three years to make buying it a better option than renting a similar unit, McWeeny said.
That certainly seems plausible in this market, where home prices have ballooned by 50 percent since 2001.
But many people contend that the stress, risk and high monthly payments that go along with a home purchase are just not worth the pain of getting to the finish line.
"Every two or three years, I get the urge to buy a place to live in, and then the urge goes away very quickly," said Guy Smith, an Alameda marketing consultant who lives and works out of his rented $1,300 beach cottage in the island city.
Smith said that if he bought a $550,000 home in Alameda, he'd put down $50,000 and borrow the rest, making his monthly payments somewhere around $2, 500.
But because he is worried about a Bay Area housing bubble, and enjoys the hardwood floors and water views in his rented cottage, Smith says he will stick with renting.
"I would like to be putting equity into my own pocket, but there's no way to do it," Smith said. "The amount of risk and up-front capital is not matching the amount of reward I want."
Margaret Chau and her husband, a research scientist, spent six frustrating months trying to buy a house in San Francisco's Noe Valley or Potrero Hill neighborhoods.
After attending numerous open houses, "where you have 30 people following you," they decided to rent a house in low-key Millbrae.
"Eight hundred thousand dollars doesn't get you much," Chau, a retired legal assistant, said of the homes she saw in the city. "It's not a good value. If you buy in San Francisco, you still have to put in money to the house and do upgrading. And then you'll probably have to pay $5,000 a month for a mortgage and property taxes."
Set on a quiet street, Chau's home has about 1,200 square feet, a sun deck and a renovated kitchen. The couple would have paid at least twice the $2, 000 they pay in monthly rent had they bought a house instead.
"We'll travel, we'll eat very well, and I can buy more shoes or donate to charity," Chau said about the money they will save. "It's so much more relaxing and enjoyable."
Still, there are undeniable economic and psychological forces pushing people to buy.
Lenders are rolling out new mortgage products, such as interest-only and 40-year loans, and first-time buyers fear they will be priced out of the market if they do not purchase soon.
Real estate agents, for their part, will tell you that the tax advantage that comes from deducting mortgage interest is enough reason to buy a home if you can afford it. It's money down the drain to rent, they'll say.
But there is an alternative viewpoint held by people who do not value building equity above all other considerations, or have no desire to house- 09hunt in this atmosphere.
"Personally, I don't like the idea of overbidding 13 times and not getting the house," said Jim Buckmaster, chief executive of Craigslist in San Francisco. "I am a minimalist and I don't have the patience for that type of thing."
"In any case, the benefits of the of super-low-interest-rate environment seem to have been taken by the sellers," Buckmaster said.
Even mortgage professionals see the point in renting.
"It's easier to be a renter with the current level of competition for buying homes, especially if you have a static income," said Kevin Clay, a former head of the California Association of Mortgage Brokers. "When you rent, you have more flexibility. You can get another job and move. You don't have the responsibility of a home. You don't have to pay the plumber to fix the toilet."
Ellyn Hament came to a similar conclusion recently, settling in an Outer Sunset flat after enduring a arduous home-buying search.
She and her husband joined with a tenants-in-common partner to bid on a Victorian in Noe Valley. With competition from two other groups, Hament raised her share of the TIC offer by $120,000. Then she was advised by her real estate agent forgo a pest inspection that could have protected her from potential structural damage.
Hament's TIC offer was accepted, but then she found out about a leaky roof. The seller refused to let her in to inspect the damage, so Hament pulled out of the deal.
"It made us feel that we were signing off so much control," Hament said. "We didn't want to feel ripped off. Plus, our monthly payments would have been between $2,500 and $3,000. My hand kept shaking when I did the calculations."
Now, she lives "happily" in a large two-bedroom flat. Her 9-year-old daughter was accepted into a good public school, and Hament is content with her choice.
"We are savoring the relative stress-free-ness of having a new place to live," she said.
After playing with the calculator for a while, it’s easy to see that the key to making the “buy” decision a slam dunk is the little slot for the home appreciation rate. A double digit appreciation rate can cover a lot of real estate commissions, property taxes and insurance.
But a slower appreciation rates makes the rent vs. buy decision a closer call. By comparing $1,000 a month rent to a $200,000 house that appreciates only 3% per year (with a 6.5% mortgage rate, a down payment of about $15,500 and 3% property taxes), the breakeven period is 16 years (!). And that’s with maintenance expenses of just $1,200 annually. A true amortization of the cost of new appliances, heating and A/C maintenance, plumber visits, and the latest power tools from Home Depot would likely put that figure much higher. In fact, if that maintenance figure doubles to $2,400 a year, the “buy” decision never breaks even during the life of the mortgage. In other words, the renter would be better off staying in the apartment than trying to get rich automatically. At least until the mother-in-law moves in.
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