Better to rent or buy in the Bay Area? Here’s what the key figures say

Additionally, this gap, called the price-to-rent ratio, is greater in metropolitan areas of San Francisco and San Jose than anywhere else in the nation, according to Moody’s Analytics. The last time the ratio reached near this high was just before the housing bubble of the early 2000s burst, portending the Great Recession.

Does this mean it’s better to rent than buy now in the Bay Area? And, given that high price-to-rent ratios are seen as possible indicators of housing bubbles, what does that mean where house prices might be headed?

Here’s a look at the data and what the analysts are saying.

How the price-rent ratio works

The price-to-rent ratio is a commonly used metric to evaluate the relative cost of renting compared to owning a home.

The math works like this: Take the average price of a house in a specific area and divide it by the average annual rent.

This equation yields the number known as the price-to-rent ratio. Lower numbers mean that owning is cheaper than renting in a particular market. Higher numbers indicate that the property costs more than rent.

The key threshold at which things change is the 15-20 range, Moody’s Analytics Cris deRitis deputy chief economist said.

The “ideal rule of thumb” is 15, he said: “It tends to correlate with a mortgage payment that is more or less affordable for most households and a rent rate that is also more or less affordable for most families. renters “. (Keep in mind that the report compares the costs of renting and owning within a market – it doesn’t indicate anything about the affordability of buying or renting in that market versus others.)

When the ratio goes above 20, concerns emerge about the property’s relative affordability – and Moody’s data over the past two decades shows that in both the San Francisco and San Jose metropolitan areas, the report has consistently far exceeded that benchmark.

Bay Area and US trends

DeRitis calculated the ratios for the period 2000-2022 using the National Association of Real Estate Agents’ median house prices and median annual rental costs for each market. House prices are for single-family homes and rental prices are primarily for large condominiums, she said.

In the San Francisco metropolitan area, which includes San Francisco and San Mateo counties, the ratio remained above the 20 mark for the entire period, data shows. San Francisco’s price-to-rent ratio was far above the national figure – double and sometimes even close to triple the US ratio – for the entire period.

The US ratio ranged from a high of 22.1 in 2005 to a low of 14.2 in 2011, figures that marked the national housing bubble and its subsequent collapse. The most recent data, from March 31, 2022, shows the US ratio at 19.9, which is at the top of the price-to-rent threshold.

The lowest ratio recorded in the San Francisco area in the analyzed period was 25.6, reached on June 30, 2001, amid the bursting of the dot-com bubble. During the pandemic, the ratio soared to record highs, reaching a peak of 58.8 on June 21, 2021, surpassing the previous high in the mid-2000s when house prices skyrocketed during the housing bubble that burst in 2007. -2008.

The peak for the San Jose metropolitan area was even higher at 59.8, reached on May 31, 2022.

DeRitis said that in San Francisco and San Jose the price-to-rent ratio “has always been much higher” than in other parts of the country. A key reason, she said, is high demand due to relative scarcity, partly stemming from government regulations and compliance constraints preventing multiple buildings.

Of the large US markets, California markets dominate the top 10: San Jose was leading, followed by San Francisco, Anaheim and Oakland. Salt Lake City was in fifth place, followed by Denver, San Diego and Seattle. Oxnard in Ventura County was ninth and Tacoma, Washington completed the list in 10th place.

The price-to-rent ratio in some of these markets, including Los Angeles and Miami, also grew during the pandemic and is approaching levels reached during the housing boom in the mid-2000s.

How long can it last?

Given the steep decline in the price-to-rent ratio since the latest housing slump, should Bay Area homeowners and buyers be concerned that the current numbers also signal that the market is on the brink?

“They are definitely high relative to history,” deRitis said of the region’s current reports.

However, he added that while there is “constant debate” on the subject, he thinks Bay Area home prices are unlikely to rise anytime soon.

“I think (the relationship is) sustainable for the market as it is, given the income and profile of the people who live there,” he said. “The market has been able to sustain these prices and these rents”.

Instead of a crash, a fix is ​​expected, deRitis said. It could mean slower growth in house prices, or even a 5% to 10% drop, he said.

Any change in remote work trends will likely affect the housing market as well, deRitis said. If many employees of Bay Area companies remain permanently distant, it could “relieve some of the pressure” and “remove some of the demand” for housing in general, particularly if they move out of the area, as many did during the pandemic.

However, those who cannot work remotely can increase the demand for rents, and higher-income workers could have a greater impact on the home buying market, whether they work remotely or not.

Regardless, the Bay Area still has “pent-up demand” for housing, deRitis said, so he doesn’t expect “major moves”.

“There are still a lot of people who want to live in the Bay Area even if they have the ability to work remotely,” deRitis said. “This is why we expect a moderation in prices and rents rather than a sudden collapse.”

What do numbers mean to you?

For people calling to rent or buy, the price-to-rent ratio should be just information that informs the decision, deRitis said.

One thing to keep in mind, he said, is that rents and house prices don’t necessarily move in tandem.

“You could reach a high level of rental price if prices rise faster than rents,” he said. “You may have prices that may fall, but rents are falling faster. Some of these dynamics are important here. ”

Also, most importantly, while the report may indicate the relative gap between the cost of a monthly mortgage and the rent payment, it won’t tell you which one is actually more convenient for you.

While the ratio is favorable, other variables include interest rates, income, 10-year financial outlook, fixed costs associated with purchases, labor market outlook, and whether you plan to stay in an area for a long time. period.

“It’s not a simple equation, but this is definitely a good rule of thumb to indicate whether the market appears to be overheated or not,” said deRitis.

Kellie Hwang is a staff writer for the San Francisco Chronicle. Email: Twitter: @KellieHwang

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