Better to rent vs buy in the Bay Area? Here’s what key data says

What’s more, that gap, called the price-to-rent ratio, is higher in the San Francisco and San Jose metropolitan areas than anywhere else in the nation, according to Moody’s Analytics. The last time the ratio reached nearly this high was right before the housing bubble of the early 2000s burst, presaging the Great Recession.

Does this mean it is better to rent than buy now in the Bay Area? And, given that high price-to-rent ratios are seen as possible indicators of real estate bubbles, what does that mean for where home prices may be headed?

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

How the price-to-rent ratio works

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

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

That equation yields the number known as the price-to-rent ratio. Lower numbers indicate that owning is cheaper than renting in a given market. Higher numbers signal that owning costs more than renting.

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

The “rule of thumb ideal” is 15, he said: “It tends to correlate with a mortgage payment that is roughly affordable for most households, and a rental rate that is also roughly affordable for most renters.” (Keep mind that the ratio compares rental and ownership costs within a market — it does not indicate anything about the affordability of purchasing or renting in that market compared to others.)

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

Bay Area and US trends

DeRitis calculated ratios for the 2000-2022 period using median home prices from the National Association of Realtors, and median annual rent costs for each market. Home prices are for single-family homes, and rental prices are mostly for large apartment buildings, he said.

In the San Francisco metro area, which includes San Francisco and San Mateo counties, the ratio stayed above the 20 threshold for the entire period, data shows. San Francisco’s price-to-rent ratio has been far higher than the nationwide 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 – those figures bookending the national housing bubble and ensuing crash. The most recent data, from March 31, 2022, shows the US ratio at 19.9, which is at the very top end of the price-to-rent threshold range.

The lowest ratio recorded in the San Francisco area during the period analyzed was 25.6, reached on June 30, 2001, amid the bursting of the dot-com bubble. During the pandemic, the ratio spiked to record levels, peaking at 58.8 on June 21, 2021 — surpassing the previous high in the mid-2000s when home prices skyrocketed during the housing bubble that burst in 2007-08.

The peak for the San Jose metro 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 fundamental reason, he said, is high demand due to relative scarcity, in part resulting from government regulations and compliance constraints that prevent more building.

Among large markets across the US, California markets dominate the top 10: San Jose was on top 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, Wash., rounded out the list in 10th place.

The price-to-rent ratios in some of these markets, including Los Angeles and Miami, also grew during the pandemic, and are approaching the 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 after that last housing crash, should Bay Area homeowners and buyers be concerned that the current numbers also signal the market is on the edge of a cliff?

“They are definitely elevated compared to history,” deRitis said of the region’s current ratios.

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

“I think (the ratio 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 correction is expected, deRitis said. It could result in slower growth of home prices — or even declines of 5% to 10%, he said.

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

However, those who can’t work remotely may drive up the demand for rentals, and higher-income workers could have more of an 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 any “major shifts.”

“There are still plenty of people who want to live in the Bay Area even if they have the option to work remotely,” deRitis said. “For this reason, we expect a moderation in prices and rents rather than a sudden collapse.”

What do the numbers mean for you?

For people making the call to rent or buy, the price-to-rent ratio should be just one piece of information informing the decision, deRitis said.

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

“You could get to an elevated level of price-to-rent if prices are rising faster than rents,” he said. “You could have prices that might be falling, but rents are falling faster. Some of that dynamic is important here.”

Also, crucially, while the ratio can indicate the relative gap between the cost of a monthly mortgage versus a rent payment, it won’t tell you which is actually more affordable for you.

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

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

Kellie Hwang is a San Francisco Chronicle staff writer. Email: kellie.hwang@sfchronicle.com Twitter: @KellieHwang

Leave a Comment

Your email address will not be published.