Renting vs. buying: What’s better in San Francisco, San Jose and Oakland now?

Rent vs. buy: No simple answer

The primary consideration is an individual’s personal and financial situation. There are many factors and variables to consider, including current income and debt, personal assets, credit score, downpayment funds, mortgage interest rate, purchase price and the location and type of property.

Home ownership is the way to go for long-term investment and equity, if an individual has the wherewithal to get into the market. But for those looking to make a head-to-head financial comparison between renting and buying in the nearer term, there are tools available to try this out.

By plugging in common variables to rent-vs.-buy calculators from NerdWallet, SmartAsset and Realtor.com, The Chronicle identified some key trends for people considering becoming homeowners (or considering exiting homeownership). The exercise found that it takes longer to realize investment in home ownership in the Bay Area’s biggest cities than in the nation at large.

For the three largest Bay Area cities (San Jose, San Francisco and Oakland), these data points were factored in:

• Median household income from the U.S. Census.

• Typical two-bedroom home value from real estate listings site Zillow from February, 2022.

• Estimate of two-bedroom apartment rent from Apartment List from February 2022. Apartment List uses Census Bureau and Department of Housing and Urban Development statistics.

We entered these values into a rent vs. buy calculator, adjusted home appreciation to 5%, set mortgage interest rate to 5.1%, which was the national average as of Sunday, and assumed a 20% down payment on a house.

In all three cities, it’s less costly to rent in the shorter term — no surprise, given the upfront costs necessary for homeownership. But the break-even point occurs at a different moment for the three cities, and later than the national average, especially in San Francisco.

Calculating the break-even point

NerdWallet’s calculator shows that in Oakland, the point at which buying is financially superior to renting comes at the 11-year mark. (This assumes a household income of $80,143, a two-bedroom home priced at $820,376, and a two-bedroom rent estimate of $1,939.)

Raise the monthly rent input by 10%, and it decreases to nine years. A 20% monthly rental increase allows the buyer to break even in seven years.

Conversely, if the home price goes up 10%, buying is again never cheaper than renting unless your rent is much higher.

In San Francisco, using the average numbers for household income ($119,136), two-bedroom home price ($1.48 million) and rental price ($2,713), you break even in 26 years, according to the calculator.

If the rent is increased 10%, the break-even point is 22 years, and a rental increase of 20% puts that milestone at 18 years. But raise the home price by 10% and you won’t break even for 30 years.

In San Jose, inputting the median household income of $117,324, a two-bedroom home price of $893,119 and rent estimate of $2,331, you break even in nine years.

Raise the monthly rent by 10% and the homeownership break-even mark comes at seven years, while increasing rent 20% makes it six years. But again, increase the San Jose home price by 10% and you’re better off renting.

Buying a home becomes the better financial bet much sooner when all the numbers are based on national averages. With a median household income of $64,994, a home priced at the typical two-bedroom home value of $245,552, a two-bedroom rent estimate of $1,295 and 3% home appreciation rate, the break-even point is just four years. Raise the rent 10% and the break-even point is reached in three years, and the same with a 20% increase in rent.

These calculators are limited in their scope, and experts say it all really depends on your end goal. Results depend on estimating and assuming many variables that can vary widely from region to region, person to person, and scenario to scenario.

“If you are in a rent control apartment and have been renting for a long time, then renting will always be cheaper,” said Jeannie Gant, a

San Francisco real estate broker and president of the San Francisco Association of Realtors. “But you will not have the many advantages of owning a home and building equity. If you are renting at today’s rental market price, then you will start to see the curve bend towards buying as a better option.”

Other factors to consider

Gant said the primary reason for home ownership is to “build equity and provide housing stability.”

Rob Warnock, senior research associate for Apartment List, pointed to the attractiveness of “passive investment” as one reason for buying a home, even if renting is cheaper.

“A lot of household wealth creation is based on mortgage payments that convert into equity, which can be used to access more capital,” he wrote in an email.

In order for a renter to achieve these gains, “they would need to calculate their monthly savings compared to homeownership, invest those savings, and achieve a return that matches or exceeds home price appreciation.”

“While certainly not impossible, wealth-creation in this way is far more demanding as a renter,” he said. “This is a drawback to these (rent-vs.-buy) calculators I think, which focus on how much you spend rather than how much wealth you generate.”

Still, there are benefits to renting including overall lower monthly costs, the flexibility to pick up and move wherever you want, not having to deal with surprise housing expenses, and being able to live in more urban areas that typically have more units for rent, Warnock said.

“But despite these benefits, our research suggests that most renters rent because they can’t afford not to, and specifically it’s the up-front costs that makes homeownership unaffordable,” he said.

The pandemic has made the home buying market especially tough in the Bay Area, which was already notorious for high prices and low inventory.

“The pandemic increased the demand for single family homes as buyers moved away from bigger condo complexes and preferred outdoor space and single dwellings,” Gant said. “Therefore the appreciation rate for single family homes went up over 10% from 2021 to 2022.”

Especially fierce competition in some parts of the Bay Area has led to “bidding wars, all-cash offers, institutional investors, waived inspection contingencies,” Warnock noted.

“Unfortunately I think the competitiveness of today’s Bay Area home market is making obsolete a lot of conventional wisdom about what it takes to buy a home,” he said. “It’s one thing for the market to be expensive…but historically low inventory and a rush to capitalize on low interest rates has created a competitiveness that poses new challenges to potential homebuyers.”

He added that the pandemic “has increased demand for owned homes while also interrupting new home construction.”

That said, Gant said prospective buyers can still find homes if “they are willing to forego some amenities”: In San Francisco, for instance, “you can pay about $100,000 less for a home without parking.”

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