Renting in San Francisco

Renting in San Francisco isn't cheap. The area has one of the most expensive rental markets in the nation. Even so, it is now much cheaper to rent in San Francisco than it is to buy. Here is a breakdown of average rents for apartment units according to rent-sf.com:

The numbers shown in the above table are based on average San Francisco rents in January of 2007. It should be noted that some neighborhoods in San Francisco have higher rent costs, while other neighborhoods have lower costs. Though houses can sometimes be slightly more expensive than apartments, it is possible to rent a nice house for just over $2,000 in most neighborhoods.

In addition to lower monthly costs, San Francisco renters also have a benefit that doesn't apply to buyers. This benefit is known as 'rent control'. The rent control laws in San Francisco apply to most of the tenants within the area, and regulate the amount that rents can be increased each year.

Rent control laws have helped to keep the cost of renting low in San Francisco. The largest annual increase occurred between 2000 and 2001 when rents were allowed to increase by 2.9 percent. But as you can see from the table below, that is slightly above average for the last decade:

- Table Source: San Francisco Tenants Union

Buying in San Francisco

While renting in San Francisco is a possibility for most residents, buying is another story. The cost to buy into the market has increased rapidly within the last five years. As a result, many residents are finding it difficult to get approved for the large loans needed to cover the purchase price of homes and condo units.

The median price for a home in San Francisco is $713,000. If you pay that amount and put 10 percent down, you are looking at a payment of $4,500 per month-if you have a fixed rate of 6.36 percent. If you have an adjustable rate mortgage, a sub-prime mortgage, or another form of creative financing, your payment may be higher.

To determine the monthly cost of buying, you must also figure in the other costs of owning, such as property tax, insurance, and maintenance. Once you figure these costs in, you are looking at a payment that is much larger than $4,500 per month:

In addition to figuring out the monthly cost of homeownership in San Francisco, potential buyers must also consider the possibility of price depreciation. Because prices in San Francisco have risen so rapidly, the chances of prices declining are very high. History has taught us that in a bubble, a market correction will almost have to take place in order for the market to stabilize.

The Center for Economic and Policy Research (CEPR) Housing Cost Calculator indicates that median priced homes in the San Francisco area have the potential to lose 56 percent of their value within the next five years. At this rate, you could pay as much as $9,800 in rent every month for the next five years and still break even.

Analysis Conclusion

Although it may seem that the point of this analysis is to deter potential homebuyers, the real point of the analysis is to show that buying isn't always the right decision and renting isn't always the wrong one.

The fact is that buying in San Francisco isn't right for everyone. If you doubt that statement, just ask the rising number of San Francisco homeowners who have fallen face first into the foreclosure trap. These poor folks got caught up in the American dream and learned about the problematic San Francisco housing market the hard way.

Don't let this happen to you. If you are thinking about plunging into the San Francisco housing market to test the water yourself, you must crunch the numbers beforehand. You must also look at the individual neighborhood's depreciation potential. This is the only way to tell whether or not buying vs. renting makes good sense for you.