Go to school, get a job, get married, and buy a house. This is what my parents have always told me to do. And I’m not alone. Owning a home is one of the major milestones in achieving the American dream. But what about owning a home in the Bay Area where a decent townhome can cost $1.4M and a decent single-family home will cost $1.8M? In this article, I'll break down how I ran the numbers and decided that it was not financially worth it to buy a house in the Bay Area, in 2019.

To understand the trade-offs between buying vs renting let's first set up the scenarios, such that the total amount spent for each scenario is identical. That is, if the buyer spends $1000 on property taxes, then the renter will invest $1000 to account for the opportunity cost. I will also capture one-time costs vs recurring costs.

Scenario 1 (Buying):

$1,400,000 townhome
2% closing costs (aggressively assuming a 1% kickback)
1.25% property tax on the purchase price, in perpetuity due to California’s Prop 13.
HOA and home insurance fees adjusted for inflation for the duration of the mortgage
30-year mortgage @ 3.6% (near all-time lows)
0.5% of home value for annual maintenance costs - usually this is estimated to be 1%
Tax savings is assuming a conservative 40% marginal tax rate and is only accounting for the opportunity cost of itemizing ($27,000) vs claiming the standard deduction ($24,000)
- As of 2018, you’re only allowed to deduct the interest paid up to $750,000 for mortgages.
- 3.6% of $750,000 is $27,000
- The difference between the tax break from buying the house vs renting is
  - $27,000 - $24,000 = $3,000 / 12 months x 40% marginal tax rate = $100 a month
- Property tax deductions are not listed because state and local taxes (SALT) are limited to $10,000 and that will already be chewed up by the income.

Scenario 2 (Renting):

$4,500/mo in rent for the same home in Scenario 1.
Rent will be adjusted for inflation of 3%
All of the additional money that would have been thrown at the house in Scenario 1, will instead, be invested in the US total stock market index.

“If the stock market appreciates at n% a year, the Bay Area home value needs to appreciate at (n-3)% a year to break even.”

Summary of results

Buying a home in Silicon Valley is worth it if the home value appreciates at a 7% annual rate for 30 years.
Specifically if the stock market appreciates at n% a year, the Bay Area home value needs to appreciate at (n-3)% a year to break even. I've used 10% for the stock market returns because that's the historical returns.
- Home Wins: Home Appreciation Rate + 3% > Stock Market Rate
- Renting Wins: Home Appreciation Rate + 3% < Stock Market Rate
- Both Wins: Home Appreciation Rate + 3% = Stock Market Rate
Homeownership is no longer as tax advantageous as it once was. The net impact is $100/month and will decay over time as interest payments drop.
Ultimately, the price of homes have an extremely low chance of appreciating 7% every year. If it did, the home value will double every 10 years—an improbable outcome. Also, the appreciation of a single-family home is generally higher than a townhouse or condo. This is one of the situations where spending more money on a house may actually yield a better return.

Caveats and Things to Consider

Current tax law allows up to $500,000 of capital gains from a home sale to be exempt. This may be a difference of ~$200,000, but there’s no analogous action for the stock portfolio. It’s not a good practice to liquidate 100% of a stock portfolio. Any adjustments will be done over time to minimize any tax liabilities. But this should be called out as it highlights one of the advantages of real estate over stocks
Having a home to call yours is emotionally more rewarding to you and your family than renting a home. The peace of knowing you can live in the same place for as long as you can pay the mortgage, the freedom to remodel and customize the house, and the relationships that you build with your neighbors all have value that is not captured here. This article specifically focuses on the financials because it’s objective no matter your personal situation.
Stocks are significantly more liquid and accessible than money tied up in real estate. Again, hard to quantify this, as it will vary depending on your personal situation.

With all of this said, I plan to buy a house at some point in my life. Just not in the Bay Area in 2019.

Featured