Recently the local news reported that people in the Silicon Valley who lease or rent are spending 47% of their income on housing. That is 17% above the 30 percent benchmark recommended by financial advisors, lenders and even landlords. Although the cost of owning a home is ever-increasing, especially in the Bay Area, the outrageous cost of renting is putting a crimp in many pocketbooks even among those high-tech earners.
Most people now rent for an average of six years prior to purchasing a home, making the typical first-time buyer 33 years of age. Although the cost of owning a home has risen over the years, rents have also been on a steep uptick. Unlike a 30-year fixed mortgage, rent can and often does increase on at least an annual basis, and often quite substantially.
Trulia has a helpful and enlightening Rent VS Buy tool that compares target monthly rent, home price, income and mortgage rates to see whether it is more financially feasible to own or rent within specific metro areas. The advanced settings also allow you to customize the closing costs, down payment and other specifics.
For example, in the San Francisco-Redwood City-South-San Francisco metro area, based on a home priced at $840,000 with a 3.78% interest rate, you would have a $2,203 monthly mortgage payment versus a monthly rent payment of $3,350. Assuming you live in the house for 10 years and are in a 25% tax bracket, renting in this area is 32% more expensive than buying. When you move to the metro area that includes Sunnyvale, buying is 16% less expensive than renting comparing a $3,000 monthly rent to a $2,439 mortgage payment.
The well known 30% rule has been around since the New Deal era but tends to remain in use today despite many changes in our overall economic position. Owning a home is a financial investment and one that will always be on the rise. So although the 30% amount may not reflect today’s reality, what is obvious it that owning a home is indeed more cost effective than renting, even in the highly priced Silicon Valley. Not only will you reduce the percentage of your income spent on housing but homeowners reap significant tax benefits as well.
Yes, the Bay Area is indeed near the pinnacle when it comes to home prices but it is still possible to own a home. Consult your financial advisor to assist you in outlining and putting a plan in place based on your economic position. Find an experienced Realtor you trust and sit down with them to better understand the areas that meet you lifestyle and financial situation. The Dawn Thomas Team can provide valuable insights and advice and get you on the right track. With these two invaluable resources, you can eventually put your hard earned money toward a home of your own rather than toward rent.