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

Does that mean it’s better to rent than buy right now in the Bay Area? And, given that high price-to-rent ratios are seen as possible indicators of housing bubbles, what does this mean for the direction house prices might take?

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

How the price/rent ratio works

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

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

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

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

The “ideal rule of thumb” is 15, he said: “This tends to correlate with a mortgage payment that is about affordable for most households and a rental rate that is also about affordable for most tenants. (Remember that the ratio compares the costs of renting and owning within a market – it says nothing about the affordability of buying or renting in that market compared to others.)

When the ratio exceeds 20, concerns about the relative affordability of property arise – and Moody’s data for the past two decades shows that in the San Francisco and San Jose metro areas, the ratio has consistently exceeded this benchmark by a significant margin. .

Bay Area and US Trends

DeRitis calculated the ratios for the period 2000-2022 using median home prices from the National Association of Realtors and median annual rental 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 metropolitan area, which includes San Francisco and San Mateo counties, the ratio remained above the 20 threshold throughout the period, the data showed. San Francisco’s price-to-rent ratio has been well above the national figure – double and sometimes even nearly 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 numbers ending the nation’s housing bubble and subsequent crash. The most recent data, from March 31, 2022, shows the US ratio at 19.9, which is at the very top 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, in the midst of the bursting of the dot-com bubble. During the pandemic, the ratio reached record highs, peaking at 58.8 on June 21, 2021 – surpassing the previous high of the mid-2000s when house prices soared 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, resulting in part from government regulations and compliance constraints that prevent more construction.

Among the major US markets, California markets dominate the top 10: San Jose was first, 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 finished ninth and Tacoma, Wash. rounded out the list in 10th place.

Price-to-rent ratios in some of these markets, including Los Angeles and Miami, have also increased during the pandemic and are approaching levels reached during the mid-2000s housing boom.

How long can it last?

Given the sharp decline in the price-to-rent ratio after this latest housing crash, should Bay Area homeowners and buyers be concerned that the current numbers also signal that the market is on the edge of a cliff?

“They’re definitely high relative 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 fall anytime soon.

“I think (the ratio is) sustainable for the market as it is, given the incomes and the profile of the people living there,” he said. “The market was able to support those prices and rents.”

Instead of a crash, a fix is ​​expected, deRitis said. That could lead to slower house price growth — even a 5% to 10% decline, he said.

Any changes in remote work trends will also likely affect the housing market, deRitis said. If many employees of Bay Area businesses stay permanently remote, it could “relieve some of the pressure” and “remove some of the demand” for housing overall – especially if they leave the region, as many have done during the pandemic.

However, those unable to work remotely may drive up rental demand, and higher-income workers could have a greater impact on the homebuying market, whether they work remotely or nope.

Either way, the Bay Area still has “pent-up demand” for housing, deRitis said, so he doesn’t expect “major changes.”

“There are still a lot of people who want to live in the Bay Area even though they have the ability to work remotely,” deRitis said. “For this reason, we expect price and rent moderation rather than a sudden collapse.”

What do the numbers mean to you?

For people calling 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 house prices don’t necessarily move in tandem.

“You could achieve a high level of price-to-rent ratio if prices increase faster than rents,” he said. “You might have prices that might go down, but rents go down faster. Some of that dynamic is important here.

Additionally, and most importantly, while the ratio can indicate the relative spread between the cost of a monthly mortgage and rent payment, it won’t tell you which is actually more affordable for you.

Even if the ratio is favourable, other variables include interest rates, income, your 10-year financial outlook, fixed costs associated with the purchase, labor market prospects, and whether you plan to stay in a region.

“It’s not a simple equation, but it’s certainly a good rule of thumb to indicate whether the market appears to be overheating or not,” deRitis said.

Kellie Hwang is a staff writer for the San Francisco Chronicle. Email: [email protected]: @KellieHwang

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