The country’s largest real estate agent has issued a downbeat assessment of the new homes development, particularly in regional Ireland,” Ms Finnegan said.

What should be considered when deciding whether to buy or rent in the Bay Area?

Renting is relatively cheap here. Ha! I know, but the place I’m in now rents for $5k ($60k a year) and the same model of the same town home just sold for $1.45 million. I would further say, that’s typical of the market for the inventory of 3 bedroom homes in the Bay Area.

Let’s break down the numbers.

Let’s say you get 3.5% mortgage on the remaining $1.15 million after your down payment. That costs $40k a year, but it’s largely tax free. So call it $28k in after tax dollars.

Property taxes are only good for your neighbors who have lived in the Bay Area for a while and with a new home purchase, you are going to have to cover them. That’s another $17k, tax free again so let’s call it $12k.

HOA fees are $3k a year.

Buying that place is going to take putting down $300k. Instead, let’s take that and put it in Reality Shares and put it to work financing other people’s debt. That will typically return 8.5% on loans where the borrower has a great credit score and is putting at least 20% down. You can further spread that investment out among 50 different borrowers. That nets you around $25k a year on the same principal that would be tied up in your house with a substantially lower risk profile. After taxes let’s say it’s $18k.

28+12+3+18=$61k a year to buy. That also ignores the cost of maintenance and upgrades that could be substantial on older homes around the area and the $60k plus it will cost to sell the place with an agent. The AMT and other tax implications can substantially up those numbers for many upper income buyers here. Also the rate you get on your mortgage will really effect things too. In any case, buying right now costs you more then renting per year, but potentially not much more.

The thing you are looking at is the past several years and seeing double digits appreciation on leveraged money. Buying in 2010 was the better path by a long shot, although still not as good as dumping your down payment in Google stock at that time. This is not 2010 though. The market is at an all time high, both in stocks and real estate. Still companies are planning to hire more and build offices for significantly more people then new homes are scheduled to be built for. The economy also appears stable at this point, but past performance tells us it’s inherently cyclical and in the Bay Area, the last down cycle halved home prices in many areas. In other words, real estate here is extremely risky. If a recession hits the Bay Area I can’t see the prices for houses in suburbs that are only remarkable for thier proximity to work holding thier value. Past history has shown this to be true. We may not be able to predict the market, but I can tell you if a recession hits it will be reflected with a dramatic down swing in real estate prices.

That brings us back to pure real estate investing. It’s certainly not without it’s risks. Debt investment properties can typically lose at least 20% of thier value before you should feel it though and have a time frames that can be a year or less so you can tune things as the market turns. They also are typically adding value to properties by redeveloping them. Not just speculating and hoping for a rise in real estate to beat the costs over time. Unlike your primary residence where any depreciation hits you directly and is not usually liquidatable without significant changes to your life goals. Lose your job in that recession and your house may soon follow at a major loss. Also, if you want more risk in outside investments to parity the Bay Area apperciation of past years, you can double your return by putting it in more risky second lien debt or equity investments while still mitigating some of it by spreading it across the country and multiple investments. You can construct an investment that has nearly all the potential upsides of buying in the Bay Area while maintaining much greater control over the risks. Unlike buying a house near your affordability range, you can decide how much or how lillte exposure you want.

My point is, buying a house in the Bay Area as a primary residence is a bad investment at this point in time. Still, there is potentially tremendous value to quality of life to owning a house beyond monetary returns to many people. There are things you simply can’t get from renting. That also means when buying here, you are competing against very high earners with kids already in school that don’t want to have to move to another district because thier landlord decides it’s a good time to sell or investors from China who want to hide thier money from thier government. If things like that don’t have value to you, you are overpaying. By pure numbers, it’s a really bad investment unless you assume there is no top. Don’t buy a house here because you think you are going to lose more money renting. Investments that outperform Bay Area housing are easy to find.