1) High up-front cost of homes in the Bay (e.g., large down payment)
2) Ongoing costs associated with ownership (mortgage interest, HOA or the equivalent in home upkeep, homeowners insurance, etc)
3) Risk factors, e.g., earthquakes (earthquake insurance is expensive, and the deductible is also sky high, pretty sure most people don’t have it)
Does it make sense to rent an equivalent home instead of buying? E.g., rent a 3 bed/2ba home in the same neighborhood instead of buying it and keep the cash invested in say an index fund?
Ignoring leverage, which can cut both ways, seems to me one would come out financially ahead being invested in an index over a house. One would also likely experience less stress (no big mortgage obligation / lack of liquidity), while also preserving the ability to relocate closer to work should one change jobs (IMO pretty important given Bay Area traffic is only getting worse).
In the Bay Area you have a buy-to-rent ratio of something like 40+ (this means buying a house is roughly equal to 40 years of rent from that house). Why does this ratio matter? It is a rough estimate of the ROI of your investment. If you bought a house to rent it out, you would have to collect rent for 40 years to just make back the investment (not even accounting for all associated costs or interest/repairs/fees/taxes).
Compare this to a state like Ohio where buy-to-rent can get down to 10 or less. This means if you bought a house there and rented it out, you would collect over 2x your mortgage payment. In the Bay, good luck trying to break even.
Why you should buy:
There’s a good chance the housing market will rise in the Bay. If there is a downturn, chances are the Bay will not be as affected as other cities/states. The Bay Area is unique in that there is a huge amount of money that flows in from VC, and large tech companies. These get trickled to the landlords and raise housing prices. 80% of funding goes to housing. Why does this matter? When you buy, you basically leverage 5:1 if you put 20% down. A 300k down payment on a 1.5m house can net you a 100% return in a few years if the house increases by 20%.