One way to think about it is the Spread between the cost of owning vs the cost of renting. For example, in SF, the spread is very small and hence favors the renter.
Here's an example:
In SF, your cost of ownership is roughly 2% per year (1.4% property taxes, 0.5% for Earthquake Insurance, 0.3% for repairs and depreciation and HOA), which comes to a total of 2.2%.
The average Rent for an equivalent house is roughly 3% of the purchase price per year. So the spread is just 0.8%. Which means, if you can take the equity you would have put into the house and put it somewhere else, as long as you get a 0.8% real return (easier said than done with the high PEs we're facing), then you'll be ahead with renting. And of course, if you need to do a mortgage as most do, that adds a additional 1-3% to the cost of ownership making it even more in favor of the renter.
Now keep in mind, here in SF, it's pretty extreme. Most places have a much larger spread between renting and owning.
In a high-demand area like SF you're probably seeing an appreciation in the value of the owned property equal or greater than whatever you would be likely to earn from other investments.
According to Trulia[1] the median sale price for two-bedroom homes increased from $1.010M five years ago to $1.407M today, which corresponds to an annual return of about 6.8%. Assuming that trend continues, the actual spread would be more like -4.3% for ownership (2.5% cost minus 6.8% appreciation) vs. 3% for renting, or 7.3% altogether in favor of ownership. You'd only come out ahead by renting if you can find an investment returning more than 7.3% per year.
You're right, but this also requires the renter to actually make their extra money work for them. Sounds simple, but so many people don't. It's similar to why people like tax refunds; it makes no sense financially, but it acts as a quasi forced savings account.
For CA: "Based on where you live, insuring a single-family house can cost from $2.50 to $5.50 per thousand dollars of coverage"
.25% to .55% That's quite significant.
That’s a percentage of the value of the structure, not the structure+land.
When buying insurance, you answer questions about your property and the insurance company estimates the cost of replacement of the structure. In my case, it’s about 30% of the market value of the home.
Yes, but most earthquake insurance policies have huge deductibles and the house is often worth ~1/3 of the entire property, so your number could still align with what others said.
+1, my annual SF earthquake insurance premium is 0.06% of the appraised value of the house. It's not even worth mentioning in adding up the total cost of ownership.
It's also not clear if any of these numbers are %ages of the total property value, land + house, or just house rebuilding costs (which are often over $400/sqft in California after a disaster).
My worry with CEA is in "the big one", will they have enough money? They have $17 billion in assets, which is theoretically enough. However, the Northridge quake caused over $10 billion in damage, and the 1906 earthquake was over $8 billion in todays dollars. (Although I question that number too. 500 city blocks were destroyed in 1906. Would it only take $8 billion to rebuild 500 SF city blocks?)
If we see a major San Andreas quake that devastates LA, the CEA could run out of money.
I do agree it will be a shit show when the big one hits. Don’t rely on earthquake insurance to fix your problems. Unless you have $$$$, your house is not going to be in the front of the line for rebuilding. Spend a thousand dollars now on braces and bolts.
I imagine everyone in the building trades will be fully employed in the rebuilding effort even if CEA runs out of money. The state would probably bail the CEA out, but either way people are going to be waiting for a long time for someone to come give them a new house.
Here's an example: In SF, your cost of ownership is roughly 2% per year (1.4% property taxes, 0.5% for Earthquake Insurance, 0.3% for repairs and depreciation and HOA), which comes to a total of 2.2%.
The average Rent for an equivalent house is roughly 3% of the purchase price per year. So the spread is just 0.8%. Which means, if you can take the equity you would have put into the house and put it somewhere else, as long as you get a 0.8% real return (easier said than done with the high PEs we're facing), then you'll be ahead with renting. And of course, if you need to do a mortgage as most do, that adds a additional 1-3% to the cost of ownership making it even more in favor of the renter.
Now keep in mind, here in SF, it's pretty extreme. Most places have a much larger spread between renting and owning.