I recently received an email from a real estate agent noting that housing prices in the Bay Area have increased nearly 400% over the past 25 years. That sounds impressive—but when compared to the S&P 500, which returned roughly 300%, including dividends, over the past 10 years (about a 15% annualized return)—housing appreciation may not seem as extraordinary at first glance.
Looking closer, the annualized return for the S&P 500 from 2000 to 2025 is closer to 6.5%, largely due to two significant bear markets—the dot-com bust and the 2008 financial crisis—which pulled down average returns over this period.
Detailed Example: Buying vs. Renting
To explore this further, I ran a 25-year scenario comparing buying a home versus renting and investing. The analysis uses average annual returns, so the sequence differs from actual market history; results could vary in practice. Still, it illustrates long-term financial tradeoffs in a high-cost market like the Bay Area.
Assumptions:
- Home purchase price in 2020: $300,000 with 20% down payment
- Mortgage: 5% fixed rate, 25-year term (~$1,828/month)
- Mortgage rate rationale: Around 2000, rates were over 8% but declined over time, so 5% is a reasonable long-term average
- Property tax: initially $3,200/year, increasing 2% annually (Prop 13 cap)
- Insurance: initially $400/year, increasing 5% annually
- Maintenance: 0.5% of home value annually
- Home appreciation: 6.67% annually
- Rent: $1,500/month, increasing 3.5% annually
- Investment return for renter’s portfolio: 6.5% annually
Note: Insurance starts low at about $400/year in 2000, but with steady increases, it reaches around $1,300/year today—a trajectory reflecting many Bay Area homeowners’ real experience.
Results After 25 Years
| Metric | Homeowner | Renter (invests difference) |
|---|---|---|
| Net worth | ~ $1.5 million | ~ $550,000 |
Key Takeaways
- Leverage amplifies returns for homeowners.
Using a mortgage allows the initial $60,000 down payment to grow into ~$1.5 million in equity. - Renters investing the downpayment and the difference see their portfolio grow to ~$550,000, even with disciplined investing.
- Market conditions matter.
If home price growth lags stock market returns, renting and investing could outperform buying in certain periods.
Local real estate trends, interest rates, and personal financial behavior all influence outcomes. - Homeownership offers additional benefits.
Stability, forced savings through mortgage payments, and living space advantages.
Final Thoughts
In high-cost, appreciating markets like the Bay Area, buying a home remains a powerful wealth-building tool, especially when paired with leverage and long-term holding. Renting can work—but only if investors are disciplined and invest consistently. Every situation is unique, so careful planning is essential to weigh risks and alternatives.