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I Was Thinking to Myself This Could Be Heaven or This Could Be Hell
2005 Oct 31, 1:59pm 73,446 views 451 comments
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Peter P
@
2005 Oct 31, 2:15pm
Do not take mortgage interest deduction as given. There is a real possibility that deduction limit may be lowered from 1M. Make sure that you can still afford the PITI comfortably even without deduction.
Don't buy. Here is my observation.
The worst-priced homes for buyers are something around 800K-1.2M, because that represents the utmost that a double-income family (~200K) can buy using the innovative mortgage buying. There are plenty of shacks (50 years old, in a decent school district) selling for this much. Beyond 1.2M, you have hit a resistance level that a family dependent on salaries cannot afford. Therefore, the homes above the ~1.2M threshold are priced much more reasonably.
However, when you go above 1.5M, you actually see plenty of good stuff! Do this, go to those suburbs that you always want to get into, like Los Altos Hills, Portola Valley, etc. and look at the properties around 1.6M-2M, they typically have an acre, a fully updated home of ~3000 sft with amazing view, 100 times better than your typical 6000sft-lot-1600-sft-60-year-old-million-dollar starter home.
So before anybody even thinks about jumping in, do a search of properties in truely prestigious neighborhood at 1.6-2M price level and compare that to a million-dollar average home, and ask yourself why the 1.8M dollar home actually looks like a million-dollar home and a 1M-dollar home looks like shit?
I think Gary isn't from SiValley.. : )
Re: the above calculations, you left out maintenance costs and hazard insurance on the property. This may have been intentional -- depending on your situation, they might be negligible (or huge).
The distilled advice is always: if you can afford it comfortably, you expect to be there for a length of time (six years is short in my book), and it's important enough to you, buy it. If you are depending on the value of the house to increase for any reason, or if you're stretching, don't buy it.
I wouldn't do it, myself. Leverage can move mountains, but that service commitment for a non-income-producing "asset" doesn't feel good to me. I also don't value SiValley living highly enough to feel the pressure of acting now, or ever. Your situation may be different. : )
Peter P
@
2005 Oct 31, 5:50pm
I read the recent economist about it and it sounded like the proposed $300,000 cap was the amount of interest you can deduct.
I think it is the interest on loan up to 300K. Most homeowners in the country will not be affected. Some can even benefit from it because of the switch from deduction to tax credit.
The typical loser: a marginal homedebtor with a 100% loan on $1M in a blue state with high income tax and high housing cost.
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Two years after signing a lease with a landlord who intended to never sell, he is selling.
I have to choose whether to buy this 3 bdr / 1.5ba, 1450 sq ft house in San Carlos for $888k or rent elsewhere. Here's my analysis...
I would put down $250k, financing $638k. At ~6.125%, my P&I comes out to $3,877. Property tax is around $928 for a total of $4805.
But I can deduct the mortgage interest of $3256. CA + Federal tax is 42%...so I save $1368 (and I already itemize, so it's not as if I lose the standard deduction). That brings me down to $3437.
Then comes something I can't calculate properly...I'd like to deduct the property tax, but I think I'm again in AMT hell this year...maybe someone can help. If I could deduct property tax, it would save my another $390 a month, bringing me down to $3047. Let's go with this for now.
Now if I think that the house won't lose value, I can look at it this way...of the P&I, $620 goes to principal. So that means my 'down the toilet' money comes out to $2427 a month. Renting anywhere on the peninsula in a comparable house is this much or maybe a bit more.
And at this point I'd say 'why not?', except for one thing...the opportunity cost on the $250k downpayment. Even with, say 5% after taxes, that's $1000 a month. Or put another way, if I rent for $2500 / mo, I really only pay $1500.
So then, let's assume I keep the house for 6 years and have to pay a 6% realtor commission. If I figure 5% savings rate, comparable rent of $2500 and $1054 opty cost on my $250k downpayment, it tells me that the house will need to sell for $1,076,000 to break even, or go up by roughly 21% (3.5% per year). If I assume no AMT deduction, I'll need to sell for $1,111,000 - required appreciation of 4.1% a year.
For fun, let's say that the proposed tax change limiting CA mortgage deductions to ~$350k comes into play. It actually makes less of a difference than you would think, at least for me. One one hand, my interest deduction goes down from $1368 to $750. But I can then deduct my state tax. Net, break even sales price becomes $1,130,000; appreciation of 27% or 4.5% a year.
Or, put another way, if the house does not go up in value, it will cost me around $260,000. If it dropped a mere 20%, it would cost me around $420,000.
I'm left with one (financial) reason to buy...inflation. Does anyone see an inflation scenario that makes this make sense to do?
Can you guys check my math?
#housing