patrick.net

pkowen says

SF ace says

pkowen did not account for mortgage/property tax deduction (which is pretty significant for buying a home in places like Walnut Creek. A 200K household should be able to shave 35% off interest and property tax) and principle payback (which is more significant as interest rates are lowered and principle payback makes up a bigger portion of the mortgage) Once those are accounted for, renting is more or about the same as buying currently.

From my experience, a typical buyer in Walnut Creek, Lafayette can utilize anywhere from 30-40% in mortgage interest and property tax deduction, a buyer in Concord and Antioch is 0-20%. That makes up for a bulk of the rent/buy variation between the more expensive place.

If you put this in a social science context, how many 200K households live and especially buys as a primary in Concord vs. Lafayette? If it is such a great deal, wouldn’t all the 200K household move to Concord too realizing all the “value”?

How exactly do you know I didn’t factor in tax savings? Actually I did factor it in, I just didn’t waste time detailing a full accounting of rent vs. buy on the place I rent. Factoring in tax savings, which I always do when considering a purchase (I have owned two houses), I am paying about 1/2 the nut to buy the same place compared to my rent.
Prices are indeed disconnected from rents in some places. For me, that means some places are better to rent than buy.

Ok, not 1/2, maybe 55% ;)

pkowen says

SF ace says

pkowen did not account for mortgage/property tax deduction (which is pretty significant for buying a home in places like Walnut Creek. A 200K household should be able to shave 35% off interest and property tax) and principle payback (which is more significant as interest rates are lowered and principle payback makes up a bigger portion of the mortgage) Once those are accounted for, renting is more or about the same as buying currently.
From my experience, a typical buyer in Walnut Creek, Lafayette can utilize anywhere from 30-40% in mortgage interest and property tax deduction, a buyer in Concord and Antioch is 0-20%. That makes up for a bulk of the rent/buy variation between the more expensive place.
If you put this in a social science context, how many 200K households live and especially buys as a primary in Concord vs. Lafayette? If it is such a great deal, wouldn’t all the 200K household move to Concord too realizing all the “value”?

How exactly do you know I didn’t factor in tax savings? Actually I did factor it in, I just didn’t waste time detailing a full accounting of rent vs. buy on the place I rent. Factoring in tax savings, which I always do when considering a purchase (I have owned two houses), I am paying about 1/2 the nut to buy the same place compared to my rent.
Prices are indeed disconnected from rents in some places. For me, that means some places are better to rent than buy.

please share some details.

price to rent your house based on best available market value
price of house based on best availble market value
SFH, condo bedroom/bathroom sq ft, city and state

Keep in my im not talking about what the "nut" did in 2006, Im talking Sep 2010 price and rent and I doubt that a buyer now will be paying twice the rate of renting. prove me wrong

Most recent sale (this year) of an almost identical property: $940,000. Rent: $2500.

that's pretty vague so I will have to play your game as well.

30,000/940,000 = 3.19%

3.875% 15 year fixed rate mortgage
1.25% CA property tax
5.125% Interest and property tax
38% Fed and CA income tax bracket for people that qualifies for this loan
3.18% = mortgage and property tax net of tax benefits, net of principle.

SF ace says

that’s pretty vague so I will have to play your game as well.
30,000/940,000 = 3.19%
3.875% 15 year fixed rate mortgage

1.25% CA property tax

5.125% Interest and property tax

38% Fed and CA income tax bracket for people that qualifies for this loan

3.18% = mortgage and property tax net of tax benefits, net of principle.

It's not a game, I just don't care to share too much personal info on a forum, and also don't really care to argue with you.

SF ace says

A 200K household should be able to shave 35% off interest and property tax) and principle payback (which is more significant as interest rates are lowered and principle payback makes up a bigger portion of the mortgage)

I don't understand this. How do you deduct the principle from your taxes? How do you get 35% in the 28% tax bracket? It's only 33% on income above 209k (assuming married, few single people buy 900,000 houses). All the taxes up to 209k is at the lower brackets. Taking 35% (however you manage to do that) off of 1.25% property taxes isn't very much money.

I want to meet your accountant.

SF ace says

30,000/940,000 = 3.19%

3.875% 15 year fixed rate mortgage
1.25% CA property tax
5.125% Interest and property tax
38% Fed and CA income tax bracket for people that qualifies for this loan
3.18% = mortgage and property tax net of tax benefits, net of principle.

You seriously have to explain the math on this one.
I show 900,000 with 20% down to be 720,000
15 year at 3.75 works out to 5,236 monthly or 62,832 per year.

If you deducted the entire amount at 33% (obviously fiction since at 200k you aren't in the 33% bracket and the bulk of your income would be in the lower tax brackets) I can only come up with 3,455 per month.
You can't net all the taxes together anyway. You deduct your state and locals against your federal not pay/deduct twice.

I really, really want to meet your accountant.

I am convinced asking selling prices compared to rents are way out of wack in Chicago area, and nobody has provided one single counter example in another thread. There are a gazillion examples of asking prices that would lose a ton if bought and then rented out.

If this is how it is in Chicago, it must be more so in California where housing prices had gotten even more out of wack.

Ok I just saw the little qualifier "qualifies for this loan". What number would that be????

bob2356 says

How do you deduct the principle from your taxes?

SF Ace was saying principal repayment should not be compared to the cost of renting:

"Once those are accounted for, renting is more or about the same as buying currently."

How do you get 35% in the 28% tax bracket?

9.3% California bracket starts at $40K. State withholding is deductible so this is effectively to ~6%.

Taking 35% (however you manage to do that) off of 1.25% property taxes isn’t very much money.

$3000 is $3000.

StillLooking says

I am convinced asking selling prices compared to rents are way out of wack in Chicago area, and nobody has provided one single counter example in another thread. There are a gazillion examples of asking prices that would lose a ton if bought and then rented out.

Well, I stopped because you showed that you aren't interested in actual evidence. If you decide you'd like to look objectively, then I'll post some for you.

All,

Any insight on the Denver, Colorado area market situation? Specifically interested in Highlands Ranch in Douglas County?

Any data on job market, rents vs. price (per this thread) would also be really useful.

Thanks in advance!

bob2356 says

You seriously have to explain the math on this one.
I show 900,000 with 20% down to be 720,000
15 year at 3.75 works out to 5,236 monthly or 62,832 per year.

Purchase Price 940000.00
Down Payment 188000.00 20.00%
Loan Principal 752000.00

Points 7520.00 1.00%
Points Net Tax 4872.96

IO 2428.33 3.88%
PMI 0.00 1.50%
Prop Tax 966.63 1.23%
Tax Credit -1195.03 35.20%

Subtotal 2199.94

HO Ins 206.67
HOA/Utils 200.00
Maintenance 217.50 0.15%
Opportunity 450.04 2.80%

Total Other 1074.20

Nominal Cost 3274.14

Actual Expense 6567.94

The $3274/mo includes the $450/mo of lost interest on the down payment and a ~$400/mo budget for utilities and maintenance that a renter does not have to pay.

$2500/mo is certainly in the ballpark of buying @ $940,000 if these two factors are adjusted (ie a buyer would rather have his money in a $900K house than with Geithner). PITI minus the P is $2400.

Also note that interest costs decline over time. In 2020 the buyer will be paying only $1400/mo in effective interest and taxes, reducing the total carrying cost to $2000/mo or so.

CAtoCO says

Specifically interested in Highlands Ranch in Douglas County

I have a good friend in Larkspur, looking at the houses in Zillow I've got to say that that fortress has finally cracked. 1 acre parcels are on the market for $80K now.

Just brutal; prices are back to 2001 now. I don't know what that implies about the local economy, but I think all the Real Estate Industry operator-types have been liquidated by the looks of it.

http://www.zillow.com/homedetails/1250-Kenosha-Dr-Larkspur-CO-80118/87810295_zpid/

pkowen says

I am paying about 1/2 the nut to buy the same place compared to my rent.

It’s not a game, I just don’t care to share too much personal info on a forum, and also don’t really care to argue with you.

this thread is about "Are prices tied to rents"?

you made a strong statement saying I am paying about 1/2 the nut to buy the same place compared to my rent. correct?

well there are too ways to look at it, believe it or question it? I didn't want any personal information just something more to work with, material facts. Without being too specific since you provided nothing specific to work with, I said it is possible for a buyer to pay an amount that is the same as buying.

What's the point of a discussion thread when you can do a hit and run without being responsible for an important point?

"I don’t understand this. How do you deduct the principle from your taxes? How do you get 35% in the 28% tax bracket? It’s only 33% on income above 209k (assuming married, few single people buy 900,000 houses). All the taxes up to 209k is at the lower brackets. Taking 35% (however you manage to do that) off of 1.25% property taxes isn’t very much money."

Based on current underwriting standards, a 720K (whatever the jumbo is) loan probably requires gross income in the 220K range. That is the minimum, most likely the prospective buyer is in the 250K-300K range which put the tax filer likely partially in the 33% federal tax bracket and partially in the 28% tax bracket or 30% average. CA state income tax is currently 9.55%, net of federal income tax it is around 6%+ 30%+6% is 36% give or take a few %.

Troy the CA tax bracket is effectively 9.55%, there is a 2.5% surcharge on top of the tax.

my wife is a tax CPA. You don't want to meet her, her rates is $400+/hr.

"You seriously have to explain the math on this one.
I show 900,000 with 20% down to be 720,000
15 year at 3.75 works out to 5,236 monthly or 62,832 per year."

Read Troy's post, mines is just a simple version of Troy's. The concept is strip out principle repayment and account for tax deductions and the cost to buy and rent looks about the same.

bob2356 says

Ok I just saw the little qualifier “qualifies for this loan”. What number would that be????

The prospective buyer in the Pkowen example, to the extent that they obtain a mortage is likely in the 250K range.

SF ace says

my wife is a tax CPA.

If I could do it over again I'd have gone into that. Such a useful knowledge set to have, making money materialize.

edit: though one does have worry about offshoring this perhaps.

My theory is, that because of proposition 13, owners have very little incentive to sell. Owning in a desirable area is a great way to park your money.
And pass on your low tax basis to your kids. Folks like LMRiM (laughing millionaire renter in Marin) (see posts on Socketsite) specialized in renting Prop 13 houses for much less than you could buy; I highly recommend his posts to anyone interested in doing likewise.

Troy, so if I read your numbers correctly, you're showing a $774/month premium for buying. Individuals then need to put this into their own personal utility function (add dollars for stuff like ability to move, subtract for pride of ownership, nails in the wall, etc...) High marginal tax rates (can anyone say "Sunset Bush tax cuts" ) and low interest rates are getting us close, but we ain't there.... yet.

Troy says

SF ace says

my wife is a tax CPA.

If I could do it over again I’d have gone into that. Such a useful knowledge set to have, making money materialize.
edit: though one does have worry about offshoring this perhaps.

She is front line, hard to replace with India when she is responsible for 2M in revenues for her firm. You really think someone like Kendall Jackson will deal with India?

Your insurance looks a little high, mines is 1K a year. Most SFH does not have HOA and utilities are renters cost.

SF ace says

The concept is strip out principle repayment and account for tax deductions and the cost to buy and rent looks about the same.

This is the mistake I made in 2000-2001. Making good money, renting at $700/mo. The thought of pushing one paycheck a month into a $350,000 condo was just not attractive.

Then that fucker Greenspan dropped rates to 5% and the rest of bubble BS took that condo to ~$650,000.

10 years on, had I bought in 2001 I would have been able to refi twice, down to today's 3.5%, my PITI less the P would be $500 less than my rent and for $2500/mo I'd have the place paid off by 2025.

Live & learn, though I *do* wonder how the PTB are going to save the system like they did in 2002-2004.

shrekgrinch says

The job of the Opposition Party is to Oppose. Look it up.

The job of government is to govern. Look it up.

"Are prices *really* tied to rents?" Not at all. Rents are reality and prices are illusion :)

SF ace says

pkowen says

I am paying about 1/2 the nut to buy the same place compared to my rent.
It’s not a game, I just don’t care to share too much personal info on a forum, and also don’t really care to argue with you.

this thread is about “Are prices tied to rents”?
you made a strong statement saying I am paying about 1/2 the nut to buy the same place compared to my rent. correct?
well there are too ways to look at it, believe it or question it? I didn’t want any personal information just something more to work with, material facts. Without being too specific since you provided nothing specific to work with, I said it is possible for a buyer to pay an amount that is the same as buying.
What’s the point of a discussion thread when you can do a hit and run without being responsible for an important point?

What else do you need? Price and rent, then plug in any loan you want. Most plugged in a pick-a-pay ARM 1% to buy these in the past years. Sorry, I left out the HOA of $435/mo ;)

Troy, I want your spreadsheet. Third time in one year. :)
I would do the math little differently if it is me to pay the cost. But, at least, your math looks alright in terms of figuring out the cost and tax stuff.

The question for you is, what would you do with P that is left out in your math? You need to deal with P in the future anyway. So, is it re-fi indefinitely till you sell the home?

pkowen says

SF ace says

pkowen says

I am paying about 1/2 the nut to buy the same place compared to my rent.
It’s not a game, I just don’t care to share too much personal info on a forum, and also don’t really care to argue with you.

this thread is about “Are prices tied to rents”?
you made a strong statement saying I am paying about 1/2 the nut to buy the same place compared to my rent. correct?
well there are too ways to look at it, believe it or question it? I didn’t want any personal information just something more to work with, material facts. Without being too specific since you provided nothing specific to work with, I said it is possible for a buyer to pay an amount that is the same as buying.
What’s the point of a discussion thread when you can do a hit and run without being responsible for an important point?

What else do you need? Price and rent, then plug in any loan you want. Most plugged in a pick-a-pay ARM 1% to buy these in the past years. Sorry, I left out the HOA of $435/mo

ok I get it now, a current 940K home that has a 435 month HOA rents for 2,500 a month. Sure...
How about town and state, that seems like a material piece of information. I'm not asking what you don't aleady know.

seaside says

Troy, I want your spreadsheet. Third time in one year

https://spreadsheets.google.com/ccc?key=tyKRyov8RIfvigk0d3EXCrg&authkey=CP30xPwC#gid=0

It's not that exciting . . .

what would you do with P that is left out in your math?

P is a form of savings since most of it is paying for the land title and not the decaying house.

As a side benefit it also gives you the housing good at a declining cost over time.

why does gold have any value beyond that of a conductor or paper weight?

Bap33 says

why does gold have any value beyond that of a conductor or paper weight?

a) It's chemically stable so it can be stockpiled economically given its $/volume.

b) It has a wide variety of economic uses, especially jewelry, so it is an excellent inflation-catcher.

c) It is a popular trading metal, unlike the platinum group metals (I was looking at getting some Pt 2 years ago). There are more people who want into gold than want out.

d) Rich people in this world are sitting on tens of trillions of dollars with nothing better to do but bid up shit.

Heh, looking at my spreadsheet I forgot that it calculates the "average" cost of the house over the loan term.

For $940,000 @ 3.85% x 15 years:

Asset Cost $940000.00
Total Interest 240783.74 866.82/mo
Prop Tax 173994.00 626.38/mo
Other 193356.64 1074.20/mo

Subtotal 1548134.38 $2567.40/mo

(the monthly numbers take into account the tax benefits)

So on the 15 year time horizon, buying is almost exactly equal to renting @ $2500, cost-wise.

The difference after 15 years is having a $940,000 house entirely paid off vs. having $940,000 + accrued interest.

Difficult to know which is the better strategy. If we are Japan, we're in for a 10 year slide still. If we are Zimbabwe, hold on to your hats. I lean towards the former, but can't discount the latter.

tatupu70 says

StillLooking says

I am convinced asking selling prices compared to rents are way out of wack in Chicago area, and nobody has provided one single counter example in another thread. There are a gazillion examples of asking prices that would lose a ton if bought and then rented out.

Well, I stopped because you showed that you aren’t interested in actual evidence. If you decide you’d like to look objectively, then I’ll post some for you.

Your evidence was proving my point.

The US has always had a steady influx of immigrants, making it heterogeneous, not just ethnically but also socioeconomically. So we adapted to having a poor working class, and basically incorporated that in to our economic model. At this point it has been that way for so long that many consider it an axiom that without a huge undereducated underclass our economy won't function. I believe that this is far from correct, as evidenced by the Norway example.

It makes sense to me that transitioning to a different model would be challenging and painful but the idea that ethnic diversity is an obstacle is absurd.

Troy says

Heh, looking at my spreadsheet I forgot that it calculates the “average” cost of the house over the loan term.
For $940,000 @ 3.85% x 15 years:
Asset Cost $940000.00
Total Interest 240783.74 866.82/mo
Prop Tax 173994.00 626.38/mo
Other 193356.64 1074.20/mo
Subtotal 1548134.38 $2567.40/mo
(the monthly numbers take into account the tax benefits)
So on the 15 year time horizon, buying is almost exactly equal to renting @ $2500, cost-wise.
The difference after 15 years is having a $940,000 house entirely paid off vs. having $940,000 + accrued interest.
Difficult to know which is the better strategy. If we are Japan, we’re in for a 10 year slide still. If we are Zimbabwe, hold on to your hats. I lean towards the former, but can’t discount the latter.

???????????????????

WTF are you talking about???? Paying $940,000 for a house is not the same as paying $2500 in rent.
If you bought a house for 940K and then rented it out for 2500 bucks you would lose a whole
bunch of money.

StillLooking says

If you bought a house for 940K and then rented it out for 2500 bucks you would lose a whole
bunch of money.

Not when this income vs. outgo is looked at over the entire life of the 15 year mortgage:

Total Rent Received: $450,000

Total Interest Paid: $156027.86 ($866/mo)
Total Property Tax Paid: $112748.11 ($626/mo)
Total Other Costs*: $193356.64 ($1074/mo)

Total outgo: $462132.62 ($2567/mo)

Rough loss over first 15 years: ~$12,000

Note that "paying down a mortgage" is the opposite of losing money, assuming property values don't decline further.

*Other costs are insurance ($200/mo), Utilities ($200/mo), Maintenance ($200/mo), Opportunity Cost ($450/mo).

Troy, thanks for providing the link.
I have my own excel file though, mine was as basic as it can be. Do you mind me revising mine using yours? :)

Stilllooking, note that Troy's math is based on Interest only loan, to find out theoretically minimum cost of having home. People are often doing math the way Troy did, and there's nothing wrong with it. In fact, it serves well for the purpose. I am quite sure Troy won't pull trigger himself based on that math alone because he is smart enough to know the number and the reality is two different stuffs.

This is where social science comes into play. People don't buy 940k home to rent, they buy 350k to
to rent for 2500. You're competing with different buyers. 250k housholds don't buy 350k homes to live that's just the way it is in real life. Also, the high end seems overvalued because of how valuable the mortgage interest deduction is to people in the 35-40% tax bracket.

To the extent that a million dollar home becomes a rental, the landlord already upgrade to a 2m dolla home or the income is just icing on the cake and don't need the money. Lastly, Why would you underestimate anyone who can buy 1m dollar rental homes, how many can even say or think about it? That's elite iq not subprime.

Troy says

StillLooking says

If you bought a house for 940K and then rented it out for 2500 bucks you would lose a whole
bunch of money.

Not when this income vs. outgo is looked at over the entire life of the 15 year mortgage:
Total Rent Received: $450,000
Total Interest Paid: $156027.86 ($866/mo)
Total Property Tax Paid: $112748.11 ($626/mo)
Total Other Costs*: $193356.64 ($1074/mo)
Total outgo: $462132.62 ($2567/mo)
Rough loss over first 15 years: ~$12,000
Note that “paying down a mortgage” is the opposite of losing money, assuming property values don’t decline further.
*Other costs are insurance ($200/mo), Utilities ($200/mo), Maintenance ($200/mo), Opportunity Cost ($450/mo).

(866 X 12)/ 940000 = .011055

This is a 20% down loan, and principal is paid down fast since it's amortized over 15 years.
Also, that $866/mo is net the tax credit of mortgage interest paid.

Excel's PMT function returns $5515.47/mo P&I for a $752,000 loan.

Over 15 years that's $992,784.60, so that's $240,784.60 in interest, $1,337.69/mo on average.
Taking 35% as a tax credit, that's $869.50/mo average interest cost over the life of the loan.

heh, you're right. GIGO, LOL.

Troy says

This is a 20% down loan, and principal is paid down fast since it’s amortized over 15 years.
Also, that $866/mo is net the tax credit of mortgage interest paid.
Excel’s PMT function returns $5515.47/mo P&I for a $752,000 loan.
Over 15 years that’s $992,784.60, so that’s $240,784.60 in interest, $1,337.69/mo on average.
Taking 35% as a tax credit, that’s $869.50/mo average interest cost over the life of the loan.

I would like to see the details on how you compute that $866/MTH number. It is a fanatasy number.

A question to everybody making the calculations. Why isn't anybody taking into account AMT (alternative minimum tax)? If you are in California you easily hit the AMT by having to pay such high taxes (You can deduct Cali taxes from Fed). If you can afford the house in question you probably are already paying an AMT. In calculating an AMT you can't deduct property tax payments, the only thing you can deduct is loan interest; hence, the property tax deductions are nullified by having to refactor in your AMT penalty. Am I missing something?