patrick.net

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?

French would be a welcome change ..... RE has been all Greek ... if you know what I mean .... "not that there's anything wrong with that". lol

StillLooking says

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

Take out a 15 year 3.875% loan for $752,000 (80% of $940,000).

Pay it down $5515.47/mo = $992,784.60 total payments on the mortgage.

$992,784.60 - $752,000 = $240,784.60, so $240,784.60 is the total interest paid on the mortgage.

Interest is tax deductible so you get back your top marginal rate, 35.2% in my calculation. 35.2% of $240,784.60 is $84,756.18, leaving the after-tax interest expense at $156,028.42.

Averaged over the 180 months of the loan that's $866.82/mo in interest costs on a $940,000 house with 20% down.

I believe looking at this average is a better feel for the true cost of ownership, but actually one should in fact look at the total benefits of owning a home vs. renting over one's lifetime, and the lifetimes of the beneficiaries of your estate.

If wage inflation returns in the next 15 years, buying now will be better than buying in the 1960s.

But I don't know if wage inflation is going to come for us. We could get stagflation, where wages remain under pressure & rising life expenses -- taxes, health costs, energy costs, food costs -- are taken OUT of the housing expense.

Or we could get stagflation and the PTB throws the kitchen sink at preserving home values -- turning the mortgage interest deduction into a credit, offering 2% 60 year loans via the Fed (this is what Japan is doing). Who knows.

shrekgrinch says

I do know that tax policies that cause tax revenues to double are definitely paying for themselves. Whether or not spending was never brought under control does not disprove that (but your articles seem to think so).

You need to know more about Reagan's tax policy. First off revenues only went from 1.077 in 1981 to 1.25 in 1988 in year 2000 dollars as per the OMB. Not double in the system of math that I use. Doesn't even beat the increase in GDP adjusted for inflation. Secondly the top rate was lowered but the the bracket was lowered a lot more. To be in the top bracket when Reagan entered office you had to make 215,000 but to be in the top bracket when he left office you only had to make 29,750. I certainly see who was doing the paying part of the tax cut paying for itself.

That's the problem with calculating this on such tight margins: Untouched property values always do decline over time, unless you catch a bubble. The constant backsliding in your value as the house ages is counteracted by the maintenance and updating. If one assumes that rents and prices should not be at least somewhat close, this factor is often being left out.

Ultimately, the homeowner in Troy's best-case scenario is sitting on an asset that without major capital input can and will decline significantly in value, and which is also highly illiquid. The renter, on the other hand, has liquid cash in the bank account which can either be placed in an absolutely safe position subject only to inflation, or be placed into higher risk and return investments. In this example, the homeowner loses.

As a general rule, rents and prices are tied together in the long term view. Ultimately, it makes no sense to pay more than you can rent something for unless it is something that you simply cannot rent. In other words, it makes no sense to pay more than rents unless there is something else about the property that you enjoy but which does not necessarily add to economic rental value. The idea that houses will never go for rent in a particular area is ill-founded, at best. Even a house in the over-priced range will go up for rent. It will simply do so at a loss. Ultimately, that person losing money on the rents will sell, and will probably gladly do so at a price which matched the value of the house based on current future-anticipated rental value. That, in turn, will bring surrounding values down.

SFRs typically cost more than rentals not because they are not rentals, but because there is stuff in them that is not present in rental houses. I can think of, in particular, an area near me which has many $400,000.00+ houses. There is currently a parcel with a 2000sqft rental on it that was slated for demo and replacement by a new 2400sqft SFR at $400k. Having no bites, the rental went back up for sale. It's priced around $120k, and has been for months. No takers. Externally similar houses in size and finish in the neighborhood (former tear down area) can and do sell at $250k. Why? Those houses have stuff that most renters do not want. Finding someone to rent your high end cabinets, built in flat panel, home theater, etc. is a little more complicated. People with that much money typically don't want to make payments on goodies unless the owner of the goodies is taking a bath on them.

If California thinks it can escape this reality is any of its communities, it probably has a wake up call coming. Properties ultimately can and will sell for close to their rental value, all factors considered, even if there are not many renters in an area. Unless you plan to live in a house for an extended term, buying a house is normally a bad deal. Try on the handy-dandy NY Times calculator for size: http://www.nytimes.com/interactive/business/buy-rent-calculator.html This basically will give you a nice graph and calculable figures for what Troy is doing.

Troy says

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 says

StillLooking says

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

Take out a 15 year 3.875% loan for $752,000 (80% of $940,000).
Pay it down $5515.47/mo = $992,784.60 total payments on the mortgage.
$992,784.60 - $752,000 = $240,784.60, so $240,784.60 is the total interest paid on the mortgage.
Interest is tax deductible so you get back your top marginal rate, 35.2% in my calculation. 35.2% of $240,784.60 is $84,756.18, leaving the after-tax interest expense at $156,028.42.
Averaged over the 180 months of the loan that’s $866.82/mo in interest costs on a $940,000 house with 20% down.
I believe looking at this average is a better feel for the true cost of ownership, but actually one should in fact look at the total benefits of owning a home vs. renting over one’s lifetime, and the lifetimes of the beneficiaries of your estate.
If wage inflation returns in the next 15 years, buying now will be better than buying in the 1960s.
But I don’t know if wage inflation is going to come for us. We could get stagflation, where wages remain under pressure & rising life expenses — taxes, health costs, energy costs, food costs — are taken OUT of the housing expense.
Or we could get stagflation and the PTB throws the kitchen sink at preserving home values — turning the mortgage interest deduction into a credit, offering 2% 60 year loans via the Fed (this is what Japan is doing). Who knows.

I still doubt your figures.

But how can life be any good if you have this massive noose around your neck if you lose your job?

Our mortgage interest deduction is truly a bad law.

shrekgrinch,

You bring up a good and interesting point about the declaration of Independence.
http://www.answers.com/topic/united-states-declaration-of-independence

"The constitutional and legal status of the Declaration of Independence is curiously ambiguous. John Hancock (in his capacity as president of the Second Continental Congress) and James Madison both considered it to be, in Madison's words, “the fundamental Act of Union of these States.” Reflecting that view, Congress has placed it at the head of the United States Code, under the caption, “The Organic Laws of the United States of America.” The Supreme Court has infrequently accorded it binding legal force"

As far as the Latino vote (2008):
http://query.nytimes.com/gst/fullpage.html?res=9C06E0DC1638F934A35752C1A96E9C8B63

"In a year when turnout among many groups surged nationwide, the number of Latinos who went to the polls increased by nearly 25 percent over 2004, with sharp rises among naturalized immigrants and young, first-time voters, according to a study by the National Association of Latino Elected and Appointed Officials. Hispanic support for the Democratic nominee increased by 14 points over all compared with 2004, the biggest shift toward the Democrats by any voter group.

For the first time, Latino voters emerged as a mobilized Democratic voting bloc in states across the country, Latino officials said.

''They really delivered,'' said Efrain Escobedo, director of civic engagement at the Latino officials' association, a bipartisan group that ran voter registration drives across the country. ''This is an electorate that now understands the importance of voting, and they made a significant shift in the political landscape.''

Nationwide, Hispanics voted 67 percent for Mr. Obama and 31 percent for Senator John McCain, according to Edison/Mitofsky exit polls. In 2004, Senator John Kerry won 53 percent, while 44 percent of Hispanics voted for President Bush, a record for Latino support for a Republican presidential nominee.

The approximately 10 million Latinos who went to the polls this year were 9 percent of the total of voters, up one percentage point from 2004. Their share of the electorate did not increase more substantially because turnout was high across most voting groups.

A striking increase was in Colorado, where Hispanics went from 8 percent of those who voted in 2004 to 13 percent this year, according to Edison/Mitofsky. Mr. Obama carried the Latino vote in Colorado by 61 percent to 38 percent, Edison/Mitofsky found."

also, I come here to learn, all geniuses were once fools.

StillLooking says

But how can life be any good if you have this massive noose around your neck if you lose your job?

LOL, this is why I'm a renter in my 40s. The only problem is over my lifetime rents have been on an escalator. In the mid-70s my parents were paying $300/mo for a 3B in El Cerrito that rents for $1500 today, in the late 70s $400/mo for a house that just sold for $315,000:

http://www.redfin.com/CA/Salinas/222-San-Miguel-Ave-93901/home/14955586

The numbers on this house are a starting monthly cost of ~$1700/mo ($2100/mo including principal repayment). This declines as the loan is paid down, for an average monthly cost of $1130 over the 30 year life of the loan.

What will rents be in Salinas in 2025? More or less than $1100?

Buying gets you off this escalator. Since this is economics, and economics sucks, this buy decision is generally never favorable to renting in the short term, it only pays off in the long term.

But for anyone who's bought in California 1850 ~ 1999, it has paid off big. My mom's housing expense is dominated by three things: Cable bill, gardener, and property taxes, in that order.

Our mortgage interest deduction is truly a bad law.

On that, we certainly agree.

good point ... but, not being afraid of something because it is very unlikely doesn't make it less dangerous. I could see Barry, and those who think like Pelosi and B.Frank, having the balls (sic) to try to remove term limits for Prez. All it takes is "a good crisis". Right? Then we be having some of those unelected dic-taters too. lol

it could happen

Late 90's that would have rented for 850

This example matches my Mom's house perfectly, almost to the dollar, though of course she didn't sell in 2009.

From the original:

So there you have it. 74% of the Twelvepack’s gain can be attributed to the 9% drop in interest rate. When you strip out the interest rate effect, the house underperformed inflation by more than 60% over 30 years

This may be true but it is missing the fact that this interest rate lowering 1983-2003 was what got us inflation in the first place! This same inflation bailed out homedebtors and totally screwed renters (I have been renting since the mid-80s, grrr).

Just for fun I've modeled this ownership.

$76,400 starting loan balance, 14% 30 year in Jan 1980, serially refi'd into new 30 year mortgages in 1983 (12.5%), 1986 (10%), 1994 (7.5%), 2003 (5%).

Total interest paid is $120,000, total property taxes $27,000 (assuming Prop 13 protection). Both are net 30% tax credit.

So for $147,000 in interest and taxes we get an average cost of ownership of $412/mo over the 30 years.

$30,000 was still owed on the home in Dec 2009, so there was a $220,000 profit on $46,000 in total investment (principal paydown).

I have no idea what kind of point this author is trying to make. ~$200,000 profit on a $1500/yr investment, a cost of ownership half or less of renting. Sign me up!

We can’t drop mortgage interest rates 9% again (currently 4.4%), but we should expect houses to continue to underperform inflation.

Oops! I found his point. Can you spot the mathematical error?

Rates fell from 14% to 5%, a 64% drop. Gee, how can rates fall 64% from 5%?

Bueller?

Here's a hint:

The funny thing is 2.35% rates would in fact send the $270,000 pricepoint to $430,000.

According to my stupid spreadsheet, $76,400 @ 14% has an average monthly TCO of $900/mo, and $270,000 @ 5% and $430,000 @ 2.35% come in at ~$1100/mo.

I don't know this area. But a quick look on Redfin shows that there may be better deals now.

http://www.redfin.com/CA/Antioch/1936-Evergreen-Ave-94509/home/748261

Home prices here seem so low.