patrick.net

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.

Bap33 says

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

While were at it, everyone be very afraid of a meteor crashing into earth and destroying everthing.

There's actually a real chance of that happening in 2015, unlike the bizarre socialist hysteria.

good point

I'm kinda seeing the Mayan 12/21/12 thing looking like a good time to end this poop.

@Nomo,
Could be you trust me to be respectful, and vice versa (?). lol

Could be some of the newer conservos are better adversaries for you? lol

Dude ... we could sit and sip coffee and talk about houses any time. Or other stuff.

Buying averaged $400/mo in interest and taxes over the 30 years.

Rent would have been $1000/mo on average let's say ($500 in 1980 and $1500 now), so that $600/mo diff over 30 years works out to around $200,000 money saved buying.

From that deduct $20,000 in incidentals: new roof, $10,000 in other maintenance. Altogether buying put you ahead ~$400,000 over renting. Compared to the $1500/yr in actual property investment, that's pretty awesome!

The dude's question whether buyers today will see that sort of appreciation is an open one. The 1980 ~ 2009 example follows the Early Boomer moving from age 30 to age 59. That was the run-up, what may follow is the run-down.

>>$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%).

>>~$200,000 profit on a $1500/yr investment, a cost of ownership half or less of renting. Sign me up!

Lets assume that you used an IO loan.

You pay interest of about 257% over the loan. (14x3 + 12.5x3 + 10 x 8 + 7.5 x 9 + 5 x 6) after the serial refinance.

You sell the house for 270,900 and pay 76,400 and pocket the difference of $194,500

You paid 76,400 x 2.57 over this time = 196348

So you lived free in the house (assuming prop taxes + maintenance vs. the tax deduction is a wash).

Amortization does not matter - for eg if you paid $1000 principal in the first(1980) , year you lost the returns on that $1000 if you had invested it all this time.(1981 to 2009). That returns would hold close to your rates you refinanced if invested in bonds but much more if you invested in S&P (700% gain). So doing this I/O calculation has a bias, if any, towards the buy side.

If you take realistic maintenance costs, and the investment gains forgone, the benefits would even less.

Calculations like these should be in real terms. $1 in 1980 is not equal to $1 in 19994 is not equal to $1 in 2009.

I just noticed that the house was sold at 410K back in 2005, then it sold at 115K in 2009 to, you rentalinvestor, I guess.

I've never been there, so bare with me. But WTF happened to that area?

^ yes, I can confirm that the tax value of IO financing does wash out with the after-tax property tax, insurance, and $20,000 of maintenance.

But free rent is nothing to sniff at!

You say the S&P returned 700% since 1980, but due to the 10% refi in 1986 and the general inflation of the 80s, in the late 80s IO had a cheaper per month cost than renting ($636 vs. ~$800) So the rent strategy can only put money into the market 1980-1985, after that it is taking money out of the market.

From 1980-85 the renter saves $18800 vs buying. This will expand to $331,000 by 2009 going with the S&P's CAGR.

However, from 1986 through 2009 the renter has to cough up an extra $172,000 to live.

The pure rent strategy thus nets $160,000.

But because IO was cheaper than renting 1986 ~ 2009, the IO buyer could have put THOSE savings into the market, yielding an extra $284,000 from the S&P over that time, over and above the $200,000 he also netted on the house.

Edit: oops, forgot the $200,000 IO interest payments.

Rent: +$160,000.
Buy: +$284,000.

Spreadsheet here :)

https://spreadsheets.google.com/ccc?key=0Av516pXK_I7HdFZhZW10cEg3ZHJ2SUt6Yk9Lc2I5T0E&authkey=CJiSh_IJ&hl=en#gid=0

^ that's probably not entirely right. The renter has to pay $354,000 in rent 1980-2009 while the IO strategy has a net housing cost of $0 thanks to the home appreciation covering the IO cost.

The only way to really model this is to include the person's entire investment strategy, not just this differential.

So let's say the dude has $12,000 less the housing expense to throw into the market in 1980, and this $12,000 rises 5% per year until it hits ~$49,400 in 2009.

In 2009 he will have $1.462M in the rent case and $1.416M in the IO case, for a rent strategy advantage of $46,000 in investment gain.

But the IO strategy does have $200,000 in home equity, for a $150,000 advantage.

I think I learned something with this, what, I'm not sure.

Oh, I know. Instead of playing Pac Man I should have been investing in the S&P. $1000 invested in 1980 would have been worth $31,000 in 2007.

Important announcement: Bap & Nomo have won the 1st. Annual Rodney King "Why can't we ... why can't we ... all ... just .... get along?" Award. I'm going to have to sign off for now. I'm afraid tears are going to short circuit my keyboard.

Oh Come on, Look at the WSJ top ten reasons, I am still laughing so hard, I had to re read it to make sure they actually put that in print.... LOLOLOLOLOLOL Ya, Lots To Choose From, Low Rates, Save on Taxes, LOL, It will be YOURS! (I guess you will ignore the bank) Inflation protection (that is like rain coat in AZ) Oh and lets us not forget the killer, Sooner or later, the market will clear. LOLOLOLOL Yea, sooner or later... alright sounds like some solid reasons.... NOT Did they really run this in the paper version? Wow

Is Mr. Arends sponsored by the NAR? We're in one of the "far-flung" areas of CA, and unless we get another industry or prison soon, nobody's going to have the income to buy our pretty country club mansions and subdivision "estates."

Nomograph says

Many desirable areas near employment opportunities have already seen major drops and are unlikely to go much further.

Really? I think you may be right if you are assuming rates will remain super low. What do you think may happen if there is a 2% hike in 2 years(I see that happening if and only if economy gathers some steam)? What if rate remains same but employment picture never improves(I see this more of a possibility than the previous scenario)?