patrick.net

Also, not included in your calculations is the cost of upkeep, renovation or fixing of the home that we do not have to worry about as renters.

When I run my models, I use 1% of the cost of the house per year for upkeep. Does that change the number of years?

You didn't mention how that $4576/mon affects your standard of living. After the monthly nut, will you still be able to adequately save for retirement, college for your children, vacation, car, etc?

HARM, let me know if you do the Vonage thingy as there are some "special" deals if a current customer refers you.

I went to Vonage because I too despise Verizon.

MtViewRenter -

That's what the bank gives you a HELOC for? :-)

Skibum,

Good points. Although the Dinkytown Rent vs. Buy calculator is a good little tool, it does have some built-in assumptions and limitations. Aside from the ones you've mentioned, it also will not accept a negative number for "appreciation", which we are now seeing in many regions. That alone would dramatically alter that "break-even".

A better, more precise tool would be the Great Randini's Bubblizer tool: http://randolfe.typepad.com/Resources/Bubblizer.xls

MtViewRenter

I'm also priced out in Mountain View, which area are you keeping an eye on?

eburbed - what type of property is it? Does it have any HOA dues?

Aside from the ones you’ve mentioned, it also will not accept a negative number for “appreciation”, which we are now seeing in many regions.

HARM,

Tsk tsk. You should know better than that. Home prices ALWAYS go up!

Thanks, Mr. X. I definitely am switching to Vonage and am interested in any referral deals. Will email you.

eburbed,

The other factor to consider, in the price range you discuss, if it is a SFH, it will inevitably be an older home that will require significant updating. In the areas and price ranges we're looking at (significantly higher - not trying to one-up you or anything), the vast majority will need you to immediately sink $100K-200K for updating, much less customizing.

Sure, you could buy a McAlbatross and be done with the upgrades, but then the place will fall apart in 15 years.

eburbed :

It is a stretch to expect house prices to go up 3% per year FROM THIS POINT onwards. Try the model with 0 or 0.5% appreciation.

SP - it's nice to know that flipping is going on adn flopping in this area, I was concerned that it's not so prevalent and thus less likely to have any fallout on the housing prices in this area.

-Is the 3% home appreciation rate on top of inflation, or nominal?

-Does this model include the monthly cash differential between $2000 rent and $4576 in PITI that can be invested?

Those are all very good questions that I don't have answers too. I look at the detailed numbers and my eyes get blurry. I provided the data in hopes that someone else would try it and let me know what they think. :)

That said, I do think they look at the investment model. Here's some of its calculations:

Year: 8
PITI: $4,506.03
Payment After Tax Savings: $3,293.55
Rent Payment: $2,631.86
Value of Investment: $316,675
Home Equity: $325,916

Year: 30
PITI: $5,326.40
Payment After Tax Savings: $4,839.16
Rent Payment: $6,237.30 [Wowsers! 4% inflation is bad!]
Value of Investment: $860,927
Home Equity: $1,594,857

Looking back, I guess it's idea of appreciation is that over inflation. If you enter 0, you don't break even - but the delta isn't that bad:

Year: 30
PITI: $4,338.66
Payment After Tax Savings: $4,127.98
Rent Payment: $6,237.30
Value of Investment: $678,879
Home Equity: $657,060

Person :

I hear you. I have not spoken a word against RE in last 3 years. Once I did, 3 years ago, some got angry and most thought I was an idiot. So I gave up.

I also remember arguing about why AMZN (hardly anything more than a bookstore at that time) should not be valued TWICE that of Sears in market cap. People thought I was nuts.

Expressing contrarian feelings to people drunk on kool-aid is often just not worth it.

Person,

But it was admitted that the payment would be a bit tough to make, therefore, if it was my case, I would not be saving it all. Certainly I find in this area that even though I automatically deduct money from our account every month for savings, I invariably have to dip back in for unexpected expenses. However, I have a feeling that eburbed has a higher salary than us, so maybe he could save.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn't be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

eburbed,

If you don't break-even after 30 years assuming zero appreaciation above CPI, then what is this telling you? If apprecation is a negative number (which the Dinkytown calculator can't handle), then how would that change the delta?

Of course, either assumption is wrong for the full 30 years anyway, as we are likely to see several years of flat-to-falling prices, followed by another up-cycle, followed by another down cycle, etc...

Regardless of fuzzy assumptions about future appreciation, a lower entry price-point will *always* save you big in interest, prop. tax & insurance, plus reduce the % of HH net income that must be devoted to housing, providing you a critical safety cushion. Also, it greatly reduces your downside risk and increases your potential upside. By buying close to the bottom of a market-cycle, if you really need to move, you won't have to bring $tens of thousands to the table or beg the lender for a short sale, as many a flopper will.

And I am talking from the layman side of things, and pointing out that for most people, they really wouldn’t be saving all of the extra money (got to have that iPod, new car, fancy holiday, food). Stacked comparison or not!

Claire,

You're probably right (look at the national savings rate - hint, it's the same as the title to a bad 1980's movie starring Robert Downey Jr.).

To be fair though, the same holds true for homedebtors. In fact, it's worse. To buy those things, they take out HELOCs instead of using cash-in-hand. Worse yet, the only way this can factor into eburbed's cited calculator is to eat away at the calculated equity (vs. investment return from cash).

Skibum,

I know, I know, hence today when I heard StreetSigns report that the housing slump is over as home builders will be building 110,000 to 120,000 houses in CA this year, I decided that I probably won't ever buy a house in CA.

Unfortunately the UK are only just starting to introduce dodgy loans and are just now increasing income to loan multiples - so that market is also just about to go crazy for a while and we are priced out there too!

2. Buy a home and rent out most of the space to total strangers = “smart way to afford that starter home!”

Have you ever seen the movie, "Pacific Heights"???

eburbed Says:

> I’ve been futzing with the Rent vs Buy calculator
> on Dinkytown - and I just don’t get it. If you expect
> inflation to be high moving forwards like I do, then
> the breakeven point on renting vs buy isn’t that bad.

I don’t have the numbers in front of me but on average over the past 50 years homes in CA have gone up in value a little faster than inflation.

The question you need to ask yourself before playing with the Dinkytown model is “if homes on CA have gone up 10-20% (many times more than the inflation rate) per year for the past decade will they continue to go up at or “above” the inflation rate or will they drop in value as things revert to the mean.

I’m renting right now since I’m sure that home prices will drop (can you put a negative number in the model) even if the overall “inflation rate” doubles.

And there was the case not so long ago in SF where the renters killed the landlord (I think a famous Jazz musician) and his dog and left them to rot in the basement while they lived rent free (at least for a while) in the rest of the house.

Claire,

StreetSigns? You might as well listen to the NAR's take on the housing market if you're going to believe the cheerleading outfit over at CNBC. Check out the graphs at the link I referred to earlier (755am today) if you want to see where housing starts are likely headed. I don't know which talking head on that show said what you mentioned, but I can't see how they can say that given all the write-downs the HBs are doing as we speak.

skibum,

Total Zero?

skibum,

I normally don't watch it, but happened to switch on when they were touting their story. They must have got their figures from somewhere, I think build, build, build - more over supply for us to pick from and pressure the prices down. As I understand it the builders have to keep building to survive, but maybe someone knows more?

Sub zero?

DinOR and Claire,

http://imdb.com/title/tt0093407/

RE: builders, yes they have to keep building to make money, but at some point (now), they will have made a calculation that based on where prices are headed, costs of land, materials, permits and labor, as well as their portfolio of land, that they will basically "write off" building on the land that has yet to get to the point of sticking a shovel in the dirt and unlikely to net a profit. The rest of their holdings that are ready to build? They will start building furiously (which they are already doing) and selling as fast as possible to capture as much profit as possible as prices decline. This behavior from the HBs has apparently heralded a housing correction every single time since this stuff has been tracked. Hence, they may be building like crazy, but that's merely to work off the stuff already in the pipeline.

"By buying close to the bottom of a market cycle"

HARM,

Don't you see! There's all these bottom feeders on the sidelines just waiting to jump in! Dozens and dozens of them! THEY'LL support the market! Don't you see?

OT, I actually use Qwest for VOIP and it's like $22.95 a month? I have to agree with X b/c overall the calls are just as good as a land line. I also have SKYPE. If it wasn't for these types of providers my bill would be around $1,800 a month. Ouch.

Does anyone have experience with the MCC program offered in some locales?

I don’t have the numbers in front of me but on average over the past 50 years homes in CA have gone up in value a little faster than inflation.

Nationwide, housing prices post WWII have appreciated at inflation + log(population growth) + 1%. If you factor in from the 1800s you lose the "+ 1%" part.

CA has enjoyed about an extra "premium" mostly due to faster population growth as compared to the whole.

And there's another model that claims the population growth is not so important as population demographics (the curve shape of ages). I linked that article last thread or two. This model says that what is gained due to population growth will be shed later unless populations can grow at exponential rates, because eventually the population becomes "elder heavy". Sound familiar?

Look on the bright side: that means it may be bad in CA but it will be worse in FL.

skibum,

Oh yeah! That's right, what'd I say "Total Zero"? No, actually Less Than Zero would be more accurate.

You're right, this is the wind down phase for the builders and as I mentioned a thread or so back, 2007 is the year where realtors will find themselves in "Julian's position"!

Well, in fairness, when I read the CNN article about that, it noted that the savings rate does not count retirement accounts (e.g., 401k’s) as savings.

Person,

How many Americans have underfunded or not funded their 401Ks? I recall the typical retirement plan savings to be anemic. I doubt that helps very much.

(look at the national savings rate - hint, it’s the same as the title to a bad 1980’s movie starring Robert Downey Jr.).

But the book was great! :)

hmmmm maybe the McDebtors will earn income like Mr. Downey did?

Thanks, Mr. X. I definitely am switching to Vonage and am interested in any referral deals. Will email you.

I have some real doubts about Vonage as an ongoing concerns.

My favorite was right before they IPOed, someone (Om?) bashed Vonage. A Vonage-fan posted a comment that basically said this: "Their stock is going to rock. Vonage is a great company - their customers love them. They lower their prices ALL the time to beat their competitors."

Sounds like a great business model to me.

http://finance.yahoo.com/q/ks?s=VG
Profitability
Profit Margin (ttm): -56.58%
Operating Margin (ttm): -56.10%

Management Effectiveness
Return on Assets (ttm): -32.55%
Return on Equity (ttm): -152.43%

OMG.

lunarpark,

I'll bet you like Ellis' latest novel even better! ;)

Btw, 5% investment return (after tax) sounds rather conservative.

Ever since the tech bubble I've become very risk averse. A huge chunk of my money is a 5% interest savings account (taxable).

I'm not sure where to invest my money these days. I keep thinking about putting more money into some index funds, but I keep hearing that the market's about tank any day now.

Ahahaha, actually I didn't care for it as much as his other work. But I just couldn't see myself posting as Patrick Bateman :)

"I keep thinking about putting more money into some index funds, but I keep hearing that the market’s about tank any day now."

Me too. I even went through the trouble of choosing some Vanguard funds, but I haven't pulled the trigger.

But I just couldn’t see myself posting as Patrick Bateman

You could have posted as "American Psycho."

Come to think about it, maybe I'll use that username sometime :)

Claire,

We're not sure whether we want to put down roots here or move back east to be closer to family. The plan is to wait and see what happens after the wife is w/ her graduate school in a couple of years.

If we do decide to buy here, I'd love to get a reasonably priced house enclosed by Shoreline, the train tracks, and Calderon. Unfortunately, we can only afford the worst house in town if it's down by ~40%.