patrick.net

Yes, this looks right, assuming you are not counting the principal portion of the mortgage, which brings the annual payments up to $33K. You didnt include maintenance, which might be $3K on this age of a house. Also, the hazard insurance insures the structure, but what about the contents, like you have when renting. Or does the hazard insurance cover the structure and contents?

LOL, that's the *exact* math I use, in every detail.

But there's also:

1) Yard care -- I plan on doing this myself for the exercise but that's easier said than done . . .

2) Maintenance -- Count on $15,000 of stuff every 10 years, easily, plus $50/mo contingency, that's ~$200/mo.

The one risk I see is rates moving up w/o concomitant rises in disposable income.

We may get inflation this decade, but if it's only in food, energy, and health care it's not going to help you unless you own a farm, oil stocks, or work in health . . .

So I'm biased towards prices moving down from here, but only slightly. It could go the other way, too.

Well also make sure you are comparing the price it can actually sell for vs. the rent it can actually rent for. But yes, it is slowly getting back to historical norms, but is still out of whack for the bay area as a whole. Here's recent numbers:

http://www.bubbleinfo.com/2010/12/23/buy-vs-rent-2/

@ Waiting to buy - you are right; but the remaining part goes into equity so its more like an investment
@ Troy - I am a farmers son; so no problem with yard work etc.. Maintenance is something I do need to factor in. Say the cost of the house minus the land is 150K; Will we be spending more than 2K per year on maintenance?
@Bryant - the numbers in the link include all of San Jose - which includes nicer and not so nice parts... that is the issue with most of the reports flying around these days...When we look closer we see more interesting numbers.. these rent/buy numbers are for VV good school districts (900+ API) - my guess is there are a lot of people wanting to put their kids into these schools and hence higher rents. Similarly; we all have heard about 10%+ unemployment figures - look at this link which talks about unemployment numbers at different education levels...

http://www.bls.gov/emp/ep_chart_001.htm For people with atleast a bachelors degree; unemployment is at 5% levels even for 2009

However what makes us take a pause now is the possibility of home prices falling by another 10% - if that happens; rent vs buy gets so much better....almost 65 K on a 650K house!!!!

naveen381 says

Will we be spending more than 2K per year on maintenance?

every part of the house that can break will break eventually.

Roof: $10,000-$20,000, good for 20-30 years.
Figure on one major thing going out every year = $1000 -- since 2004 I've replaced my mom's garage door, water heater, roof, dryer, A/C, sprinkler system, two fences, a gate, etc etc

Then throw in a remodel every 20 years . . . $3000/yr accrual for all this is really minimal . . .

I understand the argument about the principal payment being "forced savings" which is building equity. Of course this assumes that the price remains the same or goes up, but what if it goes down? I wouldn't expect to see another drop in home values like we did between '07 and '09, but what about just a slow deflation a la Japan, where home prices stagnate downward, but rents fall?

You're also assuming you get the full benefit of that mortgage interest deduction, but is that really a safe assumption given (a) the current budget environment and (b) your income?

I haven't done it myself so I'm not sure, but I believe the AMT and limited deductions bite many people on the ass when doing this math, plus assuming away the standard deduction when making the comparison, etc. (i.e., you really need to do the tax math in detail on the forms before you can be sure about how this works out). And even that fails to account for the possibility that, e.g., the mortgage deduction may be phased out, or may be limited to interest on $500k (or pick a number), etc. - unless you think the risk of these is really zero, your math needs to account for that risk.

@jimAtLaw - I have not assumed the standard deduction as we both pay more than 12,000 $ as CA State tax - which means the entire interest + prop tax paid gets our 35% deduction.. Our annual income is in the range of 200-300K (100K is variable income; we are in sales) so we end up filing separately now - it makes more sense for us as we dont have kids and other deductions.....

As for the mi deduction; I dont see that either on the republican or democratic agenda...

Interesting - I know my itemized deductions were limited last year (though I think this may have been temporarily suspended for 2010-2012), but apparently not true for others similarly situated! I also thought, e.g., that there might be limits on mortgage interest deductibility (see, e.g., http://taxes.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=taxes&cdn=money&tm=32&f=21&su=p284.9.336.ip_p504.1.336.ip_&tt=2&bt=0&bts=0&zu=http%3A//www.irs.gov/publications/p17/pt05.html, which seems to suggest limits on deductible interest for people married but filing separately around $500k) and that this could get more restrictive as the government runs out of money.

But if you want to take the position that there are no limits on deductibility and no risk that this will change, assuming that you can deduct 100% of the interest indefinitely, that's one way to look at it. If that's how you want to approach things, then it sounds like you've already made your buying decision, so enjoy your new house! :-)

"Assumptions
1. The home buyer is in the 35% tax bracket
2. Closing costs are compensated by the 1.5% rebate one can get with a discount broker
3. We do a 20% down-payment loan on the house"

And what do we do with the 20% down? You don't account for that 122K?
There was no 122K deposit on the Rental.

Also Renters don't rent for 30 years, or at least not the same place(SF homes anyway).
And the life of a typical loan is only 10 years. Which would prorate the down payment to 1,000 a month.

Most loans are refinanced on or before 10 years, either to lower payments on a lower principal, or for the lower rates on the Original loan, or to parlay the equity into a refi with pocket money.

Or you could calculate it to 30 years, it's still 333 added to the monthly payment.
The only plus side to paying that 20% up front is you don't pay interest on it. But you still paid it, none the less.

FWIW, Your assumption works just fine for most SF homes in most towns, that aren't Vehemently manipulated by the Realtor and Investor pool, and aided by Municipal officials who have conflicting interests in the local RE market staying artificially inflated. Or they have gone broke trying. If you're even contemplating paying 650K for an Americano Supreme Ranchero 3br 1300 sq ft home with a chinch bug riddled lawn, then something is wrong with that market. I wouldn't pay 2600 rent for it either.

650K is still a lot of money. Location, size, Curb appeal and Lot, determines that kind of money. This is not Inflation, this is Quantiflation. That's where people selling something says, it's inflation so... "It's worth this!" while the buyer, sees a different reality, he's actually getting less for his goods and services, labor is down, demand on goods and consumption is down. The buyer senses Deflation. He can't quantify the sellers expectations.

@ Tenouncetrout - I have factored in opportunity cost for the 130K @ 2.5% annum into the cost of buying....

naveen381 says

I dont see that either on the republican or democratic agenda…

http://www.nytimes.com/2010/11/13/business/economy/13mortgage.html

naveen381 says

I have factored in opportunity cost for the 130K @ 2.5% annum into the cost of buying….

There's also the interest you're losing on your principal repayments. I can see an inflation scenario where the cost of living goes up a lot but houses fail to rise (because everything else is going up so much). This would make housing fail as an inflation hedge compared to stocks, much like how housing didn't really do that well against stocks, 1981-now.

naveen381 says

I have factored in opportunity cost for the 130K @ 2.5% annum into the cost of buying

What kind of Voodoo economics is "Opportunity Cost"? That sounds like a lot of soul searching hooey to me.
It's at least 13K a year, and about 1200 a month. As I've said the average life of a 30 year mortgage is 10 years. Homeowners still paying on an original 30 year note 20 years out is rare. By then it would have been rolled into another transaction, in someway either selling or refinancing the house in some form or an other.

Tenouncetrout says

It’s at least 13K a year, and about 1200 a month.

what's your math to reach that number?

About the high school, suggest you go to a basketball game or football game, mingle with the crowd, before you decide about that high school. Then cruise around the neighborhoods close to it with the older, high density rentals, that send lotsa kids to that school. Reminds me of my high school years in the region, probably thomaswong1986 would feel at home there, too.

The high school and those surrounding neighborhoods represent the true diversity of California probably better than any other high school in the region.

Not exactly a Fortress Enclave.

130K / 10 years/ 12 months based on the average 30 year mortgage before it is redone into a new deal either requiring even more upfront fees.
or 130K / 30 years / 12 months if you actually go the full 30 year term.

For lower affordable FHA loans only requireing 3.5 down and dirt cheap financing at 4.5% then the numbers work. It is definately cheaper to buy than rent. Had I put 20% up front it would have blown the whole equation.
That would have also assumed my original purchase was even 20% more than I am financing now.

In this market, even with 20% down, you still assume negative equity, whether you put 20% or 3.5% down.
As you are the winning bidder, your purchase capped the price your house is worth.

Finding a buyer more interested than you, is a moot point after you've bought it, until it's a "Sellers" market again.

Edited to change "buyers market again" to ""Sellers" market again. "