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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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 Posted: Fri Jun 12, 2009 11:20 am GMT Post subject: housing |
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mpr: I almost totally agree with you. Except that I think there are still so many buyers willing to shell out so much $$$$ here for housing because they have "drank the Kool Aid", as samz so aptly put.
I would like to be a buyer. However, I am just having a hard time wrapping my head around the fact that what I currently pay for a brand-new, 3 bed apartment buys me a SMALLER, OLD house, assuming we put 20% down ... except the house needs >$50K worth of work.
I am still surprised, no, make that flabbergasted, that so many people are so willing to buy homes at these prices, when renting really is so much cheaper.
The inflation factor is a concern for me, too. But I don't think it will become a problem until unemployment gets under control and starts to TRULY decrease, as unemployment will put further downward pressure on housing prices, bank balance sheets, consumer spending, etc.
For now, we wait. And save our money.
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Jun 12, 2009 1:31 pm GMT Post subject: Re: housing |
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| melonrightcoast wrote: | mpr:
I would like to be a buyer. However, I am just having a hard time wrapping my head around the fact that what I currently pay for a brand-new, 3 bed apartment buys me a SMALLER, OLD house, assuming we put 20% down ... except the house needs >$50K worth of work.
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Is this really true counting only the interest,tax and insurance portion of
your monthly payment and taking into account the income tax deduction ?
(And, to be fair, the capital cost of your 20%). Keep in mind also
that apartments may be less costly then SFH's. If its really cheaper
to rent keeping all that in mind, I agree that is a compelling case.
(Back of the envelope calculation: With current rates,
the break even point should be about
$500 a month in rent for every $100,000 in purchase price).
| melonrightcoast wrote: |
The inflation factor is a concern for me, too. But I don't think it will become a problem until unemployment gets under control and starts to TRULY decrease, as unemployment will put further downward pressure on housing prices, bank balance sheets, consumer spending, etc.
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That is certainly what the Fed is hoping ! But there are other ways
all that new money could get into the system, such as commodities,
and stagflation is possible. I dont think its safe to assume we know
exactly how it will happen. As the name suggests, liquidity is like water,
it will find any small hole.
If that happens without a recovery then even
if the Fed notices it in time, I have no confidence they would hike
interest rates and crush the economy. Inflating away all that debt
is just too convenient - politically and otherwise - for too many people. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Jun 12, 2009 1:44 pm GMT Post subject: Re: housing |
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| mpr wrote: |
(Back of the envelope calculation: With current rates,
the break even point should be about
$500 a month in rent for every $100,000 in purchase price).
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That sounds like a pretty reasonable estimate. That would be a cap rate of 6% (500 *12 / 100,000), which doesn't sound amazing, but also isn't horrible.
From my market research, any decent place in an "immune" town that can actually hold a family of more than 2 (min of 3 BR, 1.5-2 BA, at least one den/study/playroom space outside the living room) that I can find is in the $600k range. Many of these, as Mel notes, are dated and require some level of renovation (i.e., more than new paint/carpet).
So if break-even on that place is $3k/mo, by your calc, I think you do pretty well with a $2800/mo rental, in just about any town in or around Boston. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Jun 12, 2009 1:53 pm GMT Post subject: Re: housing |
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| JCK wrote: |
That sounds like a pretty reasonable estimate. That would be a cap rate of 6% (500 *12 / 100,000), which doesn't sound amazing, but also isn't horrible.
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Actually what I figured was 5% (which you can still get if you pay points)
+ 1% taxes = $6000. Then x.75 for the income tsx deduction
(assuming you're in the 25% marginal bracket). This gives $4500.
Then I added 1.5% for maintenance and insurance to get the $6000 a year. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Jun 12, 2009 2:05 pm GMT Post subject: |
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Hmmmm.
I'm going to have to think about this some more, but later.
But I agree with your calcs intuitively. It seems sensible that spending less than $3k on a rental is a better deal purchasing the same place for $600k+. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Jun 12, 2009 2:26 pm GMT Post subject: |
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| Don't forget to include the opportunity cost of investing money in a down payment. |
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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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| Posted: Fri Jun 12, 2009 3:02 pm GMT Post subject: renting vs. buying |
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Our current rent is $1900/mo for a brand new 3 bed/2 bath "luxury" apartment, just under 1400 sq ft. A little more than I had wanted to pay, but we have a short-term lease (i.e. less than a year).
Tax rate in our town is 1.5%. Based on my calcs, in order to get down to PITI+1%maint down to $1900/mo, we are looking at $290K purchase price. In our town, that gets you a 1200 sq ft or less 60+ yr old house that needs a lot of work. Usually 2 bed/1 bath.
So, no thanks, I won't be buying the small crappy house. I'll just keep on renting and bank the $$.
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melonrightcoast
Joined: 22 Feb 2009
Posts: 236
Location: metrowest
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| Posted: Fri Jun 12, 2009 3:05 pm GMT Post subject: Note |
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Note: my calcs do not include interest paid on savings. Although it should. But if it really doesn't work out right now, I'm not going to spend the extra time to show that it still really doesn't work out to buy.
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samz
Joined: 19 Feb 2008
Posts: 102
Location: Medford, MA
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| Posted: Fri Jun 12, 2009 3:16 pm GMT Post subject: |
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| So, this is annoying: I found a small 3 bed/2 bath SFH for rent in Arlington, but the owners want $2400/mo. Zillow values the house at around $460K, which means that renting is close to, or actually more expensive than buying the house. That seems to make no sense at all! |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Jun 12, 2009 3:20 pm GMT Post subject: |
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| JCK wrote: | | Don't forget to include the opportunity cost of investing money in a down payment. |
Thats included, because I'm charging 5% on any downpayment,
which is very conservative because you'd have trouble getting anything
like a 5% risk free return these days. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Jun 12, 2009 3:22 pm GMT Post subject: |
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| samz wrote: | | So, this is annoying: I found a small 3 bed/2 bath SFH for rent in Arlington, but the owners want $2400/mo. Zillow values the house at around $460K, which means that renting is close to, or actually more expensive than buying the house. That seems to make no sense at all! |
Why doesn't it make sense? I think most would argue here that buying should be similar in cost to renting.
That's the way the market SHOULD work, and has worked in the past. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Jun 12, 2009 3:23 pm GMT Post subject: Re: renting vs. buying |
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| melonrightcoast wrote: | Our current rent is $1900/mo for a brand new 3 bed/2 bath "luxury" apartment, just under 1400 sq ft. A little more than I had wanted to pay, but we have a short-term lease (i.e. less than a year).
Tax rate in our town is 1.5%. Based on my calcs, in order to get down to PITI+1%maint down to $1900/mo, we are looking at $290K purchase price. In our town, that gets you a 1200 sq ft or less 60+ yr old house that needs a lot of work. Usually 2 bed/1 bath.
So, no thanks, I won't be buying the small crappy house. I'll just keep on renting and bank the $$. |
Well its not fair to include the P=principal in your calculation,
and you should take into account the tax benefits as well as
the capital cost of your 20%.
Then your $1900/mo should be equivalent to something closer
to a $400 K purchase price, maybe a little less since I counted 1% for taxes. |
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JCK
Joined: 15 Feb 2007
Posts: 559
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| Posted: Fri Jun 12, 2009 3:29 pm GMT Post subject: Re: renting vs. buying |
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| melonrightcoast wrote: | Our current rent is $1900/mo for a brand new 3 bed/2 bath "luxury" apartment, just under 1400 sq ft. A little more than I had wanted to pay, but we have a short-term lease (i.e. less than a year).
Tax rate in our town is 1.5%. Based on my calcs, in order to get down to PITI+1%maint down to $1900/mo, we are looking at $290K purchase price. In our town, that gets you a 1200 sq ft or less 60+ yr old house that needs a lot of work. Usually 2 bed/1 bath.
So, no thanks, I won't be buying the small crappy house. I'll just keep on renting and bank the $$. |
I tend to ignore the P part of the PITI calc, simply because it's not a direct cost, but rather an opportunity cost. You're removing a liability from your bottom line by paying down P. I therefore don't put it in the same category as the ITI or rent, which really are direct costs, although the IT part of the ITI is tax deductible. Also, if you were to finance for a 15, rather than 30 year term, I certainly wouldn't include the additional principle balance you're paying down as a cost, would you?
So I think paying a little more in PITI + maintenance than rent is probably fine, but a lot more doesn't make sense. |
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WestCoastXPlant
Guest
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| Posted: Fri Jun 12, 2009 3:34 pm GMT Post subject: |
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samz, it's very likely that the owners of that home, were they to sell it, would ask well above Zillow estimates. In fact, I'm fairly convinced that the day I see a house asking below Zillow, I'd buy it.
JCK and mpr, I have to say that I've been amazed, in the last year, to realize how much "traditional" valuation methods all converge to the same number, +/- 100 bucks. I've never seen your method of calculation before, but I've always heard the guidance that PITI should be 1.6-1.7 of rent -- which is smack down what your calculations come to.
And even more amazing, .32 of my income comes pretty darn close to 1.6 * my current rent...I've never particularly "calculated" this when searching for a rental, kind of went by "what do I feel like paying" and still having a life. I haven't found, in real life, a house that's equivalently nice to my rental at that price -- that's when I'll buy it
How did we ever get into this bubble mess -- the numbers work out so beautifully?! If only people respected that... |
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samz
Joined: 19 Feb 2008
Posts: 102
Location: Medford, MA
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| Posted: Fri Jun 12, 2009 3:57 pm GMT Post subject: |
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I think the spread between owning and renting should reflect how much the house is expected to appreciate in value. The owner reaps the benefit of value appreciation, where the renter does not.
Pre-bubble, this spread could be large because houses were appreciating quickly. Now, I'm not so sure. |
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