bostonbubble.com Forum Index bostonbubble.com
Boston Bubble - Boston Real Estate Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 

SPONSORED LINKS

Advertise on Boston Bubble
Buyer brokers and motivated
sellers, reach potential buyers.
www.bostonbubble.com

YOUR AD HERE

 
Go to: Boston real estate bubble fact list with references
More Boston Bubble News...
DISCLAIMER: The information provided on this website and in the associated forums comes with ABSOLUTELY NO WARRANTY, expressed or implied. You assume all risk for your own use of the information provided as the accuracy of the information is in no way guaranteed. As always, cross check information that you would deem useful against multiple, reliable, independent resources. The opinions expressed belong to the individual authors and not necessarily to other parties.

Advice on helping sellers to price properly
Goto page Previous  1, 2, 3, 4  Next
 
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond
View previous topic :: View next topic  
Author Message
kdog



Joined: 03 Jan 2007
Posts: 7

PostPosted: Wed Feb 07, 2007 5:29 pm GMT    Post subject: Re: turning tanker Reply with quote

john p wrote:
I liked the turning tanker analogy. I used to tell my wife that it felt like we were on the first car of a rollercoaster. When you're in the first car you're the first one to look down and start to head down. The surreal feeling is that even though you are aiming downward it seemingly defies gravity because of the weight of the cars behind you that still see it going upward behind you keep you suspended. Once the critical mass makes it's way over the hump the decline starts to pick up speed. I would say that about 75 percent of the cars are over the hump and where the bottom is I'm not sure. Realtors are hoping that they find that moron in the remaining 25 percent. Just as the bubble overshot fundamentals and you had herd mentality, I wonder if the decline will do so as well. Best of luck.


Nice analogy. Assuming you're right that 3/4 of the cars have crested (back in August, 2005), the bottom of the first drop is nowhere in sight. It'll be a relief to see some of the cars start climbing the next hill... but I wouldn't count on it anytime soon.

I think a lot of hopeful buyers were hoping to see a quick adjustment like a roller coaster, but reality in the housing market is much slower. Think mollasses running down hill. You can see what it's doing and where it's going, buy try as you might you can't get it to speed up. Trust your judgement about what has to happen in the long run (gravity in the mollasses analogy, market economics in the RE example).
Back to top
View user's profile Send private message
Looker
Guest





PostPosted: Thu Feb 08, 2007 3:23 pm GMT    Post subject: Tax benefits- just did an analysis- result and suggestions Reply with quote

I just spent a LOT of time on this tax benefit analysis after I received my W2’s, and I must say I am surprised at how well the deduction can help. It’s an unbelievable government subsidy. Patently unfair, but it is what it is.

Like another poster, I was guilty in my previous analyses of not realizing that State Tax paid is federally deductable. That makes all the difference. Our family is sitting in the 28% tax bracket. We pay almost as much state tax to hit the standard deduction, so a high portion of potential interest is deductible on top of what we would normally pay.

I have a suggestion: Get yourself a copy of TAX ACT . Run your numbers as you have now and compute your tax liability. Then, go in there and input the amount of interest and property tax you expect to pay. Calculate the difference and compare that to renting. I was absolutely shocked as my delta was $8000.

My analysis indicates that we can purchase a $450,000 house for the same monthly cost of renting ($1800) figuring in the deduction. In addition, we would be generating ~7K/yr equity. The caveat, of course is you are exposed to the downward pricing forces in play right now. If the downward trend is 1.5%/yr, as the previous poster cited as his guess, that’s exactly the 7K in equity- so it’s an even break. That also does not include closing costs and realtor fees when closing when selling – and of course if a condo HOA which is non-deductible.

For my money, I see no end in sight to the downward pricing pressure, but I can see how the original poster saw the advantage in a tax break. A little more downward direction in the pricing, and we might pull the trigger as the numbers continue to look better. Although one of the unfair ironies is that the more debt we take on the more of a tax savings we get, so the whole system is rigged to produce monopoly-style funny money pricing. The rules are made by a bunch of idiot politicians and it’s unfair, but America is geared towards 2 things: Business and Real Estate.
Back to top
JCK
Guest





PostPosted: Thu Feb 08, 2007 3:56 pm GMT    Post subject: Reply with quote

Be sure you're pricing in property tax as well, and absolutely do not discount the HOA/condo fee. Together, these can be several hundred dollars a month.


I do agree with all of your points regarding the interest tax deduction. It's a huge middle class tax subsidy that cannot be ignored.
Back to top
Looker
Guest





PostPosted: Thu Feb 08, 2007 7:21 pm GMT    Post subject: Taxes Reply with quote

Yes, property tax is absolutely part of the calculation, it's tax-deductable though.

Realize HOA is not and is factored appropriately, but then again, it includes sewer and water which is a cost one would incur when buying a house.

Again, the best way to do this is get some tax software, fill in the numbers for your specific scenario, and you get solid numbers you can plan around.

Using my spreadsheet- validated by mortage calculators online and my target town's assessment rate, I think it's pretty solid.

God help the poor souls/idiots who gambled with an ARM. I can't imagine going through life wondering how much money my house is going to cost me next year.
Back to top
bikes2work
Guest





PostPosted: Tue Feb 13, 2007 4:36 pm GMT    Post subject: Re: Tax benefits- just did an analysis- result and suggestio Reply with quote

Looker wrote:

My analysis indicates that we can purchase a $450,000 house for the same monthly cost of renting ($1800) figuring in the deduction. In addition, we would be generating ~7K/yr equity.


Assuming a $450k mortgage at 6% your payment would be approximately $2700/month. Even with a full tax deduction of 28% your payment would still be $2106/month. When you add back in property tax, maintainence, etc, your monthly cost will be well above $2500. I don't see how you can suggest this is comparable to a rental of $1800.

(If your reply is that you plan on a 20% downpayment to reduce your mortgage, then you have to consider the opportunity cost of that downpayment. For example, a $90k downpayment can earn $400/month in a money market account, or $600/month in a more volatile investment like the stock market.)
Back to top
bikes2work
Guest





PostPosted: Tue Feb 13, 2007 4:42 pm GMT    Post subject: Re: Tax benefits- just did an analysis- result and suggestio Reply with quote

My apologies, the payment after the 28% tax deduction would be approximately $1950. But I believe my main point is still correct.
Back to top
JCK
Guest





PostPosted: Tue Feb 13, 2007 10:21 pm GMT    Post subject: Re: Tax benefits- just did an analysis- result and suggestio Reply with quote

bikes2work wrote:
My apologies, the payment after the 28% tax deduction would be approximately $1950. But I believe my main point is still correct.


It's always a bit more complicated. You have to account for the fact that, although you lose the opportunity of investing the principal portion of the payment elsewhere (which may or may not be a better investment), that principal goes to your bottom line nonetheless. It cannot be counted as a loss.

Also, factor in that rent should slowly but surely go up year after year, but on a 30 year fixed mortgage, your payment will stay constant.

A rent vs. buy calculator that takes all this into account, plus more, can be found at:

http://dinkytown.net/java/MortgageRentvsBuy.html

I find that, depending on your expected rate of inflation and rate of return of alternative investments, you can come up with vastly different answers for what makes sense.

No, it won't let you put in negative values for home appreciation. But you really believe that appreciation will be negative, you should hold off on buying, unless your rent is absurdly high.
Back to top
john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Wed Feb 14, 2007 4:16 pm GMT    Post subject: you're both right Reply with quote

I think timing when to get on the train is critical, but it also important to get on at some point too. If you have the flexibility, it makes a whole lot of sense to wait right now, unless you lowball so much that you give yourself a factor of safety.

Ideally, throughout your life it is hopeful that you'll get more in interest than you pay out. If you buy a house you're paying tons of interest, front loaded and then bite into principal. Those who constantly refinance and extend the thirty years every 5 years are prolonging when they take a bite into principal. They also don't get those extra 10 years or so of no mortgage when their wealth can pile up.

I tell people, hey, if you make $100k and you have a good year, what's a good raise 5%? I say then, what if you had $100k in the bank and you got 7-10%? This is the difference between new money and old money. New money knows how to earn it; old money knows how to preserve it. All those economists talk about how productive our workforce is and then think about it again, you work really hard to get a 5% raise and investors are getting 10% or so. The investment class (old money) is getting more than the working class (new money). This is why the income gap is widening and younger people at the earning stages of their careers are left so far behind. This housing bubble should be a wake up call for economists and politicians because what is next is having a lot of retirees without a pot to piss in.

For young people:

I guess the interest only scenario made sense if you're in a short term situation and you think the principal portion is rising (house cost). It is a way to contain it. You hope you're salary catches up. We have had two recessions in the past 15 years so having that cushion in your monthly nut allowed people to build an emergency fund. If thousands of people in your local market have the same game plan, it might backfire, especially in a soft market.

The "Me" generation baby boom:

They were coming into their prime earning years and were jumping much higher than their monthly hurdles having bought their homes 25 years or so prior. The baby boom had lots of extra money to invest, housing ws the preferred investment after the stock market crash. The baby boomers created an echo with regard to their reinvestment in housing and them hip-checked the younger ones.

Side note: The baby boomers were so dead set against Vietnam when the rich white college kids had to go and fight for a foreigner’s freedom. Now, they don't care in the least for the Military who are mostly from a more modest background. Before you end up with a caste system, you need a caste mentality. One that makes you think that you deserve what someone else has and you are special and a fair equation is not necessary. The baby boomers are crying that they "lost" 20 percent on their house in the market correction when their house doubled in value in 12 years or so, they are expecting a younger generation to have it completely tucked to them. They need to be reminded that this price run up is unheard of in the history of residential real estate in our country and they are not entitled to the paper gains from this housing bubble anomaly.

I don’t think all baby boomers are evil Smile Many have given a lot to their kids i.e. college tuition and they actually need to pull out money from their homes to help pay for junior’s tuition. Because “house values” are computed by financial aid departments in colleges, it almost forces families to use their houses as ATM’s and it results in higher college tuition costs because they have invented a larger reservoir to get money from. That is another trick of old money- invent it.

In the end, greedy people see how much the market will bear. How much will people take before they push back? How much will they swallow? Greedy people are smart to segment our population and target the weak. They learned their lesson in Vietnam when they broadened the responsibility of Military service to rich white kids, they had an uproar on their hands. You know how you find out what the market will bear, you’ll just shoot away and eventually aim at a bear. If you take a shot at a bear and don’t kill him, he will hunt you down and kill you. So if you’ve got a few angry bears chasing you, then you know the market beared out…
Back to top
View user's profile Send private message
john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Wed Feb 14, 2007 8:57 pm GMT    Post subject: side not bear story..... Reply with quote

http://www.commondreams.org/views04/0316-11.htm
Back to top
View user's profile Send private message
Looker
Guest





PostPosted: Thu Feb 15, 2007 4:01 am GMT    Post subject: Re: Tax benefits- just did an analysis- result and suggestio Reply with quote

bikes2work wrote:
Looker wrote:

My analysis indicates that we can purchase a $450,000 house for the same monthly cost of renting ($1800) figuring in the deduction. In addition, we would be generating ~7K/yr equity.


Assuming a $450k mortgage at 6% your payment would be approximately $2700/month. Even with a full tax deduction of 28% your payment would still be $2106/month. When you add back in property tax, maintainence, etc, your monthly cost will be well above $2500. I don't see how you can suggest this is comparable to a rental of $1800.

(If your reply is that you plan on a 20% downpayment to reduce your mortgage, then you have to consider the opportunity cost of that downpayment. For example, a $90k downpayment can earn $400/month in a money market account, or $600/month in a more volatile investment like the stock market.)


Okay, here's my analysis:

First off- 2 things: Remember that property tax is deductable, and interest is taxable. Take that 5% HBSC savings account and multiply it by 0.72. That's 3.6% folks.

And please correct my logic/math if wrong:

450,000 80-15-5

360K @ 6.125% = 2187
67.5K @ 8.1% = 489
Taxes = 431
Insurance = 42

Monthly total before deduction = 3150

Monthly deductable

Taxes = 431
Interest = 838
Interest 2nd = 443

Total deductable expenses = 2712

After 28% deduction of deductable expenses and adding to non-deductable items (qualify for full deduction b/c state tax is over 11K, thus mortgage deduction is stacked on top of what would otherwise be std deduction) = Total monthly cost = 2466

Monthly increase from 1800 rent = 666

Monthly tax savings from deduction = 683

The big key here is - yes, I am paying more monthly for housing ($666), but if I did not buy a house, I would be paying $1800 + a tax bill of $683.

This completely checks out when I do my taxes electronically, then throw in a hypothetical mortgage interest and property tax w/these numbers.

Setting aside maintenance - and I realize it's a factor, I just wanted to simplify my variables. But also, I am gaining a few thousand in "equity" (har har) even in the first year.

Prove me wrong- really, I want to know if I'm missing something here.
Back to top
Guest






PostPosted: Thu Feb 15, 2007 1:36 pm GMT    Post subject: Re: Tax benefits- just did an analysis- result and suggestio Reply with quote

[quote="Looker"][quote="bikes2work"]
Looker wrote:


Okay, here's my analysis:

First off- 2 things: Remember that property tax is deductable, and interest is taxable. Take that 5% HBSC savings account and multiply it by 0.72. That's 3.6% folks.

And please correct my logic/math if wrong:

450,000 80-15-5

360K @ 6.125% = 2187
67.5K @ 8.1% = 489
Taxes = 431
Insurance = 42

Monthly total before deduction = 3150

Monthly deductable

Taxes = 431
Interest = 838
Interest 2nd = 443

Total deductable expenses = 2712

After 28% deduction of deductable expenses and adding to non-deductable items (qualify for full deduction b/c state tax is over 11K, thus mortgage deduction is stacked on top of what would otherwise be std deduction) = Total monthly cost = 2466

Monthly increase from 1800 rent = 666

Monthly tax savings from deduction = 683

The big key here is - yes, I am paying more monthly for housing ($666), but if I did not buy a house, I would be paying $1800 + a tax bill of $683.

This completely checks out when I do my taxes electronically, then throw in a hypothetical mortgage interest and property tax w/these numbers.

Setting aside maintenance - and I realize it's a factor, I just wanted to simplify my variables. But also, I am gaining a few thousand in "equity" (har har) even in the first year.

Prove me wrong- really, I want to know if I'm missing something here.


Good point on the interest on the savings. As mortgage interest is tax dedeductable, and interest on money markets, etc is taxable, you can simply compare the rates directly. Multiply each by 0.72, if you're in the 28% bracket, to get the "real" rates for each one.

I assume your interest is 1838, not 838.

A couple observations. Your insurance seems a bit low. Homeowner's insurance is a bit more than renters.

I'm also a bit confused on the "Monthly tax savings from deduction = 683"

Shouldn't the calculation be as follows:

$2712 Interest + Taxes
x0.72
+ Principal, Insurance, condo/HOA/"other utilities", and monthly maintenance (don't ignore these costs).

I calculated that $2712 becomes $1952 with the deduction. Let's ignore principal, as it's not really a loss, but let's add the other costs, which will at a minimum, be a couple hundred dollars a month. Now you're paying in real dollars $2250.

I'm not following

"Monthly increase from 1800 rent = 666

Monthly tax savings from deduction = 683"

Are you counting the deduction twice?
Back to top
john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Thu Feb 15, 2007 3:09 pm GMT    Post subject: risk factor Reply with quote

In all of your calculations (very well outlined) add a risk factor to each line item.

A financial analyst balances rates of return with risk factors.

Simply put a "w" next to a line item that you feel could change little by gradual and a "W" (capital W") next to a big wildcard.

When people were doing their calculations a few years ago the biggest "W" was the ceiling of where house prices were going. People were afraid of "being priced out".

Not only has the price escalation been less of a growth wildcard, it is now a wildcard because of the potential of price declines. If you buy today and you could have gotten $50k more houses next year that are another type of wildcard.

Property taxes are a wildcard, the new Governor is a wildcard, transportation costs proved to be a wildcard, god dam dentists are raping everyone so don't chew on any tootsie rolls like the lady did in Abington (who is now asking the town to pay for her tooth because she ate the candy from their candy jar). What else, if you buy an older home every where you turn is a wildcard. Heat is a wildcard, healthcare is a wildcard. etc. etc. etc. A variable interest rate is another big "W" as is interest only notes (unless you are disciplined about adding principal payment amounts).

When you do your spreadsheet make sure it isn't tattooed with "W"'s.
Back to top
View user's profile Send private message
john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Thu Feb 15, 2007 9:48 pm GMT    Post subject: Reply with quote

http://mortgage-x.com/calculators/results.asp

This is an amortization table that I used to help understand how much in interest I would be paying year to year.

Amortization for those who don't know is a breakdown year to year of how much you pay in principal and how much you pay in interest. You'll see that at the beginning you pay almost all interest (so your deduction is greatest) as you start to bite into principal you pay less and less interest.

The way you work the tool is put in the loan amount, the interest rate and then ask it to show you an amortization table. It tells you how much interest you are paying each year. I would take that amount and then determine my tax bracket and then say take the amount and multiply it times the tax bracket (say .2Cool and then divide by 12 months to get my monthly savings. In this instance you would need to figure out your 80 percent note, and your piggyback 15 percent note.

PS- are you sure about those rates?

http://www.loansnap.com/rates/

Check out a balloon payment for the 15 percent note after say 10 years or play around with the term of the 15 percent note. You'll have to study the yield curve because you are working with the 10 year yield for the 30 year mortgage and the prime rate for the 15% deal.

Or you can wait until the price drops to 360k Wink
Back to top
View user's profile Send private message
Looker
Guest





PostPosted: Fri Feb 16, 2007 3:39 am GMT    Post subject: Reply with quote

Okay, not to delve too much further, but I do think it works.

This is what I mean by "monthly tax savings": All calculations done with TAX ACT using my generated 1040.

If I do not buy:

My total federal tax bill this year is $26,055.
My monthly rent is $1800. Yearly = $21,600.
Total Outlay Housing + Fed Taxes = $47,665.

If I buy with the interest and tax figures shown:

My total federal tax bill would have been $17,855
My monthly housing will cost $2,466. Yearly = $29,592
Total Outlay Housing + Fed Taxes = $47,447

I don't know if there is any other way that makes it clearer: Either I pay $8200/yr in extra taxes or $8200 to the mortgage on a 450K home.

For -and I stress- my situation, all other things being equal, I break even on a 450K 80-15-5 loan at current rates vs. renting for $1800.

Now, to keep it simple, I understand and I am not basing this analysis on the negatives:

Maintenance
Risk of depreciation
Sales comission when I sell
Opportunity cost of not investing down payment (taxable, however)

Or the positive:

I am gaining ~7K in equity a year.

Have I explained myself clearly at this point? My overarching point is that a 450K home for a 28% earner is reaching breakeven due soley to the huge tax breaks in play. This might cause prices to remain "sticky".
Back to top
Looker
Guest





PostPosted: Fri Feb 16, 2007 3:41 am GMT    Post subject: Reply with quote

Let me add that by "breakeven" I mean for me renting at the $1800 level.
Back to top
Display posts from previous:   
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond All times are GMT
Goto page Previous  1, 2, 3, 4  Next
Page 3 of 4

 
Jump to:  
You can post new topics in this forum
You can reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Forum posts are owned by the original posters.
Forum boards are Copyright 2005 - present, bostonbubble.com.
Privacy policy in effect.
Powered by phpBB © 2001, 2005 phpBB Group