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kenfeyl



Joined: 21 Apr 2006
Posts: 11

PostPosted: Fri Apr 21, 2006 4:37 pm GMT    Post subject: Need Advice: Buy or Rent? Reply with quote

I've been really impressed with the extent to which many of you have educated yourselves on Boston housing. I've been wanting to buy, but of course I'm worried sick. I know that the prevailing general opinion is that it's now cheaper to rent, but since all of you always emphasize that it depends on individual circumstances, I thought I'd outline my circumstances and get your opinion.

- I will be in the Boston area for at least five years (I'm going to graduate school)

- Right now, I'm shooting for a condo in Allston, Brighton, Brookline, or Cambridge

- I will occupy the condo I buy

- I'm shooting for the lower end of the market: $300,000 and below

- I have the money to put at least 20% down

My questions:

- Buy or rent?

- If I buy, should I be considering another segment of the market -- another neighborhood, perhaps?

- If I rent, what should I do with my non-IRA savings of approximately $90K while I'm in grad school?

Thanks for any advice you can provide. I know you guys aren't financial planners, but I'm really just wondering if a condo's a good place to keep my money for at least the next five years.
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admin
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PostPosted: Fri Apr 21, 2006 8:05 pm GMT    Post subject: Does buying a condo make sense? Reply with quote

Note: I've moved this thread to the Economics forum since I think it fits in well there.

I'll take a stab at this. Just as a disclaimer, as you pointed out, this should be treated more like friendly brainstorming rather than professional advice to be blindly followed.

Here are a few of the additional questions that I think would need to be answered in order to get an exact threshold for whether to buy or rent:

  • What would you need to pay to rent a place that is equivalent to what you're looking at buying?
  • What would be typical for the expected monthly condo fees?
  • How far do you expect prices to have moved in five years?

You may not need to research everything in depth if you can get some rough estimates to see what ballpark you are talking about. Here's my stab at it:



Here are the references in click-able form, so that you don't have to type everything in:

Feel free to question my numbers since there are probably some non-obvious assumptions in there. The condo fees I just guessed at - those can vary quite a bit from property to property. I also assumed that you would go the regular agent route when reselling your place. If you were to use a discount service and pay only 3% instead, that would bring your monthly cost of buying down to $2,380.57.

Please note that the final cost at the bottom excludes the amount that has gone toward your mortgage principal, so this is not your monthly payment, which will likely be higher. The cost is the threshold below which it makes financial sense to rent. In other words, it is the money "thrown away" by buying.

I also made the assumption for the purpose of simplicity that the price of the home will not change in nominal terms. That is, prices will appear flat for at least the next five years, although if you factor inflation in (as would be proper in a thorough analysis), this is a decline. I think this assumption is actually very generous considering during the previous downturn, sellers in Boston had to bring checks to the table to cover their underwater mortgages. This boom has been far greater than anything before it, and I see no reason to think that the downturn will not be at least as bad as previous downturns.

Another assumption I made was that you won't be able to deduct mortgage interest because you won't be working enough while in school to generate an income that would justify itemizing deductions. Perhaps you would, in which case you should factor that in too and that will bring the average monthly cost down. This is something that brokers neglect to mention when gushing over the savings you get with the interest deduction - it doesn't matter if you don't itemize, and many (perhaps most) people don't. That's especially true if you're in school and your income is lower.

So the whole upshot of this analysis is that if you can rent for less than $2,500 per month, then it looks like it makes more sense than buying. I'm sure the number could be made a lot more exact, but this does give you a ballpark figure to know whether refining the number is worth your effort. Personally, I think the numbers are so far out of line with rents that I have written the condo market off entirely for my own consideration in the near term - I'm not even thinking about it. That's why I only crunched the numbers for single family homes when I wrote the article last month titled Boston Bubble Report: What's Really Going on in MA - Feb 2006.

Regarding your specific questions...

Quote:

If I buy, should I be considering another segment of the market -- another neighborhood, perhaps?


If there is a neighborhood in the area where buying would make sense, I am unaware of it. Sorry I can't give a more positive answer.

Quote:

If I rent, what should I do with my non-IRA savings of approximately $90K while I'm in grad school?


That's something I'd love to know as well. In the above calculations, I used an Emigrant Direct savings account as the place where the down payment could be parked in the renting scenario. They are currently paying 4.5% with no minimum and full liquidity. There is probably somewhere better to put the money, but you can make at least 4.5% which lets you calculate the minimum opportunity cost of spending the money on a down payment.

US I-Bonds are a great deal right now. I bought some last year and have been making 6.93% for the last six months. That's a little anomalous and I expect the rate to fall back to somewhere around 5% shortly, but even that's not bad for a cash equivalent. Your return is made up of an inflation component plus a fix premium on top of inflation.

The best place to park cash does fluctuate. One good resource to check out is BestCashCow.com where they give a good overview of the available options and how attractive they currently are.

These may all seem like puny returns and they are, but I am unfortunately not aware of anything better. All asset classes, including stocks, bonds, and real estate, are richly valued at the moment and could be in for sharp declines. In fact, there's a talk at MIT coming up next week on this very subject.

- admin
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Renting
Guest





PostPosted: Sat Apr 22, 2006 1:25 am GMT    Post subject: Treasury Direct Reply with quote

You can buy T-Bills on Treasury direct - buy 4 week T-Bills - you'll get pretty darn close to 4.5% and you won't pay State Taxes (or any local taxes).
You might also want to get a little bit fancier - look at some thing like the Prudent Bear Global Income Fund - there are many smarter than me that believe the US Dollar will continue to de-value. We have had a reprieve from the de-valueing dollar while the Fed has been bring the Interest rates back to normal. Do your home work - their are a number of funds out there that will allow you to diversify out of the US Dollar.

**Please do your own home work-
But, don't waste your money in Real Estate until all your friends are telling you that Real Estate is a dead end way to invest - then it will be time to buy!
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CJ
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PostPosted: Sun Apr 23, 2006 9:57 pm GMT    Post subject: Open House Blah Reply with quote

Went to several open houses today in Boston suburbs. The first one was a condo at 48 Quimby Street in Watertown (MLS#70369381). A flipper/renovator purchased a two family in March 2004 for 510k, spent a year plus rehabbing it, and then put it on the mkt as 2 condos in Aug 2005. He wanted 479k for EACH condo, A TOTAL SALE PRICE OF 958k for both combined!! This means he was looking for a 448k profit (less rehabbing costs of course) for rehabbing two condos! There was obviously minimal interest because the properties sat and sat, and then were reduced from 479k to 459k. Then in Feb 2006 it was taken off the mkt. Big surprise - it reappeared in April 2006, a re-list at 459k. Both condos are for sale now. I asked the realtor how long it had been on the mkt. He said "Only 1 week". Yeah right! Try 8 months for a real answer. The condo was nice and I am glad that these flippers are rehabbing the neighborhood, but they should not expect make 400k or whatever for just rehabbing a place, expecially when it is right down the street from some slum apt buildings. The open house was empty except for us. I kind of felt sorry for the realtor to be honest. All work and no pay these days for them. We'll see what happens next....

We also some starter houses in suburbs north of boston. One was for 420k and was conveniently located right next to a railroad track. It was kind of small and old, basically a starter house. We also looked at another similar small old house for 439k, conveniently located right next to a cemetery. I would describe them both as small undesirable starter houses that are worth (actual worth) about 250k in my opinion. If we bought one of those crap cemetery/train track starter houses, we would more than double our current monthly housing cost compared to our rent. Hmmmm, I can rent a really nice apt or pay double the amount for a crappy house with a view of a cemetery?
Frustration anyone??
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kenfeyl



Joined: 21 Apr 2006
Posts: 11

PostPosted: Mon Apr 24, 2006 8:26 am GMT    Post subject: Reply with quote

Hey admin.

Wow! Thanks so much for all your help mapping out the costs and comparing them to the cost of renting. It really helped me think through the very real risks involved with buying a condo in Boston.

What really stood out to me was the cost of financing. You often hear that renting is like throwing money away, but what more is buying than throwing money to the bank?

By the way, do you really think that over a five-year period, we won't see any appreciation at all? Maybe I'm just naive about the magnitude of a crash, but I'd like to think that a condo priced at $300,000 today would at least stay put over five years. You don't think so?

I just looked at OFHEO's historical Housing Price Index figures for Massachusetts. Check it out at http://www.ofheo.gov/media/pdf/4q05hpi.pdf. Let's take a trip back to the boom of the '80s and assume that I'm entering the market at the worst possible time, as near the peak as possible. Holding to a second-quarter purchase, this corresponds to the second quarter of 1988, with an HPI of 314.16. Five years later, by the second quarter of 1993, the HPI had fallen to 281.84 -- a 10% hit. Now a 10% hit is bad, but if it's the worst possible scenario... well, let's just say that worse things have happened. And the intangibles of buying -- owning my home, not giving a check to some clown every month -- may just outweigh the off chance of that 10% hit.

I took your inspiration and re-tooled the spreadsheet for a condo I'm considering visiting. It's a $179,000 1-bedroom with a condo fee of $166. I made a few adjustments to your figures based on various corners I'm cutting and cost-saving measures I'm taking. Here's a bullet list:

- I will buy discount points to reduce the mortgage rate
- I will be taking the residential exemption to reduce taxes to about $50 per month
- I will not be putting any effort into maintenance
- I would like to do a 15-year mortgage on such an inexpensive condo to save myself some financing costs

Here are the numbers I came up with:

Description Value
Price $179,000
Down payment $60,000
Mortgage rate 5.50%
Amortization period 180
Mortgage at start $119,000.00
Months held 60
Mortgage at end $89,594
Monthly payment $972
Cost of financing $28,933.66
Maintenance and insurance $3,000
Property taxes $3,000
Condo fee $9,987
Rate of return on cash 4.50%
Opportunity cost on down payment $14,770.92
Transaction costs $4,813

Total cost $64,504.58
Monthly cost $1,075.08

Now what's interesting is that this condo is currently renting for $1,000 a month. So I guess the question would boil down to whether my independence, and the image factor of owning your own place, is worth $75.08 a month. I don't know.

Still another option is for me to accept Harvard graduate housing and save a boatload (it's about $8,000 for nine months to cover housing and meals) but suffer the misery of common bathrooms.

I enjoyed the Cash Cow site but was dismayed by the low yields. Why not a bond fund? I checked out the Prudent Bear Fund but shy away from mutual funds... personally, I hold a global bond fund, GIM. It pays out 50 bps a month plus typically 2 to 3% at year-end (last year it actually paid 4%). Any idea if global sovereign bonds are in for a crash?
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PostPosted: Mon Apr 24, 2006 5:52 pm GMT    Post subject: GIM and Real Estate Reply with quote

The Unknown for your GIM investment is if Interest Rates increase more than expected? Other wise it looks like an excellent choice for diversifying out of US Dollars - but, real experts seem to believe that interest Rates may go up. 97.2 % of the assets of Templeton Global Income Fund are in Long Term Assets. I think that you could see a loss of value if the Interest Rate increased dramatically in the US. I AM NOT AN EXPERT ON THIS AND DON'T TRADE ON MY INFO.

Your Rent VS. Buying - The biggest danger is the Negative LEverage you MIGHT experience if prices continue to decrease. People love to talk about how Leverage (buying an asset) with other peoples money has made them a fortune.

There are lots of folks who experience NEGATIVE LEVERAGE in the early 1990s- after the 1980's run-up in Real Estate. NEGATIVE LEVERAGE + You owe the Bank more than the Property is Worth. Can you afford to take this RISK - I know that I cannot.

Sadly, its the regular folks who end up tieing the bulk of their financial assets in real estate because they can't perceive any RISK. There is always RISK sometimes how brains have a hard time discerning risk because External factors (media, family, good timing) work hard to convince us to ignore risk.

So, if you have the financial ability to write the Bank a BIG check if you Buy and Prices go south - you should consider buying.
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chrisbak55
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PostPosted: Tue Apr 25, 2006 6:44 am GMT    Post subject: Reply with quote

I would recommend renting and I've been a land-lord so I know it's not the greatest. When foreclosures pick up, as is occurring now, it usually means the person being foreclosed on has what is called "negative equity" - they owe more on the home or condo then it's worth.

However foreclosed property is often put back on the market at "quick sale" prices which in turn drives prices lower, leaving more people with negative equity. At some point it becomes hard to reverse the foreclosure and declining-price trend, until new buyers come into the market in a strong way. That usually requires low mortgage rates and lower real estate prices, which certainly isn't the case today.

The exception is single-family homes in wealthier areas where there tends to more equity in the homes. Thus prices tend to hold steady rather than decline.
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admin
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PostPosted: Tue Apr 25, 2006 9:14 pm GMT    Post subject: Reply with quote

kenfeyl,

I realized that I overlooked a possibly important piece in my initial analysis. I didn't include the opportunity cost of money that goes toward the mortgage principal. This clicked in my head when you mentioned using a 15 year mortgage instead of a 30 year one - I thought about the extreme (and unrealistic) case of putting 0% down and using a 1 year mortgage, which would have incorrectly reduced the cost dramatically using my previous spreadsheet. What I left out was the opportunity cost of the portion of your mortgage payments which go toward the principal. This money could otherwise be earning you interest in the bank or elsewhere.

I would like to revise the calculations to account for this and to respond to your most recent post in depth, though it may be a little while before I can do that as my schedule is tight this week and I also first want to analyze the report that the Massachusetts Association of Realtors just released today. Of course, you're welcome to calculate the additional opportunity cost on your own.

One more thing that I'd like to mention briefly to aid in the refinement of calculations is the interest rate used in the opportunity cost calculations. Emigrant Direct just announced 5% CDs, which should bump up the opportunity costs a little.

- admin
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admin
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PostPosted: Tue May 02, 2006 10:28 pm GMT    Post subject: Reply with quote

Quote:
By the way, do you really think that over a five-year period, we won't see any appreciation at all? Maybe I'm just naive about the magnitude of a crash, but I'd like to think that a condo priced at $300,000 today would at least stay put over five years. You don't think so?


I have always heard that the condo market is especially volatile and gets hit disproportionately hard during down swings. I have not verified that by running the numbers myself since I've pretty much given up on the condo market for now, as I mentioned before. It does make sense, though. $300K is practically the price of a house if you are willing to extend your commute and I am just bewildered why people would pay that when they could have a house for not too much more. You don't actually own the land with a condo (at least I don't think you do), just the structure - the land is what actually appreciates and the structure depreciates in reality. You also give up a good deal of autonomy as you are subject to the rules and whims of the condo association. The point is, I would expect condos to be priced substantially less than houses given the smaller size and disadvantages, but they aren't at present, so I would not at all be surprised to see condo prices strongly underperform prices on single family homes.

Not only do I expect single family homes to not appreciate at all over the next five years, I expect them to fall sharply - I merely went with flat nominal prices to make the calculations easy since the result is already beyond the threshold for favoring renting. Sharp declines are not at all unprecedented, especially in Boston. Grab yourself a copy of the book Irrational Exuberance, 2nd Ed. and take a look at figure 2.3 on page 19. It contains a plot of inflation adjusted home prices in Boston from 1983 - 2004 and shows that if you bought at the previous peak, you would have lost quite a bit of money if you had sold after 5 years and you would not have even broken even for roughly 15 years (I am eyeballing the time frames). Also take a look at figure 2.1 on page 13 which shows US inflation adjusted home prices from 1890 - 2004 (this one happens to be online at the moment at http://en.wikipedia.org/wiki/Image%3ABarrons_shiller_06-20-2005.gif). Note that the current run up in prices is totally unprecedented and far exceeds anything that has happened in the past - I would expect the subsequent downturn to be equally unprecedented. So I definitely do think there is a strong chance that we will see some serious depreciation.

Indeed, I think that a snowballing decline has already started. Check out the article I published on Friday entitled Boston Bubble Report: The Real Story for MA - Mar 2006. I will include the graph that best illustrates the decline here:



This is the year over year change in real prices for single family homes in Massachusetts. Comparing prices with what they were the year before factors out seasonal variations, which is necessary because spring is usually busy and winter is usually slow. Note that the rate of change peaked in November 2004 and has been declining ever since, albeit with a few short lived up-ticks along the way. We started setting record low appreciation rates in April 2005 and then when September 2005 hit we were into negative territory where we have been diving progressively deeper. Obviously, it's not possible to extrapolate this too far, but it does clearly show that the appreciation rate has dropped quite a bit and prices have been dropping for seven months straight now.

Quote:
I just looked at OFHEO's historical Housing Price Index figures for Massachusetts. Check it out at http://www.ofheo.gov/media/pdf/4q05hpi.pdf . Let's take a trip back to the boom of the '80s and assume that I'm entering the market at the worst possible time, as near the peak as possible. Holding to a second-quarter purchase, this corresponds to the second quarter of 1988, with an HPI of 314.16. Five years later, by the second quarter of 1993, the HPI had fallen to 281.84 -- a 10% hit. Now a 10% hit is bad, but if it's the worst possible scenario... well, let's just say that worse things have happened. And the intangibles of buying -- owning my home, not giving a check to some clown every month -- may just outweigh the off chance of that 10% hit.


There are a few reasons why I wouldn't be reassured by that data:


  • The current run up in prices has been unprecedented during the time period that we can easily compare with (1890 through the present). A small run up in the 80's led to a small decline. A large run up now could very plausibly lead to a large decline. The generic disclaimer that you will always see when someone is trying to sell you a financial instrument is that past performance is no guarantee of future results, and this is very true. The NASDAQ crash at the beginning of this century demonstrates that as both the crash itself and the run up that preceded it broke many records.
  • The data is in nominal terms and not adjusted for inflation. You would have lost more in real dollars.
  • Bear in mind that your nominal hit would not have been limited to 10% - that's just the hit on the price and doesn't include the money spent on maintenance, financing, etc.
  • Probably most importantly for you, this data explicitly excludes condos. If the condo market is indeed more volatile (and I have no reason to believe it isn't), the loss probably would have been substantially more.
  • The data does not include very many non-overlapping five year periods. In fact, there are only 4 periods of five years that don't overlap. I don't think 4 samples would be enough to draw any statistically significant conclusions and you shouldn't use overlapping samples because they will contain common data and will therefore not be independent. This realization never occurred to me until Shiller pointed it out in Irrational Exuberance (I cannot recommend that book highly enough, it just contains so many insights like that).


Quote:
I will buy discount points to reduce the mortgage rate


OK, just be sure to add that to the cost of financing.

Quote:
I will be taking the residential exemption to reduce taxes to about $50 per month


Makes sense.

Quote:
I will not be putting any effort into maintenance


While some maintenance may be discretionary, other maintenance is necessary. I don't think I would personally cut that estimate too far, though I didn't delve into how The Economist came up with the percentage that they used, so perhaps there is a little wiggle room. Also, forgoing discretionary maintenance could impact the resale value, so that is another thing to consider.

Quote:
I would like to do a 15-year mortgage on such an inexpensive condo to save myself some financing costs


Makes sense. As I mentioned in my previous followup, this would also increase the opportunity cost of the principal payments, which I forgot to include in my initial numbers. The benefits of a shorter term mortgage probably would outweigh the costs, I'm just pointing out that I forgot to mention the associated costs before.

Quote:
Now what's interesting is that this condo is currently renting for $1,000 a month. So I guess the question would boil down to whether my independence, and the image factor of owning your own place, is worth $75.08 a month. I don't know.


I don't know how much of an issue the image factor is for you, but I certainly wouldn't expect a grad student to own his own place. I've had a few friends that went to Harvard Business and they didn't own. Of course, they had also gone to MIT for their undergrad degrees, so they were coming from an environment where image matters less than usual.

Quote:
Still another option is for me to accept Harvard graduate housing and save a boatload (it's about $8,000 for nine months to cover housing and meals) but suffer the misery of common bathrooms.


Do they have any higher priced options with private bathrooms? I had a friend who used Harvard housing when he was at the business school and his place seemed decent enough that I would have expected it to have a private bathroom. Although I never did check, come to think of it, so it's quite possible that it didn't have one.

Quote:
Why not a bond fund?


Maybe that's an option - I haven't looked into that very much. Bonds don't do well in a rising interest rate environment, and they do tend to be lumped in with stocks and real estate when current asset price overvaluation is discussed. However, that is about the extent of my knowledge on the subject, so they very well could be worth looking into.

Quote:
Any idea if global sovereign bonds are in for a crash?


No idea, sorry.

Regarding the adjustments that I mentioned that I wanted to make in my previous post, I decided it would probably make more sense to make the adjustments to your numbers instead of to my initial calculations. The adjustments are to take into consideration two increases in the opportunity cost. The first increase is due to the higher rate of return at Emigrant Direct with their new 5% CDs. The second increase is to account for the opportunity cost of portion of your mortgage payments which would be made toward the principal. Here are the revised numbers:



To calculate the opportunity cost of the principal, I just individually listed all 60 weeks and kept a running tally of a bank account where a contribution of $490.11 was made monthly. Given that the CDs are available in time increments starting with 9 months, I used 5% as the annual rate for the interest, except for contributions made in the last 8 months, for which I used 4.5%. While this wouldn't be exactly correct since opening a 5% CD requires a minimum contribution ($1K, I think), it is probably close enough since the rates are pretty close and the time delay needed to get the extra 0.5% isn't very long.

So, I would add $93.81 onto your monthly estimate for the cost, plus the cost of the points you would be purchasing.

- admin
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Fred
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PostPosted: Wed May 03, 2006 2:41 am GMT    Post subject: dorms Reply with quote

Having gone through a lengthy grad school experience while renting, I am particularly qualified on the question of living in the dorm. I think it was a big mistake moving into an appartment. Grad school, at least for me, was really hard and I didn't need the extra confusion of a life, living off campus requiring commuting (a car), grocery shopping, etc. My advice is to just live in the dorm and get it over as quick as possible. Home ownership would be even more unecessary complication. If you are going into science, expect very late nights at the lab. Living on/near campus will be a real benefit.

Good luck!
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Sarum80
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PostPosted: Thu May 04, 2006 3:12 pm GMT    Post subject: Reply with quote

Why are you ignoring tax savings from your calculation? Wouldn't that help the cash flow a lot?
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admin
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PostPosted: Thu May 04, 2006 3:45 pm GMT    Post subject: Reply with quote

Quote:

Why are you ignoring tax savings from your calculation? Wouldn't that help the cash flow a lot?


I did mention this in my original post, though I can see how it could be overlooked given that there is a lot of information to go through here. The original poster will be in school and therefore not likely to earn enough of an income to justify itemizing deductions. The mortgage interest deduction is only available if you itemize (which is something that people trying to sell you real estate tend to not mention), therefore it is not applicable in this case.

Even when the mortgage interest deduction is applicable, it may not help much in many cases. If your income is on the low end, then you won't be itemizing and therefore won't be able to take the deduction. If your income is high, then many deductions are disallowed, phased out, or reduced (my reading of the instructions for Schedule A indicates that this would apply to the mortgage interest deduction, though I am not a tax professional). There is a sweet spot in the middle where you actually do get a benefit from the deduction, but even then I suspect that the benefit is less than it may seem since you would have to calculate it based on the difference between your actual deduction and the standard (non-itemized) deduction if you wouldn't have itemized otherwise. So while the deduction can be a benefit for some people, the magnitude of the benefit is very situation specific and it wouldn't be correct to assert that it will always provide a non-negligible help.

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kenfeyl



Joined: 21 Apr 2006
Posts: 11

PostPosted: Fri May 26, 2006 8:04 am GMT    Post subject: Reply with quote

Hey admin,

Thanks for your reply and sorry for the delayed response.

I visited Boston three weeks ago and went condo-hunting. Loved the obvious buyer's market. Three agents called me back and one e-mailed me! How cool is that? When my friend Tom bought his condo, the guy didn't even give him the key for a week.

I found a condo I like. It's $180,000, but the seller agreed to drop to $170,000 including furniture. I'm thinking about it.

Thanks for your reaction to my spreadsheet. Based on your suggestions, I made a new one for this condo. Here it is.

Description Value
Price $170,000 $170,000
Down payment $55,000
Mortgage rate 5.50%
Amortization period 180
Mortgage at start $115,000
Months held 60
Mortgage at end $86,582
Monthly payment $940 $0 $1,213 $1,213 (Monthly payment buying)
Cost of financing $27,961 $1,000 (Monthly payment renting)
Rental income $0 82.5%
Maintenance and insurance $3,000 $50
Property taxes $3,000 $50
Condo fee $10,380 $173
Rate of return on cash 5.00%
Opportunity cost on down payment $15,195
Cost over renting $12,759
Opportunity cost of difference $8,142 (average balance of difference, accumulated @ 5%)
Transaction costs $4,401 (cost of discount points)

Total cost $72,079
Monthly cost $1,201

Instead of considering the opportunity cost of the principal, I considered the opportunity cost of the difference between buying and renting, in this case $213 a month. After all, it's not so much the principal that matters as does the difference between buying that place and renting an equivalent place, which is the money I'm really missing out on investing.

I just found the Realtors' condo data going back to 1990: http://www.marealtors.com/content/quarterly_reports_1999_1990.asp.

Check out the Greater Boston condo numbers: the biggest drop I can find is from 1990 to 1992 -- a drop of about $19,000 or 15% -- and that had more than recovered by 1995, at least in nominal terms.

Perhaps I have been making a mistake looking at the Massachusetts-wide numbers. Boston proper is such a tight market with so little room for development that I can't imagine the price crashing. From the stories I read on this site, the massive speculation and overflowing inventory is happening in open suburbs where developers still have multi-families to turn into condos. Boston is 100% condos already. Is it possible that a lower-end condo in Brighton may be spared the brunt of a bubble burst? The best part is that it's on the 86 line directly to Harvard, so it would be an easy 20-minute ride in in the morning instead of a one-hour T drag.

admin, I had one other thought. I really like the intangibles of buying -- being able to clean up my unit, put in granity counters if I want, say that I own a place -- but of course, if there really is a crash, I want out. What do you think about buying the place, but also buying a good chunk of the HedgeStreet business to shield my assets from disaster?

Interested to hear your thoughts.
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PostPosted: Fri May 26, 2006 1:38 pm GMT    Post subject: Reply with quote

Hedging - is like buying insurance - and it will get very expensive - I think.

You mentioned intangibles of buying - and people never mention the other very tangibles of renting.
-You buy a condo in a building and one year in to ownership its determined that the roof has to be replaced - you get a one thime assessment of $1000 because the general fundis under captialized.

- Its time to leave Boston - you've completed you program - but, its a bear market for Boston Condos - time on market for Condos when you are selling is 185 days and you can't sell it at a price to pay off your existing mortgage
- When you own you will spend more on the Condo than when you rent because you want to personalize and make it home (this really adds up in money).
- If you rent and you have a really obnoxious neighbor living above you or across the hall - YOU CAN MOVE - That is a REAL INTANGIBLE.

PS: Before you buy read ever news story you can about Fannie Mae (a Gov't created company) that buys mortgages from Banks. Its possible that the crisis brewing at Fannie will come to a boil and impact the Real estate market.

Good Luck
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PostPosted: Fri May 26, 2006 7:22 pm GMT    Post subject: Reply with quote

Quote:

Three agents called me back and one e-mailed me! How cool is that?


Far cooler than the last few years. I am very glad that we're finally past the frenzied bidding wars.

Quote:
Instead of considering the opportunity cost of the principal, I considered the opportunity cost of the difference between buying and renting, in this case $213 a month. After all, it's not so much the principal that matters as does the difference between buying that place and renting an equivalent place, which is the money I'm really missing out on investing.


Ah OK, I suppose that probably simplifies things. Come to think of it, this illuminates something I left out of my calculations - I should have included the opportunity cost of the amount that you pay in rent. You are concerning yourself with the difference between renting and buying and I was calculating the total costs of each and only comparing in the end, so the opportunity cost of the rent money should have been part of my calculation. Your method does look simpler since it factors out the common opportunity cost early on.

Quote:

Check out the Greater Boston condo numbers: the biggest drop I can find is from 1990 to 1992 -- a drop of about $19,000 or 15% -- and that had more than recovered by 1995, at least in nominal terms.


That's not a very large sample space, though. You said that you plan to be in Boston for five years (possibly more), and the data you cited plus the more recent data only gives you three non-overlapping periods of five years to go on. Furthermore, the most recent five year period saw a run up in prices that has been totally unprecedented. If the great leap upward set new records, I see no reason to think that the down cycle can't as well, especially since having only three samples makes it very easy to set a new record.

Quote:

Perhaps I have been making a mistake looking at the Massachusetts-wide numbers. Boston proper is such a tight market with so little room for development that I can't imagine the price crashing. From the stories I read on this site, the massive speculation and overflowing inventory is happening in open suburbs where developers still have multi-families to turn into condos. Boston is 100% condos already. Is it possible that a lower-end condo in Brighton may be spared the brunt of a bubble burst? The best part is that it's on the 86 line directly to Harvard, so it would be an easy 20-minute ride in in the morning instead of a one-hour T drag.


That's an interesting question. It does stand to reason that there is the potential for certain areas to be disproportionately hit. One thing you could do is go to the registry of deeds and dig up the sales records for a random sampling of condos within a small radius of where you're looking to purchase. You could then compare that data against data for the entire Boston area to see how the neighborhood deviated from the general trend during past downturns and in general. I'd pick out a few places by throwing some darts at a map of the neighborhood (well, I'd probably write a program to do it, but same idea) as well as the exact place you are looking at. I don't think it would be as tedious as it sounds since you probably wouldn't need a whole lot of samples to get statistically significant results. In fact, maybe you could find others (maybe even here) who are interested in the same neighborhood who would share in the data collection project.

Quote:

admin, I had one other thought. I really like the intangibles of buying -- being able to clean up my unit, put in granity counters if I want, say that I own a place -- but of course, if there really is a crash, I want out.


As the Guest poster pointed out, there are intangible benefits of renting too, not the least of which is that you won't have to worry about maintenance eating into your time, which can be particularly nice if you are strapped for time (as can be the case with school). It is up to your personal preference whether the intangibles of one outweigh the intangibles of the other and whether the difference is enough to be worth paying the extra $213 per month, or whatever it works out to be.

Quote:

What do you think about buying the place, but also buying a good chunk of the HedgeStreet business to shield my assets from disaster?


This thought occurred to me as well. You should be able to reduce your downside using this strategy, but I think your expected cost might increase. I'd like to run the numbers myself at some point to see what scenarios this strategy would work best in. Also, there is one complication for your situation in that I think all the current hedging vehicles are for single family homes as opposed to condos, so it may or may not be a sufficient proxy.

- admin
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