San Diego Housing Bubble News and Analysis

Davelj,

This is an interesting discussion, and one that's pretty relevant. To be clear, when you specifiy "mortgage is comparable to your rent (or the rent on a comparable home)," do you mean an interest-only mortgage as you mention in paragraph 3?

So with an interest-only loan, you are basically "renting-with-benefits" (the benefits in this case being the tax savings, so more cash at the end of the year). The downsides are you are responsible for all maintenance costs and you are tied to the home (in the context of job-changes, moving etc).

Of course, one should be sure one can afford the payment when the loan resets to avoid future trouble, as well.

Does this capture the issue fairly well?

Davelj, you scenario works only if you have a holding period of 10 years or more.

If you need to move, the transaction costs will kill you if your house is down 10% from purchase price.

Also make sure you have solid income so you can take advantage of mortgage interest deduction. If you're out of a job, even for a few months, and trying to sell, then you'll get a double whammy -- selling costs and loss of tax advantage, which effective hikes you house payments at the worst of times.

Those are the things people used to worry about in the 80s and 90s downturns.

WTE, I just used an interest-only, zero down payment loan to make an apples-to-apples comparison with rent. Otherwise, you have to take into account paying down principal each month and the opportunity cost of lost interest on the down payment. I just wanted to simplify the math and thought process. But, yeah, the "renting with benefits" captures the same idea.

Patientlywaiting, yeah the break-even holding period expands if you have to sell. No doubt about it. I didn't include that in the analysis because that's always the case if you buy, regardless of what you pay. Selling expenses are part of every sale transaction. But, yeah, I'm assuming that the buyers have a long term orientation.

My real objective here was merely to point out that if you think you're going to live in a place for a long time, then timing the ultimate bottom along with its corresponding trough price is probably not as important financially as merely getting within 10%-15% or so because the advantage to renting declines with each passing year as housing price declines move toward that lower asymptote with a negative second derivative, in calculus terms. That is, as prices decline at a decreasing rate, the marginal benefit to renting declines as well.

Anyone who wants to live long-term in Chula Vista or Murietta, to use two examples, and can buy a house or condo for (a) less than it would cost them to rent the same place, and (b) 50% off peak pricing, probably won't have many regrets five years down the road, despite the fact that there may be some modest declines still ahead and that prices may not actually turn up for many years.

For most of SD, however, this doesn't apply (yet). Most SFRs are still too expensive, albeit less so with each passing month. But we already know that.

davelj, I totally agree. It gets much harder to justify renting once it's cheaper to buy vs rent and the rate of decline is slowing as well.

I am not so sure about tax adavantage.

For 6% interest, you get 2% back (assuming 33% tax bracket), but you have to pay 1.25% property tax.

So, you get only 0.75% back.

On the other hand, renters have the standard deduction.

The difference between the 0.75% and (33% of the standard deduction) is your actual saving.

By the way, the interst over 1MM is not deductible.

To make this decision, you need a good rent vs. buy calculator. I've been using this one:

http://spreadsheets.google.com/pub?key=p...

If you know of another that you like, please post a link.

pepsi, sorry I wasn't clear. I included property taxes as part of the mortgage payment since the they're both tax deductible. So, when I say "mortgage payment" I really mean "mortgage and property taxes combined." My mistake.

That's the kind of thinking that went into this bubble in the first place.

I/O mortgage vs rent is more like renting-with-risk than renting-with-benefits.
Renting exposes you to risk of rental cost increase; but you have the option to move or re-negotiate your lease arrangements.

I/O mortgate exposes you to housing market risk, interest rate risk, tax target risk, HOA rate and special assessment risk (if you have HOA), fire/flood/earthquake/etc. disaster and associated insurance market risk....

But you do get to participate in the benefit of speculating in housing price appreciation. Of course to monetize that benefit, you have to extract that gain in the form of increased debt, or: SELL AND BECOME A RENTER!

Actually, joe, that's NOT "the kind of thinking that went into this bubble in the first place." The kind of thinking that produced this bubble was the idea that price appreciation would more than offset any problems with negative cash flow. Had people bought houses purely based on cash economics we wouldn't be where we are today. I'm NOT suggesting that people use I/O loans. I merely used an I/O loan for the purposes of making a better economic comparison to renting from a tax standpoint. I thought I made that clear in one of my posts. Personally, I have a fully-amortizing 30-year fixed-rate mortgage. I'd say that if you're buying a home at a price in which your mortgage+tax+HOA payments are roughly equivalent to the rent you'd pay, in the long run you'll be better off owning than renting, assuming you're planning to stay awhile. In such a case, insulating yourself from the "rental cost increase" generally more than offsets most of the other issues you raised. But, to say it AGAIN, in most of SD we aren't there yet. It still makes more sense to rent.

davelj,

You are leaving out a few other inputs that I would include.
Taking CA as an example we all know that the state and cities are having some serious issues with funding. Are you sure that the state/city won't raise property taxes to help make up the shortfall in the next few years? How would that effect your rent vs buy calculation.

Or what if they decide to raise income tax. If I am a renter I have the flexibility to downsize very easily to reduce my costs to weather the storm. What if the buyer has a job loss in the next couple of years? As a renter I have the flexibility to relocate to find another job.

I know most people out there believe this will be short and shallow, but if this turns out to be worse then that, holding off and not buying in the next couple years will insure you don't set yourself up for pain. This housing correction will not be a V shaped bottom. We will bounce on the bottom for many months. It isn't going to be hard to wait and buy within a few percent of the bottom. Be patient and protect your wealth from being put at risk.

My2cents

"In such a case, insulating yourself from the 'rental cost increase' generally more than offsets most of the other issues you raised."

Past performance is no indication of future returns.

Hi Running Bear,

Proposition 13 is supposed to protect us from a property tax increase; however, mello-roos were invented to get around that.

"Past performance is no indication of future returns."

Same can be said for rental cost. That's definite a good point, that's why the only thing we can be sure of is the cost of rent vs own right now.