An observation on waiting to buy

[davelj]

There are obviously a lot of folks currently renting who are getting the itch to dive in and buy a foreclosure. But many of these folks are also sitting back thinking, “What if the values fall further?” Which is a very relevant thing to keep in mind, of course.

Another thing to keep in mind if you’re in this group, however, is that the length of time you think it will take for the type of property you want to “hit bottom” is important in the analysis. In other words, depending on how long you think it might take to hit the trough, you still might be just as well off buying sooner rather than later.

I’ve done some back-of-the-envelope analysis on a few different scenarios and found that, on average, if you think the decline for what you’re interested in will be less than 2.5%-3.5% per year, and assuming that your rent is the same that an interest-only mortgage would be if you bought now, the tax advantages of paying a mortgage come out to 2.5%-3.5% per year, depending on your tax bracket and the size of the mortgage.

Now, for many folks, this doesn’t help much because prices on the properties they want still have quite a ways to fall (that is, more than 2.5%-3.5% per year). But if you’re looking at a foreclosure that’s fallen by 40%+ from the peak, the mortgage is comparable to your rent (or the rent on a comparable home), and you think there’s maybe another 10%-15% decline in store for the property, but you don’t know how long it’s going to take… then you might as well buy sooner because the the tax advantage will offset a few percentage points of decline each year.

Again, this really just applies to folks looking at homes that have seen huge price declines but the folks are saying to themselves, “Yeah, it’s down a lot, but where’s the bottom?” For most buyers it’s still almost certainly better to wait. But a tax advantage of 3.3% per year offsets an additional 10% aggregate decline over three years. Just something to keep in mind as prices continue to decline.

[WaitingToExhale]

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?

[WaitingToExhale]

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?

[WaitingToExhale]

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?

[WaitingToExhale]

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?

[WaitingToExhale]

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?

[patientlywaiting]

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.

[patientlywaiting]

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.

[patientlywaiting]

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.

[patientlywaiting]

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.

[patientlywaiting]

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.

[davelj]

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]

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]

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]

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.

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