Bubble bust and changing landscape

[BGinRB]

[quote=FormerSanDiegan] So, the unit in question ‘cash flows’ at about 260 x rent with 20% down. Does that make sense to you?

Why use a rule of thumb (price as a multiple of rent) when the numbers are all laid out already.
[/quote]

The numbers laid out are not inclusive. We would need to consider additional inputs if we want to come up with some actionable analysis.

That is why I pulled a “rule of thumb”, as a product of a reality-tested analysis.

[Scarlett]

$130K is take-home pay under $7.5K/month after taxes and $10K in 401k, assuming generous employee match, married, 2 dependents w/ standard deduction, $0 for wifey’s IRA and employee covered insurance. Your marginal rate is 25%, but since you itemize you forfeit your standard deduction and assuming you cheat by claiming MR your “effective rent” is closer to $3.5K.
Your fixed monthly expenses are:
$3500 “effective rent”
$500 principal
$100 HOA
$300 cable, phone, misc utilities
$600 car payment (entry level sedan and minivan)
$500 food
$300 gas & car maintenance
————————
$5800
You are left with $1700/month to cover medical bills (two kids – what are the chances at least one will need braces?), landscaping, clothing, electronics, furniture for your new house, vacation, preschool/school supplies, birthday parties… you will be able to set asside few hundreds/month, if that, to recover your $130K downpayment.

I am not saying it is impossible, but it sounds very risky and the engineering types with a spouse and two kids, that you count on, are usually risk-aware and rarely accept prayer as a convincing risk mitigation plan.

BGinRB,

You really underestimate the cost of food. I did too, until recently when my financial advisor required my monthly expenses and I was forced to add up transactions on my cards saying “Vons”, “Ralphs”, “Costco”, “Trader Joe”…. For a family of 4, the food is at least $1000, could be even $1500. unless they eat only mac&cheese.
But except for that, you make a very good case.

Another issue that one may want to take into account when comparing rent vs. own: cars, gas, car maintenance and insurance. If one rents close to work/school and in walking distance from parks and grocery stores and if buying means moving further away, requiring 2 cars, driving anywhere and a significantly longer commute, that will drive up the costs of transportation a lot.

[Scarlett]

$130K is take-home pay under $7.5K/month after taxes and $10K in 401k, assuming generous employee match, married, 2 dependents w/ standard deduction, $0 for wifey’s IRA and employee covered insurance. Your marginal rate is 25%, but since you itemize you forfeit your standard deduction and assuming you cheat by claiming MR your “effective rent” is closer to $3.5K.
Your fixed monthly expenses are:
$3500 “effective rent”
$500 principal
$100 HOA
$300 cable, phone, misc utilities
$600 car payment (entry level sedan and minivan)
$500 food
$300 gas & car maintenance
————————
$5800
You are left with $1700/month to cover medical bills (two kids – what are the chances at least one will need braces?), landscaping, clothing, electronics, furniture for your new house, vacation, preschool/school supplies, birthday parties… you will be able to set asside few hundreds/month, if that, to recover your $130K downpayment.

I am not saying it is impossible, but it sounds very risky and the engineering types with a spouse and two kids, that you count on, are usually risk-aware and rarely accept prayer as a convincing risk mitigation plan.

BGinRB,

You really underestimate the cost of food. I did too, until recently when my financial advisor required my monthly expenses and I was forced to add up transactions on my cards saying “Vons”, “Ralphs”, “Costco”, “Trader Joe”…. For a family of 4, the food is at least $1000, could be even $1500. unless they eat only mac&cheese.
But except for that, you make a very good case.

Another issue that one may want to take into account when comparing rent vs. own: cars, gas, car maintenance and insurance. If one rents close to work/school and in walking distance from parks and grocery stores and if buying means moving further away, requiring 2 cars, driving anywhere and a significantly longer commute, that will drive up the costs of transportation a lot.

[Scarlett]

$130K is take-home pay under $7.5K/month after taxes and $10K in 401k, assuming generous employee match, married, 2 dependents w/ standard deduction, $0 for wifey’s IRA and employee covered insurance. Your marginal rate is 25%, but since you itemize you forfeit your standard deduction and assuming you cheat by claiming MR your “effective rent” is closer to $3.5K.
Your fixed monthly expenses are:
$3500 “effective rent”
$500 principal
$100 HOA
$300 cable, phone, misc utilities
$600 car payment (entry level sedan and minivan)
$500 food
$300 gas & car maintenance
————————
$5800
You are left with $1700/month to cover medical bills (two kids – what are the chances at least one will need braces?), landscaping, clothing, electronics, furniture for your new house, vacation, preschool/school supplies, birthday parties… you will be able to set asside few hundreds/month, if that, to recover your $130K downpayment.

I am not saying it is impossible, but it sounds very risky and the engineering types with a spouse and two kids, that you count on, are usually risk-aware and rarely accept prayer as a convincing risk mitigation plan.

BGinRB,

You really underestimate the cost of food. I did too, until recently when my financial advisor required my monthly expenses and I was forced to add up transactions on my cards saying “Vons”, “Ralphs”, “Costco”, “Trader Joe”…. For a family of 4, the food is at least $1000, could be even $1500. unless they eat only mac&cheese.
But except for that, you make a very good case.

Another issue that one may want to take into account when comparing rent vs. own: cars, gas, car maintenance and insurance. If one rents close to work/school and in walking distance from parks and grocery stores and if buying means moving further away, requiring 2 cars, driving anywhere and a significantly longer commute, that will drive up the costs of transportation a lot.

[Scarlett]

$130K is take-home pay under $7.5K/month after taxes and $10K in 401k, assuming generous employee match, married, 2 dependents w/ standard deduction, $0 for wifey’s IRA and employee covered insurance. Your marginal rate is 25%, but since you itemize you forfeit your standard deduction and assuming you cheat by claiming MR your “effective rent” is closer to $3.5K.
Your fixed monthly expenses are:
$3500 “effective rent”
$500 principal
$100 HOA
$300 cable, phone, misc utilities
$600 car payment (entry level sedan and minivan)
$500 food
$300 gas & car maintenance
————————
$5800
You are left with $1700/month to cover medical bills (two kids – what are the chances at least one will need braces?), landscaping, clothing, electronics, furniture for your new house, vacation, preschool/school supplies, birthday parties… you will be able to set asside few hundreds/month, if that, to recover your $130K downpayment.

I am not saying it is impossible, but it sounds very risky and the engineering types with a spouse and two kids, that you count on, are usually risk-aware and rarely accept prayer as a convincing risk mitigation plan.

BGinRB,

You really underestimate the cost of food. I did too, until recently when my financial advisor required my monthly expenses and I was forced to add up transactions on my cards saying “Vons”, “Ralphs”, “Costco”, “Trader Joe”…. For a family of 4, the food is at least $1000, could be even $1500. unless they eat only mac&cheese.
But except for that, you make a very good case.

Another issue that one may want to take into account when comparing rent vs. own: cars, gas, car maintenance and insurance. If one rents close to work/school and in walking distance from parks and grocery stores and if buying means moving further away, requiring 2 cars, driving anywhere and a significantly longer commute, that will drive up the costs of transportation a lot.

[Scarlett]

$130K is take-home pay under $7.5K/month after taxes and $10K in 401k, assuming generous employee match, married, 2 dependents w/ standard deduction, $0 for wifey’s IRA and employee covered insurance. Your marginal rate is 25%, but since you itemize you forfeit your standard deduction and assuming you cheat by claiming MR your “effective rent” is closer to $3.5K.
Your fixed monthly expenses are:
$3500 “effective rent”
$500 principal
$100 HOA
$300 cable, phone, misc utilities
$600 car payment (entry level sedan and minivan)
$500 food
$300 gas & car maintenance
————————
$5800
You are left with $1700/month to cover medical bills (two kids – what are the chances at least one will need braces?), landscaping, clothing, electronics, furniture for your new house, vacation, preschool/school supplies, birthday parties… you will be able to set asside few hundreds/month, if that, to recover your $130K downpayment.

I am not saying it is impossible, but it sounds very risky and the engineering types with a spouse and two kids, that you count on, are usually risk-aware and rarely accept prayer as a convincing risk mitigation plan.

BGinRB,

You really underestimate the cost of food. I did too, until recently when my financial advisor required my monthly expenses and I was forced to add up transactions on my cards saying “Vons”, “Ralphs”, “Costco”, “Trader Joe”…. For a family of 4, the food is at least $1000, could be even $1500. unless they eat only mac&cheese.
But except for that, you make a very good case.

Another issue that one may want to take into account when comparing rent vs. own: cars, gas, car maintenance and insurance. If one rents close to work/school and in walking distance from parks and grocery stores and if buying means moving further away, requiring 2 cars, driving anywhere and a significantly longer commute, that will drive up the costs of transportation a lot.

[peterb]

Wow. It sounds like rental prices have come down a little in the last year for this area. Can anyone verify this? Or am I smoking something? Dont answer that.

[peterb]

Wow. It sounds like rental prices have come down a little in the last year for this area. Can anyone verify this? Or am I smoking something? Dont answer that.

[peterb]

Wow. It sounds like rental prices have come down a little in the last year for this area. Can anyone verify this? Or am I smoking something? Dont answer that.

[peterb]

Wow. It sounds like rental prices have come down a little in the last year for this area. Can anyone verify this? Or am I smoking something? Dont answer that.

[peterb]

Wow. It sounds like rental prices have come down a little in the last year for this area. Can anyone verify this? Or am I smoking something? Dont answer that.

[DWCAP]

[quote=esmith]Ok, if you insist, let’s do everything accurately.

Assumptions:
130,000 gross income, married, 2 kids, single income (mom stays at home with children), 10,000 into 401k

Purchase price $650,000 with 20% down, 6.25% for 30 years, property tax + MR 1.7%, HOA $100/month, insurance $600/year

Scenario 1. Buying a 4S Ranch McMansion

Expenses(monthly):
Interest $2,708.33
Principal $493.40
Insurance $50.00
Property tax $920.83
HOA $100.00
— Housing 4272.56

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $2,720
Federal tax paid $8,216
— Net income $8405/month

Cash left after paying off housing: $4132
Contributed towards principal (forced savings): $493

Scenario 2. Renting a house in 4S Ranch. The cheapest detached I see is $2700.

Expenses (monthly):
Rent $2700
— Housing $2700

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $6,770
Federal tax paid $19,037
— Net income $7165

Cash left after paying off housing: $4465

As you can see, there’s not much cash-flow difference between buying and renting. Surely you wouldn’t make an argument that it’s very risky to rent in San Diego if you have a $130,000 salary.

Ultimately, what matters is whether you have the down payment and whether you can qualify for a mortgage. If you qualify at 40% gross DTI, you will be able to pay off your mortgage without stressing too much (unless you lose your job). [/quote]

Maybe I am way out on a limb here, but does anyone else notice that under the buying scenario the family who just bought is dedicating 50% of their income to morgage payement? The renters are using ~38% of income to rent. The only reason the total cash flow is similar to one another is due to the decreased taxes a homeowner has to pay compared to a renter.

Perhaps I need to change my expectations of risk and aversion to it, but isnt 50% of income going to houseing rather excessive?

[DWCAP]

[quote=esmith]Ok, if you insist, let’s do everything accurately.

Assumptions:
130,000 gross income, married, 2 kids, single income (mom stays at home with children), 10,000 into 401k

Purchase price $650,000 with 20% down, 6.25% for 30 years, property tax + MR 1.7%, HOA $100/month, insurance $600/year

Scenario 1. Buying a 4S Ranch McMansion

Expenses(monthly):
Interest $2,708.33
Principal $493.40
Insurance $50.00
Property tax $920.83
HOA $100.00
— Housing 4272.56

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $2,720
Federal tax paid $8,216
— Net income $8405/month

Cash left after paying off housing: $4132
Contributed towards principal (forced savings): $493

Scenario 2. Renting a house in 4S Ranch. The cheapest detached I see is $2700.

Expenses (monthly):
Rent $2700
— Housing $2700

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $6,770
Federal tax paid $19,037
— Net income $7165

Cash left after paying off housing: $4465

As you can see, there’s not much cash-flow difference between buying and renting. Surely you wouldn’t make an argument that it’s very risky to rent in San Diego if you have a $130,000 salary.

Ultimately, what matters is whether you have the down payment and whether you can qualify for a mortgage. If you qualify at 40% gross DTI, you will be able to pay off your mortgage without stressing too much (unless you lose your job). [/quote]

Maybe I am way out on a limb here, but does anyone else notice that under the buying scenario the family who just bought is dedicating 50% of their income to morgage payement? The renters are using ~38% of income to rent. The only reason the total cash flow is similar to one another is due to the decreased taxes a homeowner has to pay compared to a renter.

Perhaps I need to change my expectations of risk and aversion to it, but isnt 50% of income going to houseing rather excessive?

[DWCAP]

[quote=esmith]Ok, if you insist, let’s do everything accurately.

Assumptions:
130,000 gross income, married, 2 kids, single income (mom stays at home with children), 10,000 into 401k

Purchase price $650,000 with 20% down, 6.25% for 30 years, property tax + MR 1.7%, HOA $100/month, insurance $600/year

Scenario 1. Buying a 4S Ranch McMansion

Expenses(monthly):
Interest $2,708.33
Principal $493.40
Insurance $50.00
Property tax $920.83
HOA $100.00
— Housing 4272.56

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $2,720
Federal tax paid $8,216
— Net income $8405/month

Cash left after paying off housing: $4132
Contributed towards principal (forced savings): $493

Scenario 2. Renting a house in 4S Ranch. The cheapest detached I see is $2700.

Expenses (monthly):
Rent $2700
— Housing $2700

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $6,770
Federal tax paid $19,037
— Net income $7165

Cash left after paying off housing: $4465

As you can see, there’s not much cash-flow difference between buying and renting. Surely you wouldn’t make an argument that it’s very risky to rent in San Diego if you have a $130,000 salary.

Ultimately, what matters is whether you have the down payment and whether you can qualify for a mortgage. If you qualify at 40% gross DTI, you will be able to pay off your mortgage without stressing too much (unless you lose your job). [/quote]

Maybe I am way out on a limb here, but does anyone else notice that under the buying scenario the family who just bought is dedicating 50% of their income to morgage payement? The renters are using ~38% of income to rent. The only reason the total cash flow is similar to one another is due to the decreased taxes a homeowner has to pay compared to a renter.

Perhaps I need to change my expectations of risk and aversion to it, but isnt 50% of income going to houseing rather excessive?

[DWCAP]

[quote=esmith]Ok, if you insist, let’s do everything accurately.

Assumptions:
130,000 gross income, married, 2 kids, single income (mom stays at home with children), 10,000 into 401k

Purchase price $650,000 with 20% down, 6.25% for 30 years, property tax + MR 1.7%, HOA $100/month, insurance $600/year

Scenario 1. Buying a 4S Ranch McMansion

Expenses(monthly):
Interest $2,708.33
Principal $493.40
Insurance $50.00
Property tax $920.83
HOA $100.00
— Housing 4272.56

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $2,720
Federal tax paid $8,216
— Net income $8405/month

Cash left after paying off housing: $4132
Contributed towards principal (forced savings): $493

Scenario 2. Renting a house in 4S Ranch. The cheapest detached I see is $2700.

Expenses (monthly):
Rent $2700
— Housing $2700

Income:
Gross $130,000
401k contribution $10,000
Social security tax $6,324
Medicare tax $1,885
State tax paid $6,770
Federal tax paid $19,037
— Net income $7165

Cash left after paying off housing: $4465

As you can see, there’s not much cash-flow difference between buying and renting. Surely you wouldn’t make an argument that it’s very risky to rent in San Diego if you have a $130,000 salary.

Ultimately, what matters is whether you have the down payment and whether you can qualify for a mortgage. If you qualify at 40% gross DTI, you will be able to pay off your mortgage without stressing too much (unless you lose your job). [/quote]

Maybe I am way out on a limb here, but does anyone else notice that under the buying scenario the family who just bought is dedicating 50% of their income to morgage payement? The renters are using ~38% of income to rent. The only reason the total cash flow is similar to one another is due to the decreased taxes a homeowner has to pay compared to a renter.

Perhaps I need to change my expectations of risk and aversion to it, but isnt 50% of income going to houseing rather excessive?

[Author]

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