Bubble bust and changing landscape

[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?

[(former)FormerSanDiegan]

[quote=DWCAP]

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? [/quote]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages.

[(former)FormerSanDiegan]

[quote=DWCAP]

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? [/quote]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages.

[(former)FormerSanDiegan]

[quote=DWCAP]

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? [/quote]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages.

[(former)FormerSanDiegan]

[quote=DWCAP]

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? [/quote]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages.

[(former)FormerSanDiegan]

[quote=DWCAP]

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? [/quote]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages.

[(former)FormerSanDiegan]

[quote=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.

[/quote]

The issue regarding this particular rule-of-thumb is that the break-even point might be at 200x rent for folks at the 150K income level, but 140x rent for folks at the 50K income level. The impact of taxes is non-linear, plus there is a large offset from zero to deal with (standard deduction).
Using a ratio implies a linear relationship and zero offset. So a scale factor of rent to property value is inherently flawed.

One must run the numbers for the particular income and home price range.

[(former)FormerSanDiegan]

[quote=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.

[/quote]

The issue regarding this particular rule-of-thumb is that the break-even point might be at 200x rent for folks at the 150K income level, but 140x rent for folks at the 50K income level. The impact of taxes is non-linear, plus there is a large offset from zero to deal with (standard deduction).
Using a ratio implies a linear relationship and zero offset. So a scale factor of rent to property value is inherently flawed.

One must run the numbers for the particular income and home price range.

[(former)FormerSanDiegan]

[quote=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.

[/quote]

The issue regarding this particular rule-of-thumb is that the break-even point might be at 200x rent for folks at the 150K income level, but 140x rent for folks at the 50K income level. The impact of taxes is non-linear, plus there is a large offset from zero to deal with (standard deduction).
Using a ratio implies a linear relationship and zero offset. So a scale factor of rent to property value is inherently flawed.

One must run the numbers for the particular income and home price range.

[(former)FormerSanDiegan]

[quote=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.

[/quote]

The issue regarding this particular rule-of-thumb is that the break-even point might be at 200x rent for folks at the 150K income level, but 140x rent for folks at the 50K income level. The impact of taxes is non-linear, plus there is a large offset from zero to deal with (standard deduction).
Using a ratio implies a linear relationship and zero offset. So a scale factor of rent to property value is inherently flawed.

One must run the numbers for the particular income and home price range.

[(former)FormerSanDiegan]

[quote=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.

[/quote]

The issue regarding this particular rule-of-thumb is that the break-even point might be at 200x rent for folks at the 150K income level, but 140x rent for folks at the 50K income level. The impact of taxes is non-linear, plus there is a large offset from zero to deal with (standard deduction).
Using a ratio implies a linear relationship and zero offset. So a scale factor of rent to property value is inherently flawed.

One must run the numbers for the particular income and home price range.

[DWCAP]

[quote=FormerSanDiegan]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages. [/quote]

I dont think that is the problem.
Owners pay 4272 in housing related expenses and have a NET income of 8405.

Renters pay 2700 in housing related expenses and have a NET income of 7165.

The difference between the two is the markedley better tax writeoff of $1240/month recieved by the owners. Remember, they make the same PRE tax income.

So 2700/7165= 0.376
And 4272/8405=0.508

Hence the renters are paying roughly 38% of their NET income, while the Owners are paying 51% of theirs.

[DWCAP]

[quote=FormerSanDiegan]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages. [/quote]

I dont think that is the problem.
Owners pay 4272 in housing related expenses and have a NET income of 8405.

Renters pay 2700 in housing related expenses and have a NET income of 7165.

The difference between the two is the markedley better tax writeoff of $1240/month recieved by the owners. Remember, they make the same PRE tax income.

So 2700/7165= 0.376
And 4272/8405=0.508

Hence the renters are paying roughly 38% of their NET income, while the Owners are paying 51% of theirs.

[DWCAP]

[quote=FormerSanDiegan]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages. [/quote]

I dont think that is the problem.
Owners pay 4272 in housing related expenses and have a NET income of 8405.

Renters pay 2700 in housing related expenses and have a NET income of 7165.

The difference between the two is the markedley better tax writeoff of $1240/month recieved by the owners. Remember, they make the same PRE tax income.

So 2700/7165= 0.376
And 4272/8405=0.508

Hence the renters are paying roughly 38% of their NET income, while the Owners are paying 51% of theirs.

[DWCAP]

[quote=FormerSanDiegan]

If they are roughly equivalent, how can one be 50% of income and the other 38% ?

The problem is you compared the pre-tax numbers when computing the percentages. [/quote]

I dont think that is the problem.
Owners pay 4272 in housing related expenses and have a NET income of 8405.

Renters pay 2700 in housing related expenses and have a NET income of 7165.

The difference between the two is the markedley better tax writeoff of $1240/month recieved by the owners. Remember, they make the same PRE tax income.

So 2700/7165= 0.376
And 4272/8405=0.508

Hence the renters are paying roughly 38% of their NET income, while the Owners are paying 51% of theirs.

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