housing bubble?

[CA renter]

[quote=spdrun]Repeat of the tax-credit-driven mini-bubble of 2009-10, with a more dramatic rise (3.5% vs 4.5% interest rates had more of an effect on monthly payment than a max. $8000 credit ever did) and possibly a less dramatic slowdown (owing to the economy being in slightly better shape than in 2010).[/quote]

Agree with this, for the most part. IMO, interest rates will largely determine which way the housing market goes.

[joec]

Appreciation may slow this year, but I am probably in the minority in thinking there isn’t really a bubble in the whole 4s ranch area since for one thing, people buying now have probably a ton more equity in the house with much larger down payments and these people aren’t house flippers or investors.

As you need a place to live in no matter what, people will buy if they have kids and can afford the monthly payments. I think people shop for a house more based on payments vs. the overall cost of the house since if you don’t buy, you have to rent anyways.

On craigslist, 4s seems to be getting about 3.5 – 4.1k per month for the typical 3k sqft house with around 4 for the bigger ones in Del Sur.
http://sandiego.craigslist.org/search/apa?zoomToPosting=&catAbb=apa&query=4s+ranch&minAsk=&maxAsk=&bedrooms=3&housing_type=6&excats=

http://sandiego.craigslist.org/nsd/apa/4306945264.html

http://sandiego.craigslist.org/nsd/apa/4300457498.html

Using this calculator:
http://www.mortgagecalculator.org/

For an $800,000 home, with 20% down (this is easy for most “asian” families I think with family money/help or heavy savings…30 year 4.5% loan, I get a monthly payment of $4,242.79. You assume a decently high tax deduction of about 35% for state and federal and after taxes of $2757.81. Wow, it’s 1k less to buy than rent…You can buy and rent it out yourself as well and depreciate as a business over 27.5 years (is that still around?) and write off against your own personal income as well…

With rents in the area this high, and MUCH MUCH stronger buyers who are generally much more financially invested (higher down payments needed recently), they can simply wait out any price drop or simply rent it out and wait as well.

Interest rates do determine affordability, but they are still very low and if you need a home for your family with kids and have a decent job/income, the numbers sorta pencil out ok…

Someone correct me if I’m wrong, but rents are pretty high in that area and schools are “decent” with “affordable” housing compared to say, Del Mar, La Jolla, anywhere in the Bay Area, Los Angeles, etc…

Really, compared to the bay area, real estate in San Diego IMO is down right cheap…(one reason I left I guess).

[HenryPP]

I think you are leaving out several important costs from your purchase calculation.

For example, 4S has quite high Mello Roos (especially for north 4S). Unless you plan to pay that off early, you have to add that in (in addition to the HOA, which is reasonably low in 4S). Also, the various costs of home ownership.

I looked at 4S pretty extensively a couple of years ago (I work in one of the tech companies nearby and I like the area). I ended up buying elsewhere, but I might still buy in 4S in a couple of years (good schools, etc).

But I seriously doubt that I would be able to find such a deal on a purchase that it would be $1,000 less than renting.

[scaredyclassic]

i went to ayard sale last weekend at a house down the street, not as nice a house, sold for 275,000 more than i paid for my place. it’s not as nice as mine. we got an awesome deal ona metal table, a former display table from macy’s. only 10bucks. guy was taking the money and running. i am going to say the price he just got on his house strikesmeas a bubble price. it’s too much… the metal table, however, under market price…i tried to buy a bike from his son but hisson simplywouldnt negotiate. im pretty sure he’s not going to get what hewas asking. he shouldve worked with me…

it’s weird how you can justzillow some guys address at a yard sale and find out exactly what his place sold for…

[joec]

[quote=HenryPP]I think you are leaving out several important costs from your purchase calculation.

For example, 4S has quite high Mello Roos (especially for north 4S). Unless you plan to pay that off early, you have to add that in (in addition to the HOA, which is reasonably low in 4S). Also, the various costs of home ownership.

I looked at 4S pretty extensively a couple of years ago (I work in one of the tech companies nearby and I like the area). I ended up buying elsewhere, but I might still buy in 4S in a couple of years (good schools, etc).

But I seriously doubt that I would be able to find such a deal on a purchase that it would be $1,000 less than renting.[/quote]

I actually plugged in a 1.5% tax rate so I already factored that “cost” in so to speak…Del Sur is a bit more expensive tax wise (maybe as much as 1.9%), but you don’t have to live there to make the numbers work I don’t think…HOA is $85/month I believe.

Again, people need to do the math and all that to see if it makes sense for them, but it’s easy to say the numbers don’t work just because of Mello Roos when the cost of the home is already factored in (lower for MR houses)…To me at least, the numbers don’t really lie and it seems like it’s not as bad as I read about where people think everything is a bubble.

Also, anyone who can buy an 800k place with a 20% down I assume, usually is 1 or 2 professionals pulling in close to MINIMUM 150k a year (this doesn’t sound like a lot IMO). That puts your tax rates at the marginal bracket at 28% – 33%. You factor in CA state at a massive 9.3% or more and you’re in the 37-42% bracket.

Without a large mortgage as a tax deduction, you’ll also get killed in income taxes so most buyers are able to deduct that huge amount. Add in property tax including the MR and you’re able to save a ton of dough compared to purely renting for that 3.5-4k price.

I don’t know if you are married or have kids, but I think people who buy to live tend to care less about it MUST being lower, but with guaranteed or controlled housing cost and your own place, I think people are willing to pay more if they like the area/schools, etc…

Just do your own numbers of course, but to me at least, the math isn’t that insane with rents at these levels IMO.

[ltsddd]

.

[HenryPP]

OK, that’s why our numbers are different. We used different tax rates. To account for the Mello Roos, I used higher tax rates than what you used. For Del Sur, I used 2.2%. For north 4S, I used 2.075%. For south 4S, I used 1.525%. Those are all based on what I could calculate for the Mello Roos taxes from Redfin.

For example, I looked at a random house in north 4S. Here is the link from Redfin:

http://www.redfin.com/CA/San-Diego/17173-Ralphs-Ranch-Rd-92127/home/12153594

It’s been sitting for a month at a price range of $850,000 to $875,000. So lets assume they accept a bid slightly below that range, at $835,000.

We see that the HOA is $85/month. Meanwhile, under Fee Information, it shows Total Monthly Fee as $658/month, so I kluged it and said $658-$85=$573 a month in Mello Roos taxes. (The $573/month might include something other than Mello Roos but I didn’t dig into it). $573/month X 12 months = $6,876/year in Mello Roos. Assuming this house sells at $835,000, that is 0.825% Mello Roos tax. Giving total tax = 1.25% + 0.825% = 2.075%.

I went back and redid the calculation on the mortgage calculator you linked to. I assumed excellent credit and a 4.25% interest rate, to get a best case scenario. For an $800,000 house with 20% down, I got the following numbers:

Del Sur: $4,615 Principal+Interest+Tax. Add $85 for HOA and $200 for Home Insurance gives a total of $4,900/month.

North 4S: $4,532 + $85 + $200 = $4,817/month.

South 4S: $4,165 + $85 + $200 = $4,450/month.

Now add to this the various costs of owning a home. To me, it looks like the homes in 4S and Del Sur are relatively low maintenance, so that cost should be pretty low. (Relatively newly built homes, small lots, etc). But it would still add up over time.

I do agree that when you count the mortgage tax deduction, especially for the type of people who live there (i.e. upper middle class professionals with kids and very interested in tax deductions), it is likely to be cheaper than renting. I just doubt that it would really be $1,000 less than renting there.

I myself looked at a lot of homes in 4S in 2011, back when they were about $150,000 less than they are going for now. I liked the homes and the schools were highly rated. Plus it’s a very convenient and pleasant area. What I did not like was the high Mello Roos, the small lots, looking right into neighbors windows, and most homes lacked a decent view. I ended up buying elsewhere.

I keep an eye on 4S, however, since I can practically walk to work from there. My plan is to keep my current place and rent it out, and move to 4S if I can find the right home at the right price.

[joec]

Hey, thanks for taking all the time to write this up and all the calculations. It does put the numbers in perspective as to who can/will buy and if it’s worth it or if we’re in a bubble.

I really think if we put ourselves in the minds of a current buyer in general…they always include the tax deduction in their calculations since it’s just too big to ignore.

Also, for a lot of folks who make “good” incomes with a standard W-2 job, the downside is you really have very little ways to deduct taxes and this is sorta why the tax breaks on home loan interest sorta favor the rich since the higher their income, the bigger the deduction since it’s taken off their marginal tax rate.

From your monthly numbers and a standard buyer in the 37-42% (again, this is someone who’s Married Filing Jointly):

10% on taxable income from $0 to $18,150, plus
15% on taxable income over $18,150 to $73,800, plus
25% on taxable income over $73,800 to $148,850, plus
28% on taxable income over $148,850 to $226,850, plus
33% on taxable income over $226,850 to $405,100, plus
35% on taxable income over $405,100 to $457,600, plus
39.6% on taxable income over $457,600

37.3 – 42.3% tax bracket means these become after the tax deduction:
Del Sur: $4,900/month (3077.20 – 2827.30/month).
North 4S: $4,817/month (3025.08 – 2779.41/month).
South 4S: $4,450/month (2790.15 – 2567.65/month).

I think there are plenty of people making these incomes in the area since the home loan process is pretty much impossible without that high income and debt/income ratio levels to make it work. Note that for even HIGHER income people, they would be paying close to 49% in state and federal taxes so for doctors with private practices, tech millionaires, partnered law firm people, they would be paying even less that what you posted as the tax deduction is about 10% more…

I think one of the craigslist links I posted was in Del Sur and was close or over 4k / month so that would be at/more depending on your income. If you’re in south 4s, the numbers are even easier since pretty much all of the larger 4s ranch houses seem to rent for 3.6k+ or so.

I used to debate all the time about the MR fees, but the thing is with MR, you tend to pay less for the home overall so I just see it as balancing out.

Some people get all bent out of shape about MR, but at the end of the day, I think most people who buy shop for what the monthly nut is compared to renting and from the data, at least from all my calculations (and I believe yours as well), we’re not in a bubble right now based on current interest rates, what the rent is going for in the area, and prices being charged. I’d assume most of the buyers also aren’t looking to flip unlike the no-money down days of 2005…

http://sandiego.craigslist.org/search/hhh?zoomToPosting=&catAbb=hhh&query=4s+ranch+rent&minAsk=&maxAsk=&bedrooms=4&housing_type=6&excats=

Rent ranges from $4695 (4450 sqft – large in 4s) to
$3100 (2188 sqft (small in 4s)) so the 4.6k rent place is well cheaper to buy possibly.

Lastly, I think it’s overstated about the “cost” of owning a home. YES, there is a cost to fix stuff, landscaping for new homes, and all that, and people need to go in eyes wide open to those costs, etc

…but there is also a “cost” (maybe not as much monetarily) of renting such as getting rent raised, being forced to move and find a new place, total lack of control in whether rent goes up, limited options to customize, no tax deduction and paying “market” rates ALL the time since the landlord tends to charge market prices…you also “still have” a tax free option to sell the primary residence and move (one of the few tax frees still)…

We bought back in 2009 so things are up a lot from where we bought, but the price we are paying is still 2009 prices…Yes, prices can and do go down as well, but you can wait if the numbers don’t make sense financially and that was why I posted.

At the end, I guess it really depends on your situation, but knowing your housing cost for the next 30 years is very powerful as your income hopefully goes up and the mortgage stays the same…You also get a house after that 30 assuming you don’t cash it out and can live for relatively less (minus prop tax)…

[skerzz]

Your tax effected payment calculations are misstated; Only the interest and property taxes are deductible. Further, the property tax deductions won’t shield you from The AMT. You do not get a tax deduction for principal, insurance, HOA, and, under most circumstances, MR tax.

I purchased my first home in 2009 and turned it into a rental last October after making a “move up” purchase into a undervalued “fixer” property.. After crunching the numbers, I’ve realized that I have too much equity in my rental at current prices to justify holding it. I’ll be selling later this year to “lock in” my gains tax free (primary residence exclusion). However, I do hate to lose the leverage at a 3.5% interest rate….

To summarize- I think the market has gotten ahead of itself and it’s a good time to sell (assuming you don’t need a place to live).

[usr145]

I think the numbers makes sense to buy with current interest rates. but its going to change pretty soon, once the QE3 is done and Fed start to raise interest rates, it will be interesting to see what happens to the property values.

I am sure with in a year or two interest rates will go up to 5.5 to 6%. so assuming the current properties won’t go up or go up only a bit, you still need $600 – 750 more in monthly payments for the same house. so obviously demand will go down b/c peoples income won’t raise that much in a short period of time.

one other assumption that you are making is only people that will sell the house in the future are the ones buying right now with at-least 20% down. at any given year less than 10% of the houses are sold / bought in a given neighborhood unless its a new construction. so with in the last few years lets assume 30% of the people bought, so you don’t know about the rest of 70% of the households.

what about the people who uses their equity like an ATM ?

my assumption is at least 40 – 50% of the houses foreclosed in 2008 – 2010 are not b/c they bought house in bubble price period (2004 – 2006), but b/c of misuse of their equity in the house.

so this problem still exists regardless of how qualified the current buyers are.

so right now the property values are fairly priced, but without any change in property values it might look like bubble in a year or two when interest rates go up. may be its time to lock in the profits now.

[joec]

Yes, I’m aware that only interest and prop tax can be deducted and some others aren’t…Even then, for a new 30 year loan, the bulk of the new loan payment is interest initially. After about 15 years, it starts to balance out, this is when a homeowner could possibly refinance to a new 15 year to continue getting a large tax write off to sorta reset the clock or refinance to another 30 for cash flow reasons…

The whole MR being debated as tax deductible was debated in another thread and has been a closed case for now according to the FTB following the fed decision that it was deductible.

That said, my numbers above have about a 1k buffer already for nearly anyone who can buy and a 2k buffer for super wealthy people so if you take away the non-financial benefits of owning a home, you still have some buffer depending on income, as well as the general benefits of home ownership.

Again, I’m not a housing bull at all and don’t really care where the market goes since I can’t sell (need a place to live/schools/etc), but I am just giving data proof that the area doesn’t look like to me a bubble (at least not yet).

We’re not in bubble territory NOW with current interest rates and what rents are since these places are still easily being rented out.

The MAIN problem, and I keep saying this is a person/family tends to HAVE to live somewhere. Some people maybe willing to live in a crap hole for 1k/month (me, not the wife though)…but when you have kids, those people sorta now needs/want better schools and are stuck with paying these insane rents.

Some people here have waited to buy and kept saying it would go lower, etc etc etc for years and have “missed out” now. If you need a place to live for your family, buying is such a time saver and a load off your mind to be more settled and not worry really what housing costs, what interest rates does, etc…I even come here less since it doesn’t affect me much at all now and this is true for a lot of the other posters who also bought.

Everyone just needs to run their own numbers, but as Rich mentioned in the front page post, it’s still not crashing at this time/yet…if it does and you still need a place to live, well, no skin off your back since you can’t sell anyways and you aren’t moving neither…It’s just all paper money for those young families.

[Jazzman]

[quote=joec]If you need a place to live for your family, buying is such a time saver and a load off your mind to be more settled and not worry really what housing costs, what interest rates does, etc…I even come here less since it doesn’t affect me much at all now and this is true for a lot of the other posters who also bought.
[/quote]
Well, that is a personal view not shared by everyone it seems: There are huge weights lifted off your shoulders by renting according to this person. http://www.ft.com/intl/cms/s/2/c240cd3a-8805-11e3-8afa-00144feab7de.html#axzz2sJdoZaRZ

[flyer]

Interesting personal view that works well for the gentleman from Dorset, in his chosen locale. We know the area, and can understand his feelings.

Conversely, we hope never to give up our home in RSF to rent, since, by today’s standards, it was such an incredible bargain. Because we purchased the home over twenty years ago, we have very little, if any, weight on our shoulders with regard to the home, and also have great freedom to do whatever else we may wish to do.

I only mention this because there are many, many very content people who purchased homes in the relatively distant past, who don’t consider them to be a burden, and are also living their “dreams.”

There are so many personal variables concerning housing, that everyone just needs to find what works for them. IMO, there really is no “right”
or “wrong”–it’s whatever makes you and your family happy.

[joec]

All true and good for him, but again, housing purchases tend to be pushed/dictated by young families (wives a lot) and schools so it’s easy to see why a middle-aged SINGLE man wants to rent…

If I was single, I’d also have no problem literally renting one of those funeral beds/shacks in Japan honestly. I don’t need square footage, I could use the public baths, etc etc etc…I could live in a BAD area of town, you name it…

Bottom line is do what’s best for your situation/family and run the numbers…The numbers aren’t that out of whack…yet…IMO…

…but again, I don’t think single/middle-aged dudes are who home sellers are trying to reach. I wouldn’t even try honestly.

[The-Shoveler]

Well I was not worried about a housing bubble but just looking at the number of house flipping seminars ad’s I have been getting I think is getting kind of disturbing.

My guess is it must be getting hard to make a buck at this so now they turn to selling seminars.

IMO anyway.

[Author]

Posts