is the housing market coming back??????

[LA_Renter]

I think by the end of this year it should be a little bit more clear how this market will play out. It seems we are all walking through the fog right now. I haven’t seen any thing of real substance to change my bearish stance. The reason for that is the back drop of this market. Many of my primary concerns seem to be unfolding right now. The unwinding of the yen carry trade, the implosion of sub prime lending, the steady trickle now running stream of foreclosures. All of these things are working against the market and I don’t see many of these trends improving as far as the eye can see.

It will be the inevitable economic slowdown that will have the biggest impact on housing. We haven’t entered that stage just yet. A recession or even a near recession will reduce demand, home prices as pointed out by this blog and many others are still disconnected from traditional fundamentals, the source of liquidity that made recent home appreciation possible is drying up, and we see the rumbling of NOD’s and foreclosures as these exotic loans reset. As many pointed out the past couple of years this is a slow process due to the nature of homes verses stocks. In my mind nothing has really changed.

[DaCounselor]

“There is absolutely no rationale at all since as JohnAlt91941 said you can rent for 50% of the cost without any exposure to the risks associated with owning in an uncertain market.”
_________________________

Is the SD rental discount from owning really 50%? Is that pre-tax or post-tax deduction? Is a 50% rental discount from owning way out of whack with historical figures?

[(former)FormerSanDiegan]

Is the SD rental discount from owning really 50%? Is that pre-tax or post-tax deduction? Is a 50% rental discount from owning way out of whack with historical figures?

Recently it has been about 50% cheaper to rent than own. SFR’s have been grossing about 4% of the price of the home.
Example: 500 K home in Clairemont, rents for about $1700 per month. 1700 x 12 = 20,400. 20,400/500,000 = 4.1%.

Assuming that carrying costs on a purchase total up to about 8% (6.5% loan, 1.2% Taxes, Insurance, Maintenance). Then the number is about half the cost of owning. Taxing tax consequences into account, renting can be anywhere between 50% to 85% the cost of owning (depends heavily on the person’s tax situation).

In 2001 I sold a rental in Clairemont for 280K. The rent at that time was about 1300/month. The gross rent in that case was about 5.6%. That’s about 40% more than the 4% number I would assume for today, and is consistent with Rich’s analysis.

SO, to answer your questions:
Yes, the discount from owning is about 50% before tax. And yes it is out of whack with recent history.

[cr]

Coming back to what?

Where it was 2-3 years ago? I don’t think anyone here can make a case for that.

Back to reality? That’s more likely.

As prices drop, some (probably less informed) will think they are getting a better deal, believing those who claim the worst is over.

There are people on the sidelines, but buyers are not going to come out of the woodwork in mass groves.

Those that are buying now, will most likely see the value decline from the purchase price, which should cause others to wait, and lower prices even more.

[DaCounselor]

“Yes, the discount from owning is about 50% before tax. And yes it is out of whack with recent history.”
_______________________

Well, the key figure is the % spread post-tax benefits, not pre-tax.

The reason I ask about others’ experiences on historical spreads is that I am not seeing a massive rent discount – certainly nowhere near 50% – on the properties I own. I haven’t run hard numbers for the past 16 years, but my spitballing figures indicate to me that the rent discount – while most definitely up – is not as massive as some are portraying. At least not where I own.

[PerryChase]

As FormerSanDiegan pointed out, it’s 50% cheaper to rent.

As for the tax benefit, it’s certainly no benefit to the people who have the stated-income “liar” loans. They have no declared income to begin with, so they certainly don’t benefit from the mortgage interest and property tax deduction.

DaCounselor, your tax situation can certainly be different. We are talking here about the situation for the average buyers — those who use exotics such as I/Os, Option ARMs, liar loans and negative amortization loans.

[DaCounselor]

I haven’t run the numbers but I would expect to have seen a pretty similar spread between renting and owning when I first bought in ’91 if all this crazy creative financing was available back then. The reason the spread was much smaller back then was due to the downpayment requirement. If the numbers were run today based on convential 20% down loans and convential debt-to-income ratios, I would expect that the spread would be substantially lower than the 50% claimed and probably fairly close to what it was back in the early 90’s. So apples to apples, I think the numbers would show a present-day higher % discount for renting than in the past, but not by a whole lot.

[kewp]

“I recall the stats showed minimal deals that were 100% financed (but don’t hold me to that).”

Wow, if thats a case a soft landing is much more likely.

But, then again, it takes much more financial sense to accrue a million in cash vs. a million in credit, so I wonder if the smart money is really going to buy in so soon.

[no_such_reality]

The stats on 100% financed are pretty poor. Few loans are done 100% financed on a single loan. Often the 2nd mortgage is a hidden rider that the first isn’t counting in their calculations for credit worthiness. Hence, pairing the loans in aggregate calculations typically doesn’t happen.

[SD Realtor]

JohnAlt91941 –

I have moved 3 times within 18 months and I am renting. That seriously disrupts my life and puts undue stress on my family. As a renter I have no control when my landlord suddenly decides he wants to sell his house which has happened twice. Nor do I have the freedom to go ahead and do whatever I want to the house, whenever I want. As an owner of several dogs and cats my rental selections are limited. As a parent of two small children who will be in elementary school soon, I want them to grow up in a stable environment, in a school that I choose, not that is dictated by availability of rental stock. I can go on and on and counter the financial argument. I choose not to rent in many of th zip codes in this city because of the schools there or the neighborhoods themselves.

Once again, it is quite easy to pontificate the rental verses buying argument strictly from a dollars and cents point of view. However, it is all to easy to see that not everyone considers other elements in the equation. I cannot convince you of them if you haven’t experienced them. It is like single people talking about marriage, or people who have never had children talking about raising kids.

So yeah with all the dollars at stake from only that point of view it is stupid. From making the quality of life better for your family (if you have the money) and are not going to be moving it may not be so stupid.

Again, I am not advocating that anyone buy. I am advocating that those who like to hammer others that are considering buying, maybe don’t have all the facts before they paint the picture that what they say is gospel.

[no_such_reality]

Well, the key figure is the % spread post-tax benefits, not pre-tax.

The townhome I rent in OC near the beach.

Purchase price $620,000 (similar unit sold in Feb ’07)
monthly costs
Pmt at 6% $3717. (No money down)
HOA $ 300.
Taxes (1.25%) $645

interest portion of payment ~$3084.

Pretax Expense portion of owning $4030. Pretax Cashflow of owning $4663.

Marginal tax rate 40% combined. Effective expense of owning post tax $2542. Cashflow $3205.

Cost of rent? $1600-$1950. Prices vary greatly according to time of year.

Costs of renting assuming a 40% combined marginal tax rate before other special HOA assessments or ownership expenses like maintenance after taxes is 63 to 75 percent.

Another similar unit has been advertised since October 1st was available Nov 1 and is still empty at $2150. Two other units have become available.

I may need to ask for a rent reduction. 🙂

[SD Realtor]

Perry and FSD –

For the home I wanted to buy, putting 20% down and financing the rest using a fixed rate loan amortized over 30 years, including property taxes, insurance, the differenct was not even close to being as much as 50% more then renting. I pay 2500 a month now in rent. The loan would have cost 2200 a month, plus another 600 a month for prop tax. Through in another 100 a month for insurance. Now yes I would get income from the downpayment if I didn’t buy which I am getting now. However the money needs to be liquid in case I find something I want AND that income is taxed.

If you want I can go into much more details on the numbers.

[PerryChase]

SD Realtor, like I said before, each person’s circumstance is different. I think we are here talking about the “general” idea of buying.

You are a professional and get a tax break for buying.

The lower-income buyers who go into enormous debt to buy hardly get a tax break at all because of the standard deduction. They also tend to have more kids so their tax rate is low to begin with. The home ownership rate has been going up because of the marginal buyers entering the market. If they didn’t feel the need to absolutely buy, before they get “forever priced-out,” the market wouldn’t be as inflated. The REIC has been giving buyers snow jobs on the “benefits” of buying.

I understand that you’ve moved 3 times in 18 months. Wouldn’t it be wise to sign a minimum of a 2-year lease so you wouldn’t need to move as often? Maybe I don’t undersand the “pain” of moving. I’m a long time homeowner so it makes sense for me to stay put. However, I think that potential buyers are better-off renting for the foreseable future.

[DaCounselor]

You don’t need to go into more details on the #’s for me. I own 3 properties in SD and with just a quick look at my properties I can tell you that the rental discount is nowhere near 50%. It’s looking like 10-15%. I’m spitballing here but it’s close. And again, I’m looking at apples to apples, using conventional financing. Once you start running numbers using the 100% financing option, of course that is going to jack up the rent vs. own spread. You are financing way more $$ at a higher interest rate. You’re paying a steep premium for the luxury of not putting any skin in the game – as you should.

In NSR’s scenario, it looks like about a $1300/mo. rental discount, but note that the calculation is based on 100% financing. If you run the #’s using conventional financing, the spread probably gets knocked in half.

If you run the #’s based upon financing options that have not been historically available, you cannot determine whether the spread is historically high, low, or average. My guess is that it’s probably a bit higher than average, but not massively outrageous (ie 50%).

[no_such_reality]

In NSR’s scenario, it looks like about a $1300/mo. rental discount, but note that the calculation is based on 100% financing.

I assumed 100% a 6% interest because it benefits the owner.

If you put 20% down, you’ll still only get a loan at 6% currently. Unless you ARM it. If you actually finance 100% you’ll probably pay more than 6%.

how much does $120,000 invested earn a year? 10%? do you want to CD it and make 6%?

Putting the downpayment in a CD and paying 40% taxes on it the numbers are still 67% and 81% depending on the range of rent. For monthly out of pocket cash it is 44% to 53%.

If you make more on your investment, say 10%, the numbers are much worse, out of pocket is 37% to 45%, expense is 53%-64%.

I know several homes in my neighborhood asking $3500 or less for rent and trying to sell at $1.4M or more.

[Author]

Posts