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

[(former)FormerSanDiegan]

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.

DaCounselor – I showed the actual numbers comparing 2001 to today above, not 1991. However, I would agree that comparisons of rent versus own were likely very similar between about 1990 and today. (I think I saw a graphic on this board once that actually supports this notion. I’ll try to find it.)

Regarding the 50% discount before tax considerations …
As I said, the after-tax consequences can result in renting costing anywhere between 50% of buying and 85% of buying, depending on individual tax circumstances
Example 1: Married couple making 75K per year, with a 200K loan (e.g. 250K condo). Their total interest might be about 13K in the first year, prop tax at 3K for a total of 16K. Thats only 6K more than they get for a standard deduction. If their marginal tax bracket is Fed= 25%, state =6% they get a benefit of owning of $1860 per year .

Example 2: Married couple makes 250K per year, with a 800K loan on a $1Mil house. Their total interest is 52k, prop tax is 12,500. Total deductions are 64,500. Well above the 10K standard deduction. Plus they are in a higher tax bracket, say a marginal rate of Fed=33%, State = 9.3%. Their tax benefit relative to standard deduction is: (54,500*0.423) about 23k per year .
The couple with the 4x more expensive place have a 12x larger benefit from owning. In this case, the relative cost of renting versus owning might be as high as 90%.

In fact, for higher income folks, a mortgage of up to $1 Mil may even keep them from being subject to AMT. Because a Primary mortgage is still deductible under AMT (but property taxes are not).

Because of the non-linearity of the tax code, it is impossible to cite a single number for after tax cost of renting versus owning.

[sdcellar]

SDR– Don’t really want to pry too much, but you offered.

I’m trying to make sense of your numbers, but just can’t. Perhaps the $2,200/mo for the loan reflects tax benefits, just the interest, or a low interest rate, but from your tax figure (assuming no mello-roos), I’m guessing the purchase price of the home to be around $650,000. I must have something wrong…

I love these rent vs. buy questions. Every time I run the numbers, it’s a no brainer. Rent baby, rent!

[(former)FormerSanDiegan]

I found the link.

Historical Home Prices, Payments, Rents, and Rates

The chart in Rich’s discussion shows monthly outlays in mortgage payments and rents in both inflation adjusted and nominal prices.

Inflation adjusted rents increased by 7-8% from 1991 to 2006
Inflation adjusted monthly payments increased by about 95% between 1991 and 2006.

On another note, inflation adjusted monthly mortgage payments are about the same as they were at the 1982 peak.

[DaCounselor]

Good talking points NSR.

We’re saying the same thing regarding financing – that the no-skin 100% financing carries an interest rate premium that will obviously result in a larger rent vs. own spread than conventional financing. A much larger spread.

As for what to do with the downpayment $$, that is of course not a novel debate. It’s possible to put it in the market and make a killing, and it’s also possible to get creamed. You can go ultra conservative and put it in a mattress. The options are many. I think the general philosophy of pouring alot of dough into real estate up front is to reap the benefits of excellent interest rates, reduced monthly overhead and – gasp – the antiquated idea of getting a huge running start to complete ownership.

It makes perfect sense that the rent vs. own spread increases when you get into the higher end properties that you cite in your neighborhood. The higher the rent, the less demand. The obtainable rent is not likely to rise lock-step with the value of the property up through this range.

Anyway, from my experience, based on my properties, there is nowhere near a 50% discount for renting, apples to apples.

[SD Realtor]

SDC – The loan amount was for 400k at a rate of 5.5% as I would have bought the rate down. That is 2271 on a standard 30 year amortized loan including principal. I was toying with the idea of a 10 year fixed interest only to hold on to more cash. The price of about 650k is more or less correct.

Perry – I agree with your points which is what I was trying to say as well. That every post, every person who inquires about rent verses buy, should maybe provide more of us with reasons behind the request, and as you guys have pointed out, financing plans.

I would say this WITHOUT A DOUBT. DO NOT BUY if you do not have a significant downpayment. With that, I TOTALLY agree but that is simply because you should never ever buy what you cannot afford.

SD Realtor

[PerryChase]

formersandiegan, your calculation clearly illustrates that lower-income folks don't much benefit from buying. If they have many dependents then their tax benefits from buying would be even lower. Thanks for doing the calculations. I was too lazy to do it.

——————– 

Anyway, from my experience, based on my properties, there is nowhere near a 50% discount for renting, apples to apples.

DaCounselor, since renters are much more mobile than owners shouldn't they take full benefit of that "competitive advantange" and do an apples to oranges comparaison?  That is rent in a nicer neighborhood than they could buy; enjoy a better standard of living, and provide their kids with a better school experience.    That's the message that would-be-buyers should be hearing.  

 

[sdcellar]

Okay, in SDR’s case I come up with the following numbers showing that renting is 85% of the cost of buying and I was being *generous* on the buy side of the equation. That is, the tax deduction for the buy side ignores the standard deduction already allowed; and the rent side takes a full marginal rate hit and only expects a conservative 4% return (and further reduced through use of simple interest calculation)

House: $650,000
Down: $250,000
Loan: $400,000
Int Rate: 5.5%
P&I: $2,271
Taxes: $596
Ins: $100
PITI: $2,967
Fed: 28%
State: 7%
Benefit: $850
Effective: $2,117

Rent: $2,200
Ins: $25
R&I $2,225
Int Rate: 4%
Earnings: $833
Taxes: $292
Return: $542
Effective: $1,683

[sdcellar]

and, oh yeah, 5.5% for an interest rate seems pretty low too. Bump that to a more realistic (for today) 6.5% and the rent to buy ratio improves to 75%.

Factor in locking up $250K and the (highly likely) possibility of further price declines eating away at that principle, you gotta ask yourself…

[(former)FormerSanDiegan]

Nice work sdcellar.

These numbers are representative of someone with an income of 100K or so (I’m assuming PITI = 35% of income).

So, for this example, the buyer can choose between
A. renting a house and making new car payments
B. buying and driving their older, paid-off vehicle.

When buyers in income ranges of 60-70K can make this same choice (tougher because of the compressed tax advantage), it might be time to buy. I’m guessing we are about 20% overpriced before we hit that point.

[DaCounselor]

What I think renters should be doing now, PC, is sitting back and watching what happens in the SD market. I don’t think they will get burned by soaring interest rates or prices this year. Nor will tightening credit standards affect those who are truly qualified to buy. In short, there doesn’t seem to be any measureable downside to sitting tight, and there is probably going to be an upside.

I never have supported the concept of long-term renting. I don’t think there is a massive rental discount now and I think the spread is going to shrink as this market evolves. My advice to renters would be to start plotting your purchase now by getting your finances together. Don’t rent the house in Bird Rock and lease the Benz because you can – instead, rent the house in Clairemont and drive your older car and bank as much dough as you can for a downpayment. Sounds awfully dreary and old-school for our instant gratification generation, but it’s a tried and true strategy. Little something called sacrifice.

I could barely afford both my first and second purchases – even took in room-mates at the outset to make things easier – and now I own both properties outright. Sacrifice. It’s more than a word and it’s something that seems lost on our younger generation.

Now, enough preaching – I’m off for a beer. Cheers.

[kewp]

Hey, here’s an idea, buy a house for cash up front! Then its a 100% cheaper than renting on a monthly basis.

Except for the first month, that is.

Isn’t this really an apples and oranges type discussion?

I would think it makes sense to buy when the cost of renting is more than a monthly (non-toxic) mortgage payment, plus expenses, minus the tax break.

And we are a *long* way from that!

[Reality]

No offense SD Realtor.

I didn’t mean you were stupid, and I realize there are other issues than financial. It just seems the premium for buying is exhorbitant at this time.

[SD Realtor]

JohnAlt –

Definitely no offense taken at all, no worries at all.

SDC, to say that 5.5% on the mortgage is not realistic is not really true at all. I am sure you noted what the 10 year treasury is doing, and as I said I would have been buying down the loan.

Also SDC my rent is 2500 a month not 2200 as you used in your calculations.

Have any of you guys tried to find a rental in Scripps that would accept 2 dogs and 3 cats?

*****

Anyways again guys, by the postings shown I think it si clear that the benefits of renting versus buying vary with each individual. Factors such as thier income, how much down they have, kids, pets, school districts, and how much they do not want to have to deal with a landlord factor into the equation.

DEFINITELY if it is only dollars and cents I could not agree more.

For sure for sure for sure…if you don’t have the income, if you don’t have the downpayment… definitely don’t do it.

please donSD Realtor

[sdcellar]

I missed the part about buying down the loan. Sorry about that. I’ll stick by my $2200 number for a $650K property as I see listings for that kind of thing pretty regularly in the Scripps/Poway/RB/4S areas. I’ll definitely admit that the pet thing is a challenge however.

Again though, you must have been a bit nervous at the thought of putting so much money down on a place in this market.

[PerryChase]

One small factor to consider: buying-down the interest rate on a loan means paying the interest up-front. That works-out well if you remain in the house a long, long time. The APR on the loan is most likely in the 6%+ range.

Not to minimize your pet situation, you’re probably scaring landlords buy tell him you have so many pets. Many tenants would say that they have one dog, then they move in the whole kennel after signing the contract. At that time, it’s a little late for the landlord to do anything about it. I’m not recommending that you do that.

I’m making these points to illustrate how the rental market generally works for the average renter/would-be buyer.

[Author]

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