The purchase dilemma

[jmrrobbie1]

JMR

A great site with loads of info and the best “free” calcuators for this type of mortgage/rent/buy calculations. For those unfamiliar with his site – it is the “standard” for mortgage info that others are compared to and worth a few minutes of time for anyone in the process of purchasing a home.

http://www.mtgprofessor.com/

[Anonymous]

Trojan

People normally rent something that suffices current requirements and buy something that suffices current requirements+future requirements+luxury+sense of pride of ownership+wife/kid sense of nesting+ etc

So you cannot compare say renting a 2bhk in Mira Mesa for an avg $1650/month (incase you have a family and are not sharing a 2 bed apt!) and buying a home for 750K.

With $1650/month, you are paying about 20K on rent. This (considering you are well above a 25K gross income bracket) doesn’t help in any deductions during tax time.

Now, instead of a 750K home, I would like to suggest an example where you purchase a 500K home with 10% down (or more if you want) at 6% 30Yr fixed. If you get a place where HOA and Mello Roos are low or non existant, you will probably end up paying 30K a year in interest payment and property tax.

So the difference with a rental today would be 10K (without considering tax benefits) if you purchased such a home.

Now, depending on your tax bracket, it might not be a 10K difference in the end. For me, its about 6K. Lets not leave aside any incidental homeowners expenses, HOA, insurance etc for the moment and get that annual premium figure 6+2 = 8K. (conservatively)

So if you buy a home, you spend about 8K more (today). Is it worth ?

Consider the following

1. Rents go up …and the other cons about renting
2. Well may be not today, long term, your home should be worth more than what you bought …and the other benefits already pointed out on financial front. If you would have bought stocks worth 8k instead, you can even think that you bought stock worth 8k of your home!
3. If you got wife, kids …you better give a lot of importance to what Marion said above.
4. If you are dual earner family, its really a no brainer with the 8K premium ..infact you perhaps need a mortage deduction to avoid AMT – you never know!

I am not suggesting you go buy something right away, I am not suggesting a right time to buy either. All I am telling you that your dilemma is because you are shortsighted.

Buying a home is not foolishness unless you are caught up in funky mortgages with intentions to flip during a housing downturn.

[Anonymous]

Trojan

People normally rent something that suffices current requirements and buy something that suffices current requirements+future requirements+luxury+sense of pride of ownership+wife/kid sense of nesting+ etc

So you cannot compare say renting a 2bhk in Mira Mesa for an avg $1650/month (incase you have a family and are not sharing a 2 bed apt!) and buying a home for 750K.

With $1650/month, you are paying about 20K on rent. This (considering you are well above a 25K gross income bracket) doesn’t help in any deductions during tax time.

Now, instead of a 750K home, I would like to suggest an example where you purchase a 500K home with 10% down (or more if you want) at 6% 30Yr fixed. If you get a place where HOA and Mello Roos are low or non existant, you will probably end up paying 30K a year in interest payment and property tax.

So the difference with a rental today would be 10K (without considering tax benefits) if you purchased such a home.

Now, depending on your tax bracket, it might not be a 10K difference in the end. For me, its about 6K. Lets not leave aside any incidental homeowners expenses, HOA, insurance etc for the moment and get that annual premium figure 6+2 = 8K. (conservatively)

So if you buy a home, you spend about 8K more (today). Is it worth ?

Consider the following

1. Rents go up …and the other cons about renting
2. Well may be not today, long term, your home should be worth more than what you bought …and the other benefits already pointed out on financial front. If you would have bought stocks worth 8k instead, you can even think that you bought stock worth 8k of your home!
3. If you got wife, kids …you better give a lot of importance to what Marion said above.
4. If you are dual earner family, its really a no brainer with the 8K premium ..infact you perhaps need a mortage deduction to avoid AMT – you never know!

I am not suggesting you go buy something right away, I am not suggesting a right time to buy either. All I am telling you that your dilemma is because you are shortsighted.

Buying a home is not foolishness unless you are caught up in funky mortgages with intentions to flip during a housing downturn.

[Anonymous]

Trojan

People normally rent something that suffices current requirements and buy something that suffices current requirements+future requirements+luxury+sense of pride of ownership+wife/kid sense of nesting+ etc

So you cannot compare say renting a 2bhk in Mira Mesa for an avg $1650/month (incase you have a family and are not sharing a 2 bed apt!) and buying a home for 750K.

With $1650/month, you are paying about 20K on rent. This (considering you are well above a 25K gross income bracket) doesn’t help in any deductions during tax time.

Now, instead of a 750K home, I would like to suggest an example where you purchase a 500K home with 10% down (or more if you want) at 6% 30Yr fixed. If you get a place where HOA and Mello Roos are low or non existant, you will probably end up paying 30K a year in interest payment and property tax.

So the difference with a rental today would be 10K (without considering tax benefits) if you purchased such a home.

Now, depending on your tax bracket, it might not be a 10K difference in the end. For me, its about 6K. Lets not leave aside any incidental homeowners expenses, HOA, insurance etc for the moment and get that annual premium figure 6+2 = 8K. (conservatively)

So if you buy a home, you spend about 8K more (today). Is it worth ?

Consider the following

1. Rents go up …and the other cons about renting
2. Well may be not today, long term, your home should be worth more than what you bought …and the other benefits already pointed out on financial front. If you would have bought stocks worth 8k instead, you can even think that you bought stock worth 8k of your home!
3. If you got wife, kids …you better give a lot of importance to what Marion said above.
4. If you are dual earner family, its really a no brainer with the 8K premium ..infact you perhaps need a mortage deduction to avoid AMT – you never know!

I am not suggesting you go buy something right away, I am not suggesting a right time to buy either. All I am telling you that your dilemma is because you are shortsighted.

Buying a home is not foolishness unless you are caught up in funky mortgages with intentions to flip during a housing downturn.

[Anonymous]

Trojan

People normally rent something that suffices current requirements and buy something that suffices current requirements+future requirements+luxury+sense of pride of ownership+wife/kid sense of nesting+ etc

So you cannot compare say renting a 2bhk in Mira Mesa for an avg $1650/month (incase you have a family and are not sharing a 2 bed apt!) and buying a home for 750K.

With $1650/month, you are paying about 20K on rent. This (considering you are well above a 25K gross income bracket) doesn’t help in any deductions during tax time.

Now, instead of a 750K home, I would like to suggest an example where you purchase a 500K home with 10% down (or more if you want) at 6% 30Yr fixed. If you get a place where HOA and Mello Roos are low or non existant, you will probably end up paying 30K a year in interest payment and property tax.

So the difference with a rental today would be 10K (without considering tax benefits) if you purchased such a home.

Now, depending on your tax bracket, it might not be a 10K difference in the end. For me, its about 6K. Lets not leave aside any incidental homeowners expenses, HOA, insurance etc for the moment and get that annual premium figure 6+2 = 8K. (conservatively)

So if you buy a home, you spend about 8K more (today). Is it worth ?

Consider the following

1. Rents go up …and the other cons about renting
2. Well may be not today, long term, your home should be worth more than what you bought …and the other benefits already pointed out on financial front. If you would have bought stocks worth 8k instead, you can even think that you bought stock worth 8k of your home!
3. If you got wife, kids …you better give a lot of importance to what Marion said above.
4. If you are dual earner family, its really a no brainer with the 8K premium ..infact you perhaps need a mortage deduction to avoid AMT – you never know!

I am not suggesting you go buy something right away, I am not suggesting a right time to buy either. All I am telling you that your dilemma is because you are shortsighted.

Buying a home is not foolishness unless you are caught up in funky mortgages with intentions to flip during a housing downturn.

[Anonymous]

Trojan

People normally rent something that suffices current requirements and buy something that suffices current requirements+future requirements+luxury+sense of pride of ownership+wife/kid sense of nesting+ etc

So you cannot compare say renting a 2bhk in Mira Mesa for an avg $1650/month (incase you have a family and are not sharing a 2 bed apt!) and buying a home for 750K.

With $1650/month, you are paying about 20K on rent. This (considering you are well above a 25K gross income bracket) doesn’t help in any deductions during tax time.

Now, instead of a 750K home, I would like to suggest an example where you purchase a 500K home with 10% down (or more if you want) at 6% 30Yr fixed. If you get a place where HOA and Mello Roos are low or non existant, you will probably end up paying 30K a year in interest payment and property tax.

So the difference with a rental today would be 10K (without considering tax benefits) if you purchased such a home.

Now, depending on your tax bracket, it might not be a 10K difference in the end. For me, its about 6K. Lets not leave aside any incidental homeowners expenses, HOA, insurance etc for the moment and get that annual premium figure 6+2 = 8K. (conservatively)

So if you buy a home, you spend about 8K more (today). Is it worth ?

Consider the following

1. Rents go up …and the other cons about renting
2. Well may be not today, long term, your home should be worth more than what you bought …and the other benefits already pointed out on financial front. If you would have bought stocks worth 8k instead, you can even think that you bought stock worth 8k of your home!
3. If you got wife, kids …you better give a lot of importance to what Marion said above.
4. If you are dual earner family, its really a no brainer with the 8K premium ..infact you perhaps need a mortage deduction to avoid AMT – you never know!

I am not suggesting you go buy something right away, I am not suggesting a right time to buy either. All I am telling you that your dilemma is because you are shortsighted.

Buying a home is not foolishness unless you are caught up in funky mortgages with intentions to flip during a housing downturn.

[(former)FormerSanDiegan]

This is not always in the case in all areas of San Diego, much less, California. If 10-14 is historic norm, area like Mira Mesa already have rent multiple as low as 13-14.

AN – When we bought in Clairemont in 2006 (within months of the last bottom) the rent ratio was about 12. House was 160K, rents were about 1100 per month for equivalent house.

That was in an interest rate environment where 30-year fixed rates were about 8%. The inverse of rent ratio (or gross yield if you will) was about 8%.

When these numbers equate, the rent vs buy monthly outlay becomes very close (when accounting for tax benefits).

Currently, in places like Clairemont and Mira Mesa the rent ratio ranges from 13-16. This corresponds to a gross rate of as low as 6.25%. There are some examples in these areas where the rent vs buy is getting pretty close to favoring a buy. Looking forward, I would assume that rates move up to upper 7% range or higher, so I expect another 10-15% downside in these areas as monthly carrying costs approach monthly rent costs.

As far as a bottom, there are many factors and it will only be known in retrospect. But in terms of buying, I consider the comparison of monthly rent to monthly carrying costs in bread-and-butter areas like Clairemont as my best metric.

Of course I am looking at other signs/metrics. I currently have my eye out for the next Money magazine article or Business section piece that clearly shows that it does not make sense ever to own in Southern California and that renting is always favorable from a strictly financial perspective. That will be our cue.

[(former)FormerSanDiegan]

This is not always in the case in all areas of San Diego, much less, California. If 10-14 is historic norm, area like Mira Mesa already have rent multiple as low as 13-14.

AN – When we bought in Clairemont in 2006 (within months of the last bottom) the rent ratio was about 12. House was 160K, rents were about 1100 per month for equivalent house.

That was in an interest rate environment where 30-year fixed rates were about 8%. The inverse of rent ratio (or gross yield if you will) was about 8%.

When these numbers equate, the rent vs buy monthly outlay becomes very close (when accounting for tax benefits).

Currently, in places like Clairemont and Mira Mesa the rent ratio ranges from 13-16. This corresponds to a gross rate of as low as 6.25%. There are some examples in these areas where the rent vs buy is getting pretty close to favoring a buy. Looking forward, I would assume that rates move up to upper 7% range or higher, so I expect another 10-15% downside in these areas as monthly carrying costs approach monthly rent costs.

As far as a bottom, there are many factors and it will only be known in retrospect. But in terms of buying, I consider the comparison of monthly rent to monthly carrying costs in bread-and-butter areas like Clairemont as my best metric.

Of course I am looking at other signs/metrics. I currently have my eye out for the next Money magazine article or Business section piece that clearly shows that it does not make sense ever to own in Southern California and that renting is always favorable from a strictly financial perspective. That will be our cue.

[(former)FormerSanDiegan]

This is not always in the case in all areas of San Diego, much less, California. If 10-14 is historic norm, area like Mira Mesa already have rent multiple as low as 13-14.

AN – When we bought in Clairemont in 2006 (within months of the last bottom) the rent ratio was about 12. House was 160K, rents were about 1100 per month for equivalent house.

That was in an interest rate environment where 30-year fixed rates were about 8%. The inverse of rent ratio (or gross yield if you will) was about 8%.

When these numbers equate, the rent vs buy monthly outlay becomes very close (when accounting for tax benefits).

Currently, in places like Clairemont and Mira Mesa the rent ratio ranges from 13-16. This corresponds to a gross rate of as low as 6.25%. There are some examples in these areas where the rent vs buy is getting pretty close to favoring a buy. Looking forward, I would assume that rates move up to upper 7% range or higher, so I expect another 10-15% downside in these areas as monthly carrying costs approach monthly rent costs.

As far as a bottom, there are many factors and it will only be known in retrospect. But in terms of buying, I consider the comparison of monthly rent to monthly carrying costs in bread-and-butter areas like Clairemont as my best metric.

Of course I am looking at other signs/metrics. I currently have my eye out for the next Money magazine article or Business section piece that clearly shows that it does not make sense ever to own in Southern California and that renting is always favorable from a strictly financial perspective. That will be our cue.

[(former)FormerSanDiegan]

This is not always in the case in all areas of San Diego, much less, California. If 10-14 is historic norm, area like Mira Mesa already have rent multiple as low as 13-14.

AN – When we bought in Clairemont in 2006 (within months of the last bottom) the rent ratio was about 12. House was 160K, rents were about 1100 per month for equivalent house.

That was in an interest rate environment where 30-year fixed rates were about 8%. The inverse of rent ratio (or gross yield if you will) was about 8%.

When these numbers equate, the rent vs buy monthly outlay becomes very close (when accounting for tax benefits).

Currently, in places like Clairemont and Mira Mesa the rent ratio ranges from 13-16. This corresponds to a gross rate of as low as 6.25%. There are some examples in these areas where the rent vs buy is getting pretty close to favoring a buy. Looking forward, I would assume that rates move up to upper 7% range or higher, so I expect another 10-15% downside in these areas as monthly carrying costs approach monthly rent costs.

As far as a bottom, there are many factors and it will only be known in retrospect. But in terms of buying, I consider the comparison of monthly rent to monthly carrying costs in bread-and-butter areas like Clairemont as my best metric.

Of course I am looking at other signs/metrics. I currently have my eye out for the next Money magazine article or Business section piece that clearly shows that it does not make sense ever to own in Southern California and that renting is always favorable from a strictly financial perspective. That will be our cue.

[(former)FormerSanDiegan]

This is not always in the case in all areas of San Diego, much less, California. If 10-14 is historic norm, area like Mira Mesa already have rent multiple as low as 13-14.

AN – When we bought in Clairemont in 2006 (within months of the last bottom) the rent ratio was about 12. House was 160K, rents were about 1100 per month for equivalent house.

That was in an interest rate environment where 30-year fixed rates were about 8%. The inverse of rent ratio (or gross yield if you will) was about 8%.

When these numbers equate, the rent vs buy monthly outlay becomes very close (when accounting for tax benefits).

Currently, in places like Clairemont and Mira Mesa the rent ratio ranges from 13-16. This corresponds to a gross rate of as low as 6.25%. There are some examples in these areas where the rent vs buy is getting pretty close to favoring a buy. Looking forward, I would assume that rates move up to upper 7% range or higher, so I expect another 10-15% downside in these areas as monthly carrying costs approach monthly rent costs.

As far as a bottom, there are many factors and it will only be known in retrospect. But in terms of buying, I consider the comparison of monthly rent to monthly carrying costs in bread-and-butter areas like Clairemont as my best metric.

Of course I am looking at other signs/metrics. I currently have my eye out for the next Money magazine article or Business section piece that clearly shows that it does not make sense ever to own in Southern California and that renting is always favorable from a strictly financial perspective. That will be our cue.

[an]

FormerSanDiegan, you mean 1996 and not 2006, right?

A house @ 160k @ 8% = ~1175/month. Since there’s a difference in rates between then and now, I think it’ll be more fair to compare monthly payment instead of pure price. If you give it 3% yearly appreciation, which is relatively conservative, you’ll get a monthly cost of ~$1675/month. Given today’s interest of about 5.5%-6%, if the house is around $280k-$290k today, it would be similarly valued as the last bottom. How much do you think your house would go for today? If you give it a higher yearly appreciation, like 4% or 5%, then we might be at the same level as 1996 bottom, adjusted for inflation already.

[an]

FormerSanDiegan, you mean 1996 and not 2006, right?

A house @ 160k @ 8% = ~1175/month. Since there’s a difference in rates between then and now, I think it’ll be more fair to compare monthly payment instead of pure price. If you give it 3% yearly appreciation, which is relatively conservative, you’ll get a monthly cost of ~$1675/month. Given today’s interest of about 5.5%-6%, if the house is around $280k-$290k today, it would be similarly valued as the last bottom. How much do you think your house would go for today? If you give it a higher yearly appreciation, like 4% or 5%, then we might be at the same level as 1996 bottom, adjusted for inflation already.

[an]

FormerSanDiegan, you mean 1996 and not 2006, right?

A house @ 160k @ 8% = ~1175/month. Since there’s a difference in rates between then and now, I think it’ll be more fair to compare monthly payment instead of pure price. If you give it 3% yearly appreciation, which is relatively conservative, you’ll get a monthly cost of ~$1675/month. Given today’s interest of about 5.5%-6%, if the house is around $280k-$290k today, it would be similarly valued as the last bottom. How much do you think your house would go for today? If you give it a higher yearly appreciation, like 4% or 5%, then we might be at the same level as 1996 bottom, adjusted for inflation already.

[an]

FormerSanDiegan, you mean 1996 and not 2006, right?

A house @ 160k @ 8% = ~1175/month. Since there’s a difference in rates between then and now, I think it’ll be more fair to compare monthly payment instead of pure price. If you give it 3% yearly appreciation, which is relatively conservative, you’ll get a monthly cost of ~$1675/month. Given today’s interest of about 5.5%-6%, if the house is around $280k-$290k today, it would be similarly valued as the last bottom. How much do you think your house would go for today? If you give it a higher yearly appreciation, like 4% or 5%, then we might be at the same level as 1996 bottom, adjusted for inflation already.

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