What are the “standard” fundamentals?

[sdrealtor]

BMS
I think you pretty much illustrated the difference between those who prefer to and should rent with those who can buy and prefer to.

The idea of relocating in 10 years let alone 30 days is outside of my mindset. I have had several opportunities to chase big bucks other places but have chosen to live where I want and how I want.

SDR

[an]

bigmoneysalsa, I agree w/ you completely. The mobility factor is HUGE. especially to the younger generation. Statistically, people in my generation tend to change job every 3 years. That’s much shorter than previous generations. Since my generation are the typical candidate buyer for the starter homes, it does affect the premium in the big way for the starter home.

[davelj]

sdrealtor, a couple of things, in reverse order.

First, where taxes are concerned, you’re not taking into consideration the standard deduction that everyone gets. If the TYPICAL home buyer nets out the difference between what they itemize for interest expense and their standard deduction, the actual tax savings aren’t that great… maybe 10%-15%. This obviously increases as one’s income increases.

Peace of mind is totally subjective. Your 5%-10% number might be a good start. (Although one could argue that this “peace of mind” should be offset to some degree by loss of mobility, from which many people derive value.)

Finally, the rent increase issue is a touch complicated from an analytical perspective. First of all, although your rent will increase in a rental, the cost to owning your home increases as well (upkeep and HOAs if you’re in a condo) – let’s say this adds 1% to your total gross housing payments each year. So, this upkeep/HOA issue has to be offset against the rental increase. So, let’s net the two out and say the difference is 2% annually (that’s 3%-1%). Now you have to figure out what the present value of those increases are going to cost you and AVERAGE this number out over the 10 year average ownership period. (Also, recall that you’re trying to decide whether to buy TODAY but you will be paying your rent or housing payments in inflated dollars tomorrow.) If you work through the math assuming a 6% discount rate, you’ll find that a 7% “ownership” premium, or thereabouts, will negate the effect of the higher rent payments. (Obviously, the higher the rate of rental increases you expect, the higher the ownership premium should be.)

So, the 20% premium may be on the low end, but it’s definitely not out of the question for some people. On the other hand, some people could probably justify a 40% premium depending on their circumstances.

[sdcellar]

sdrealtor– I don’t see how you can say relocating within 10 years is out of your mindset when you yourself have admitted you’ve only been in your current home for 8 years. It’s certainly possible you were wherever you were before for longer than 10 years, making it a little more palletable, but are you going to tell me you’ve never lived somewhere for a shorter period? Perhaps you meant “at this time in my life.”

As far the tax benefit is concerned, that is often dubious, as I pointed out in my first post here.

[SD Realtor]

Been on the sidelines reading the posts which are good. I will say though as a family guy who is renting and has had to move a few times in the past few years, it has been a 100% total chore. If any of the lowball offers I submitted would have been accepted I would have bought. I am not saying anyone is right or wrong here. I just think that the personal choice and lifestyle is a pretty nt factor that may overule fiscal objectives IF you don’t go broke because of a stable long term horizon.

SD Realtor

[sdrealtor]

SDC,
Of course I meant at this time in my life. It would be silly for me to talk about something in the past as my Delorean is on the fritz. Between the ages of 18 and 35, I moved 15 times. Thankfully that is in the past and nothing I ever intend to do again.

Regarding the tax benefit you calculated the tax savings on a 50% down purchase rather than a 20% down purchase which is more typical. You also subtracted the real estate taxes which i already included. It’s the “T” in the PITI (Principal, Interest, Taxes and Insurance).
SDR

[sdrealtor]

DLJ,
Everything I hypothesize on is for the typical household living in a nice part of the NCC area. Thus, I’m assuming a typical white collar professional family with one or two well employed people and a HH income of $125,000 to $200,000 (or more). I suspect you might fall into this category or soon will. In this situation the tax savings I used are entirely reasonable.

I think the 5 to 10% for peace of mind is very reasonable. If you are worrying about loss of mobility you should rent and thats why I dont think its relevant.

I went through most of what you covered regarding rent increase in my mind (including a quick and dirty discounted cash flow calculation) and used the 3% to compensate for those factors. The truth is rent will increase more than 3% per anum on a long term basis.

Last and not insignificantly, I purposefully left out appreciation. Assuming you purchase at a reasonable price relative to the cost of renting, the potential for significant appreciation with the benefits of leverage enter the equation again.

IMHO, if someone places only a 20% premium on owning vis a vis renting for whatever combination of the above reasons they probably are better off renting.

[greekfire]

sdr-
I may be wrong, but I’d be willing to bet that the demographic you are speaking of, the one that earns $125k-$200k per year or more, is in the minority. This figure seems to be well above the median income ($52,192 per household SD County in 2005 adjusted for inflation – SANDAG) of the North County Coastal area, and many of the surrounding areas.

Maybe you have some concrete data that shows what percent of households make this much, but I would bet it is not that high. I estimate that the majority of household incomes in SoCal are well below your figure and perhaps many of these households are living off credit, which is the new second job these days. Either that or they took advantage of the stated income aspect of the loan process that was so prevalent in the past few years. Is this where you got your figures from?

[sdrealtor]

greekfire,
My figures are purely anecdotal and are defintely in line with most people I run into in my area. I’m am sure it is the minority but it is only a small minority that purchases a home each year. I don’t pretend that it fits median stats which include renters and lower income workers. I am only refering to what I see as the typical homeowner profile in my area. This brings an interesting thought to mind. Could it be that being a home owner puts me in an environment where I typically interact with more successful, higher income individuals and shelters me from the opposite. It would a ppear so and the benefit of interacting with highly educated, highly motivated, family oriented neighbors is yet another benefit of homeownership that I enjoy. That is another thing i would pay some sort of premium for.

I wonder how many on this board fit that profile? I suspect it would be most of you. If you are under 35 & single earning at least $75,000 you are well on your way to fitting this category also.

One interesting thought that came to me as a result of this thread is that there is defintely a difference in how much of a premium people place on owning a home. Many of you might fall into 20% premium and I suspect this would put you into the lifetime renter category. I remember buying a home at the bottom of this last cycle in my area when homes were undervalued by most measures and the premium was definitely more than 20% to get in the game. I would venture to guess that most homeowners out there put a much bigger premium on home ownership which is what it takes to become a homeowner around here.

SDR

[(former)FormerSanDiegan]

It seems to me that most folks on this thread agree with the notion of comparing rent to own with perhaps some premium is the best fundamental measure. The only differences are in the details. The problem is that the assumptions for premium people are willing to pay vary by as much as 40%. Here’s my $0.02.have been true for sdrealtor’s areas, I don’t think a 20% premium to own versus rent is an accurate description of the previous bottom in most areas. For older bread-and-butter rental areas such as Clairemont this premium dropped to nearly zero or 5% (depending on down payment). Don’t know what will happen this time, but I’m guessing that rent vs own numbers will nearly come in line for older central SD neighborhoods.

[CardiffBaseball]

I live there am quite active with a local Little League, and coach some basketball as well, and thus run across a lot of people. I definitely fit into sdrealtor’s anecdotal NCC resident, and I have a hard time believing there are not a lot more like us. Sure there are kids with single moms in apts. and a few teachers kids, but there are a surprising number of attorney’s, high level salesmen, big finance types engineers way up the chain, etc. Heck one guy that coaches my younger son who seems so meek and humble (but drives amazing cars), I just found out has been CEO of two companies, one that was very well known in the tech industry. I’d have never guessed that coaching around the guy.

On the other hand in my neighborhood, I am one of the few well educated, high earners, but most of my neighbors bought 12-15 years ago when you could be a bartender or school janitor, and still purchase a home. The homes are all small (>1100 Sq. Feet) All interesting people, and quite fun, and have been very accepting of a renter like me. Wife would gladly buy in this area, except I told her anything north of 350K for these houses forget it I am not touching since rent is $1800.

[sdrealtor]

FWIW,
I know several teacher family HH’s in my area that fit this profile. Two experienced teachers in this area can easily have an income over $125,000 while working 10 months a year with a handful of two week breaks each year. Not a bad gig in my book!
SDR

[barnaby33]

They must have alot of seniority. Teachers in San Diego start in the low 30’s. They don’t even hit 50k till they are around 5 years plus a masters degree. One of my best friends is a math teacher in Palm Springs. When we graduated he couldn’t make the numbers work, even for a rental, as a teacher. This was in 1998.

sdrealtor, your numbers are anecdotal and skewed. Someone else even posted that the median household income in Carlsbad is only 90k. I am guessing here but thats mostly dual income families, not just single lawyers.

Josh

[davelj]

sdr,

An anecdote to clarify what I’m talking about. When I moved to SD in 2000 I bought a condo that would have broken even on a cash flow basis if I had decided to rent it out – that’s right, broken even… maybe even provided a small positive cash flow. And this was in a reasonably nice, albeit 20-year old, complex (maybe that’s an oxymoron – I don’t know). From the price history I could tell that buying one of these units at any time between 1996 and 2000 would have given you break even or slightly positive cash flow using traditional financing (20% down, fixed-rate mortgage) and then-current rents. Now perhaps that was unusual at the time. I wouldn’t know as I had just moved to the area. In hindsight, obviously, I should have bought a much larger, pricier place. I had no idea how crazy things would get.

Anyhow, I sold in 2004 (for a bunch of different reasons at the time) as the ownership premium we have been discussing had risen to about 160%. The premium then rose to almost 200% over the subsequent year-and-a-half (yup, I left money on the table) before declining back to around 160% today. (I track this complex as a market bellwether because I’m familiar with it.) My suspicion is that the premium will decline further to 120% or less before this decline is finished.

My point is that the people who bought at 160% probably won’t see much appreciation over an 8-10 year time horizon, so there’s no need take such appreciation into consideration – it probably won’t be there. Which is one of my points – this premium is telling you the degree to which you’re overpaying on the fundamentals. I’m highly confident that if you consistently pay a 150% premium to own/live in a house/condo, in most cases you will experience minimal appreciation over the subsequent 8-10 years.

(Also, I’d love for someone to pull these figures – I’m too lazy – but my suspicion is that residential rents in SD County have not increased by more than 3% per year on a PPSF basis since 1990. They almost certainly have since 2000, but it wouldn’t surprise me to see 2% increases over the next several years. Most this type of rate-of-change analysis is highly dependent on your starting point.)

For the record, the only reason I own now is because I ran across a (crazy) seller in a building I really liked who was willing to leave a big chunk of equity in the unit and assume virtually all of the downside price risk over the next few years. (It’s a very complicated transaction – I won’t bore you with the details.) I’m paying a 115% ownership premium, which is fine with me. Otherwise, I would have been content renting for several more years.

Having said that, I could buy my place and your place for cash tomorrow. But the accumulation of that capital didn’t come from buying dear and selling cheap, but rather the other way around.

[no_such_reality]

I’ve posted on this before. In north County, particularly La Costa, average teacher salary is $60-$65K.

http://tsa.hiddengap.org/schools.php?district=37735510000000

A too public servant family (teacher, police, firefighter,etc.) easily makes $130-$170K a year.

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