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This post probably applies mostly in higher cost housing areas mainly the Northeast (Wash DC up to the New England area and Southern/Northern CA and some parts of Chicago.
Most private rents for homes in my old neighborhood in Suburban Maryland go between $2500-4K a month. The school district is rated one of the best (Clarkesville, Howard County)
It is my belief most families cannot rent for long periods time paying this much for rent and still want their kids to attend good public schools. Say you rent for the lower end ($2500X24 months). You would be paying 60000 in rent money over the course of 2 years.
My mortgage costs me $3200 ($700 into the principal each month) a month plus 6K a year in property tax and a $175 a month in HOA fees which includes community pool and gym. I put 20% down in my home when I purchased it in early 2005.
So my total cost over a 24 month period would be 76800 in mortgage, 4200 HOA, 12000 in property taxes. So my total costs over a 24 month period would be 93K.
I would have 48000 in interest deduction and 12000 in property tax deduction. My "tax savings" because I'm in the 35% tax bracket would be roughly 20K in real time savings. Plus I would have paid 17000 into the principal over a 24 month period.
So my adjusted costs to own my home would be roughly 56K (93000 in mortgage/HOA/Property Tax)-37K (48K mortgage interest deduction+ 12K property tax deduction +17K paid into the principal).
This is in comparison to people who would have rented for 2 years and rental cost would have been 60K at that time.
The main point I'm trying to make is that even though I pretty much brought at peak, housing eventually will have to stabilize. People cannot keep on renting forever, especially in high cost, high rent areas. 24 months is about the break even point for most homeowners. This is assuming people put sizeable downpayments on their homes and paid into the principal each month.
I'm not suggesting a V shape housing return in 2010. What I'm suggesting is that real estate will stabilize, especially in more desirable area, and housing will probably stay flat (1-3% appreciation) beginning in 2010-2011.
While I like you optimism, and think your quick and dirty cashflow analysis is spot-on, there is no telling how long people who've been stung by things like declining home prices, plummeting 401Ks and shrinking wages will treat 'rent' the same way they treat 'car leases', "cable fee" and other modern household living expenses.
If people have soured on ALL FORMS on future oriented investing (and really that is what home ownershio ultimatel must be...) they may shift every dime of 'income' toward consumption.
Not pretty, but maybe that has already happened...
People are shunning debt. It's easier to rent and deal with a financial crisis (move and lose a deposit) then owning a home and have it hit (foreclosure) if you need to pare down your expenses.
If people have soured on ALL FORMS on future oriented investing (and really that is what home ownershio ultimatel must be...) they may shift every dime of future, yet to be earned 'income' toward consumption.
Not pretty, but maybe that has already happened...
Well hello stranger. It's good to read you again.
I made one teensy change to your staement. I hope you don't mind.
I would have 48000 in interest deduction and 12000 in property tax deduction. My "tax savings" because I'm in the 35% tax bracket would be roughly 20K in real time savings. Plus I would have paid 17000 into the principal over a 24 month period.
You're making more than 370k a year? If so you're living in a very modest house for your income. Anyhow, the tax savings is more like $17k. You are ignoring the fact that when you itemize you lose the standard deduction that a renter is going to be getting.
But those making over $370k a year are by far the minority, in fact only around 1% of the population makes that much. Those with lower incomes will not get as much of a tax break.
Also, counting principle is speculating on the future price of your house. When you pay principle its just an indication that you are paying down part of the loan, not that you are gaining equity. So you are already assuming your view point on housing in your calculations which you then try to use to justify your view on housing. "Let's assume X, therefore X".
I know I sure can't pay it. The rents are 1,300 out here in the OC. Unemployment is one of the highest among the nation. I am leaving CA for some place with lower cost of living and more jobs.
Sounds like your house price was in the 600K range, give or take. Be sure to include the 12-15% a year you're losing in equity as house values drop as part of your calculation - that adds another $75-$100K each year to the benefits of renting column. That'll pay for a lot of rent.
Sure, the market will eventually stabilize. Any guesses what the prices will be like at that time?
I'm not really trying to make a rent vs. buy comparison. Or whether the real estate market has hit bottom yet.
It's all about the economy. Places that have highly educated/trained workforce will always lure businesses. I think there was an article in MSNBC yesterday under the real estate section about the top 5 cities to rebound with commercial real estate. The usual cities, NYC, SF, LA, Seattle, Wash DC.
I know inside the Beltway, homes have actually held up very well. Also homes in the better school districts have held up. There's been a decrease in home values in even those area; I'm realistic about that.
The homes in the "outer burbs" are the ones that have the highest distressed homeowner who pushed their income limits.
As for the rents in the Maryland/DC/Northern VA area; they are high. You could be cheap and rent in a poor school district, and if you cared about your kids, you would have to pay an extra 7-20K extra a year for private school.
I think you raise a good point. Those with secure enough employment that pays enough to afford $3000-5000 a month for a single family rental are more likely to get over the fear of buying in a down market, than not.
They are also more likely to want to put down some roots in a solid community with good schools, install an invisible fence, let the dog run and get on with their lives.
Many of these wanna-be buyers are not renting right now. They are trying to sell their existing home for $500K , enough to make the leap into the $600-700K market. And so many of them can't pull it off and so, remain, where planted. They are dependent upon buyers trying to sell their $300K homes, who are dependent on buyers trying to sell their $179K homes and on and on.
I am also aware that this is not the typical profile in the U.S. Most people cannot afford $3000-5000 rent, let alone a house payment, deduction be dammed. Most people make compromises on neighborhoods and schools because they have to and at some point, good enough is good enough.
Location: Georgia, on the Florida line, right above Tallahassee
10,471 posts, read 15,831,906 times
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Quote:
Originally Posted by HappyTexan
People are shunning debt. It's easier to rent and deal with a financial crisis (move and lose a deposit) then owning a home and have it hit (foreclosure) if you need to pare down your expenses.
BAM! <---that's me. I have no debt. Where I live a 3 bedroom costs 700K.
My rent is $1460 (water and garbage included). I get all the benefits of living in a rich area, and I pay a lot less per month for housing. That money goes into savings. I am saving for a house and was looking to probably by in 2011, maybe 2012 and I was WRONG. I see the government trying to artificially prop up home values... So, I'll just wait a little longer.
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