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I did misspoke about econ 101, you are correct, however i don't think i can wrap my head around your tax example, maybe I'm just doing it wrong. I assume that money paid for mortgage are not taxable. So for if person makes 50k a year, he pays around 16.5k in taxes for 33% rate. He also has a house which he pays 18k to bank per year for mortgage. At the end of the year he has 50k gross income. We have 8.5k (i think) exception for single person which makes taxable income to 41.5k. Adding 18k that he paid for house he has 23.5k of taxable income at 33%, which amounts to 7.7k that taxes he paid. So his return would be close to 8.8k from IRS.
The person who has no house, with the same income and everything would have 41.5k taxable income which amounts to 13.7k of taxes, which leaves him with 2.8k in tax return.
However i found this gem on the internet:
which states that only interest can be deducted from taxes and not full mortgage payment. So that 18k that owner pays to bank each year, is NOT tax deductible, only interest portion of it. For the calculation it took 225k loan at 7% for 30 years. My interest for the year 1 is close to 16k and it decreases over time. After same calculations you get taxable income 25.5 which will give you a cool 8k refund from IRS.
You are already short on 800 a year, which is not a lot, but if you don't account for that, and i bet quite a few people don't can result in some strain on the budget. In addition, you have to invest in the house in form of maintenance and other things.
If i made mistake on the calculations, please tell me since eventually i will need to buy a place for myself rather than renting and understanding stuff like this is crucial before i choose to invest in the house.
Keeper, sorry for off topic discussion i just wanted to clarify my understanding about this.
The homeowner in the other poster's example paid 18k in just mortgage interest and property taxes in the first year. Total payments in his example were about $22k in the first year.
Especially given the tax issues (which change every year as higher portions of payments go to principal and are not deductible), the analysis underlying whether (and what) to buy or rent is highly individualized. Depending on your income and other tax deductions, you may or may not be able to take advantage of any of the tax benefits of home ownership. Heck, half the country pays no income tax at all, so the tax benefit is right out the window for them.
So, one thing to consider in your example: someone grossing $50k/yr probably can't afford to purchase a property requiring a $2,200/mo payment (this is the number from other poster's example). And, certainly, our $50k/year guy doesn't have enough income -- let alone at a high enough marginal tax rate -- to get the full benefit of $18k worth of interest/property tax payments. Make it $80k for a dual-income family, and it starts to make more sense.
If it is at all possible could we get back to the theme of the original post concerning the issue of whether the housing market was going to drop another 25%. I read a month or so ago that the market was probably going to take another 7% hit. But 25% seems to be an awfly big stretch.
I do believe that the banks may slow down on the mortgage foreclosures, not because they are "compassionate" but rather the Courts and the politicians want them to prove that they actually "owned" the mortgage when they started the foreclosure proceedings.
BBI i must have missread that 18k figure being interest only. On a bright side i know more about taxes and mortgages now
And yes, a person making 50k a year cannot possibly take out mortgage that costs him 1500/month. or rent anything for that amount.
If it is at all possible could we get back to the theme of the original post concerning the issue of whether the housing market was going to drop another 25%. I read a month or so ago that the market was probably going to take another 7% hit. But 25% seems to be an awfly big stretch.
I do believe that the banks may slow down on the mortgage foreclosures, not because they are "compassionate" but rather the Courts and the politicians want them to prove that they actually "owned" the mortgage when they started the foreclosure proceedings.
25% Might be based on a individual property, not an average of 25% for sure.
We have a listing that was lowered so much and might be considered 25% lower due to a ktichen being stolen and half of the bathroom. People need to know the exact details about a home and not just take a news paper article as a fact. There are plenty of areas that have bottomed out and except from maybe one or two that are in very bad shape the prices won't go lower.
Based on statistical evidence, I am having a tough time believing that there'll be a 25% drop across the board. It might be region/location specific. Some rundown neighborhoods might experience more than 25% drops, but the more desirable neighborhoods (almost all over the US) are seeing price stabilization for the last 6 months or so.
I was checking out recent home sale prices at specific neighborhoods in Tampa, and for the so-called highly reputed area, I am seeing a stabilization (and even slight rises in some cases) in prices per square feet. My data window is between Nov 2010 and Apr 2011 (I agree not a long enough time frame, but enough to give some initial indications).
Quote:
Originally Posted by HughMcs
If it is at all possible could we get back to the theme of the original post concerning the issue of whether the housing market was going to drop another 25%. I read a month or so ago that the market was probably going to take another 7% hit. But 25% seems to be an awfly big stretch.
I do believe that the banks may slow down on the mortgage foreclosures, not because they are "compassionate" but rather the Courts and the politicians want them to prove that they actually "owned" the mortgage when they started the foreclosure proceedings.
Based on statistical evidence, I am having a tough time believing that there'll be a 25% drop across the board. It might be region/location specific. Some rundown neighborhoods might experience more than 25% drops, but the more desirable neighborhoods (almost all over the US) are seeing price stabilization for the last 6 months or so.
I was checking out recent home sale prices at specific neighborhoods in Tampa, and for the so-called highly reputed area, I am seeing a stabilization (and even slight rises in some cases) in prices per square feet. My data window is between Nov 2010 and Apr 2011 (I agree not a long enough time frame, but enough to give some initial indications).
I follow the market where we live (33626) and I can't imagine a 25% reduction further- not at least in a year or two. For that to happen unemploymeny must keep going up and more people keep defaulting and that's not the case. But there is some signifcicant price drop year-over-year still from what I can tell.
People have to understand that current reported price reflect all type of houses: convensional, short sale and foreclosures. The best way to track is to look at prices for each category. Dependening on the proportion of mix of which type of houses sold, the price will go up or down.
House prices will stabilize, if not already, once foreclosure and short sales have cleared and employment keeps going down. But once that happens I believe price will show significant uptick as there are not distress sales anymore and people who aren't losing their jobs aren't going to default and aren't going to sale low (remeber their house is already lost significant equity and can't afford to unload for loss)--simple economics.
In our neighborhood, property taxes actually have risen in 2010. That's the first time from the last 4 or so years from what I can tell and county assessment is lagging indicator..
There is going to be continued weakness in housing for the foreseeable future. There are a lot of headwinds still facing housing:
1. Stagflation. Inflation is running hot on items that we need, ie. food and fuel. Meanwhile wages are down in real terms 1% over the last year. That leaves less money for the consumer. This is going to put downward pressure on certain asset classes such as housing.
2. Taxes and insurance. Home insurance, medical insurance, you name it, it keeps rising, quickly. Local governments are facing huge deficits for years to come. This will likely result in more taxes. The taxes may not be readily apparent such as a raise in your property tax bill. But the government will find ways to raise revenue (examples include: rise in driving ticket prices, rise in vehicle registration costs etc.).
3. Fannie and Freddie. These two provide the overwhelming majority of mortgages to the market. They are set to be phased out in the next couple years. This is a HUGE negative for residential real estate. Fannie and freddie are essentially govt subsidies of the housing market. You can be certain that the private sector will require higher borrowing costs.
4. Elimination of the mortgage interest deduction. Probably won't happen but is being talked about. If it does (and it should, it's a government handout that is distorting the free market) it'll be negative for real estate values.
5. Higher down payments and tighter lending standards. A recent survey of banks found that more banks were still tightening lending standards than loosening. 20% down payments are becoming the norm again. That's a lot of cash to come up with, especially in light of everything that I mentioned above that is pinching the consumer's pocketbook. With tighter lending standards, higher down payments, and flat wages, I just don't see a ton of qualified buyers anytime soon.
I can't really think of anything that would make prices rise significantly in real terms any time soon. I could see prices rising in nominal terms if we get runaway inflation but going sideways or down in real terms. That'll make people feel like their home value is rising, but it won't be.
One thing that really bothers me is all the people out there that talk about how we need to get prices going back up (sellers and realtors) as if this drop in prices is some temporary aberration. Newsflash people....the bubble and those inflated, ridiculous prices was the aberration. Absent some massive distortion of the market (like banks handing out free money to anyone with a pulse again) we're not going back to those prices now or next year or 10 years from now. Prices need to settle to their historical norms with respect to income and rent. That's what they're doing now. If prices were to surge again it would be a bad thing because we would be creating another bubble.
Among other inflows, a homeowner can reasonably expect to receive, on an annual basis, tax refunds related to, among other things, mortgage interest, PMI, certain types of property improvements, property taxes, etc. These tax benefits are unavailable to renters and are substantial. The other poster gave an example of a person who pays $18k/year in mortgage interest and property taxes. If that person has a 33% marginal income tax rate, he should expect to receive approximately $6k in tax refunds as a result of paying mortgage interest and property taxes. $6k/year is $500/month, so if the person was paying $1500/mo for rent, then, all else equal and on an annual basis, he's in the same financial situation if he pays $2000/mo to own. Those expected cash inflows are at risk of only that the tax code may change (or that you'll refi at a lower interest rate). Expecting to get tax benefits is reasonable.
Substantial?
I'm going to have to step in again here. Expecting to get tax benefits is reasonable, but using the word "substantial" is a bit extreme.
Another fallacy of the realtors is the whole "tax benefit" math that they trot out whenever they want you to overpay for a property.
In your example above, you neglect one very important piece of information: EVERYONE gets a standard deduction, and those who itemize only receive incremental benefits above that amount.
For your 2010, married couples that filed jointly received a standard deduction of $11,400. In your example above, if it was a married couple and that was their only deductions, their true benefit would be only 0.33 x ($18,000 - $11,400) = $2,178, or $181 a month, because you have to forego the standard deduction to itemize.
If they rented, they would still get the $11,400 deduction.
Every year, the standard deduction will go up faster than your deductible expenses, because your mortgage amortizes away over time. So the tax benefit that you may or may not receive will likely shrink over time.
My parents, who still have a tiny mortgage and pay few property taxes, don't even bother to itemize because the amount has dropped below the standard deduction amount. In fact, if your mortgage balance is less than $150,000, you probably* won't be getting much, if any, tax benefit from home ownership. That is why Obama wants to abolish it -- it only benefits the middle- and upper-classes.
[* I am making the assumption that a vast majority of deductions are home-related]
I'm going to have to step in again here. Expecting to get tax benefits is reasonable, but using the word "substantial" is a bit extreme.
Another fallacy of the realtors is the whole "tax benefit" math that they trot out whenever they want you to overpay for a property.
In your example above, you neglect one very important piece of information: EVERYONE gets a standard deduction, and those who itemize only receive incremental benefits above that amount.
For your 2010, married couples that filed jointly received a standard deduction of $11,400. In your example above, if it was a married couple and that was their only deductions, their true benefit would be only 0.33 x ($18,000 - $11,400) = $2,178, or $181 a month, because you have to forego the standard deduction to itemize.
If they rented, they would still get the $11,400 deduction.
Every year, the standard deduction will go up faster than your deductible expenses, because your mortgage amortizes away over time. So the tax benefit that you may or may not receive will likely shrink over time.
My parents, who still have a tiny mortgage and pay few property taxes, don't even bother to itemize because the amount has dropped below the standard deduction amount. In fact, if your mortgage balance is less than $150,000, you probably* won't be getting much, if any, tax benefit from home ownership. That is why Obama wants to abolish it -- it only benefits the middle- and upper-classes.
[* I am making the assumption that a vast majority of deductions are home-related]
Eh, you're nit-picking. The tax benefits can be substantial, and can be material to a rent/buy decision. Apologies to others for the re-post, but since you missed it: Especially given the tax issues (which change every year as higher portions of payments go to principal and are not deductible), the analysis underlying whether (and what) to buy or rent is highly individualized. Depending on your income and other tax deductions, you may or may not be able to take advantage of any of the tax benefits of home ownership. Heck, half the country pays no income tax at all, so the tax benefit is right out the window for them.
Also, real estate is, for many of us, the significant itemized deduction and, without it, we would not itemize. In that case, real estate ownership may open the door to other itemized deductions which would not, by themselves, take the homoeowner over the standard deduction (e.g., medical expenses, sales tax, charitable contributions, etc.). Again, any income tax analysis is, by its nature, highly individual.
And, of course, I'd love to be in the situation like your parents where my mortgage payment was nearly all principal. Principal payments over rent is a no-brainer (because I care about asset value...).
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