Monday, January 29, 2007

'The Easy Money...Has Been Tapped Out'



From the Sacramento Business Journal:
Sacramento was one of three metropolitan areas in the state that together accounted for almost half the decline in single-family housing permits in 2006, according to the California Building Industry Association. (The other two were San Diego and Riverside/San Bernardino.)
...
California Energy sells primarily windows but also some siding in an area that stretches from Vacaville to Grass Valley, and from Lodi to Yuba City. Most of its customers are homeowners who are remodeling though the company also does a few jobs for contractors and new construction.

"2006 was a rough year for most everyone I talk to. For every dollar you'd put in advertising in 2005, you'd have to put in three dollars in 2006 to get the same results," he [owner Phil Isaacs] said.

Another hurdle is the climate for mortgage rates. While rates came down through most of the last six months, it didn't translate into a new wave of remodeling projects for California Energy. "The easy money that was out there for remodeling has been tapped out," Isaacs said. "When the whole economy was good, they were tapping into the equity to remodel because interest rates were so low."

That would seem to contradict the industry group's rule of thumb that remodeling goes up when home sales go down, or it could simply mean that segment is played out for now. Dave Coffin, sales manager for window manufacturer Burnett & Sons Mill & Lumber Co., has become a doubter.

"Walk-in traffic seems to be more lookers than buyers, which we had a year ago," he said. "We sensed a change in the climate about six or eight months ago."
Also from the Journal:
Pulte has sold its interest at Placer Vineyards, totaling about 450 acres of owned and optioned land, to Sacramento's Reynen & Bardis Communities. Financial details were not released.
...
The deal closed last month as part of Pulte's strategy of focusing on existing communities and withdrawing from future ones during the housing downturn, a company spokeswoman said. It's one of the largest land transactions in the region during the past year as the market cooled off significantly, several land experts said.
...
This month, Pulte said it would take a $330 million to $350 million charge, included abandoning land options, and possibly post a fourth-quarter loss. Pulte's Sacramento division recently laid off about 20 workers, from construction workers to administrative staff, or about 10 percent of its work force.

58 comments:

Looking_in_EDH said...

I've been thinking of a quck way to calculate the "point of max pain".

Consider the following equation:

C <= A

where C is the cost of ownership and A is the expected gain (appreciation). Therefore, as long as C is less than A (i.e. housing appreciates more than cost of ownership), the flippers look good.

Now let us see what C is made up of. I submit, that with the cost of tax (1%), the cost of an interest only loan (6%) and the cost of maintenance (approx 1%) the total cost of holding is approx 8% of the value of the home. This is pretty much independent of the value of the house (in other words, it does not matter whether the house is $500K or $1M). Also, assume that the financing was with $0 down, which is also a very plausible scenario for most flippers.

Now let us see how the trends have been holding up. The appreciation
rates below are my guess at the rate each year from 2003 onwards.

Year Cost Appreciation Net

'03 8% 8% 0%
'04 8% 12% +4%
'05 8% 16% +8%
'06 8% 1% -7%
'07 8% -2% -10%

In 2007, a mild downtick of 2% in home prices is enough to put an "investor" from 2003 in the hole by 5%. If they were to unload the home this year, you can add another 3% to the cost side for the cost of selling, so the total loss on the investment is 5+3, which is 8%.

Given an average house value of $500K, this is a loss of $40K for the investor.

What is interesting is that if the prices remain flat, you'll be seeing a bleeding each year of the cost of ownership ~8%. Something tells me that it is not sustainable for an investor to keep taking a drubbing of $40K each year, so I doubt that they will stick around beyond 2007.

In other words, expect an avalance of homes on the market this year.

The lucky ones will get away with a $40K loss!

Anonymous said...

I was taling to a person who works for one of the major builders today. I asked how it was going and are they laying off any people.
He said of a crew of 29 on one project, they laid off all but 13. I belive the ripple effect will be terrible to see as unemployment rises along with the proposed tax increases I am hearing about. Prices will fall dramaticly.

Anonymous said...

The equation likely needs to include some factor for rental income, and at least a small factor for the tax benefits on the annual negative. Then add a significant cost in the year of sale, likely 6% of the sales value.

Perfect Storm said...

The well is dry and the water table for homes sales is dropping.

Were on track for a 50% decline by 2009.

Look out below!!!!

Real said...

Were on track for a 50% decline by 2009.


perfect storm, if the current trend for existing home prices continues at the 'rapid' pace of -1.7%/year, we should hit your prediction of a 50% decline in 2035, enjoy renting for the next 29 years....

Perfect Storm said...

Sacramento County
YoY median price change: -9.00% [v. +13.64% in December 2005]
7th month of YoY price declines

Change in median since price peak: -9.70% (down $37,832)

Keep dreaming about your 1.7% decline YOY.

Anybody who buys now is a fool.

Anonymous said...

Once again, Real is making wild statements about YOY declines. Must be a realtor that is struggling to survive and needs a pompom and a dance routine to stir the masses toward buying in this falling market. Also must be young enough not to have seen the early 90's and what happened to home prices back then. Money wasn't near as cheap and the boom prior didn't rise nearly as much. Real, get Real! Any mind you change belongs in a Barnum & Bailey side show act.

Anonymous said...

I witnessed both the declines in '79-'83 and '90-'94 as a transactional insider (actually handled foreclosures for a title company). I can tell you that the problems we face this time around are substantially worse. At least in 1980, when interest rates rose through the roof, we knew relief would eventually come through the lowering of those rates.

This time around the FED doesn't have the capability to stimulate the market with interest rate reductions because the rate is currently so low. Unemployment will start to rise when the secondary effects of the downturn in real estate related jobs (construction, mortgage, title company, building suppliers, etc.) begin to climb.

The reality before this decline started was that buyers were establishing sales prices. That reality continues. What has changed is the wake up call relating to the lack of an expected gain (appreciation).

Why buy something I can barely afford if all it provides is shelter? As long as the disparity between the cost to rent and the cost to own is so wide, renting is clearly the way to go. I'd sell and rent if it were not the pain associated with moving and clearing out 20 years of junk and the loss of the Prop 13 benefits.

patient renter said...

"Once again, Real is making wild statements about YOY declines. Must be a realtor that is struggling to survive"

I had guessed that Real was short for Realtor based on some earlier comments. Just a guess though.

Gwynster said...

I got the impression that real and anon 1137 were the same person. Is that correct?

Real said...

Oh, I am making wild claims?
Here is the link right from the SacBee (look at existing homes sales for Sacramento)

http://media.sacbee.com/smedia/2007/01/17/18/91-re2.standalone.prod_affiliate.4.gif

My claims are wild because I grab my numbers from the newspaper vs. my ass like the renters on this board?

No, I am not a realtor - I am a homeowner and not even a realty investor. I just like reading the board as this is a perfect lesson in group think as the 'sky is falling' crew preaches to themselves and make ever wilder predictions.

Let's take a step back and look at the facts:
1.) Existing home prices fell in Sac by 1.7% last year. So, if a person bought a home in the last 12 months, they are likely down by <1.7% so there is not this huge wave of under water homeowners that the renters are praying for. Next, we have new homebuilders cutting their workforce and giving up land options - THIS IS EXACTLY WHAT THE MARKET NEEDS TO HAVE HAPPEN - as this clears the excess inventory on the market. The new homebuilders are hurting - that is a good sign that they will stop flooding the market with the low end crap they have been pushing for the last year which causes the median price for new homes to fall 10% as they switch from building 4-3 to 3-2 or smaller. You guys do realize what median means and the impact of more low end homes has on the number, right?

Now, I am not saying now is the time to buy, but it is not that much further off. Once the common thought of the peanut gallery is sell, that is the time to buy. However, if you enjoy renting, I see no reason why even a 50% decline would prompt you to buy.

Anonymous said...

DO NOT BUY NOW!

WAIT, the bottom has not been reached...UNLESS you find a distressed buyer..and then go straight to the buyer, and cut out the realtor...offer cash and cut the price by 2/3 to 1/2...offer a window of 24 hours, and if they counter...tell them to stuff it and move on...

IF you are short of cash, go ask Councilman Rob Fong, Mayor Fargo or her goons, Kerridge and Dangberg for a real fine loan...ask for 10 million as that seems to be the magic number...they do it for evey Tom Dick and Harry, why not you?

Real said...

and then go straight to the buyer, and cut out the realtor...offer cash and cut the price by 2/3 to 1/2

This is a great strategy. As we know, most buyers are under water by 50-67% so I think you will surely get that property of your dreams.

Are there any real people here or just 14-year olds logging on at the library?

Anonymous said...

Do not trust realtors...EVER...

If one finds a property you like, do as recommended above...but be sure to get the offer low, low, low, low...because the market continues to fall...

The last bubble hit the top in 88 in SF, and apparently again in 2005, so plan accordingly...goin down and the a low plateau for quite a few years...so if you have to buy now, cut the price with low ball offers...and avoid realtors like the plague

patient renter said...

Real:

"Now, I am not saying now is the time to buy, but it is not that much further off. Once the common thought of the peanut gallery is sell, that is the time to buy."

There are a few things that you're failing to address: primarily, the situation with rising forclosures, NODs, record vacancies, rising inventory that will likely hit record levels this year (supply/demand), and the incredibly massive amount of mortgage adjustments set to occur. Additionally there are employment and economic factors related to a dwindling industry that is seeing job losses (everything related to housing).

These things have not played out yet, and are in fact still just getting under way. If you want to say the bottom is not much further off, that's fine, but you're not going to be taken seriously unless you address all of the factors.

Anonymous said...

Real, Anon 1137

You got to be able to laugh off some of these responses.

Anonymous said...

Anyone who bases decisions on how the "median" price of homes is moving is a niave dummy. Median price is not a reliable indicator of the upward or downward movement of prices. Median price completely ignores the mix of homes sold in a given period vs. another. Sorry. For those of you who look at median prices and say, "oh no!" or "oh wow!" are just exclaiming in the wind.

Anonymous said...

Anonymous 7:45. Your response is about as good a summation as I've heard. If you add in that M-3 money supply has been rising at a 10% clip per year (which many believe to be the true rate of inflation), the only way the Fed has to go is toward higher rates. There's a Catch 22 in the making. I'm not saying that we're headed for the 70's with regard to interest rates, but the dollar keeps falling and at some point the Fed will have to step in to avoid a currency crisis. Add a moderate increase to the federal funds rate (say 125 basis points) and now we have even more unaffordability in the real estate marketplace. Affordability, inventory, and cheap money are the keys to any turnaround. You need all three going in the right direction in order for this market to stabilize. When you add everything up, as Real fails to do, the direction of this market this market has a ways to go before we see daylight again. Renters keep your powder dry until buyers take another huge chunk out of their selling prices.

Ostrich Hunter said...

"Anyone who bases decisions on how the "median" price of homes is moving is a niave dummy." Median price is not a reliable indicator of the upward or downward movement of prices. Median price completely ignores the mix of homes sold in a given period vs. another. Sorry. For those of you who look at median prices and say, "oh no!" or "oh wow!" are just exclaiming in the wind."

Are there still people out there that claim there have been no price declines???? Anyway you slice it: average price, price per sq/ft, median price, PRICES ARE DOWN. Need proof, check out the graphs on the Lyon Realty site.

Anonymous said...

hey ostrich, i didn't say prices aren't down. i only said that median price is not a reliable indicator.

Anonymous said...

And if your information comes from the Sacto Bee or the California Board of Realtors you might want to sit down with a therapist and try and find out why every decision you make is a bad one.

Morris said...

If you look long term (like 25+ years, you can begin to see the pattern. If you then look into why the pattern exists and what the factors that drive the pattern are it becomes clear. Here we go:

1) Long term, real estate rises at the rate of inflation.

Why?

Because long term, people only have a certain percentage of their income (which also rises by the rate of inflation) that can be dedicated to housing.

2) For short periods of time real estate can widely fluctuate above or below inflation.

Why?

Because of human behavior and speculation. When prices advance rapidly (i.e. recently) there is a pack mentality of being priced out. When prices drop dramatically or money becomes too expensive (i.e. 1980), demand dries up and prices drop until they reach equillibrium.

Example: Let's asume prices of housing from now on are going to increase an average of 10% per year, but inflation (hence wages) are going to follow history and advance 3%. Housing that costs $100,000 today will cost $270,000 in 10 years. However, the income of $26,000 that qualified for that $100,000 house will only have advanced to $35,000 which would qualify for a $135,000 house.

See the pattern?

Ultimately, because housing is a necessity rather than a luxury, it must closely follow inflation. Otherwise, bananas might be $130 each.

Sippn said...

Morris, a few things I agree with you.


Housing is a necessity - yes a 500 sf apartment, family of 6 in 1200 sf maybe. The rest is gravy.

Cost of housing must follow wages. - assumes that purchased housing must fill this bill - no.

If the ownership rate is about 60%, its the top 60% of income that is owning, the bottom 40% goes wanting or renting or living with Mom and Dad. Forget averages.

Sorry, but with land rationing by those who think they are doing right, this is what happens. You will see this in all land rationed societies. The report was actually cited by lander a week or 2 ago.

Anonymous said...

Morris, I agree with your assessment but what happens when inflation moves up but job creation or real wages across the board move down. All we hear about are all the new jobs created. When you dig deeper you find that real wages are in stagnant decline and have been for years. Real wages are not pacing with inflation. Therefore the only way to control inflation would be to curtail money supply which would mean higher rates and tighter restrictions. This would push the affordability index down even further creating a longer depressed market and lower prices with it.

Real said...

1) Long term, real estate rises at the rate of inflation.

LOL, your funny. If this was the case, the price of a home in Indiana would equal the price of a home in California. First, the rate of housing appreciation is a function of

1.) Job growth
2.) Organic population growth
3.) Population movement to the city/area from other cities/areas
4.) Wage growth
5.) Location/Location/Location

To simply say appreciation is capped at inflation is pretty foolish. Now, those those saying that 'real wages' are not increasing or 'no good jobs' are available, I would suggest your skillset is off. Homeownership is what, 60%? Wage growth for the top 40% of this country continues to outstrip inflation year in and year out. If you are stacking boxes or clearing tables - yes, your wages did not go up, but you are likely not in the home owning portion of the population anyway.

Renters, don't let your envy overrule your common sense. You may choose to not buy a house because you do not value the homeowner lifestyle, but do any of you honestly believe home prices will not be higher over next 5 years?

Perfect Storm said...

Just a couple more months before the blind optimism dies in the face of no spring bounce. It’s going to be quite a spectacle to observe here in Sacramento.

Anonymous said...

"1.) Existing home prices fell in Sac by 1.7% last year. So, if a person bought a home in the last 12 months, they are likely down by <1.7% so there is not this huge wave of under water homeowners that the renters are praying for."
--------------------------------

It isn't the 1.7% fall that has homeowners upside down. What has them upside-down is the fact that they borrowed more than they could afford, speculating that home values would go up enough so they could refinance into loans they could afford later. Even a slightly elevated market will not help these folks, so anything in the negative is a death nell. It's too bad, but that's how things are. Prices will continue to fall as these folks wash out.


No matter what "Sir. Real" says there is one basic fact that cannot be ignored... affordability. I don't care how rose tinted your glasses may be, at some point you realize that only a handful of people can actually afford to buy a house in this market. That is why NODs are up, Foreclosures are up and why the market is falling. (This should have happened some time back, but the funny money kept things propped up way past the point of insanity.) The funny money is going away now, so unless wages suddenly increase far beyond the current rate this market is doomed to crash until affordability falls back in line. It will happen! It's already started, none can reasonably deny that.

Perfect Storm said...

Crash and burn. Yep that sums it up in nutshell.

Housing Doom 2007.

Were on track for a 50% decline by 2009. Let the Congressional hearings begin.

Got popcorn?

anon666 said...

Re:"Anonymous 7:45. Your response is about as good a summation as I've heard."

Yes, I was going to post to say the same thing. A very simple example of why this time may be different.

Now, for all of us anon's out there who do not want an identity, why not do what I'm doing and just pick 'other' when posting. You can choose anon123 or anon916 and you can still remain fairly anonymous. It makes it much easier to discern between all of the postings in a thread.

lexi said...

I think the market will have to
correct. For example... if
I were to rent a newer home
in El Dorado Hill...4 bedroom
2 and a half bath with 2300 or
so square feet it would cost
about 2200 to 2300 a month.
To buy that same house would
cost over 500 thousand with
lets say zero down at 6 and a
half percent would cost about
3300 a month plus about another
500 or more for tax and insurance
totaling 3800... let me see.
Rent for 2300 or buy the same
house for 3800 a month. Makes
much more sense to rent untill
a major correction takes place
and renting and buying are much
closer in price on a monthly bases.
Just my two cents.

Anonymous said...

Sir Real also needs a tune-up in Economics 101. IMHO, the key reason unaffordability remains so high is that the dollar has fallen dramatically since 2000. It takes more dollars to buy fewer goods, make the mortgage payment, send the kids to college, pay for health care costs, etc. The government quit tabulating the key M3 money supply figures months ago because its running wildly rampant to the upside. More dollars in the economy means more inflation. More inflation creates the need for inflation control either by price controls or higher interest rates. Higher rates force the affordability index down and more prospective buyers out the market. What Sir Real fails to understand is that his higher wages afford less and are dwindling every month. A raise of 10% probably gets you even for the year. Anything less and your likely moving in reverse. He fails to look at macro picture pontificating on age-old real estate precepts of location, location, location; prices will rise over a 5 year period, blah, blah, blah. There are serious flaws that must be addressed before this market gets a chance to breathe again. It takes time to shake the bad apples off the tree. In this case I wouldn't be surprised if it took 5 years for all the blow-up loans, foreclosures, NOD's, and consumer debt to level off. And within that five year period there will be a time to buy. There's enough information out there to make wise decisions with regard to renting or buying in this market. Those that choose to delve into the true facts will know when time is.

Real said...

"M3 anonymous"
A raise of 10% probably gets you even for the year. Anything less and your likely moving in reverse.

I suggest you ask Sac State for a refund as you obviously did not learn much during your time there. In case you missed it, inflation is good for people owing money at a fixed rate as you are paying back cheaper dollars than you borrowed - Econ101, obviously you missed that. As for M3, the government can do very, very little to control it as it includes private debt and American consumers are willing to take on debt at a much higher rate than the Fed rate - 18% credit cards ring a bell for you? Further, the Fed is basically done raising rates - if you expect fed rates to balloon to 10% to offset growth in M3, you are a simpleton.

So, now that I blew a hole clean through your "real estate rises at the rate of inflation" arguement, I would have expected you to admit that you were wrong or simply keep your mouth shut until you good hone up your econ understanding to the point that you could make an educated statement.

lexi said...

I don't know the deal with
Real. I bought a house in
the early 90's and watched my
house lose equity till I was
upside down for 6 years.
This same thing is going to
happen again ... all the domino's
are lined up it's just a matter
of how long it takes for them
to all come tumbling down.
No one wants to pay over 3,000
on a mortgage when they could
rent the same house for a thousand
a month or more less. The party
is over...

Real said...

No one wants to pay over 3,000
on a mortgage when they could
rent the same house for a thousand
a month or more less. The party
is over...


Please provide an example of this occurring. That equates to a $500K home renting for under $1,000 - what warped world do you live in?

lexi said...

I meant a thousand LESS than
three... which equals 2 thousand
for example....
I were to rent a newer home
in El Dorado Hill...4 bedroom
2 and a half bath with 2300 or
so square feet it would cost
about 2200 to 2300 a month.
To buy that same house would
cost over 500 thousand with
lets say zero down at 6 and a
half percent would cost about
3300 a month plus about another
500 or more for tax and insurance
totaling 3800... let me see.
Rent for 2300 or buy the same
house for 3800 a month. Makes
much more sense to rent untill
a major correction takes place
and renting and buying are much
closer in price on a monthly bases.
Just my two cents.

lexi said...

You know Real you are convinced
the housing market will be just
fine and maybe you are right.
I personally don't believe so
but it doesn't matter because
either way I win... if I keep
renting I save over a thousand
a month... in 6 years when I retire
I can move and buy some place
out of state with more reasonable
prices if they don't come down.
I don't like renting but I
can't see throwing away over
3500 a month on a house that
best will hold it's value for
6 years and has a strong chance
of declining value. When you add
in real estate commissions and
closing costs to sell plus any
upgrades and repairs it's just
too expensive to buy in this
market. I know you won't agree
but you won't change my mind.
I was already burned in the 90's

Anonymous said...

"if you expect fed rates to balloon to 10% to offset growth in M3, you are a simpleton."

Sir Real, you don't read with understanding nor do you understand the basics. The rest of us would be wasting our time trying to educate someone who continually wants to make future predictions based on past results. Fundamentals have changed dramatically in this country. You're so stuck in Sacramento, you have no idea what these fundamentals are, nor have a clue as to what the ramifications are for the future of real estate, or the economy in general. Fed Policy doesn't have to raise rates at all, Surreal. The expanding money supply creates its own upward pricing pressures. More dollars chasing goods and services equal higher costs and lower affordability for things such as homes, cars, etc. This dilution IS inflation and not the kind of inflation the govt. reports. I doubt anyone on this blog would state that prices aren't rising and in some cases rising faster than income can keep up with. It's easier to say its not there (ie. CPI and PPI) than to deal with it by raising rates. Catch 22 Sir Real....kind of a head in the sand approach. I wouldn't be trying to catch this falling knife. You've already been sliced up on this blog enough.

patient renter said...

"Please provide an example of this occurring (rent better than mortgage)"

This is a topic we've discussed many times on the blog and many calculations have been posted showing typical scenarios where it is far better to rent than own. For example, a home selling for $400,000 can easily be rented for $1,400 a month. With all of the costs taken into account including rent increases, property appreciation, taxes, principal paid on the loan, etc., given a 4% annual appreciation on the home (which is completely unreal right now) in 5 years you're STILL better off renting by $30,000+ and in 10 years by ~$15,000.

I'm not going to post the details since they've been posted before and because you can do your own calculation or try the rent/own calculator at eloan.com, which is pretty comprehensive. There's no way around the reality that renting will SAVE you money versus buying right now.

Lander said...

Real-

Please tone down the insults. I'm sure you're capable of making reasonable arguments without them.

Real said...

For example, a home selling for $400,000 can easily be rented for $1,400 a month. With all of the costs taken into account including rent increases, property appreciation, taxes, principal paid on the loan, etc., given a 4% annual appreciation on the home

Can you please send this analysis to me? I am just running some quick numbers here to see the 'premium' I pay to own a home vs. renting. Let's take your $400K home and assume a 6% IO loan.

I effectively pay $2,000/month to the bank but I get a tax credit on the interest so effectively I pay $1,320/month. Through in property tax ($4K/Yr. with tax deduction) for a total monthly payment of $1,540. That is a $140 premium over your renting scenario - a premium I and millions of other home owners are willing to pay to own a home. Now, the 4% annual increase equates to $16K/Yr. or $1,300/month which would erase that $140 'premium' we calculated earlier. What am I missing in my analysis?

Lander - I appologize for being too sarcastic. As a contrary view is too upseting to the herd mentality folks on this forum, I will refrain from posting further.

Anonymous said...

The rent vs. own forum was a few weeks back, go check the data. Why we even talk to these trolls is beyond me.

patient renter said...

"I effectively pay $2,000/month to the bank but I get a tax credit on the interest so effectively I pay $1,320/month. Through in property tax ($4K/Yr. with tax deduction) for a total monthly payment of $1,540. That is a $140 premium over your renting scenario - a premium I and millions of other home owners are willing to pay to own a home. Now, the 4% annual increase equates to $16K/Yr. or $1,300/month which would erase that $140 'premium' we calculated earlier. What am I missing in my analysis?"

You are missing many factors in your analysis that can effect the bottom line including closing costs, annual property tax (you can't have a tax deduction without first paying the tax), the income tax rate, maintenance, mortgage interest rate, down payment (if any), and on the flip side you have rent increases and renter's insurance.

Again, go to eloan.com. It's very comprehensive and can give you a calculation taking ALL factors into account.

https://www.eloan.com/s/show/calc_rentvsown

patient renter said...

It's worth mentioning that the annual appreciation rate is the biggest variable that tends to swing things heavily one way or the other. Try playing with the calculator and the apprecaition rate.

Anonymous said...

I'd just be curious if Real
WAS a renter right now (he's
a home owner I know) if he
would buy right now. Does
he feel that confident to
put money in this market.
Let's say if he were only
planning to rent for 5 years.

Anonymous said...

"I effectively pay $2,000/month to the bank but I get a tax credit on the interest so effectively I pay $1,320/month. Through in property tax ($4K/Yr. with tax deduction) for a total monthly payment of $1,540. That is a $140 premium over your renting scenario - a premium I and millions of other home owners are willing to pay to own a home"

Wow, you're taking a better than 33% tax rate against the IO loan on a $400,000 note and RE Taxes?

You should have bought the McMansion cause you could've afforded it at those tax rates.

Anonymous said...

Funny how you can make those sing, isn't it?

Real said...

I really hate to go back on my word about not posting anymore, but it is obvious that you guys need my help so I will do the math for you once again (without skipping steps so you can follow).

You are missing many factors in your analysis that can effect the bottom line including closing costs, annual property tax (you can't have a tax deduction without first paying the tax), the income tax rate, maintenance, mortgage interest rate, down payment (if any), and on the flip side you have rent increases and renter's insurance.


Okay, here is the math:
Renters Side of the equation
Rent = $1,400 (2.5% yearly increase) + $30/month for insurance.

Yr 1:
Rent = $1,680
Ins. = $360
Total Out of Pocket = 17,160
5 Yr total = $90,106

Home Owner
Assume 35.5% marginal tax bracket (per your eloan link)
$400K loan, interest only at 6%
Yr. 1
Mortgage = $24K
Property Tax = $4K (1% in Sac)
Maint = $3.2K (per eloan)
PMI = $1400 (would go away by year 5 with 20% equity at 4% annual appreciation)
Insurance = $1,280
Tax Savings = $9,940
Total Yr. 1 = $23,940
5 Yr. Total = $119,700

Now for appreciation and closing/selling costs
Purchase Price = $400K, 4% appreciation = Sale price of $487K
Closing cost = $8K (2% of purchase price)
Selling commission = $29,200

Net Savings for buying = $19,867.

Now, selling costs are one issue where they can be pushed out by simply not selling and holding for a longer period of time. As you can clearly see, the longer I own vs. rent, the more money I save. This money is on top of all the enjoyment I get from owning vs. renting. Once again, your math is wrong and mine is correct.

Over and Out!

lexi said...

so where can we get a sales
contract with that 4 percent
appreciation a year guarenteed
in the contract? That would
sure make a difference if I knew
that were guareented for the next
five years while I'm a home owner.
That 4 percent is hypothical
and one I'm not willing to
put my money on.

lexi said...

oh and rental prices have
actually been coming down
due to the flood of specualtors
having to rent their homes out
since they can't sell them.

Anonymous said...

"I really hate to go back on my word about not posting anymore"

Ah come on you don't have to go back on your word.


Then there's the old addage "liars figure and figures lie" You are asking this blog to believe that 4% appreciation is achievable? When, this year, next, or maybe the year after? Ross Perot once said, "Can't you hear the sucking sound? That's the market we're in, like it or not. You use a 35%+ margin tax rate. Are you kidding? Nobody in that tax bracket would hold $400,000 IO note. They's either own it outright or buy two or three and rent them out. Until there's one solid year of 4% appreciation, your numbers don't wash much less your taxable savings figures. Try again and maybe next time you could make it halfway believeable.

patient renter said...

Real:

"Once again, your math is wrong and mine is correct."

You never saw my math, I just mentioned some of the main numbers. Like I did mention though, I used a rent rate of 1400, not 1680. I also included a down payment, used a 25% tax bracket (for myself) and had a few other realistic differences that reflect my situation. (By the way, you can remove selling costs by zero-ing out closing cost percentage rate on the calculator). One particular calculation isn't really important though.

What is important is what I mentioned (above), that the rate of appreciation will effect the formula drastically in one way or another. Change that to something realistic like 0% or less, and everyone's calculations including your own flip heavily in favor of renting. Try it.

patient renter said...

"so where can we get a sales
contract with that 4 percent
appreciation a year guarenteed
in the contract?"

"You are asking this blog to believe that 4% appreciation is achievable?"

To be fair, he used the 4% appreciation since I mentioned I used that in one of my previously posted calculations (being generous) that came out in favor of renting. Some of the other numbers he used were different than mine though, thus a different result.

Regardless, You guys hit on the most important variable, appreciation.

Anonymous said...

Patient Renter:

"Some of the other numbers he used were different than mine though, thus a different result"

Sure, his intent was to achieve his intended results regardless of what is reasonable and Real.

Real said...


Like I did mention though, I used a rent rate of 1400, not 1680. I also included a down payment, used a 25% tax bracket (for myself) and had a few other realistic differences that reflect my situation.


My appology, the $1,680 was a typo, it should have said $16,800 (12*$1400) for year 1 rent expense. A down payment is not going to make any difference as that money comes back in equity in the home upon sale, I simply assumed IO so I would not have to shown amortization tables. If I assumed 20% down or more traditional financing, I would have saved on the PMI as well. 25% tax rate is a personal number so it varies for many people (remember that this is the 'marginal' rate though and not 'average' rate) and can actually drop to near 0% if you hit AMT. My number is closer to 33% but I used the 35.5% as stated in the eloan calc you linked to. Lastly, the 4% was as you stated a input given right in your original posting on the subject. As to whether 4% is too high or too low, I say that there are buyers and sellers right now meaning there are people betting on it moving up and down. Over the next 5 years, I would be pretty certain it will move up though.

As to the 'no one would hold and IO, they would buy it outright' I can tell you I could pay off my house tomorrow 2x over and still have money left over. I don't because the cost of debt on a home loan is less than what I am achieving in other investments. Once again, finance 101 my good boy.

Now, truly, I am Over and Out!

Anonymous said...

"it is obvious that you guys need my help so I will do the math for you"

Don't trouble yourself

lexi said...
This comment has been removed by the author.
lexi said...

Honestly, I believe some
markets will appreciate 4 or
even more percent in the next
five years. I just don't
think Sacramento is going to
be one of them. They'll be
lucky if they don't depreciate
4 percent or more a year.

jeff said...

Real is a real fraud. Lander, please remove him/her from this. Their statements are not productive to this conversation. Thanks.