If someone bought your home today:
1) What is your home's bubble worth (if a sucker bought at the big bubble price you thought you could get)
2) Based on that number, if you sold it to a new buyer, what would be their total monthly cost of owning your home (principal, interest, taxes, association fees, etc). Here's a calculator, I'd recommend using 6.5%, the US average.
3) Take 25% of the monthly interest cost and subtract it from #2 (the tax deduction - overstates the credit a bit vs standard deduction)
4) What would your place legitimately rent out for (seriously. not pie in the sky. if you had to find a renter)
5) What would be the monthly negative cash flow for a new buyer who bought your place and had to rent it out?
Here's an example - my old home in Arizona:
1) Bought for $315k
2) =$1991 payment, plus $100 taxes, plus $200 condo fee = $2,291 monthly cost
3) Less tax savings of $425 a month = $1,866 a month total cost
4) I tried (and failed) to rent the loft out for $1000 a month. So I'd say $800 could possibly find a renter
5) Negative cash flow for my buyer is $1066 a month
I'd also say the place is declining in value $1000 or so a month (if not more) from the bubble top in July. Ouch. Then add in the $4,000 or so in fees to buy the house, and the $20,000 in fees to sell the house. If the buyer owns the house for 24 months based on those numbers, he'd be down $72,000 in cash in two years. Well on the way to bankruptcy
See the problem here? And not only is this type of P/E situation happening worldwide, it's more severe in many towns where rents are so-so and prices are out of control, like San Diego and Dublin.
So do the math. Let's see what you come up with.
April 02, 2006
HP home owners - do your home's price to earnings math, then tell us the number.
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28 comments:
Sale Price: $375,000
(80% mortgage): $300,000
Monthly Payment (30yr @6.5%): $1,896.20
Taxes(reduced 25%): 450
Insurance: 70$
Total Payment: $2,416.20
There are five houses that are rentals in my neighborhood (4 occupied). The average advertised $/sq.ft rate of those rentals is $.81 per month. That puts the monthly rent for my house at $2,190.
$2,190 - 2,416 = -226
Advantage renter.
The buyer gets the 25% discount on interest and RE taxes paid, but an investor does not.
Since "investors" drive a lot of the market, whether they can afford to hold without rising prices is a big question.
In my personal experience at work, people become "investors" when they move up to a bigger house, but keep the old once since they say "why sell when prices are still rising". They then go for a 100% financing on the new big house rather than roll over their profit in their current house (or stay put and get the use value themselves....)
As you go into the higher end of the market the disconnect between rent and purchase costs gets greater.
This is because at the higher end, people who can afford the higher rent can also afford to buy, and tend to resist putting that much into "rent".
One property owner I know had a $300,000 home split into two apartments, and when advertised for $1150/mo each apartment, got lots of calls (gross $2300/mo).
When he went to rent out a single $500,000 place, he advertised at $2800/mo, got no calls, relisted at $2500/mo, and ended up renting for $2300/mo.
In my local:
House $860,000, Taxes $9,000/yr.
Payment: 20% down, $4380/mo, plus taxes, $5130/mo.
If owner occupied, get 25% off of the interest, and RE tax, which nets out at about $4000/mo (watch out for AMT!)
Rent for big houses in my area advertise for about $3000/mo, and the sign is up for a month or two.
This is a negative of about -1000/mo right now. Plus, don't forget that 20% of 860,000 is 172,000. You can get 5% on a CD, and this is 8600/yr, or 716/mo. So the real loss for owning is -1716/mo. If an investor, then the tax deduction is lost, and negative goes to -2716/mo.
Finishing my series on higher end of the market:
When an 1150/mo apartment turns over, the clients move out in a day with UHaul, or their friends Subaru wagon (big stuff on the roof, I have watched). I have yet to see a mover called.
When the big house rents out, it involves house movers which can be well over $1000 or more for a local move. All the more reasons bigger more expensive homes tend to be bought, which keeps rents lower than they could be.
There is a niche for corporate RELO's, but these tend to turn over every year. I live near a big employer, and their are a fair number of people coming and going for them. Typically, they rent a year, and either go back, or buy in the area, depending on the nature of their business stay in the area.
I actually arrived the same way, and why I have data on the larger homes as rentals. I rented for a year, then bought.
Agree with Anon on the dynamics of the higher end of the market. A similar situation/trend with high end resort properties. People with large disposable incomes simply prefer to own, despite rental logic.
However on the other end of the market... Here in Colorado, we've got the following house listed in Broomfield.
3BR, 2BA ranch with ~2300SQFT
It's a nice, well maintained starter home in a good neighborhood. It's also close to schools, parks, the library, and bikepaths. The commute time is also very reasonable to Denver and to Boulder.
Here's the ad I'm running in Craigslist with more details and photos (link will rotate/disappear by Tuesday).
The Numbers:
Purchase Price = $199,900
Downpmt (20%) = $39,980
Monthly PMT = $1,011 (6.5%,30YR FRM)
Taxes (04) = $1132yr/12= $94.32/mo
Total PMT = $1,105 (plus insurance)
Conservative Rental = $1,000-$1,100/mo
p.s. it's under contract now with an investor, but the sellers are seeking backup offers.
If it is so beneficial to rent vs. own, then why does 70% of America own? Any why does another 20% wish they could own.....
Do the 5% of you think you are smarter than everyone else? Or do the 5% of you just live in AZ, CA, FL, and Hawaii......
Owning is always better in the long run but we are talking short run here. If you buy today and have to sell in 2 years, there is a very high chance you will lose money. In some markets it's close to 100% probability.
If you look 10 years out, there is close to a 100% probability you will have made some money. At the very least, there will have been no cost associated with owning whereas you would have lost money by renting.
Owners are not fools and renters are not genuiuses (or the other way around). It's looking at the short/long term and market dynamics.
I think San Francisco is the city which has the most distorted ratio between rent and house price ratio.
Just look at zipreality.com and look for MLS 303830. It is 725K and realtor says it rents for $1850.
I think this is the link:
http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=303830&page=1&property_type=SFR&mls=mls_ca_ba&cKey=97f2z763&source=CABCREIS
In short, the 800K house (if you can find one ;)) rents for max 2500K.
I was wondering, what happens if you rent and the house goes into foreclosure, most likely because the investor was counting on continuing rapid appreciation, is fully leveraged, can't sell short, and bleeding thousands per month?
In the most extreme bubble markets, if investors panic and start dumping their properties in mass with renters in them, this can become just as problematic for renters as they will be forced to move often. Couple that with the fact that you have more people renting due to the affordability crisis, and the impact could mean a rapid increase in rent prices.
Overall, it seems in these bubble markets everyone is screwed.
Former Apt. Broker:
Your parents should sell their rental home. They would earn $3700/mo from simple 4% interest on $1.5M minus selling costs and capital gains. Why would anyone want to sacrifice $1500/mo with more risk?
Do they assume that appreciation will only go up and make up that $1500/mo loss??
If it is so beneficial to rent vs. own, then why does 70% of America own?
Because it used to be beneficial (and affordable!) to own, before this bubble got going. Think about it. People who are already owners don't like to sell and rent, even if they think their own property is overpriced.
phil said:
Do the 5% of you think you are smarter than everyone else?
keith says:
Yup. Us 5% do think, and know, that short term, we're smarter than everyone else. And most of us used to own, and sold to suckers at the top of the bubble.
Any questions?
Phil:
I try not to be smug, but being an ex-owner and now temporary renter is the smart thing to do, IMHO.
The dotcom crash was an easy lesson: when things get really out of wack, sell. Just because we are talking about a different industry, doesn't mean it doesn't have the same fate.
I would like for my parents to sell, but their situation has them stuck in that house for another two years at least. It's really too bad.
nice response - now i can see why you are the writer of the definitive source of news, opinion and user commentary for the worldwide housing and credit bubble.
I'll bet the 5% of you were the same folks who have done very well in the stock market recently as the Dow has gone over 11,000. I actually know some people who predicted the Dow would be at 8800 on December 31,2006.......I'm sure you'd agree those guys are idiots.
There are too many variables involved to see what is worth renting VS. buying: kids, pets, salary, age, area, type of job for starters. Problem is when people brag "my house made $X amount." Then renters say "Well at least I'm not stuck paying X." All that matters is if you are at peace and happy.
Riverside, CA
These numbers are pretty close to accurate. We just sold our home in October but didn't close escrow until February. I am assuming a 30 yr. fixed rate on 1st and 20 yr. fixed rate on 2nd, paying principal and interest (since I didn't know their exact terms).
1) Sold for $400,000 (purchased for 98k in 1988)
2) Borrower had 10% down plus another 10% 2nd mortgage.
$320,000 1st at 6.5% = $2,022.62
$ 40,000 2nd at 7.5% = $ 322.24
Taxes at $4,400 annually = $366.67
TOTAL PAYMENT of $2,711.53
3) Interest on 1st = $1,733.33
Interest on 2nd = $ 250.00
TOTAL INTEREST OF $683.33 @ 25% = Credit of $170.83
4) Rent: $1,600.00 (pretty good estimate since we are renting in same area now so kids can finish school). I am also assuming that rents don't go up for the next 5 years.
5) -$940.70 neg cash flow before maintenance
I will give an optimistic outcome of only a 40% decline w/i 8 years. This equals $1,666.67 per month in value loss.
If sold in 24 months, total loss is:
$40,000 (value loss)
+$26,600 (closing costs to sell)
+$ 8,600 (c/c to purchase)
+$22,576 (rent loss)
-$ 8,673 (principal paid)
=$89,103 total loss
Ok, here's 5 years (60 months):
$100,000 (value loss)
+$ 23,000 (c/c to sell)
+$ 8,600 (c/c to purchase)
+$ 56,442 (rent loss)
-$ 21,692 (principal paid)
=$166,350 total loss
Fortunatly for our purchaser, they are owner-occupied that plan on staying for the long-haul.
Riverside, CA
Sorry, #3 above should be $1,983.33 interest = $495.84 credit. somehow I messed up my calculations on that one (too many I guess).
From baltimore sun today - Renting beats overpaying for homes
Renters can come out ahead of buyers if they are disciplined enough to invest what they save and wait for the right opportunity.
"Real estate is like most other investments," Latko argues. "When everybody can't get enough of something, sell them all you have. When nobody wants it, buy all you can."
He speaks from experience as an investor who got caught in the hype of Chicago's Gold Coast condo market. The "once-in-a-lifetime" purchases he made in the early 1980s required him to wait 15 years just to break even.
For those who do want to buy, Latko recommends looking for bargains and staying away from anything new.
Builder's profit margins can run at 20 percent or 25 percent above the cost of building a new home, he said. If builders have to cut prices in a slow market, their previous customers are the ones who suffer the most.
Instead of doing it the way described, a real estate investor suggested the following rule of thumb for the "real" (non-bubble) value: Determine what you can rent it out for (monthly), and multiply by 150 & 200. Expect value to be about 150, but NEVER pay more than 200.
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