Just wanted to go to the confessional and admit what a big geek I am ... I really like The Carpenters’ music and voices.
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Gee! That music sucks! Good thing Karin is gone.

We love you Karen.  You are still a Superstar.

There is also the cost of your freedom to relocate.

If your employer changes buildings, transfers you to another site, etc or some other reason where you decide that you need to move; it sure is a lot easier to get out of a rental lease than a mortgage.

Renting gives you much more flexibility and freedom.  You can usually pay some cash and make the lease go away.

“Owning” on the other hand.... stage the house for viewing, put the house on the market, wait for an offer, make demanded repairs, bend over for the buyer, bend over for the realtor, bend over for the title company, write your initials on 100 pages, sign 100 more papers.

People have to get over the stigma of renting.  Pressure to “buy” so that your peers will not think that you are worthless trailor trash is a huge part of the psychological component.

But at the same time, I don’t really care either.  If all homeowners decided to bail out and start renting then my rent would go way up. 

Keep buying houses America.

If you transition from renting an attached residence (apartment) to owning a detached residence (SFR) you will see a substantial utilities increase.  This is also a big factor in my calculations.

Great analysis. Maybe one of the reforms to at least reduce the next bubble would be to have every homebuyer read this! The maintenance costs seem very high to me, though (admittedly I live in a newish place with a tile roof). Where did you get the estimate from? If it’s some standard source I suspect it’s 1.5% of the *cost of construction* which in OC right now is typically about 1/3 of the house cost. That would reduce your cost of ownership and cash cost by over $400 dollars.

Is CA state income tax a fixed rate system? How much CA state income tax will this Irvine homeowner likely to pay if household income is , say, $100k/year?

Does it allow mortgage interest deduction?

And how about property tax deduction for CA income tax purpose?

Also, generally speaking, in the long term, houses appreciate in value (contrast this with cars, for example).  Of course this is not a good assumption right now, but an honest calculation would include this factor.

Excellent point.

Especially in hot climates like AZ summers.  Gonna have a pretty hefty electric bill to run your McMansion’s air conditioner.

Ouch!

Wow, as a home owner in a new home, that number is very different than mine.  I have been in my house for 6.5 years, and there is no way I have spent over even $5K on M&R since I’ve been here.

Curious IR, if one can obtain a premium level home warranty to cover every system in the home and all appliances for $40/month or so, where would you think the rest of the $625 could go?  These warranties cover the cost of all repair/replacement for essentially $50-75 per occurrence.

Excellent analysis, especially for a Monday!—the one point I would take slight issue with would be the allowance of 25% of the mortgage interest as a tax shield—though there are certainly many sets of people for whom that would be a pretty accurate reflection of the value of the tax shield.

However, now that you need to have a real income to qualify for loans of this magnitude, a portion of the people buying (not sure what %) will be itemizing anyway because California income tax is so high.

For a single filer in 2008, the federal standard deduction is $5,450.  Using the CA tax calculator on the State’s FTB web site, they offer that a “California Taxable Income” income of $83,000 has a 2007 tax of $5,524.

As a result, for most people making over $100,000 in CA, you are likely to itemize deductions (doing so also allows one to deduct the Vehicle License Fee).  And don’t we all drive a Maybach in OC?

So if you are 28% Federal and 9.3% CA marginal tax rater, then your mortgage tax shield is worth about 34.7% (given that CA tax is deductible from Federal) of the interest paid.  This also assumes that you are deep enough into 28% tax bracket, and your mortgage is “reasonably sized” so that you are not pushed into a lower marginal tax bracket by the time the last dollar of the deduction is applied to your income.

Should you be lucky (?) enough to be in the 33% Federal tax bracket, the value of the interest deduction is a bit higher for you.

That extra 10% savings pulls the owner’s equivalent costs closer down to the rental equivalent, though things still need to drop considerably before it makes sense to buy in the Irvine market.  Perhaps 20%-25%...maybe more?

Best of luck to all!

CA is a variable income tax state, though the maximum tax bracket is fairly low ($43k single, $87k married).  Once you hit that threshold, it’s 9.3% - one of the highest in the nation.  AMT and other details can be found on the FTP web site.

Deduction rules track very closely with the Feds - yes, mortgage interest is allowed, even under AMT (just as the feds).

sorry FTB not FTP.  can you tell I’ve been in IT for most of my life ?!

Yes - if you’re under the AMT limit. 

I don’t believe it is deductible if you are subject to AMT (certainly not at the federal level).  My understanding is only interest and charitable contributions are deductible if you are subject to AMT.

A house can appreciate, but not out of a vacuum.  Appreciation is assuming that the “owner” “keeps it up”.  You know, keep the paint looking new, do some landscaping, replace a water heater from time to time, replace carpet when it gets worn out, etc. Installing a cheap Home Depot granite countertop before moving out does not mask out the smell of cat urine, cigar smoke, holes punched in the wall, scratch marks on the floor from the dog skidding through, etc.

I would imagine that the monies spent in maintenance over the years would significantly bring down the net gain from appreciation in a normal market.

Home-owners always think that they should “get” what their neighbor “got”.  The fact that one neighbor maintained their property over the years while the other neglected theirs is never even given a second thought by many sellers.

Talk about a sense of entitlement.

jaysen,

Should you be lucky (?) enough to be in the 33% Federal tax bracket, the value of the interest deduction is a bit higher for you.

If you are in the 33% fed tax bracket, there is a good possibility you are subject to AMT.  Once that triggers, property tax is not deductible and negates a piece of the tax savings. 

To your point, we’re still a far cry away from parity with renting - even after considering the tax benefits.

Locally, with all the units that will become condo conversion (cpw, anaslime platinum triangle come to mind) combined with the “accidental-landlord” effect of the speculative transactions, PLUS the fierce pace of IAC development, I can’t see how rents will rise.  Even when you consider inflation…

My last house was big and had a pool. My average electricity bill was $400 per month.

It was fun while I was there, but the cost of that fun was too high.

The operative word is reserve.

You’re funding your reserve the same way many mismanaged HOAs fund their’s.  You’d do a special assessment on yourself when a big item comes up.  How much will it cost to do the repair or refurbishment on the roof in 20 years?

Big ticket items are crushing, a roof, even simple stuff, like termite damage and termite tenting cost major dollars.

As for the warranty, carefully read what is and is not covered in a typical one.  https://www.ahscustomer.com/productBacker/NSVHS7.PDF

The bathroom faucet leaks, replace it.  $100-$150 just to buy the faucet.

The $625 might be high, but maintenance and reserves isn’t $100/month.

tealeaf,

Interesting point about AMT.  Do you know if mortgage interest is an AMT deduction?  If not, then you have an interesting situation where your income has to be in a pretty narrow range (or you have other tax circumstances) in order to obtain the maximum tax shield from the mortgage interest and property tax deductions.

In keeping with the Karen Carpenter 70s theme:

I am beginning to hear about baby boomers wanting to get out of their homes and into a smaller place so they can unlock the equity they built up over the years.

The boomers have now passed the “my home is my wealth” phase and have entered the “my vacation is my wealth” phase.

There will something like another 32 new huge mega cruise ships coming on line in the next few years to serve this market.

In the 70s, we bragged about our cars. In the 80s we bragged about our jobs. After that we bragged about our houses. From now going forward we will brag about the 105 day world cruise we are going on, or how we got our liver fixed with just three stem cell injections.

Real estate as an investment and a way to get rich in the short term or maybe even the longer term is OVER. The boomers have moved on.

I’m not going to vouch for the specific 1.5% number.  But I think IR’s intent was for that to be a long term number over the life of a house.

So in the first 10 years, you wouldn’t have to replace a roof, but if you want to really model the costs, you should be accumulating reserves for replacing the roof, updating the kitchen, etc.

When you buy a brand new house, with new carpet, roof, appliances, paint, etc, you don’t have any replacement/updating costs initially.  But if you stay in the house 5 years, you are at least going to have to paint… possibly replace carpets before you sell.  And if your stainless steel appliances and granite counter tops are no longer the popular choice after 10 years, you might need to replace those even if they are still functional. 

The costs to do that per year after 10 years may be much greater than that 1.5% per year… the 1.5% is to average it out over the long term.

I like the breakdown of the costs associated with owning a home. Of course some folks dissagree with the M&R assumptions but that cost is an estimate as the costs could be much greater on an older home and much less on a new home. Were I do take issue is with the the $500K purchase price. Face it, that is way down on the price curve for this area. Look at the cost of purchasing a plain Jane 2400sq ft SFR at $700k to $800k. That’ll tell you how far out of whack the house prices are in this area.

The AMT applies after deductions. So you would have to have a really significant amount of income after mortgage interest (>>200K of income). Also, note that state income tax is not deductible under AMT, so if you are worried about AMT, it should already be hitting you...and the savings on the AMT (by deducting interest) will reduce the AMT you are paying on the state income tax...so you are probably still getting a net tax benefit.

BTW, this is not tax advice, only experience from one that paid AMT and the ONLY deduction was state income tax :(

“I have been in my house for 6.5 years, and there is no way I have spent over even $5K on M&R since I’ve been here.”

As NSR pointed out, you have incurred these expenses, you just haven’t paid for them.

You should not use the cost of forgone interest caused by the down payment as the basis for cost. The risks are not the same. For example, you know that you will get your 5% return, but do you know that you will recover your down payment? What if you have to sell after only one year? You should base your interest cost on a risk adjusted basis. That is, what would be the cost of a 95% loan w/ PMI, or an 80/20 type of loan? That will reflect the true risk, since you could theoretically go out and invest in 2nd TD mortgages and earn more than 5%.

Inflation is non-trival and should be included. That is why I recommend different GRM’s for different types of properties when trying to determine whether rent vs. buy makes sense. 160 for condo’s because you probably won’t live there long enough for inflation to offset transaction costs (3% inflation for 3 years vs. 10% transaction cost). For homes, it tends to be something larger than 200 because you can assume that you will be there for 15 or more years. Assuming a house appreciation much more than inflation should be considered speculation...as is assuming something less than inflation (speculation goes both ways).

You should at a minimum be setting aside one month’s equivalent rent for maintenance. If you are buying a duplex, the bank only allows 10 months of gross rent to be considered income (at least the last time I looked into it). 1 month is deducted for vacancy and 1 month for maintenance.

Qualified housing interest is allowed a deduction. Not the exact same thing as the stuff on Schedule A, but pretty close.

AC units last 15 years so in newer house you wouldn’t run into repair maintence issues.  AC replacement will set you back a couple thou.

Water heaters last 8-10 years and run about $400 + installation.

The exterior of your house should be repainted about every 10-15 years, that’s not cheap.

Sure, if you don’t do anything to your house you wouldn’t spend much, but deffered costs will add up.

I guess kids don’t play outside like they used too, Irvantes are sooo scared of molesters, so there are fewer baseballs breaking windows, unless your lucky enough to live on the GC and catch the flying balls.

Kaen had the best voice ever.

Oh, and did you know they lived in Downey.

Downey is also home to the original McDonalds.

I don’t have a pool but my folks do..

They cut their cost huge by putting a solar heater on the roof.

$100-$150 just to buy the faucet

That’s the cheap crap..

A nice faucet will cost double and the really good stuff can run a grand or more.

I’ve heard that those “premium” home warranty programs are typically a joke.  My brother tried to have the warranty folks repair his shower (something to do with the pipes/connectors).  They came out, charged him $50, and said that it wasn’t covered.  Another person I know with a home warranty had a similar experience when calling them to fix the plumbing to their kitchen sink.

Fantastic post IR!  I will definitely be coming back to this one in a few years when I am looking to buy. 

To all: I am curious what you think a $500K place in Irvine will look like in 2-3 years.  Right now places for this price are not at all appealing to me.

We have an unusual mortgage, and since I am anonymous, I will tell you about it!  Our mortgage is with Thornburg, based in New Mexico.  Your down payment is invested in mutual funds which they run.  We bought a 700K house in 2002.  Put down 20%, or 140K.  Since then our down payment in their mutual funds has grown to 250K.  Now, of course, they could crash and burn, and we could lose all that money too, but that was a risk we were willing to take.  There are income or net worth requirements, so not everyone would qualify, but our money manager suggested them, and we have been quite pleased.  However, I haven’t checked the balance this month!

Another escrow entrant:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1210120

Based on my daily watchings of listing activity, I’d say transaction volume has picked up since October/November/December.  I expect the sales volumes figures for February will reflect a little bounce.

Many of the homes going into escrow are older and more reasonably priced IMHO.  That should help drop the median…

Jaysen, I used to think the same as you, and only looked at the tax savings on marginal dollars, but IR has a valid point with regards to the tax savings. 

If you aren’t owning, then you are renting, and very likely taking the standard deduction.  The only material components of itemized deductions, unless a family is an a very unique situation (e.g. exorbitant medical bills), are housing-related and state tax related.  One would have to be making quite a bit of money to have the state income tax deduction exceed the standard deduction.  While you are correct in rates, what in effect occurs is the interest deduction is reduced considerably in base value by the foregone standard deduction.

I used IR’s figures, assuming a family of three making $100K with no other significant deductions are ran both scenarios through Turbo Tax.  The tax savings related to mortgage interest and property tax were much closed to IR’s 25% number (they were actually lower) than the marginal rates…

You can run the scenarios yourself to see if you are curious:

http://turbotax.intuit.com/tax-tools/

We spent 30 grand fixing our depreciating house asset about 10 years ago, when we first moved in.  It all needs doing again, or will in the next 3-5 years, and no we didn’t save up to pay for what needs doing.

But we did pay off the house during that time.

So, I suppose when we go to sell it in maybe 5 years, we could get a small mtg to do the fixing up.  I hope the housing mess will be straightened up in 5 years.  Or, maybe we will stay here a couple of years after that.  At that point the hub will be 72.

A grand for a faucet?  Is it made of diamond dust?

Great post.

I often look at condo fees and think ‘ouch, thats a lot of money, it makes more sense to purchase a SFH.’ But I suspect most condo boards are run pretty well, and that the condo fee is a fairly conservative estimate of legitimate maintenance costs.  In reality, what I should probably think is ‘ouch, maintenance costs on a SFH are probably at least that, if not higher.’

Do you get to withdraw the $250, and net it against your mtg at the time of your choosing?  Golly, that’s what I would do now, the mkt scares me to death.

Sounds like an excellent decision at the time.  Thanks, today I learned something new.

Very cute house.  Decent sized.  This is a reasonable price?  Gasp, choke.  Ok, I’ve recovered.  If you say so.

In Florida, the assns can waive the escrow for roof repair and painting, and they often do, especially if inhabited by seniors who figure the roof will outlive them and it will be someone else’s problem.  Then the roof dies and guess what?  Problem!!  Big assessments made.  Tears and gnashing of teeth all around.

I am curious as to what that house will sell for.  I’d think high $700K range in this market.  If they got $800s, I think they are fortunate…

Pretty much is a joke.

Your warranty company will find the lowest bidder to send out to your house.

It’s a recipe for sub-standard quality work.

I prefer that the guy cutting a hole in my wall be sober when he arrives at my home.

I liked her rendition of “dem bones”. 

And who could forget Richards touching version of “she aint heavy she’s my sister”

Ditto, Joe.  We had bad experiences with our policy and ultimately let it expire.

I think in 2010 that $500k will look like this:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1314069

Or maybe this:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1045848

Depends if most the value is in the land or not.  The ugly tiny 30’s house on a large lot that’s rented out and not maintained properly for several years, then resold when the land appreciates and the new owner bulldozes the house to build a new home comes to mind.

Never seen a Maybach around here.
Did see 5 Lambo’s all in a row driving yesterday though, that was pretty cool.

great post, IR.  A good Monday morning read.  When you look at these numbers, the biggest factor that sticks out at me is the required monthly cash flow.  That’s a lot of money to pay every month, and that doesn’t include any other monthly obligation.  Scary!

Your analysis assumed a 20% down payment.  Just imagine if it were 0% to 10%--the payments would be HIGHER.  I know many people who have to file exempt just so they can pay their bills.

I think we are safe here in Irvine when looking at the stability of the city, but you never know.  Imagine if you purchased a home in Detroit in 1977 with a 30 year fixed.  You just paid your house off, but now the area is a sh*t-hole, and your neighboring houses are boarded up.

You used a value of 500k, but this won’t even get you a new 2 BR condo in Irvine right now.

In a way, we renters should be thanking the homeowners for paying their RE taxes, because we get to access the same parks, and schools as they do.

I take it youve never toured “Home Expo” but the really nice faucet’s are $250 and up.  Designer faucets are a grand or more.

Unfortunately, history is going to look back on this period of time as an example of American materialism and greed.  While most of us are good people; the rotten players tarnish everyone.

The parents will tell the kids how evil the banks are for the creative financing and predatory lending.  They will conveniently leave out the part about mom and dad partying it up - refinancing the house to pay for the Hummer H2, Carribean vacations, wine and cheese parties, golf clubs, and checkered pants, etc.

If you are talking strictly land then, yes, I agree with you.

In talking homes though, the tear downs seem to be the exception rather than the rule.

Most people don’t buy just to tear it all down and start from scratch.

actually, the opposite is true.  many house flippers dump a ton of money and sweat into a flip and then attribute a price gain to this work.  it isn’t.  houses gain or lose value based on location, market condition, square footage, and bathrooms, and it is almost never a good ‘investment’ to pour money into a house, unless one is investing in one’s own enjoyment.  what’s really going on is the very human need for a sense of control and accomplishment.

that can be a bad assumption.  i’m aware of at least one building where there was about one lawsuit for every three units (squabbles between units, insurance, hoa getting sued, etc).

yeah, the $500 bucks a year the oldsters pay probably pays for at least a few days’ worth of pay for one of the local park crew.  thanks.

I generally don’t like these kinds of warranties but to give the oppositve view point, my friend recently had a leak from his upstairs bathroom and had a great experience.  The warranty company first sent some losers which he turned away and requested better people so the next guys who came were quality repairmen.  They gutted the shower, traced the leak, sealed it all, and put everything back together in pristine condition.  Total cost would have been $2000 so his warranty has been great for him.

I have an agency issue with HOAs.  My theory is this: a little goes a long way.  Too much HOA involvement means overreaching busybodies.  No HOA leads to aqua-colored homes and rock lawns.

I once lived in a place that INSISTED on levying cable fees thru the HOA. it saved a whopping $3 per month, but forced satellite-watching folks to pay from something they didn’t use and, more importantly, lowered the value of the homes as the inflated HOA fee is that much less attractive to a potential homebuyer.

It is my experience that attached properties are on the busy-body end of this spectrum.

My condo does the same but we do it because we DO NOT want (unsightly) satallite dishes placed on the balconys.  It’s not about saving money, it’s about maintaining the appearance of the complex.  Owners are free to place satalite dishes up on the roof as long as they are not visible from the street if they want to pay for the inside wiring involved.

I especially like their Christmas albums.

leaking is usually just the washer in the faucet - only a few cents for a replacement if you do it yourself.

(not to detract from the point about keeping appropriate reserves - just that faucet leaks aren’t usually as bad as you think)

Another point on warranties the group may not have considered.  Yes, they’re largely a sham; however, if you have an older AC, remember that if it breaks (and is covered), the warranty company has to replace with a unit with an efficiency rating that’s up to code.  As of 1/1/07, that’s an R13 unit.  No more repairs to keep an R8 unit alive…

Food for thought.

Wow, this pretty much explains the differences between us. I prefer aqua-colored neighbors’ homes and “rock lawns”, to a world of nothing but beige and golf-course-green lawns in the scorching California summers.

And I wouldn’t allow any neighbor or association the power of foreclosure because I didn’t follow some ludicrous CC&R.

As they say in the NRA: From my cold, dead hands.

You can’t be an Irvanite then…

Cities require that cell phone towers be camoflaged for the same reason, disguised as palm tree’s (I suppose the birds are fooled)

Or would you rather let the carriers place any old tower, anywhere.

Everyone here seems to forget the cost of natural disasters.

CA is subject to period quakes… Earthquake ins has a high deductable, in my folks case the chimneys separated and had to be reattached.

One of my buddies got to redevelop his Northridge shopping center after the quake there totaled it.

Something about a “black swan” event.

“leaking is usually just the washer in the faucet”

Youve never fixed one, it’s called a valve and you can buy individual ones for 3-5 bucks or a 4 pack for about 10 bucks.  better take your old one in or know the make of your faucet to get the right one.  Takes about 20 minutes total to change.

Still cheap, but most renters don’t know about home repair.

Here’s the * from Thornburg Mortgage’s website ( http://www.thornburgmortgage.com/thornburg/HomeLoans/ProductsPrograms/LoanProducts/PledgedAssetLoanProgram/tabid/191/Default.aspx ):

“Eligible investment assets may be pledged in lieu of a down payment. The initial pledge must equal up to 143% of the required down payment at loan closing and must be maintained at a value of 120% during the pledge period. If the borrower is unable to maintain the value at 120%, the lender may require the sale of all or a portion of the pledged assets. All borrowers should consult a financial planner before selecting this type of loan. The Pledged Asset Loan Program is not available in all states.”

So, whatever Silly’s Mom (& Dad?) did in ‘02, today they would have to have a little over $200k invested in mutual funds at loan disbursement and that would be pledged to the lender.  It’s a program which has been widely available through private wealth managers (e.g., Merrill, Citi, GS, UBS, etc.) for some time--essentially, you don’t have to cash out your appreciated equity (stock) positions to make a down payment; you get 100% financing; you maximize your interest deduction (margin interest is usually not deductible); and you get treated by the lender as if you have made a 20% down payment--because you’ve made a 28.6% down payment, with a promise to maintain it at 24%.

Well, obviously I’m not an Irvine person, I keep saying so. I’m not objecting to anyone’s opinion, just pointing out the differences.

I’m not so libertarian that I think zoning has no meaning. But that’s a long way from a HOA fining me for having frackin’ weeds or a flowerbed for a front lawn. HOAs can have my property when they take it from my cold dead hands.

But I also don’t mind cell towers. I like cell service.

I think when it’s the bottom (dont’ know exactly when) those places will be more like $400,000

That’s BS and a gross generlization.  I have accountants working for me with masters degrees and they make $50-55K.  They are early in their careers, so they aren’t that far up the pay scale.  If their spouses made equivalent, their state income tax deduction would be less than the standard.  Many teachers with masters degrees still make $50-60K…

And obviously not all grad school schoolers can spell correctly on their posts… Bad Ipop.

Of course I was generalizing. 90% of the comments on this blog are generalizations!  Although there are a few here who forecast the future with particular granularity. 

Here’s my modified generalization: If you’re a professional, not in the first few years of your career, and you were smart enough not to choose teaching and then complain about the pay, then you’re likely not claiming the Standard Deduction because CA income taxes are so high.

A grand for a faucet? Is it made of diamond dust?

Oh I almost forgot to remind you..

THIS IS ORANGE COUNTY, CA BABY

Out here, it’s not unusual for young women to spend $150 just getting their hair done.

So what’s $350 for a nice faucet?

In 3 years of owning a new townhouse (built in 2002) in Northern Virginia, we spent about $1200/year on repair and maintenance. The biggest hit was for a new AC condenser (original York AC unit had a 4-year warranty, it died at year 4.5) at $1200. New control panel for dishwasher was $280. New something for the gas stove was $175. Stanley Steemer carpet cleaning was $400/year. Fix malfunctioning alarm system was $200. A couple regular plumber visits added up to $400. Re-caulk a couple of settling windows and around bathroom tub, I did myself. Call it $12 for supplies. Sealer and supplies for wooden back deck was $60. I did the work myself on power-washing and sealing that deck to save money.

Add it all up and it was about $1200/year.

Oh, and I forgot to add the $535 handyman charge to fix all the little things our buyer found in home inspection at closing.

We were lucky to own a well-built home: no roof, brick, chimney or foundation issues to deal with. And new appliances: really, they only run well for about 5 years before little problems come up.

IR,
One of your greatest post ! But ok, they are all good

I’d like to comment about the “lost down payment interest”:
- I fully agree, it is a loss but assuming 5% return on 100K$ means you leave a lot of money on poor return CD, and it does not even compensate for inflation and taxes.  Indeed, if you are able to have at least that ready for a downpayment, it means you may be in the high tax range, and so this money won’t be taxed at 25%, but at >~40% as it comes on top of all what your incomes are already.

- So, as we all know that it is now the time to buy and we need to wait, it is key to find tool to build your down payment TAX FREE and protected from inflation (expected to grow).
It is difficult to find… (any one has a hint !?)

Besides, assuming you are taxed at >30% (overall, federal), and you are renting, and have some decent cash ready to put a down payment, the overall calculation of cost of ownership is very tricky, because the more you wait, the higher the risk of seeing your CD loosing against inflation (and if you have money on other vehicle like funds or stock, even more scary right now)

So my point is that beyond the emotional aspects (which are true), even just looking at the buying decision financially may imply that you have to buy before the bottom to avoid a potential erosion on your saving, and get benefit of the tax saving.
Scary. I don’t want to be the knife catcher, but I’m afraid the risk i’m force to be one is high unless I find great financial vehicle to protect my money from tax and inflation in the next 1-4years.

A single person needs to have a CA taxable income of at least $80K for the CA income tax deduction to “best” the Fed standard deduction.  I’d say that was mid to later career professionals.  Likely 10+ years experience.  For married filing joint couples, that TI needed is $160K.

I know a fair number of teachers and most of them are quite happy with their comp.  Good bennys, nine months off per year, and salaries that can go up to $90-95K by the end of their careers.  My wife, with less than 10 years in the field, makes almost $50/hour equivalent in her position at Uni.  When I hear some complaining, I always remind that about how the rest of us have to bang out 2000+ hours per year to get our salaries…

“...speculation goes both ways...”

That should be written in bold and repeated!  We’ll be at a point within a year or two where prices will be attractive to many here; yet my guess is many will speculate on further depreciation.

I’m not suggesting they’ll “lose out” on anything, ‘cause renting is great.  I just think many don’t see how they’re just as guilty speculating downward, as many they poke fun of were speculating up.

ipoplaya,

The interesting thing about the tax shield offered by real estate is how it’s different for each particular buyer.  Your link to Intuit’s calculator helps show that.  While the 34.7% fed/CA combined tax rate might apply to a specific person, it might not apply to “the market” which is setting the price for housing.  If my logic is correct, this means that high-income people who buy in an area where the market price is set by lower-paid people will get an economic benefit.

If a 2/2 condo were for sale at, say, $300,000 a single male making $120,000 (28% fed / 9.3% CA / automatic itemization due to CA tax) would value that more highly than a mom-dad-kid combo making $80,000 (lower fed, probably 25% / child tax credit? / removal of standard deduction of $10,900 eats into mortgage tax deduction).  The single male saves more on taxes, resulting in a lower ownership cost and higher valuation of the property.

I expect to see a slow decline in the percentage of OC residents 28-45 with kids.  I have seen friend after friend move to Vegas/Phoenix/CO/ATL when the baby shows up.  Reason usually given—lower housing costs with about the same income.  Of course, if they stayed and rented—one could probably buy at the right time and minimize the difference in OC and non-OC housing costs.

Great post.  Thanks.

I think that’s an accurate observation Jaysen. I know many DINKs ("dual income no kids") who’ve bought in this bubble, even knowing prices could come down substantially, because the rental equivalent cost was very close to break-even when considering taxes.

As a renter, I currently pay about $200/year for renter’s insurance.  Of course, it doesn’t cover the structure, only my personal property and liability. 

My landlord does not require me to carry renter’s insurance, but my understanding is many rental apartment complexes do.  As you said, it’s good idea to have one anyway.

So maybe we should reduce the homeowner insurance to the difference between homeowner insurance and renter’s insurance?

My son..

Only buy when you find a home you like that you want to live in.

Only when you stop looking at homes as investments instead of homes will you be happy.

As long as you can afford the home you like (and I don’t mean 50% of your income devoted to payments) and you enjoy living there it really dosn’t matter what happens next year to the person living next door.  I matters what happens 30 years from now and no one knows that.

That said, current home prices in So Cal are a bubble that is in the process of popping.  I would wait at least a year before buying anything in So Cal.

So decide how much you have to spend on your home each month.  From blogs like this decide how much you can afford.  Decide what you really want.  Only start looking (in 2009).  When you find what you want at a price you can afford buy.

The other option is winning the lottery.

Are you crazy…

You are only insuring your contents… whats that 50K

Homeowners insurance insures what $300k+ replacement cost + contents.

You are comparing grapes to watermellons.

That is a good point. Once prices drop down to rental equivalent value, I will start looking, but I won’t feel any particular sense of urgency until the massive overhang of REOs begins to dwindle. I don’t see me stopping myself from buying due to the likelihood of further price drops in order to catch the exact bottom. There will probably be 2 or 3 years where prices are at or below rental equivalent value, so buyers can take their time and search for the right property. With an abundance of inventory to choose from, there will be no excuse for missing the right property.

Indeed, every tax situation is different.  While I used to apply marginal rates all the time to derive tax benefits, mostly because I already own and already itemize, marginal rates don’t work for many renters.  Many households that are renting today in Irvine make north of $100K per year and are taking the standard deduction still.

When I find houses I like, I plug everything into a big ole spreadsheet, to calculate the tax savings of a potential purchase vs. keeping that status quo, i.e. my current residence.  One thing I learned was to stay away from places with mega high mello roos.  I was looking at VoC houses and in spite of some good pricing, they were a terrible buying decision as the proportion of prop taxes relative to mortgage interest kicked my household into AMT territory.  That wiped out a big chunk of tax savings…

Here’s a good example:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1303038

Bank owned and let’s say you could pick it up for $325/sf.  Purchase price of $900K or so would yield prop taxes of $10,500 and mello roos of $6400.  Even if you cheated on your taxes and deducted the MRs of $6,400, that $10.5K prop tax bill gets wiped out on AMT calc and could seriously mitigate the tax savings on buying this place vs. renting an equivalent.

On a related note, I actually stopped by the open house at this property this weekend.  Very nice floorplan.  Still over-priced but I bet you some knife catcher will look at the $250K decline from purchase in 2006 and grab it up.

mark,

I’ve found a few places in Irvine that are getting close to the rental equivalent—for a DINK/Single high income earner.  However, they were all condos—and I’m probably understating some ownership costs in my model (unplanned assessments, inside repairs.)

I have yet to see too many detached single family houses where the ownership costs are near the to-rent costs.  But it’s exciting to hear that you had some friends for whom this was the case.  The small Woodbridge Aspen-model house (6 Fallbrook I think) which has 1440 sq. ft. and backs to Jeffrey went for $540,000—a new low for that model.  At the peak, one went for $675,000.  However, I have a friend who just rented it for $2,285.  His rental backs to Culver, so we have the same drawback there. 

I haven’t twirled the numbers, but I can’t imagine there is value in owning at $540k.  At best the price will stay flat as rents slowly rise.

ipoplaya,

“When I find houses I like, I plug everything into a big ole spreadsheet, to calculate the tax savings of a potential purchase vs. keeping that status quo, i.e. my current residence...”

This well-reasoned approach would have prevented much of the current bubble (assuming people didn’t justify the higher to-own costs through an appreciation argument).

I agree that Mello-Roos are a disaster.  Doubly disastrous on brand-new properties.  The buyer pays the premium for the “new” factor (which dissipates over time), and then is stuck paying costs that the developer should have borne via Mello-Roos.  Of course, with a low enough purchase price, even a home laden with Mello-Roos could pass muster.  For now, seems like the Woodbridge/Northpark/El Camino housing stock works out to a better deal.

http://www.redfin.com/stingray/do/printable-listing?listing-id=1142199

Thought this was funny… This one was featured on the blog I believe. 

Porsche in the driveway but they are delinquent on property taxes.  $4600 still due for the 2006 supplemental and $7500 for the 1st half 2007 bill.  Wonder if it’s a short too?

Actually, an earthquake in California is just a medium gray swan event, being totally predictable except for when it happens.  Maybe even a pale gray event.  I mean plate techtonics is not gonna stop.

What surprises me is how little you guys talk about it.  Floridians are always talking about hurricanes:  insurance, supplies, shutters, types of appropriate roofs, silliness of buying trailers, water, what type of generators, gosh we’re glad we didn’t get hit this year, etc, etc.

Is it because hurricane season comes faithfully every year?  Is it because we can actually individually do some pretty effective things to prepare and you can’t do stuff individually to protect the house against earthquakes?

I read somewhere that people who live directly below dams worry much less about them than people way downstream.

Here’s a few I think are close to rental equivalent for the right kind buyer:

http://www.redfin.com/stingray/do/printable-listing?listing-id=1337424

This is near my place and these units typically rent in the $2400-2500 range.

http://www.redfin.com/stingray/do/printable-listing?listing-id=1210130

I have someone at my work who rents one of these exact same models at $2700.

One can obtain financing on via a 30-year conventional for well below the 6.5% that IR used in this calc right now assuming a healthy down, good credit scores, and decent income.

News Flash!!!

Just in from Lasner

http://lansner.freedomblogging.com/2008/01/14/oc-home-inventory-starts-year-up-28/

OC inventory of homes priced $4M+ just reached 4 1/2 years (44 months)

homes priced $1M-2M are at 22 months of inventory…

For a refesher… any inventory above 6 months puts downward pressure on prices.  Just imagine what 5 years worth of inventory will due to the market below.  And resets of alt-A adjustables are just starting, inventory is projected to skyrocket.

Better put on your seatbelt IPOP, the real ride is getting started!

You posted this graph
http://www.irvinehousingblog.com/2008/01/05/more-price-to-rental-data/
and using your ideal GRM of 154 (monthly) or 12.83 yearly, compares to the lowest GRM value in the graph of about 192 monthly/16 yearly.

I am curious if such a graph exists for rental costs.

I would think that the two costs would almost never coincide, due to the inflation defense that owning allows (all things being equal, and expectations of stable-to-increasing home value). The equilibrium point would be where ownership costs would always be at least renting + some margin, where the amount of margin reflects the perceived risk.

Thats what we surfers think about getting bite by a shark in Florida… perfectly predictable.

I am curious if such a graph exists for rental costs.

Now that I’ve said that, I think I misunderstood your other graph on the same page, titled pricetorentratio.

I think I’ll superimpose one on the other when I have some time.

Couple of comments to share today ... stream of conscience .... no order ...

ipo - nice post! if that’s not Irvine in a nutshell, what is? Wonder when the Deutschelander sled is due back to the leasing dealer? IMO that neighborhood is poised to take a beating. Completed in the height of the bubble, top dollar was paid and then Woodbury went in right across Jeffrey. OUCH!

Karen, you left us too soon!
MMMM ... McDonald’s!

On HOA seizure rights, how in the wide, wide world of sports did that clause EVER make it into an HOA agreement?! How come they get signed?  Has no one ever challenged that in a court of law?  I just cannot understand how an HOA can seize property for unpaid fines & dues when the value of property would nearly always be greater than whatever the fines could amount to. Lunancy!

Lastly, came across this in latimes.com:

“Evolution accounts for a lot of our strange ideas about finances.”

http://www.latimes.com/news/opinion/commentary/la-op-schermer13jan13,0,2616027.story?track=mostviewed-storylevel.htm

Haven’t fully digested how it relates to housing but it appears we’re hardwired to be risk adverse and make some slightly strange decisions when it comes to risk and money.  According to the study, we primates (humans) will allow emotion & feelings to trump rationality. Go figure!

Peace.

Excellent point..

Many on this sellars are under the illusion that there will be a dollar for dollar recovery for any upgrades put in (e.g. granate counters) when the reality is you may get more like 60 cents/dollar for any money in upgrades.  In a down market, you may not get your money back on the sale but if your house looks better, your house should sell faster then your no-upgraded neighbor.

Granate counters are not a subsitute for location or size.  You can’t make a pig pretty by putting a dress on it.

Hey Weird Al, did you notice that the months inventory number has declined some since they summer:

http://lansner.freedomblogging.com/category/selling-patterns/inventory/

Unless I am reading things wrong, it was 15-16 months worth back in September and October after the credit markets seized up.  Has ticked back up some over the past couple of months, but not back to the late summer levels.

Now if we get back to that overall level again, with 15+ months inventory vs. volume, without the credit catalyst we had in August, we’ll be in for some really nice price reductions. 

I don’t think that’s going to happen though given the escrow activity I am seeing.  I’ve seen at least ten 2000+ sf Irvine and Tustin properties enter escrow over the past few weeks.  Back in late summer, it was maybe like one per week…

Small correction.  If you are in the 33% marginal tax bracket, you are not subject to AMT, because AMT is for those whose deductions push them into the lower brackets.  If you are in the 33% bracket after deductions; no AMT.  But, your total Schedule A deductions will be limited by high income phase outs, so you still don’t get your full mortgage interest deduction or property tax deduction or ... even if you are not subject to AMT.  Nice, eh?

Shark bites are very very rare.