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Latest REOs
- $349,900 :: 10 Greenleaf 16, Irvine CA, 92604
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- $429,900 :: 56 Great Lawn, Irvine CA, 92620
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- $458,500 :: 3 Ultimo Dr, Irvine CA, 92620
- $398,900 :: 191 Lockford, Irvine CA, 92602
So, you are saying that this would NOT be a good investment? Would not getting $4200 a month in rent be a GREAT deal? If I get a loan, do I have to pay it back?
I am so confused!
On a more serious note, thank you for taking into account all of the items that actually figure into the investment numbers.
I was repulsed by another housing bubble site that put out a mortgage vs rent cost calculator that was just woefully incomplete - and this was from some supposedly leading economic think-tank! Even when some of the additional items to be considered were pointed out, it seems to me that the site owner did not formally recognize the merits, he effectively said, well, just know that these spots are still a bad place to buy! It seems to me that he was just not bright enough to do the actual computation, or maybe he just could not be bothered with it. I guess the world is full of Doofuses, so it would follow that many of them have web sites.
Just to reiterate - paragraph one, IHB. Rest of the post is about another site. Thanks for your work!
The “calculator” was so pathetic I decided I had to share it with the IHB world. Compare this to IRs analysis, and decide which one you think is a more accurate reflection:
http://www.cepr.net/calculators/hb/hcc.html
In my opinion, anyone who thinks this page has merit should not be working in any financial capacity!
That one’s really humourous, because it assumes you’re stupid enough not to have waited until at least some of the price depreciation has already occured. But it’s an interesting complement to Ginnae Mae where it’s not programmed to allow housing prices to go down.
Mine was funny, it said “Your basic costs start at $ 1,400 per month. However, if you can rent a similar home for less than $ 3,100 per month, you may be better off renting.” That’s a pretty impressive statement.
Thanks for the humour today! I needed it!
I was drawn to your statement, “In my opinion, anyone who thinks this page has merit should not be working in any financial capacity!” Clearly referring the Center for Economic Policy and Research site but I couldn’t help but apply the comment to the financial industry in general. With the absolute implosion of our financial industry seemingly within reach, it seems we’ve got an ENTIRE CLASS of people poorly qualified to be let anywhere near a balance sheet or other people’s cash. Of course the alternative is equally if not more scary to consider which is these people were so cynical and greedy they deliberately drove this nation to the brink of disaster to make a quick buck. I do hope there’s a special place in hell for people like that.
Regarding this property, even a GRM of 180 (admitted generous) yields a sale price of $756K. Clearly this joint is still WAY overpriced and the spirit of Gordon Gecko is alive and well and trolling the streets of Irvine. I weep for the future.
Well, if you need more humor today, I have one more supplement to your comment. I also obtained a mortgage broker license (please don’t hate me - I never even wrote a loan after circumstances changed) a few years ago in FL. When I went to the first class, the instructor explained the makeup of the exam. I believe the makeup was 70 questions, 10 of which would be mathematical word problems! He also went to a great length to point out that even if one missed every single math problem, you could still pass the exam - so don’t worry! If this wasn’t sad enough already (fancy having to do math to be a mortgage broker!), on the actual test, at least 8 or 9 of those 10 could have been answered by a person with a solid 10th grade education WITHOUT even taking the class!
We were really making sure we had the cream of the crop in that profession, weren’t we?
Wow. Craziness. Thanks for the inside view on that.
Gack.
I suspected ... Oh I did suspect that some of the folks I met over the past several years, purporting to be mortgage brokers had somehow slipped in under the radar. Now I have proof.
And yet so many still go “Aw gee, lordy me how did this all go so wrong so quickly?” Yikes.
I don’t believe in hell. I’d be much happier if there were a special place in prison for the assholes who drove this nation to the brink of disaster to make a quick buck.
Any specific criticisms of CEPR’s calculator, here? I realize that the HCC is out of date at this point, but other than that?
As the author of said calculator, I’m quite curious.
Of course it “assumes you’re stupid enough not to have waited until at least some of the price depreciation has already occurred.” Language aside, that was the point. It was clear in early 2007 that prices were going to fall, and that the transaction would wind up very costly to many new homeowners. Just as it was clear that we were in a bubble in 2005. (Or 2002 for that matter, when Dean Baker started writing about it!)
I have a question about the tax savings part of your equation:
My last source of income was income tax exempt (got to love being in a combat zone) so I do not know much about tax deductions.
I have now moved back to Irvine and started a new job. I am in the top tax bracket, I claim a 2 on my w2, and have about $800 withheld every paycheck. How significant would the home ownership tax deduction be for someone like me? Would it lower my personal GRM when I look at buying?
I am single, but carry a large debt load from single. I would like to get out of Mom’s house this winter and then perhaps look at buying a year or two after, but I wonder if my tax status would make buying sooner rather than later a better idea, despite the falling prices. Any thoughts?
When you go from renting to home ownership, you give up the personal exemption in order to itemize and claim the home mortgage interest deduction. Since you are losing one deduction to gain another, this lost deduction reduces your effective tax savings. If you are in the highest tax brackets both Federally and in California, you will get a net tax relief of around 25% rather than the 40%+ that you might expect. Several people have run the calculations both ways, and 25% is about the norm. If you are not in the highest tax brackets, you will get an even lower tax break.
IR,
That’s true, but it’s not a clear decision. For example, I rent, but I also itemize my deductions. Between the California state income tax and my charitable contributions, I already can itemize more than the standard deduction. So, any interest/re tax amount to buy a house falls directly to deductions for me. Consulting a tax advisor is most people’s best bets ($100 for an hour or so to discuss and run some numbers). It never ceases to amaze me that people will spend 800K on a house, but consider tax and legal advice for a couple hundred dollars too expensive.
I am lucky since I used to do tax accounting in a previous career and my father is a tax accountant. There is much to know about getting the best deal.
BTW, if you want to release me an advance copy of your book, I’d be willing to write an article on it. Contact me.
Chuck Ponzi
IR assumes if you rent, you are taking the standard deduction (he referred to giving up the “personal exemption” which in inaccurate - you get the personal exemption no matter what), which is not necessarily the case.
If someone makes $80-85K, as CA is a relatively high income tax state, their state tax expenses could already make itemizing more beneficial than the standard deduction.
For those not itemizing already, the loss of deduction does as IR indicates. I have run this calculation for a couple of people, both single and married, and the effective tax savings for them ended up as low as 22% and as high as 30%.
The top tax bracket for single filers starts at a taxable income of $357,500.
Given you get $800 withheld on single/2, I expect your wages to be in the $65-70K range annually. I assumed bi-weekly pay of course as that is the most traditional pay cycle.
That would make your marginal tax rate 25%, far lower than the top tax bracket of 35% for single filers.
LOL - I lOVE how people brag they are in the top tax bracket no matter how much ( or little in this case ) they make!
Im sure NOBODY makes more than you pal - 70k is a lot of money, especially here in CA, ROFL!
Not sure where you saw bragging, friend. And I know plenty of people that make a whole lot more than me. Just trying to get some opinions.
Thanks for the thoughtful responses.
I am at $100,000, and I itemized last year. How is the deduction calculated?
Uh, At Mom’s, you are either incorrect above your income or whoever is paying is not properly withholding your taxes…
If you are claiming single and 2 on your W-4, your tax withholding per pay period would be well above $800 per pay pay cycle (on both bi-weekly or semi-monthly pay) if you made $100K in taxable compensation per year. Companies all withhold based on the same withholding tax requirements…
If you are making $100K, state taxes kicks you into itemizing and you would get a deduction on interest and property taxes at marginal tax rates of likely 28% federal and 9.3% state. So, for every dollar you spend in mortgage interest and property taxes, you will get a deduction of $.37 on your taxes.
That could be very true, ipoplaya. I have only had one paycheck, so I stated my withholdings from memory. Plus, there is a retroactive raise that has yet to kick in.
Thanks for taking the time to explain that to me. I completely slept through my tax law class, and was so used to getting everything back in one big tax return. Living in the real world is a large kick in the ass. I did not know the deduction included property tax payments, as well. That is good to know.
By the way, you do good work with your blog. Between you and Irvine Renter, I think the flow of information begins to tip our favor. Thanks.
IIRC, if you only have 1 paycheck, and it’s already October, they’ll withhold less, since your annual income this year will only be a small fraction of what your income will be next year (1/5th or so)
So, for the rest of this year, it might be 800 but don’t be surprised it if goes up next year.
At least that’s what I remember when I got my first job (that started in Sept) and being surprised in January when things suddenly changed. Mind you, that event was 10+ years ago for me, so YMMV.
Agent#777, anyone who takes real estate buying advice from a DC think-tank should probably have their head examined.
or their wallet emptied.
Be patient. The train is just leaving the station.
Get ready to go shopping in 2012. Start saving now.
Those recasts look significantly later than from other sources. Among other things, this one starts in 2009. However, I am also unsure if this shows scheduled resets, or also takes into account the maximum LTV for each loan hitting a limit like 115%. That moves the resets earlier.
By the way, in Malibu and Calabasas there are an enormous amount of new listing for homes $1.5 million+. Why is this happening in what people know is a terrible housing market? A. A few longtime holders wanting to get out before their remaining equity is gone. B. A lot of people who are hitting their resets and can’t afford. Yes, this happens on lots of homes $2 mil+. C. You haven’t seen the notices of default yet, but they are already not making payments. D. They have to move for work, and the new employer is not paying $500k to pay off the loan.
Yes, I don’t think we will see the lull in Option ARM implosions in 2009 that the chart would suggest. These loans are hitting their recasts early due to the loan-to-value caps.
Two words for ya, loan modification…
Do you think the push to modify will mute the reset/recast effect?
Wouldn’t loan mods require either cram downs or equity/proof of ability to pay the loan? If so, how many of the Opt-ARM loan candidates can either prove their income or have enough equity to modify the loan? If the cram downs are used, wouldn’t the lender want to attempt to sell to the highest bidder in high demand areas like Irvine/SoCal? Also, if forced cram-downs are used where do the losses go and won’t that raise interest rates? What about those individuals who actually can afford those homes, do they get cram-downs too? Re-writing the loan rules in the middle of the game will have dire consequences since I’ll be the first one to stop making payments on my mortgage to get a loan mod.
So is there a link to the calculator that IrvineRenter used?
We have not finished it yet. We are creating one that calculates the cost of ownership based on an asking price, and one that computes the rental breakeven value. The beta is here:
http://www.edgeworld.com/ihb/rentvsown.htm
IR,
I cannot recall what is and how you calculate the Equity Hidden in Payment.
(which page in your book, or any link you can hint)
thanks
This is just the amount of money that is actually going toward the principal of your loan, i.e. you make a $2000 payment, $1600 is toward interest, $400 is toward the principal or the equity hidden in the payment.
IR please correct me if I am wrong.
Awesome! Thanks for that. I’ve been trying to find a good calculator, but most remove too many factors.
http://spreadsheets.google.com/ccc?key=pmwX78uUYC0s61NxFhJ07HA
I made a quick file in Excel which is very similar to IR’s calculations. The only difference is my Tax savings seems to always be slightly higher. Enjoy.
“Interest rates are rising”
well, the jury is still out on that one.
http://finance.yahoo.com/q/bc?s=^TNX&t=1y&l=on&z=m&q=l&c=
As the markets are forced to be a little more transparent by government regulators, interest rates will continue to rise. Over the past 6 or 7 years low interest rates were made available by a combined, shell, ponzi scheme. Soon longer term investments such as 5 year CD’s will be paying more than short term CD’s…..this situation was reversed for the past 6 or 7 years.
Why bother raising interest rates now and cripple house prices when you can let it happen on President Obama’s watch and use it as ammunition in the 2012 presidential debates?
“Why bother raising interest rates now and cripple house prices when you can let it happen on President Obama’s watch and use it as ammunition in the 2012 presidential debates?”
This is what happened to Carter - who under other circumstances, would have been an unremarkable, albeit tedious, president. He got clobbered when the bills came due for Vietnam. Not his fault. Not his doing. But he got the blame for it, just as Obama will get the blame for the crash that will be well under way by the time he takes the Oath in January.
Actually, no it’s not ...
http://www.reuters.com/article/reutersEdge/idUSTRE49F65R20081016
Spreads are still 260 to 280 BP’s and likely to stay there for quite some time. Those silly investors still think mortgage debt investments are risky ... go figure!
It’s college econ 101 ... as goverment debt rises so do interest rates. Unavoidable.
ipop would die and go to heaven if this property falls to $660k
Yes I would…
Check that, I’d be living in my heaven and have only a $300K mortgage.
Located on Trailwood, across from the park, probably sells for $1.1M, maybe a bit more, I’d guess. If they are willing to take those offers, they’ll get into escrow soon…
That house is so ugly, I don’t know how the hell the owners think they have a chance to sell it for 1.2 mill.
Because if they sell it at the average equivalent pricing of recent sales, it would sell for $1.1M. It is not that overpriced per comps and recent sales across Irvine…
Location, location, location - the three most important things in RE and this one has a very good location.
Happy Friday gang.
What do you think of this property:
http://tinyurl.com/5b4vdl
Short sale in Turtle Rock for $725k. Guess the seller paid $840k and dumped another $150k in improvements to the property. The HOA’s are a killer though. Do you have much negotiating with a short sale or is the listed price the best you can do?
Worth a look?
Thanks…
Do you have the address for this property - the link doesn’t appear to work without a sign in…
8 Mill Creek, Irvine, CA 92603
Thank you for the great analysis. Would you mind sharing the spreadsheet or application that you used to calculate these numbers? This would be a great asset.
When we get it finished, we will have a link on the main blog. The beta link is above.
a 5% return every year for 9 straight years puts the value at 853k. That’s greater then the average rate of inflation and the 10 year t-note
$250 per month for homeowners insurance? The last time I went to insure a $1M property, the premium was around $1200 per year. Not that it makes this place a buy or anything, but I’m just saying…
Ummm…in Florida, IIRC my premium in 2006 was more than $1200 for our 1542 SF, sub-300K house.
Does your insurance cover earthquakes?
Nope. I insured my 1622sf condo here in Irvine for around less than $600 per year last year, sans quake insurance of course.
ipo…
you only bought condo owners insurance. this wouldn’t cover replacing the actual building.
your HOA buys insurance on the structure, which is assessed in your monthly dues.
if you buy a detached home you will be buying insurance for both contents and structure, which is higher than a condo owners policy.
To Lendingmaestro, your calculation of 5% return is generous, too generous and your assumption of the inflation rate is way off. The numbers for inflation that the gov’t puts out is wrong, they manipulate the forumula and throw everything out except the kitchen sink. The reason that they do this is simple, entitlement payments, if they stated what the real inflation rate was they would have to increase all those social security and other entitlement checks, something they don’t want to do, especially now that we are going to get another great rush of babyboomers leaving the work field and looking at SS checks to supplement their income, good luck suckers!
Since housing prices are dependent on wages (for most of us), it is wage inflation, and not general inflation, that should affect house prices most. In fact, general inflation should *decrease* house prices since with higher prices for food and gas, you will have *less* money available for housing.
So high general inflation and low wage inflation should (in a more rational world) lead to lower house price appreciation.
General wage inflation has been 2% over the past 10 years.
IR
I like your analysis—simple and easy to follow. But don’t forget two additional items
First, most rental properties will have some months in which the place is not rented—so while you may get $4,200 a month when it is rented, at a 95% occupancy rate average, you will get an effective rate closer to $4,000 a month.
Second, we are entering a recession—so to any knife catcher note this one—the number of people with paying jobs able and willing to pay $4,200 will decline sharply. Which goes back to point #1—perhaps the good investor should consider the real possibility of a much higher vacancy rate with the long term sustainable monthly income being closer to $3,500. But what is another $10k in annual negative cash flow…..
The koolaide drinking never ceases to amaze me. I have one good friend who until last month thought I was crazy. Now he sees his business going way down and his tone has changed. I would have thought he would have been able to see the trend clearly, after all he runs a very large and succesful business—but there is a very strong ingrained belief that realestate is a great investment.
Data used by our city for calculating potential rental income (for tax purposes).
Gross Annual Income (I) = Monthly rent * 12
Vacancy is 5%I
Management 5%I
Maintenance 10%I
Net Income would be 80%I
is that sink in the kitchen pink?
Yep - It goes well with the purple master bedroom !
I don’t think I have ever seen so much white & glass in a house. Weird…
“I was required to take courses in real estate economics in school…”
I never knew there were such courses. Really, a “real estate finance” course should be taught to seniors in high school - especially in southern California! Although I’m sure the CAR would lobby against such a measure.
Yes, many finance departments in major universities have real estate economics as an area of specialization. My degree required these courses as well as urban planning to understand the relationship between finance and design.
I agree with the good Major: high school seniors should be taught the basic financial skills necessary to evaluate the purchase of a house and the true cost of home ownership.
Curiously enough, my degree in architecture required me to take not just macro and micro econ but probability and statistics AND basic business management courses. Normally a degree in architecture is a BA, mine is actually a BS because of the number of credits accumulated in math, econ and business.
Clearly the good folks at KSU knew something about making a well rounded artist. Over the years and time and time again I’ve been able to call upon what I learned in those classes.
I also agree with the good Major S. ... kids in high school should be taught basic personal finance and how to read things like credit card disclosures, loan terms and a corporate balance sheet. My 13 year old isn’t gonna like it but I’ve already told her she’s going to learn how to manage her finances in the next couple of years. She may still do stupid stuff over the coming years but at least she won’t be able to say she didn’t know.
IR, your writing is always very good, but in the interest of fairness to the realtors whose lack of English QA you so rightly lambaste:
“Speculation or Investment to try to show the key differences between those two styles of investment”? (Investment is a kind of investment?)
“pschology”?
“Are are entering”?
“apocolyse”?
You are correct. I should have said “to try to show the key differences between those two methods of selecting entry and exit points in financial markets.”
I must have missed spell checking that paragraph. Oops! Well, I will go back and correct my mistakes rather than leave them on the MLS for months.
Heh heh. Right on, brother.
So the “lost income to Down Payment”, that would be the amount earned if the down payment were tied up in a CD or other investment instead of being tied up in a depreciating house?
I ask because once the market has bottomed and houses start appreciating again, this factor is minor, no? 4% home appreciation vs. 5% return on safe investment?
6.5% interest for a fixed 30 years on an investment loan for $800,000.
Where do I sign up? I heard the current jumbo fixed 30 years are going for 9.5%, too high for me. I think a 130x monthly multiplier for gross rent is high, let alone 157x multiplier.