graphrix,

Thanks for the break down.

I was actually asking about the monthly cost comparison. Since we do have 20% down and plan on staying at least 10 year, it seems that renting a comparable unit would cost us as about the same monthly.

I guess our goal is a bit different we’re not really interested in timing the bottom for this purchase. I was just curious to what is the motive/explanation behind the argument that cost of ownership is double the market rent even after the tax break. Seems like the argument is more appropriate for the 2005 peak price AND for 100% financing with conventional 30-year fixed payment before tax break.

crucialtaunt - I didn’t use any economic basis for my percentage increases. It was just a number off the top of my head and figured I shouldn’t be too bearish so I kept the first five years flat. It took ten years from the peak in 91 to break even for inflation. To be honest I thought that I may even prove myself wrong and that the buyer would benefit in the second scenario. I for one think prices will go down a bit more which would make the buyer numbers look even worse. If wages were to continue to grow at 4% in year ten affordabilty would only improve by 15% so even then less than a third of OC could afford the median. I need to look into what OC’s average affordabilty rate is. The only way the buyer scenario wins is home prices exceed inflation in which the last five years is true and exceeds the profit on the investment of the money saved vs. down payment.
Do you think I was being too bullish or bearish on the percentages?
Red - You have to compare renting vs. buying a house with no money down because when you rent you do not have the huge cost of a down payment. I know irvinerenter has pointed this out and this is what is known as opportunity cost and time value of money. You are right that it is no longer double 100% more of a cost to buy it is around 75% or give or take.
Also you said that a $40k down payment gets 100% return on investment if your house goes up 10% is not correct when factoring in inflation it is 72% or 5.57% annualized or if in ten years your $400k home is now worth $440k without adjusting for inflation your annualized rate of return is .96% or -1.5% when adjusted for inflation.
If you take the second scenario and use 20% down then 2007 buyer is -$389k compared to 2012 buyer who is -$197 which is close to 100% or double at 97.5%. Also 2012 buyer if structured properly would only be down -$22k and that would make it way more than double. It isn’t about timing the market it is about inflation, opportunity cost and time value of money. I didn’t even add the costs that come with owning compared to renting and even new homes will have some costs.
I apologize if you think I am being a bit harsh on you but I think it is important to understand that there is a strong possiblity that you could lose a lot more money by buying right now. It is a place to live and not an investment and it is your money and your place to live. I just want prices to come down so that I can buy a rental property with positive cash flow and a cap rate that makes sense.
Take some quotes from Warren Buffett:
"It is optimism that is the enemy of the rational buyer."
"Turn-arounds" seldom turn.
 

"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities—that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future—will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

graphrix,

Dont worry about being harsh. As I said I enjoy reading this blog maybe too much lately. Many bears in this blog obviously have the knowledge and experience to speak out and educate people. Some of the comments sound a bit over-pessimistic sometimes and I may need to clarify where it is coming from, for my own benefit. But it certainly beats reading NAR statements or getting bullish real estate outlook from your sales agents.