Rent Versus Own

Talking to myself and feeling old
Sometimes I’d like to quit
Nothing ever seems to fit
Hangin’ around, nothing to do but frown
Rainy days and mondays always get me down

What Ive got they used to call the blues
Nothing is really wrong
Feeling like I don’t belong
Walking around some kind of lonely clown
Rainy days and mondays always get me down

Rainy Days and Mondays — The Carpenters



How Much a House Really Costs

A useful way to look at the total cost of housing is to evaluate the monthly cost of ownership. An ownership cost is any expenditure required for the possession of property. A working definition is important because there are many hidden or forgotten costs people overlook. These costs are borne by owners and not by renters. There are 7 costs to owning a house. Although some of these costs are not paid on a monthly basis, they can be evaluated on a monthly basis with simple math. These costs are:

1. Mortgage Payment

2. Property Taxes

3. Homeowners Insurance

4. Private Mortgage Insurance

5. Special Taxes and Levies

6. Homeowners Association Dues or Fees

7. Maintenance and Replacement Reserves

Mortgage Payment

The mortgage payment is the first and most obvious payment because it is the largest. It is also an area where people take risks to reduce the cost of housing. It was the manipulation of mortgage payments that was the focus of the lending industry “innovation” that inflated the housing bubble. The relationship between payment and loan amount is the most important determinant of housing prices. This relationship changes with loan terms such as the interest rate, but it is also strongly influenced by the type of amortization, if any. Amortizing loans, loans that require principal repayment in each monthly payment, finance the smallest amount. Interest-only loan terms finance a larger amount than amortizing loans because none of the payment is going toward principal. Negatively amortizing loans finance the largest amount because the monthly payment does not cover the actual interest expense.

Property Taxes

Property taxes have long been a source of local government tax revenues. Real property cannot be moved out of a government’s jurisdiction, and values can be estimated by an appraisal, so it is a convenient item to tax. In most states, local governments add up the cost of running the government and divide by the total property value in the jurisdiction to establish a millage tax rate. California is forced to do things differently by Proposition 13 which effectively limits the appraised value and total tax revenue from real property. Local governments are forced to find revenue from other sources. Proposition 13 limits the tax rate to 1% of purchase price with a small inflation multiplier allowing yearly increases. In California, the first half of regular secured property tax bills are due November 1st, and delinquent after December 10th; the second half are due February 1st, and delinquent after April 10th each year. If the delinquent date falls on a Saturday, Sunday, or government holiday, then the due date is the following business day. Often the lender will compel the borrower to include extra money in the monthly payment to cover property taxes, homeowners insurance, and private mortgage insurance, and these bills will be paid by the lender when they come due. If these payments are not escrowed by the lender, then the borrower will need to make these payments. The total yearly property tax bill can be divided by 12 to obtain the monthly cost.

Homeowners Insurance

Homeowners insurance is almost always required by a lender to insure the collateral for the loan. Even if there is no lender involved, it is always a good idea to carry homeowners insurance. The risk of loss from damage to the house can be a financial catastrophe without the proper insurance. A standard policy insures the home itself and the things you keep in it. Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets. Damage caused by most disasters is covered but there are exceptions. The most significant are damage caused by floods, earthquakes and poor maintenance. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowners’ responsibility.

Private Mortgage Insurance

Mortgages against real property take priority on a first recorded, first paid basis. This is known as their lien position. This becomes very important in instances of foreclosure. The 1st mortgage holders gets paid in full before the second mortgage holder gets paid and so on through the chain of mortgages on a property. In a foreclosure situation, subordinate loans are often completely wiped out, and if the loss is great enough, the first mortgage may be imperiled. Because of this fact, if the purchase money mortgage (1st lien position) exceeds 80% of the value of the home, the lender will require the borrower to purchase an insurance policy to protect the lender in event of loss. This policy is of no use or benefit to the borrower as it insures the lender against loss. It is simply an added cost of ownership. Many of the purchase transactions during the bubble rally had an 80% purchase money mortgage and a “piggy back” loan of up to 20% to cover the remaining cost. These loan pairs are often referred to as 80/20 loans, and they were used primarily to avoid private mortgage insurance. There were very common during the bubble.

Special Taxes and Levies

Several areas have special taxing districts that increase the tax burden beyond the normal property tax bill. Many states have provisions which allow supplemental property tax situations. The State of California has Mello Roos fees. A Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district is established to obtain public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The taxes paid are used to make the payments of principal and interest on the bonds.

Homeowner Association Dues and Fees

Many modern planned communities have homeowners associations formed to maintain privately owned facilities held for the exclusive use of community residents. These HOAs bill the owners monthly to provide these services. They have foreclosure powers if the bills are not paid. It is given the authority to enforce the covenants, conditions, and restrictions (CC&Rs) and to manage the common amenities of the development. It allows the developer to legally exit responsibility of the community typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots. Most homeowners’ associations are non-profit corporations, and are subject to state statutes that govern non-profit corporations and homeowners’ associations.

Maintenance and Replacement Reserves

An often overlooked cost of ownership is the cost of routine maintenance and the funding of reserves for major repairs. For example, a composite shingle roof must be replaced every 20-25 years. It may take $100 a month set aside for 20 years to fund this replacement cost. Also, condominium associations often levy special assessments to undertake required work for which the reserves are insufficient. In the real world, most people do not set aside money for these items. Most will attempt to obtain a Home Equity Line of Credit (HELOC) to fund the repairs when they are necessary. Of course this assumes a property has appreciated and such financing will be made available.

Tax Savings

There are two other variables people often consider when evaluating the cost of ownership that is not included in the prior list: income tax savings and lost downpayment interest. When a borrower takes out a home loan, the interest is tax deductible up to a certain amount. For borrowers in the highest marginal tax bracket, the savings can be significant, and this can make a dramatic difference in the true cost of ownership. However, this benefit diminishes over time as the loan is paid off and the interest decreases. Plus, contrary to popular belief, it is never good financial planning to spend $100 to save $25 in taxes. Also, these benefits are almost universally overestimated by people considering a home purchase. A renter considering home ownership will need to remember they will be giving up the standard deduction when they itemize to obtain the Home Mortgage Interest Deduction (HMID). A “married filing jointly” taxpayer will forgo a $10,700 deduction in 2007. This reduces the net impact of the HMID. Anecdotally, even those in the highest tax brackets usually do not get more than a 25% tax savings.

Hidden Savings

This is the forgotten benefit of a conventionally amortizing loan: forced savings. Most people are not good at saving. The government recognized this years ago when they started taking money out of peoples salaries to pay income taxes because they knew people would not do it on their own. People who become homeowners during their lifetimes often have the equity in their home as their only source of retirement savings other than social security. To accurately calculate the cost of ownership, this hidden savings amount needs to be deducted from the total cost of ownership because this money will generally come back to the borrower at the time of sale. Since taxpayers in the United States get a capital gains exemption up to $250,000, this savings amount does not need to be adjusted for taxes.

Lost Downpayment Interest

Unless 100% financing is utilized, a cash downpayment will generally be withdrawn from an interest bearing account to purchase a house. The monthly interest that would have accrued if the downpayment money was still in the bank is a cost of ownership. This is perhaps the most overlooked ownership cost. For instance, if you are putting 20% down on a $500,000 property, you will be taking $100,000 from a bank account where it would have earned 5% in 2007. This $5,000 in interest comes to $417 in lost interest the moment this money gets tied up in real property. If someone chooses to rent rather than buy, they would earn this interest income. Of course, this earned income is also taxed, so 75% of this number is the net opportunity cost of a downpayment.

To establish the cost of ownership, each of these costs, if applicable, must be quantified. When the total monthly cost of ownership is equal to the rental rate, the market is considered to be at fair value for owner-occupants. In fact, this is the equilibrium in most real estate markets across the nation. In a strange way, the bubble did not upset this equilibrium. The use of negative amortization loans with artificially low teaser rates allowed borrowers to obtain double the loan amount with the same monthly payment: double the loan; double the purchase price. This is how prices were bid up so high so fast without a commensurate increase in wages. The elimination of these loans is also the reason prices collapse.

Ownership Cost Math

Below is a typical cost of ownership for a $500,000 Irvine property:

$500,000 Purchase Price

$100,000 Downpayment @20%
$400,000 Mortgage @ 80%

$2,528.27 Mortgage Payment @ 6.5%
$416.67 Property Taxes @ 1%
$104.17 Homeowners Insurance @ 0.25%
$104.17 Special Taxes and Levies @ 0.25%
$100.00 Homeowners Associate Dues or Fees @ $100
$625.00 Maintenance and Replacement Reserves @1.5%
$3,878.27 Monthly Cash Cost

………………$2,166.67 Interest on First Payment
$(567.71) Tax Savings @ 25% of mortgage interest and property taxes
$(361.61) Equity hidden in payment
$312.50 Lost Downpayment Income @ 5% of Downpayment
$3,261 Total Cost of Ownership


  • The mortgage payment assumes a 30-year fixed-rate conventionally amortized mortgage at 6.5% interest.
  • The property taxes are set at the 1% limit imposed by Proposition 13.
  • The homeowners insurance is estimated at one-quarter of one percent per year.
  • Private Mortgage Insurance is estimated at one-half of one percent per year. It is not included in the calculation above because this example utilized 80% financing. If the financing amount required PMI, the costs would have been over $200 a month higher.
  • Special Taxes or Levies (Mello Roos) is estimated at one-quarter of one percent per year. Some nieghborhoods do not have Mello Roos as the bonds have been paid off. Some Mello Roos fees are as high at 1%.
  • HOA dues are estimated at $100: some are lower, and some are much higher.
  • Maintenance and replacement reserves are estimated at 1.5%. This may be the most contentious estimate of the group because most people assume they will simply borrow their way around these costs when they are incurred. This certainly has been the pattern during the bubble years when credit was free flowing. This method of home improvement and maintenance may be significantly more difficult as the credit crunch and declining values make financing much more difficult to obtain. In any case, these costs are real, and failing to acknowledge them denies the realities of home ownership.
  • The sum of the above costs are the monthly cash costs of ownership. A homeowner may not write a check for each of these costs every month, but the costs are still incurred, and renters do not pay them.
  • The tax savings are based on the maximum interest payment at the beginning of a loan amortization schedule. This tax savings will decline each month as the mortgage is paid off. Contrary to popular belief, this is not a bad thing. Also, the property taxes are also deductable, but Mello Roos are not fully deductible (even though most people mistakenly deduct it.)
  • The opportunity cost of lost interest assumes a 5% interest rate on the downpayment reduced by 25% for taxes on this earned income.

So there you have it. The actual cost of ownership on a typical $500,000 property in Irvine would be approximately $3,250 per month. Some will be higher and some will be lower, but the calculation above, when adjusted for the specific property details being examined, will yield the cost of property ownership.

Gross Rent Multiplier

So what general relationships can be inferred from the ownership cost breakdown provided above? First, notice the relationship between monthly cost and price. This property is worth 154 times the monthly cost when you fully examine the cost of ownership. This is the basis for the Gross Rent Multiplier (GRM). The GRM is a convenient way to evaluate whether or not a rental rate will cover the monthly cost of a particular property. It was developed by landlords seeking a method to quickly evaluate the purchase price of a property to see if it would be a profitable investment. When performing such an evaluation, a cashflow investor will typically look for a GRM near 100 to find a property with positive cashflow. This method can also be easily adapted to calculate the breakeven point where an owner/occupant would break even compared to renting. As you can see, when you consider the full cost of ownership — including those costs often ignored — the gross rent multiplier is lower than most think. The GRM of 154 is very close to the 160 I have been using in my posts here. The Gross rent multiplier is a convenient measure of value because it spares you the brain damage of performing the above, detailed calculation for every property you wish to evaluate.

Renting Versus Owning

Renting versus owning is both an intellectual, financial decision and an emotional one. The financial decision is first and foremost an analysis of the comparative cost of renting versus owning. The cost of a rental can be determined fairly easily as there are usually a number of comparable properties on the market to establish a realistic rental rate for any given property. Of course, it is easy to justify in one’s mind a comparative rent that is higher than the market will bear. A house someone is in love with will almost certainly rent above market in their minds. Also when looking at similar products the rental rates may not be realistic in the marketplace. It is probably a good idea to take 5% to 10% off comparable rental rates on properties offered on the market. Once you have established what you believe to be a comparative rental rate, and you have gone through a realistic evaluation of the true costs of ownership as outlined above, a simple comparison of the two figures will tell you if a property is overvalued, undervalued or just right.

This point-in-time analysis of the relative worth of a house does leave out a couple of important financial factors: inflation and transaction costs. Inflation is the erosion of purchase power of money over time, or looked at another way, it is the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index. The effect of inflation on housing costs is that it tends to increase the cost of renting over time, and theoretically, it will increase the value of a house over time as well. If the cost of rent is increasing, but your cost of ownership is fixed (assuming a fixed-rate mortgage,) then owning a home becomes less expensive over time and serves as a hedge against the impact of inflation. If you are a homeowner, inflation is your friend. There is one big cost of home ownership that works against the positive impact of inflation: transaction costs. When people buy a house, they pay some closing costs, but many of these get rolled into your loan and forgotten. When people sell a house, they generally go to a realtor to help them market the property and complete the paperwork necessary for the transaction. Real estate commissions for many years have been held at an artificially high 6% in the United States, and the seller is the one who pays this commission. From the time of purchase to the time of sale, inflation (or irrational appreciation) must have increased the value of the house enough for the sales price to cover the real estate commission or the seller will lose money. This is why it is often recommended for people who are not going to live in a given area for more than 2 or 3 years to rent instead of own. Renting is freedom — freedom to move when you wish (within the terms of your lease.) As I noted in America’s Debtor Prisons, homeowners who go underwater lose this freedom of movement. This advantage of renting is nullified during a price rally as owners have this same freedom during those times, but this forgotten benefit becomes readily apparent once prices start to fall.

Some people spend a great deal of effort evaluating the costs of ownership to determine if is a correct decision, but many people do not. Some people make the decision to purchase the most expensive asset they will ever own with no analysis at all. The decision to buy a house is primarily an emotional one. Even those who go through all the analysis generally only do so to provide rationalizations for their emotional decision. During price rallies, greed becomes a powerful emotion motivating people to fudge their financial analysis in order to justify their emotional purchase. Another factor often called the “nesting instinct” causes both men and women to want a place to call their own, particularly when there are children in the family. There is nothing wrong with deciding for emotional reasons. Most people pick a spouse this way. The real challenge is to have the emotions and the intellect working together to make a decision that is both fiscally sound and emotionally satisfying. This is easier said than done.

120 thoughts on “Rent Versus Own

  1. awgee

    Just wanted to go to the confessional and admit what a big geek I am … I really like The Carpenters’ music and voices.

  2. AZDavidPhx

    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.

  3. renter

    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.

  4. FairEconomist

    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.

  5. George8

    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?

  6. renter

    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.

  7. AZDavidPhx

    Excellent point.

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


  8. ipoplaya

    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.

  9. jaysen

    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? πŸ™‚

    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!

  10. tealeaf

    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).

  11. tealeaf

    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.

  12. AZDavidPhx

    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.

  13. tealeaf


    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…

  14. Mr Vincent

    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.

  15. No_Such_Reality

    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.

    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.

  16. jaysen


    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.

  17. Mr Vincent

    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.

  18. Flyovercountry

    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.

  19. Larrygg

    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.

  20. surfing in newport

    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 πŸ™

  21. IrvineRenter

    “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.

  22. surfing in newport

    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.

  23. zornundo

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

  24. Alan

    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.

  25. Alan

    I don’t have a pool but my folks do..

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

  26. Alan

    $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.

  27. Joe

    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.

  28. Mel

    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.

  29. ipoplaya

    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:

  30. lawyerliz

    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?

  31. Chris

    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.’

  32. lawyerliz

    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.

  33. lawyerliz

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

  34. lawyerliz

    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.

  35. ipoplaya

    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…

  36. AZDavidPhx

    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.

  37. SawItComing

    I liked her rendition of “dem bones”.

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

  38. Stupid

    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.

  39. Stupid

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

  40. lendingmaestro

    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.

  41. Alan

    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.

  42. AZDavidPhx

    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.

  43. AZDavidPhx

    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.

  44. rkp

    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.

  45. tealeaf

    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.

  46. Alan

    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.

  47. slacker kate

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

  48. slacker kate

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

  49. tealeaf

    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.

  50. ex-Tangelo

    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.

  51. Alan

    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.

  52. Alan

    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.

  53. Alan

    “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.

  54. zaleriana

    Here’s the * from Thornburg Mortgage’s website ( ):

    “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%.

  55. ex-Tangelo

    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.

  56. mark

    If you’re a “professional” (i.e. grad school degree) in CA, you’re earning enough to deduct state income taxes from your Fed return!

  57. Stupid

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

  58. ipoplaya

    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…

  59. ipoplaya

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


  60. mark

    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.

  61. Alan

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

    Oh I almost forgot to remind you..


    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?

  62. TurtleRidgeRenter

    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.

  63. want to buy in irvine

    One of your greatest post ! But ok, they are all good πŸ˜‰

    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.

  64. ipoplaya

    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…

  65. mark

    “…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.

  66. jaysen


    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.

  67. mark

    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.

  68. kanchou

    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?

  69. Alan

    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.

  70. Alan

    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.

  71. IrvineRenter

    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.

  72. ipoplaya

    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:

    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.

  73. jaysen


    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.


    “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.

  74. lawyerliz

    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.

  75. ipoplaya

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

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

    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.

  76. alan

    News Flash!!!

    Just in from Lasner

    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!

  77. ex-Tangelo

    You posted this graph
    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.

  78. ex-Tangelo

    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.

  79. soapboxpolitico

    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

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


  80. alan

    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.

  81. ipoplaya

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

    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…

  82. awgee

    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?

  83. alan


    Your reading things wrong.

    Maybe your Isreali… hebrew reads left to right.

    Just because you found a few sales doesn’t mean the crisis is over.

  84. alan

    Nearly 900 homes priced 2M+ chasing only 34 buyers (and who’s to say all 34 of those pending sales will close)

    All I can say is…

    Look out below!

  85. SacRenter

    Is that really true? You’ve really got me thinking here…we moved from New York State where you couldn’t rent or sell a house unless it met certain standards. One of the standards was that the garage door opener had to have a safety stop thing.

    Our rental here in California has the older garage door opener that won’t stop for anything. The landlord uses a home warranty company and they’ve fixed that darn opener a couple of times but won’t replace it completely. I’ve wondered if California regulated anything like that.

    Is there somewhere I could look to find out more about it?

  86. Land of Delusion

    I think that “dollar for dollar” illusion was fed by shows like Flip This House. It always confounded me when they would tally up the improvements and arbitrarily add huge markups to the work/materials.

    For example, a $10,000 kitchen update magically added $20,000 to the asking price.

    I think that mentality is soon to disappear, just as the “If I can’t afford the reset payment, I can always just sell” mantra has evaporated.

  87. Pioneer10

    The most interesting thing about the month inventory number is how the below 500k (i.e. what fits under the FHA caps) is keeping the overall number down. It’s only at 11+ months vs 14+ months versus everything else – which is big jump. In addition, as the listing prices go up the months inventory is also generally increasing. Pretty much the entire 1 mill market is over 20+months of inventory.

    Prices are going to continue to drop significantly except for the lower end unless those caps gets raised. Even if the caps gets raised (considering how cash strapped Fannie and Freddie this not guaranteed), then anything above the cap is still going to be under tremendous stress

  88. zoiks

    “Scary. I don’t want to be the knife catcher, but…”

    You contain too much fear my son. Embrace your fate and relax!

  89. zoiks

    Cell towers made up to look like trees have always struck me as a great idea. Yeah, it’s not a real tree, but it takes an important edge of the decidedly unaesthetic of a cell tower. We have several of these in Costa Mesa. One is at Harbor and Gisler. There’s another one near Royal Palm and Adams. And some more I can’t recall ATM.

    Thank goodness Costa Mesa utilizes this or it would really look like crap. Oh wait, it does look like crap. Nevermind.

  90. zoiks

    I have an assistant who takes care of the HOA fees for the townhome that I live in. The assistant’s position is called “landlord”. Really handy, those landlords!

  91. lvtfan

    Houses, like cars, do NOT appreciate. They will never be worth more than the cost to build another similar house.

    It is the land, the site, the privilege of living in that particular location, that rises and falls in value in response to the market, to increases and decreases in mortgage interest rates, rises and drops in the property tax.

    Have you ever stopped to realize that it is Proposition 13 which has driven land prices so high?

    If California simply funded all local spending needs with a land-based property tax, California’s housing would be affordable to most of its residents. And California’s communities could fund themselves more than adequately, without resorting to sales taxes or wage taxes, both of which damage the economy.

    90 years ago, this was known as Natural Taxation. Google those words and “Shearman” and you’ll find a worthwhile book, readable online. The laws of economics haven’t changed. Won’t change. But maybe California will start acknowledging them and the effects of attempting to ignore them — but I don’t know whether California’s education system provides for that anymore.

    When will we ever learn? Oh, when will we, ever, learn?

  92. lvtfan

    L.G. Anteaters, I think you’ve got it backwards! You HAVE been paying for proximity to those parks and schools. Your rent reflects all the advantages associated with the location your home is in. You pay your landlord, every month. Most of what you’re paying for is not the building and its amenities, but its location. Probably 70% is for the location, 20% is for the building and amenities, and 10% for services the landlord furnishers (moving trash, mowing, suchlike). Your apartment isn’t all that much fancier than one could get outside California for a small fraction of what you’re paying.

    The bad news is that your landlord, protected by Proposition 13, doesn’t have to pass much of your rent along to the entity which maintains those parks. When he raises your rent by, say, 5%, his property tax rises by only the Prop13 2%. The rest is his to keep.

    He/she/it/they gets to keep those funds. H/s/i/t is only paying 1%, or maybe 1.25% of the assessed value of the property, which might be a rather small fraction of its market value (which is based mostly on the value of the location), particularly if the property hasn’t changed hands in more than 5 years.

    So instead of your rent being passed along to fund local services, it is leaving town, going into the portfolio of the landlord, Real Estate Investment Trust, family trust, absentee owner or poor widow who owns the property. (And won’t be spent locally to rev up the local economy, either, most likely.)

    THEN you get to pay again for the services that the town and county and state provide, through taxes on things you buy and taxes on your wages. Neat Trick, huh? At least it is for landlords. Not so neat for tenants. And terrible for the community — that’s all of us, together.

    Check out and for a bit more on this.

  93. Alan

    I’d still have to check..

    I would have to run that by an attorney, I would have thought that as long as you have a designated area for satallite dishes (the part of the roof not visibible from the street) then you would be in compliance since you are not prohibiting them outright.

  94. lvtfan

    Something like the 1.5% this article wisely recommends accruing for maintenance.

    Something else one needs to account for.

  95. lvtfan

    A May, 2006, Federal Reserve Board study pegs depreciation at 1.5% per year for single-family housing stock across 46 top metro markets.

    They say,

    Once we have calculated the cost of building the structure brand new, we depreciate the structure to better estimate its true replacement cost (or market value of the structure). The way to think about depreciation in this context is that it measures the expense required to bring an existing aged structure up to “like-new” standards. This includes expenditures on physical repairs, such as fixing a roof, as well as expenditures on functional improvements, such as improving the insulation.

  96. Dawn

    I’d like to add a comment in defense of (some) homeowners. I do now own a home, but waited a long time to do so. My partner and I lived in DC and NY City – renting in two of the highest cost cities in the world – for almost 10 years. Between the two of us, we spent $5000/month in rent plus about another $500/month commuting back and forth.

    We moved to Seattle for new jobs and an easier way of life. We bought a home and think it was well worth it no matter the issues with the housing market these days and even if the home decreases in value. We love our home; love the neighborhood. We pay $7000 in mortgage, taxes and insurance – so $500 a month more than we were paying in rent. We are close to the highest tax bracket, so will get an additional tax deduction we weren’t getting from renting. Even if our home decreases in value – with the present value of our money and a fixed rate mortgage, inflation increasing and rising rent prices in Manhattan and DC, 10 years from now, we’ll definitely have come out way ahead from owning now.

    Plus, we have a beautiful home – 2000 more square feet of it than we had with both our apts in DC and NY – with a view of the whole of downtown Seattle, the mountains and Elliot Bay. Also, rather than spending much of our disposable income outside on dining, theater, etc because we needed to get out of our expensive little boxes, we spend time inside cooking and we like spending time and money doing maintenance and little things to spruce up the house – it’s actually a fun hobby – and not as bad as many hobbies I know.

    Now, we are in a different position than many – we have a fixed rate mortgage – put an appropriate amount down, are not underwater and can afford, easily, our home expenses. But, we also went into it with the understanding that we wanted to spend time in our house for the next decade or even two. From that standpoint (and compared with our previous renting expenses), it is a fantastic deal.

    If we end up with a little equity when we decide to leave it (if we do), so much the better. But, we are hardly relying on it. We aren’t relying on our house to pay for our retirement anymore than we would gambling winnings.

    So – anyway – just wanted to say that some homeowners still are happy with their situation.

  97. Eric U.

    I think a lot of those upgrades were just using up the margin they would get from the next fool that bought the house. I wonder how many flippers upgraded a house only to have the next guy come in and tear some of it out. OTOH, some of that work was really nice, and the houses were real dumps when they started.

  98. tonye

    Brrr… it’s cold in Seattle and it’s often gray and dreary.

    I assume you bought around SW Seattle? Just SE of Alki Point, East of California? The drive ain’t too bad downtown there and the neighboorhood is really very nice. Beautiful homes in that part of town.

    I took some pictures of Seattle one Xmas night by that park on top of the cliff… I forget the name. But it has an awesome view of Seattle like the one you describe… just from the port all the way up.

    But, it’s pretty cold in the winter.

  99. Dawn

    Well the weather is all relative. It’s colder and grayer than S. Cal or Miami, but I’ve never lived there and never wanted to. On the other hand, the weather in Seattle is 100x better than NY City. I loved living in NY but definitely not for the weather. Winter’s in a big city like NY can be brutal – really cold and the snow turns black almost immediately after it comes down. So, I’ll take the winters in Seattle anyday – plus, it doesn’t get that cold – light coat weather – only snows really in the mountains and when the sun comes out it is amazing! The mountains in the distance are snowcovered and lovely while the weather downtown is wonderful.

    Anyway – was a good move for us and we do live in West Seattle (SW area). I think the park you were in was Discovery Park in Magnolia which is also beautiful.

  100. Cara

    As a potential first-time home buyer, thanks for all your posts this one in particular, as well as the link to Redfin! It’s fantastic.

    I’m in D.C. not O.C. and here prices have come down to where a factor of 140x rent is within reasonable offer/ask range. However…. homes have been so expensive for so long that rents themselves are insane (not affordable for reasonable incomes). Like O.C. we have a high median income and high rates of prime borrowers that have enabled extensive use of the exotic mortgage products to help inflate the bubble in the panic of “if you don’t buy now you will never be able to buy”.

    We have to move this summer anyway to shorten commutes, and have built up a 10% downpayment for the loan amount we’d be willing to sign up for, but its just such an agonizing choice, rent again cheaply and keep saving or buy and start nesting for the next 5-10 years.

    My question is really, if rent to buy ratios are now reasonable, can I really expect house values to drop any further (based on my gut feeling that rents are just as exorbinant and that rents were that high partly because landlords knew renters didn’t have the choice to buy)?

  101. IrvineRenter

    It is quite a quandary, isn’t it. In all likelihood, prices will continue to fall, but if you can find a place where the cost of ownership is less than the cost of a rental, prices probably won’t drop much below that level. If you have reason to believe rents will decline significantly, perhaps you should wait. Rents are intimately tied to incomes, and during a recession incomes do tend to stagnate or fall, so rents should decline with them, particularly if the rent-to-income ratio is high.

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