Amish Paradise — Al Yankovic
The wheels of progress keep turning here at the Irvine Housing Blog. Some of you may have noticed that we have introduced a new rent versus own decision calculator. It is still a work in progress, but it is good enough to put on the main site. We hope to add some formatting and create a stand-alone version for people to download and use.
Our goal was to create an accurate and detailed accounting for the true cost of ownership. This is a point-in-time calculator. You are not asked to make assumptions about inflation or appreciation. There are no projections for the future. People who invest in real estate (I am not talking about stupid amateur speculators) always look at the stabilized cashflow in the first year of ownership. If it doesn’t make sense in year 1, then it isn’t an investment, it is a speculative gamble. There are a variety of rent versus own calculators out there. Most are put up by realtors. They are totally biased and ignore costs and exaggerate benefits. Some are put up by bubble bloggers that are biased the other direction. We want to be accurate.
Most of the underlying assumptions are documented in the post Rent versus Own. Most of the inputs are in the left-side column, and most of the outputs are on the right (the exception is the HOA fees which are plugged in directly on the cost side). Play with these assumptions at your own risk. As I documented in the Rent versus Own post many of the costs are underestimated, and many of the benefits are overestimated. The most common mistakes are to ignore maintenance and replacement reserves and to overestimate the tax savings. The true tax benefit is not the highest marginal tax rate you pay.
The primary function of the calculator is to determine the true cost of ownership to compare to a base rent. However, we have added a reverse calculation that allows renters to put in the rent they are currently paying and show them how much house they can afford. Since this is not a spreadsheet calculation and we could not iterate to run the calculations backward, we cheated: we use a percentage of rent that goes to the cost of ownership beyond the payment and subtract this from the rent to compute the purchase price, downpayment and loan amount. You will see the two methods produce very close results both forward and backward.
Any comments or suggestions for improvement will be appreciated.
In other news, I wanted to remind everyone that we are having an Irvine Housing Blog party and book signing at 6:30 on Wednesday, November 12, 2008, at JT Schmids at the District. All who wish to be a part of the IHB community and meet others
in the community are encouraged to attend. We may have staff writers and photographers from OC Weekly in attendance to write a story on the IHB community. You can avoid the pictures and remain anonymous if you wish. Participation is voluntary.
Look for an interview with me in the Irvine World News on Wednesday and the OC Register on Thursday.
I was having a conversation about current events and the massive deleveraging we are witnessing globally and I realized something rather remarkable: most residents of California have seen their new worth decline 40% or more over the last 2 years. Think about that for a moment. The California median home price is down 40% according to the California Association of Realtors. Since houses are almost always hugely leveraged, many homeowners have lost all the net worth they once had as equity in their houses. The stock market is more than 40% down in the last year. Anyone invested in the market either directly or through their retirement plans is down 40%. Stocks, bonds, real estate, commodities, and currencies: nearly every asset class is down, and down big. The only group that has not seen a huge decline in their net worth has been renters who are mostly in cash.
What is going to become of this huge “reverse wealth effect”? There have been many studies on how much people spend when their stocks or houses appreciate. I don’t think anyone have every studied what people do when every asset they own declines significantly in value. I don’t know if it has ever happened before. You have to imagine this will create a giant sucking sound in our economy. The only people who aren’t impacted by this and who don’t care are the Amish. Maybe there is something to be said for the simple life…
We have talked about cash being king. Right now, it really is.
{book}
As I walk through the valley where I harvest my grain
I take a look at my wife and realize she’s very plain
But that’s just perfect for an Amish like me
You know, I shun fancy things like electricity
At 4:30 in the morning I’m milkin’ cows
Jebediah feeds the chickens and Jacob plows… fool
And I’ve been milkin’ and plowin’ so long that
Even Ezekiel thinks that my mind is gone
I’m a man of the land, I’m into discipline
Got a Bible in my hand and a beard on my chin
But if I finish all of my chores and you finish thine
Then tonight we’re gonna party like it’s 1699
We been spending most our lives
Living in an Amish paradise
I’ve churned butter once or twice
Living in an Amish paradise
It’s hard work and sacrifice
Living in an Amish paradise
We sell quilts at discount price
Living in an Amish paradise
Amish Paradise — Al Yankovic
In the meantime, the banks are lining up bagholders to absorb the remaining market losses. There is still plenty of kool aid in the market in Irvine, and there seems to be no shortage of those with good credit and enough cash willing to buy at our inflated prices. Of course, there is also no shortage of distressed properties either, and this supply will continue to grow. Bagholders provide a useful function. If these people did not step forward to overpay for housing, the banks would be absorbing even larger losses, and our economic system would be put in even more jeopardy.
New Listing (24 hours)
Riding on the range,
The night was mighty dark so you could hardly see,
