The fall continues in DataQuick's March statistics. Los Angeles County volume (above) for March was down 49% from March 2007. Median price was down 18.5% from the August 2007 peak. Note the graph above highlights in yellow the second quarter of each year, historically the highest volume and largest price rise.
Below are median prices for four southern California counties. Los Angeles County is back to March 2005 levels, Orange and Ventura Counties are earlier in spring 2004, and San Diego County has crossed back into late 2003.
Tuesday, April 15, 2008
March DataQuick
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This can only mean one thing. The bottom is in! BUY NOW! Prices will be going back up soon*!
*The word "soon" is used is in relation to a geologic timescale.
I am no bottom caller but here is my conundrum ...
I live in a house that might be worth 1.1 to 1.2 Mil in Westwood. Rent is $4000 per month. Funny thing is ... when I run the numbers I find that my cost of renting would be fairly close to the approximately the same amount as if I bought this place for about $1.1 Mil with 20% down.
I'm starting to wonder whether there is really as much downside as people tend to think here.
Suppose I purchased at 1.1 Mil with 20% down at 7% 30-year fixed.
Monthly numbers:
Principal = 721
Interest = 5134
Prop Taxes = 1050
Insurance = 100
Total PITI = 7005
Sounds expensive, right ? I am saving 3000 per month, right ?
Well, here's the rub. I just did my taxes. I am in margin tax brackets of 31% federal and 9.3% state.
Suppose I bought and I account for 28% federal tax bracket (after the duduction brings my income down a bit) and 9.3% state.
I already itemize, due to state income taxes and charity donations, so my tax benefit from buying would be about 0.373*(Interst+PropTaxes) = 2290 per month.
SO, my after tax cost of buying would be something like 4716.
Since I would be paying down the loan principal about $721 per month, that would make my monthly nut for buying about $3995, versus my current rent of $4000.
I know that I would be losing the interest on my down payment, but 220K making 3% interest is about $550 per month.
I have concluded that in my neighborhood the difference between buying and renting is less than the cost of my car payment.
And that is assuming interest rates at 7%.
I am getting frustrated and just can;t see how prices are going to come down more than 5 or 10% from current values over here, unless interest rates go up to 8% or something.
What am I missing ?
Good scenario, Anon. Accepting your marginal tax brackets, and without checking your math, my first questions are:
* Are your $4K rent and $1.1M estimated cost a typical relationship for the neighborhood?
* Would rents fall as the economy goes into recession?
11:04 -- Beyond what Westside Bubble said, I think you're taking for granted the current interest rates. If we're talking about conforming mortgages, their rate is set generally by 10 year Treasury (now around 3.5%) + a risk premium. At the height of the bubble, that risk premium was probably around 1.6% which is pretty low, whereas right now it might be more like 2.2%, which is fairly high, because before and throughout the early parts of the boom, it was more like 1.8%-2%. And in Feb '00, the 10 year Treasury hit 6.6%, so people could easily be looking at a 6.5-8.5% conforming loan if the Fed were to raise rates at some point.
The jumbos are running a little higher -- more like a 3.5% risk premium. At some point, the fed will have to raise rates to fight inflation, so if the 10 year Treasury goes up a point or two, you could easily find jumbo rates at 8-9% at current risk premiums.
"conundrum" anon back again ...
WB - I believe that the rent/home price is fairly typical for the neighborhood, +/- 5 or so%. Further north, the homes are priced 30-40% higher, but do not rent for 30-40% more, maybe 10-15% more.
And the more inexpensive homes (say 900K) tend to be small dumps that I wouldn't want to rent, but still are fairly close in the 3000-3500/month range.
Regarding Rents/Recession -
Yes, I suppose that rents may fall depending on how bad the recession is. Still, we are not that far off of rent/own being equal and I would expect the prices to drop about the same amount as rent would drop in that scenario.
Re: Anon 1:24pm, Interest Rates -
Sure, interest rates could rise significantly. But, if we are in an environment where the Fed is in inflation-fighting mode, then I would also worry that we would be in a rising rent environment. But at least the price/rent ratio would have to decline in that scenario to reach equilibrium/ Perhaps that would put a lid on prices until rents (and incomes) catch up.
The problem with these scenarios is that in order to make a decision I have to speculate on the direction of future interest rates and rent. I don't want to speculate, since I am conservative by nature. So I just wait it out and do nothing. But if I were to drop in from another planet, not knowing anything about past prices or bubbles or whatever and simply looked at costs of renting to owning it would seem to me that houses were only moderately overpriced in this area.
What about other areas ?
It's been a couple years since I seriously considered places in Santa Monica. What are typical rents for SFRs in Sunset Park for say a 3br/2 Bath, decent size (e.g. 1500 sq. ft) with at least a patch of back yard (for the kids and dog)?
Conundrum,
I think your analysis is sound.
I notice you don't have any money set aside for maintenance. I rent a <20 year old condo in SM, and in the past 2 years, we've required 4 plumber visits (recurring problem, potentially not yet fixed), a new dryer, an electrician visit. Also, the small condo complex has a weekly gardener that I don't pay for. These are all small paper cuts, but they do add up over time.
Net net in my situation, I think my rent vs. buy on this unit (were it for sale) is pretty close to break even. But the value is dropping, so while I'm "throwing a way" a few dozen dollars a month, I'm preserving my equity in the form of CDs. By they way, if you're only earning 3% on your $220,000 potential down payment, you need to spend some time looking for better yield on bankrate.com.
The second thing you might consider is whether you'll be even better off waiting until this coming winter. Foreclosures are through the roof in Riverside, and the problems are in fact moving from the outside in, or in LA from the East, North and South to the Westside. I'm totally confident that I'll be able to buy a better place for less money on the Westside next winter than I'm able to today, and almost certainly get an even better deal in the winter after that too. That said, I'm impatient to get my growing family into a place that feels more permanent. For now, that tension has me continuing to sit on the sidelines, but I understand the desire to jump in now.
Best of luck, and give us an update on what you decide to do.
Rents for 3/2 SFR (over 1500 sq ft) in Sunset Park are from $4000 to $6500/mo....pricey, but sales prices are from 1 mil to 1.6 mil range for a 3 bed/2 bath in SP.
Source: Westside Rentals and Craigslist
With a deduction that big, are you sure you won't get hit by the AMT? You'd still have your mortgage deduction, but you may lose property taxes.
I think the hardest part of all these rent vs. buy calculations is the downpayment, though. If you assume you need the money available, and factor in only 3-4%, it's not worth much. If you consider it like a 30 year investment for the life of the mortgage, you should be assuming a return more like 9%, and the numbers start looking very, very different...
Have you looked at the NY Times rent vs. buy calculator? A quick google search can usually find it.
"conundrum" anon:
my husband and I are in a same tax bracket as you are. we are renting currently.
2900mo for 700K house-the rent is 10% higher than the similar size houses around. because this house is new, it is rebuild ground up in 2005.
Also water, gardener and trash included which easily cost $250mon.
And all the appliances included.
3 maintenance visit for fridge, fence, and rain gutter during the last 6 mon paid buy the owner.
anyhow, I do see the cost of owning is dropping fast during the last 12 month. if it drops 10% more I will go house hunting.
I don't know how you calculate your tax. although I have a accountant does it, I know it very well and can easily do it myself if I want.
Question: How could you get Tax deduction on property tax & insurance?
at this income level, you will hit by AMT. So besides your $5134/mo Mortgage interest. The Prop Tax and insurance are not really deductible as the way you calculated.
XH
"Conundrum" anom back here ...
Good points on AMT and obviously on maintenance.
In my situation it is within about $1000 difference in terms of taxes based on a quick spreadsheet. I assumed the 2007 exemption level of about 66K (assuming Congress continues to pass the patch each year).
Probably need to run scenarios in Turbo Tax and sharpen my figures to get a truer answer or hope that AMT is repealed in the next year or so.
Property tax is not deductible under AMT. Insurance is not deductible at all under regular tax or AMT and I did not include insurance it from my after tax analysis above. Insurance is pretty small beer relative to the other components anyway.
Having owned a home previously I am well aware of various maintenance and repair costs. To some extent these replace other things I would spend my money on. In my case the stuff I did around my first house sort of became my weekend hobby (boring but true). SO the money I spent on that stuff probably would have gone to more weekend getaways and stuff like that. At a minimum I guess this would probably add up to a couple grand per year, maybe more.
Still, the fact that I have to sharpen my pencil on AMT and consider maintenance costs means that the rent vs buy is much closer for my area and income level here in 2008 than I previously suspected, when I ran the numbers just a couple years ago.
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