These Homeowners Decided to Rent Again

paydawg said:
Liar Loan said:
Not a bad move at this point in the cycle.  Let others be the bag holders.

Very risky if they're giving up their low interest rate mortgage

Borrowing money at 2.5% in order to get a -20% leveraged return is bad economics no matter how you slice it.  On top of that, if monthly rent is significantly lower than the cost of ownership, what would be the upside of holding a low interest rate mortgage?
 
It's not just an Irvine phenomenon:

John Burns RE Consulting: Demand Shifting from Owning to Renting

High home prices and rapidly rising mortgage rates have created a rosy backdrop for the rental sector, with many prospective home buyers now priced out of homeownership or forced to purchase a smaller home in a less desirable area.

A little over a year ago, the monthly cost of owning (as we calculate it*) and renting were virtually identical. Now, owning a home costs $839 more per month than renting. This differential is almost $200 higher than at any time since the turn of the century.

(Scroll to the right on the graphic to see how things compare now to the prior peak in 2006.)


Light-graphic_June-01-2048x1965.png

https://www.realestateconsulting.com/demand-shifting-from-owning-to-renting/
 
so rent demand goes up, landlord will; raise the price; purchasing demand goes down, forcing sellers to lower the price, until we reach equilibrium. econ 101.
 
The California Court Company said:
so rent demand goes up, landlord will; raise the price; purchasing demand goes down, forcing sellers to lower the price, until we reach equilibrium. econ 101.

Yes agreed, but that is based on today's employment level.  If unemployment suddenly goes up, then all bets are off.  Demand for both purchases and rentals will decline as household formation drastically slows down.
 
Every single "econ 101" argument has an implied "all else being equal" caveat.

Plus don't ignore actual utility in the comparison.  For most people, renting is not a perfect substitute for owning; many place greater value in owning, so have a higher willingness to pay.  Of course, a lot of people are idiots when it comes to math and choices, and theory is just that.
 
Rational actors, lack of information, switching costs, etc. Anyways, most of the people profiled in the NYT article have additional non-economic reasons to rent. Short term horizon, preference for amenities more often found in rental properties (especially in the tristate area), recent changes in family, etc.
 
CalBears96 said:
WTTCHMN said:

It's laughable that the author of the article just assumes 1.5% property tax across the board for owners.

Why is that laughable?  I think the more egregious assumption is that owners can save 20% of interest and taxes as a deduction on their income tax.  With the higher standard deduction, SALT cap, and 750k cap on mortgage interest, most buyers aren't saving 20% as a deduction.
 
USCTrojanCPA said:
WTTCHMN said:

I know some won't agree with me but the principal repayment portion of the loan should be excluded from this calculation as it's paying yourself in the form of building equity but then add a repair/capital improvement budget per month (amount depends on the age of the home).

Something rarely considered in these rental parity comparisons.
 
Liar Loan said:
CalBears96 said:
WTTCHMN said:

It's laughable that the author of the article just assumes 1.5% property tax across the board for owners.

Why is that laughable?  I think the more egregious assumption is that owners can save 20% of interest and taxes as a deduction on their income tax.  With the higher standard deduction, SALT cap, and 750k cap on mortgage interest, most buyers aren't saving 20% as a deduction.

Because property tax is ~1%. Most areas don't have MR, so assuming 1.5% is laughable.

But I do agree that 20% tax deduction is also not right.
 
CalBears96 said:
Liar Loan said:
CalBears96 said:
WTTCHMN said:

It's laughable that the author of the article just assumes 1.5% property tax across the board for owners.

Why is that laughable?  I think the more egregious assumption is that owners can save 20% of interest and taxes as a deduction on their income tax.  With the higher standard deduction, SALT cap, and 750k cap on mortgage interest, most buyers aren't saving 20% as a deduction.

Because property tax is ~1%. Most areas don't have MR, so assuming 1.5% is laughable.

But I do agree that 20% tax deduction is also not right.

A lot of OC is between 1.1-1.2% when you add in the bond measures and other assorted fees they tack on.  My IE rentals included trash service for two units (basically 2x what an SFR would pay), which pushed the rate above 1.5%. 

One reason I wanted to sell was because a large sewer project was being proposed that would have pushed my tax rate even higher as they planned to bill for the upgrades on a per unit basis.  That would have been detrimental to the monthly cashflow and would have lowered the property value for prospective investors in the future.
 
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