Below rental parity where I am renting

[usctrojanman29_IHB]

I've used Ipop's numbers. 4.75% interest, $360K down. You're welcome to try it yourself ;-)

Here's my calc in IRs calculator:

The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.

MRs and association are very low relative to much of Irvine on this property.

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

 

[ipoplaya_IHB]

If you think you're going to be in it for years and the numbers don't make you stretch, I say go for it. While most people on this blog keep talking about prices going down, the fact is that you never know what may happen in the future. You don't know what else the government will do to prop up housing. You don't know how many home buyers are also waiting to pull the trigger. So what if you might get it cheaper next year? Maybe you'll pay another year's worth of rent that might be equal to the difference. If you're there for 20 years, it won't matter. Good neighbors, and known friends, are a huge, huge plus, not to be underestimated. If it were a rental, you wouldn't hesitate. Too many people think of a house as only a financial investment, like stocks. I think if financially it works for you, don't hang on waiting for prices to go down. The only down side I see is that remodeling work. Is the purchase really worth that hassle?

In a weird way, the remodel stuff is one of the selling points. I'd probably do the demo, framing, and drywall myself. Have to sub out the electrical and HVAC. The added bedroom would primarily be used as an office so I'd probably lay down some cork flooring (better sound insulation than hardwood or laminate) and take care of the trim/moulding work myself as well. It would be a fun project and since we're in the rental now anyway, it wouldn't disrupt our lives.

 

[ipoplaya_IHB]

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

I'm trying to talk myself out of buying it SC... My gut has been saying "go for it" and those sub 5% 30-year rates just reinforce the darn notion.

I am very happy we have waited to buy. Back when we are looking to pull the trigger in 2007, my monthly would have been $4500 or so on a comparable home and that was using an I/O mortgage. Just don't know if its going to get that much better in the near term. We won't wait until 2011-2012, which is probably where the real bottom will be, to buy a place.

 

[SoCal78_IHB]

Low rates may be appealing when considering today... but not tomorrow. Did you read IR's Dec. 8th blog?

 

[ipoplaya_IHB]

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

Keeping all other things the same, the difference between my down and a 20% only changed the monthly expense by $40, i.e. the difference was immaterial. Now people can longer borrow $668K for 4.75% so if I used a true jumbo rate, the calc would get very ugly.

The typical Irine buyer, at least in 2008, puts down over 25%, so the for most buyers out there, this place would be at or near rental parity.

 

[ipoplaya_IHB]

Low rates may be appealing when considering today... but not tomorrow. Did you read IR's Dec. 8th blog?

Yup, and that is the primary impediment to me writing an offer on this property.

This place is very close to CPI-adjusted break-even based on the purchase price and upgrades added a few years ago. If it wasn't so close to having all the bubble appreciation removed, I wouldn't even consider going after it.

 

[freedomCM_IHB]

Wait ipop!

I thought you just told us that your employer was going to fold the company in the next three months!

What if you can't find suitable employment in Irvine?

 

[Daedalus_IHB]

I'd probably do the demo, framing, and drywall myself. Have to sub out the electrical and HVAC.

Wuss.

:cheese:

 

[irvine_home_owner_IHB]

ipop... step away from the Kool-Aid.

But seriously, I think really the only thing you have to consider is if it's really the home you can see yourself in for the long run. We would not have sold our house and lost tons of money if I wasn't convinced it wasn't the house we really wanted. We really thought it was when we bought it but realized that the location wasn't where we wanted to be. I know you like where you are currently living so that's a plus... but do think you may want to wait for a floorplan you like better (is there one?).

The other reason I think ipop may be looking at getting this now despite the unknown job stability is rates are so low and he can qualify now. If rates go up next year and he's unemployed... it will be much harder for him to get a loan. I know he'll find new work and probably has enough socked away to weather for a while... but banks don't care about that.

 

[ipoplaya_IHB]

Wait ipop!

I thought you just told us that your employer was going to fold the company in the next three months!

What if you can't find suitable employment in Irvine?

My wife and I talked about that last night. We really can't see moving anywhere else. She has a good gig with IUSD and while I may be able to make more money in LA, SD, or SF, I think we'd rather stay here and make less. One consideration would be if I got a gig in South County. In that case, a move to AV might make the most sense as we like it there as well.

Looking back, I have lived in Irvine longer than anyplace in my entire lifetime. I was a military brat, so we moved a bunch when I was young. I did eight years of time in the IE, five years in SLO, five different cities and six apartments from '93 to '00, and have been in Irvine ever since. It's home I guess and we're not interested in moving somewhere far away to make an extra $12K after taxes per year.

 

[usctrojanman29_IHB]

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

I'm trying to talk myself out of buying it SC... My gut has been saying "go for it" and those sub 5% 30-year rates just reinforce the darn notion.

I am very happy we have waited to buy. Back when we are looking to pull the trigger in 2007, my monthly would have been $4500 or so on a comparable home and that was using an I/O mortgage. Just don't know if its going to get that much better in the near term. We won't wait until 2011-2012, which is probably where the real bottom will be, to buy a place.

Why a need to buy in the near term? Is the wife putting pressure to become an owner versus a renter? I really think that if you could wait a few more years, a similar home like this one will be 20-30% lower in price and you'll have a lower property tax bill (btw, mortgage rates are going nowhere but down in the near future).

 

[nefron_IHB]

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

I'm trying to talk myself out of buying it SC... My gut has been saying "go for it" and those sub 5% 30-year rates just reinforce the darn notion.

I am very happy we have waited to buy. Back when we are looking to pull the trigger in 2007, my monthly would have been $4500 or so on a comparable home and that was using an I/O mortgage. Just don't know if its going to get that much better in the near term. We won't wait until 2011-2012, which is probably where the real bottom will be, to buy a place.

Why a need to buy in the near term? Is the wife putting pressure to become an owner versus a renter? I really think that if you could wait a few more years, a similar home like this one will be 20-30% lower in price and you'll have a lower property tax bill (btw, mortgage rates are going nowhere but down in the near future).

Decisions about houses are not entirely about money unless it's nothing but an investment to you.

 

[SoCal78_IHB]

IPOP : How secure is your wife's job as an employee of the school district? I just received an email on Dec. 3rd from the district. They are very concerned about the proposed budget cuts coming up in 2009. California school funding could be cut by $8 billion. I can post the email here if you want, but I don't want to take up too much room if you already got the same notice.

 

[ipoplaya_IHB]

Any property can be purchased at rental parity if you throw enough downpayment funds at it. Try running your calculation using a 20% downpayment and see where you stand. I still think you are talking yourself into buying this home.

I'm trying to talk myself out of buying it SC... My gut has been saying "go for it" and those sub 5% 30-year rates just reinforce the darn notion.

I am very happy we have waited to buy. Back when we are looking to pull the trigger in 2007, my monthly would have been $4500 or so on a comparable home and that was using an I/O mortgage. Just don't know if its going to get that much better in the near term. We won't wait until 2011-2012, which is probably where the real bottom will be, to buy a place.

Why a need to buy in the near term? Is the wife putting pressure to become an owner versus a renter? I really think that if you could wait a few more years, a similar home like this one will be 20-30% lower in price and you'll have a lower property tax bill (btw, mortgage rates are going nowhere but down in the near future).

The wife definitely wants something we can decorate and upgrade to our taste, but the main driver is continuity of schools. My oldest is starting kindegarten next year and we really would prefer not to move him from 1st grade on. We want to be in a neighborhood where he can make and have friends that he'll keep through his school years...

 

[ipoplaya_IHB]

IPOP : How secure is your wife's job as an employee of the school district? I just received an email on Dec. 3rd from the district. They are very concerned about the proposed budget cuts coming up in 2009. California school funding could be cut by $8 billion. I can post the email here if you want, but I don't want to take up too much room if you already got the same notice.

The teachers are getting regular updates re: additional cuts that could be coming down the pipe as well.

In spite of that, her job security is pretty high. She has the most some seniority and enrollment in special ed continues to grow and grow. I believe IUSD, Huntington Beach Union, and Newport-Mesa have open reqs for special ed teachers right now. Save for a repeal of the Individuals with Disabilities Education Act, I'm pretty sure she'll have a place to work.

 

[awgee_IHB]

I think you can do the electrical yourself. It is not as complicated as one might think. There are videos at Home Depot which will give you the info and the confidence necessary.

 

[No_Such_Reality_IHB]

The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.

MRs and association are very low relative to much of Irvine on this property.

I think 2.5% net is pretty low for lost investment. You're basically saying that since you've allocated it to a safe investment to protect it's downpayment ability that you've flushed it as an investment. Are you really a CFO that doesn't think he'll beat a 7.5% gross return on his investments? That's the rate that breaks even with the tax advantage on the interest right off.

If you figure a net 6% after from a gross 10% investment return, I get $4161.

If you figure 7% net if targeting a 10% return with a long term cap gains rate, I get $4440.

If you adjust your maintenance and replacement reserves, it get's worse. $417/month or $5000 a year sounds like a lot, but over ten years it's only $50,000, over 30 years, it's only $150,000.

Ironically, if you use a 6% lost return and a 25% down, I get a ownership cost close to a flat $4100 with a 1% maintenance reserve. I really think this is a better comparison. Not to mention the $125K that you can investment or use as a cushion.

 

[qwerty_IHB]

I've used Ipop's numbers. 4.75% interest, $360K down. You're welcome to try it yourself ;-)

The key difference is tax savings. At our income level, we are already itemizing due to state tax liabilities, so our tax savings on morg/tax deduction is at marginal rates, 28% and 9.3%, for a total of 37.3%. Also, I used an after-tax rate on our foregone/lost income. Since we are earning around 4% on our down payment fund, and lose 37.3% of that to taxes, a net rate of 2.5% is more appropriate.

MRs and association are very low relative to much of Irvine on this property.

IPO - remember you are deducting your state taxes on your federal return, so your net state tax rate is 6.70% (72% of 9.3%) - good luck, on your purchase.

I personally would not do it. A lot of people rationalize an overpriced home purchase by saying a home is not an investment or its not just about the bottom line. And I agree on the investment part of it, a home is not an investment. However, if you wait two years and get a similar house at a 20% discount, if and when you sell that will be another 160K in your pocket. Just because you can afford something doesnt mean you should buy it.

Another thing, if you end up losing your job in two to three months as you mentioned, there are not a lot of CFO positions out there, not sure how much you make now, but you could potentially end up having to take a lower paying CFO gig.

 

[evening rose_IHB]

Thanks for the clarification IPO, I guess our basic assumptions were a little different. Keep us posted on what you eventually decide to do

 

[ipoplaya_IHB]

Thanks to everyone for their thoughts and feedback. After much consideration and some pouring over the floorplan tonight, we decided not to make an offer. While the house has many things we like, to jump at this point in the game, we should have a lot more love for the entire floorplan, not just the downstairs... We like our rental plan, 450sf smaller, almost as much and definitely like the larger plans in the tract more.

Its not a culdy location either and my boys spend a good bit of time riding bikes, scooters, etc. out on the street we rent at now. In a few years, I'm sure that will be skateboards. It sure is great to plop Mr. Slowman out in the middle of the culdy and know that our neighbors will keep a watchful eye out for my kids whizzing around when they return to their homes.

The employment factor isn't huge, as I'm sure I wouldn't be out of a gig for long, but I could end up working in the Spectrum area, AV, or such and may want to move further south in that case. I have a feeling I will end up in a Controller or maybe Assistant Controller position at a larger company and end up with a decline in my comp. When I changed positions in 2005 it was a boom year for accounting types due to the downstream effects of SOX. It's a much more competitive employment environment today.

Guess this place will just have to serve as another nice low comp for if and when a better plan/location comes available... Again, appreciate everyone's two cents on this thread. It's great having a place to toss this stuff out and get different viewpoints.