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IrvineRenter -

I dont think AMT disallow mortgage interest deduction. It disallows property tax deduction but I heard that they are about to change the AMT rules to ensure only the 'really' high-income tax payers get hit.

It seems to me that your calculation is very conservative but perhaps for a good reason. Everybody should decide their own risk tolerance and preference. I personally dont mind paying 10/1 IO loan vs renting since the net cost is the same after tax break, and the benefit of 'owning' outweigh the hassle of renting. The only risk I can see is if I have to sell the house when the price dips.
 
oc_fliptrack - I simplified the math it was a ballpark number. I was assuming you can write off interest (~$2200) + property tax (~$500) and your tax bracket is 28%. I guess you might say there's standard deduction but on the other hand you may also have medical, donation that can't be itemized if you choose standard deduction. I know tax break is a little tricky as everyone can be different.
 
"Vientos Plan2X is a 2-story DETACH townhome"

My bad. I agree that probably bumps up the comp rents a bit.

I gotta say, 1075 sf detached, brand new townhome for $450K seems like a smoking deal compared to most of the crap I see on the MLS for around that price. I can see why the savvier of todays buyers are graviating to new construction.
 
Let’s compare apples to apples here. Let’s say we take your $2400 a month payment for Vientos with the 10% down and after 5 years your cost would be $144k. Now I think I can get a TIC apartment for $2k a month and let’s assume that rent is increased by a rate of 3% a year so that my total cost for 5 years is $128k. I took that $45k and invested wisely to earn 10% a year so that it is now worth about $66k. If prices were to stay flat (notice I am not saying down, I figure this way it is neutral for the bull/bear opinion) for the five years the Vientos property when adjusted for inflation is worth about $395k.

Renters cost -$128k + the invested savings $58k (adjusted for inflation) = -$70k

Vientos buyer cost -$144k (not adjusted for inflation since rent was adjusted) + -$55k loss for inflation + $39k down payment (adjusted for inflation) = -$160k. So in real dollars that is $90k more of a loss than that of the renter. Ouch! Yes real estate is where the smart money is.

Now let’s take this a step further and say that we compare a $900k purchase with 10% down in 2007 with a tax base of 1.6% and no HOA dues. For 5 years prices are flat and year six is up 4%, year seven 5%, year eight 6%, year nine 7% and finally on year ten back to what OC averages 8% and your place is now worth $1.042mil in 2017. Did you beat the same inflation rate of the 1997 to 2007 period? Nope your place should now be worth $1.152mil and you are looking at a real loss of $110k plus $20k for what you lost on your down payment.

In year five 2012 a renter says you know what now is the time and buys an identical place for $900k. From 2007 to 2012 the renter rented an equivalent place that cost him $200k for those years. The renter who took the $90k he had back in 2007 for a down payment and invested it wisely it is now worth $120k when adjusted for inflation. The renter only uses $90k for the down and saves the $30k. In 2017 after five years of living there renter decides to sell and so does the person who bought ten years ago at $900k does too.

2012 buyer sells for $1.042mil his gross profit after adjusted for inflation is $3k + -$200k five years cost of rent = -$197

2007 buyer sells for $1.042 and his gross profit after adjusted for inflation -$130k + -$245k first five years cost for mortgage and property taxes with tax break included = -$375k. That is $178k more than 2012 buyer, again ouch.

Plus 2012 buyer had saved the $30k so 2012 is worth more than 2007 buyer. The above scenarios are possible or it could be worse if prices go down even modestly. If for some reason they did go up the buyer would only be in a little better position than the renter. Now you may want to check my math or methods because to be honest I could have made a few mistakes. http://www.minneapolisfed.org/Research/data/us/calc/
 
graphrix: "For 5 years prices are flat and year six is up 4%, year seven 5%, year eight 6%, year nine 7% and finally on year ten back to what OC averages 8%..."

Can you state the economic basis of this assumption? I am just trying to understand your approach. Since there are several ways to skin the proverbial "cat", changing your assumptions will give you whatever end result you are trying to justify...
 
graphrix,

Thanks for the break down.

I was actually asking about the monthly cost comparison. Since we do have 20% down and plan on staying at least 10 year, it seems that renting a comparable unit would cost us as about the same monthly.

I guess our goal is a bit different we're not really interested in timing the bottom for this purchase. I was just curious to what is the motive/explanation behind the argument that cost of ownership is double the market rent even after the tax break. Seems like the argument is more appropriate for the 2005 peak price AND for 100% financing with conventional 30-year fixed payment before tax break.
 
crucialtaunt - I didn't use any economic basis for my percentage increases. It was just a number off the top of my head and figured I shouldn't be too bearish so I kept the first five years flat. It took ten years from the peak in 91 to break even for inflation. To be honest I thought that I may even prove myself wrong and that the buyer would benefit in the second scenario. I for one think prices will go down a bit more which would make the buyer numbers look even worse. If wages were to continue to grow at 4% in year ten affordabilty would only improve by 15% so even then less than a third of OC could afford the median. I need to look into what OC's average affordabilty rate is. The only way the buyer scenario wins is home prices exceed inflation in which the last five years is true and exceeds the profit on the investment of the money saved vs. down payment.

Do you think I was being too bullish or bearish on the percentages?

Red - You have to compare renting vs. buying a house with no money down because when you rent you do not have the huge cost of a down payment. I know irvinerenter has pointed this out and this is what is known as opportunity cost and time value of money. You are right that it is no longer double 100% more of a cost to buy it is around 75% or give or take.

Also you said that a $40k down payment gets 100% return on investment if your house goes up 10% is not correct when factoring in inflation it is 72% or 5.57% annualized or if in ten years your $400k home is now worth $440k without adjusting for inflation your annualized rate of return is .96% or -1.5% when adjusted for inflation.

If you take the second scenario and use 20% down then 2007 buyer is -$389k compared to 2012 buyer who is -$197 which is close to 100% or double at 97.5%. Also 2012 buyer if structured properly would only be down -$22k and that would make it way more than double. It isn't about timing the market it is about inflation, opportunity cost and time value of money. I didn't even add the costs that come with owning compared to renting and even new homes will have some costs.

I apologize if you think I am being a bit harsh on you but I think it is important to understand that there is a strong possiblity that you could lose a lot more money by buying right now. It is a place to live and not an investment and it is your money and your place to live. I just want prices to come down so that I can buy a rental property with positive cash flow and a cap rate that makes sense.

Take some quotes from Warren Buffett:

"It is optimism that is the enemy of the rational buyer."

"Turn-arounds" seldom turn.
 
"The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."
 
graphrix,

Dont worry about being harsh. As I said I enjoy reading this blog maybe too much lately. Many bears in this blog obviously have the knowledge and experience to speak out and educate people. Some of the comments sound a bit over-pessimistic sometimes and I may need to clarify where it is coming from, for my own benefit. But it certainly beats reading NAR statements or getting bullish real estate outlook from your sales agents.
 
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