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I want to buy, have no cc debt,high credit score, priced out
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Wed Feb 28, 2007 7:14 pm GMT    Post subject: Reply with quote

parsec,

Dave may have made a mistake by not accounting for the difference in standard deduction and itemizing deductions, but you're likely making another mistake in assuming that mortgage interest is his only deduction. Dave can likely deduct his state income tax, which, depending on his income, will take up a either large chunk or all of the difference between the two.

More food for thought.

JCK
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davelew



Joined: 28 Feb 2007
Posts: 2

PostPosted: Thu Mar 01, 2007 2:32 am GMT    Post subject: mortgage interest deductions vs standard deduction Reply with quote

Parsec and JCK: good points about the standard deduction. Since my soon-to-be wife is in grad school, we have some tuition deductions in addition to the state taxes.

I haven't worked out all the tax consequences with JCK's suggestions, but I did run my spreadsheet with Parsec's suggestion of ignoring the tax deduction (which is probably less accurate, but also a lot less work to calculate). Completely ignoring the tax deduction, I'll end up paying $44 more per month for a 6 room condo with driveway, as opposed to my current 5 room apartment with on-street parking. I still think $44 is a good deal for an extra room and a driveway (I could rent a driveway in my area for $100 a month) Here are the assumptions I used:

1. Rent in my current apartment will go up at 4% a year
2. My condo will appreciate at 4% a year
3. My condo association payments will appreciate at 4% a year
4. My down payment would have earned interest at 10% a year
5. Inflation will run at 4% a year (all my values are calculated in 2007 dollars)
6. I won't get any advantage from the mortgage tax deduction.

The result is that I'll pay more for my condo for the next 7 years (ranging from $175 extra a month now to $0.06 in month 82), as my rent would have increased but my mortgage payments stay constant. After that, there will be short period of small savings, peaking at $5 a month, for two years. After year 9, the money that would have been earning interest (the down payment, inspector's fees, lawyer's fees, etc) would have compounded enough so that I'll start losing money again. The total cost over ten years will be $5312, which works out to about $44 a month in average. Like I said, I'm getting an extra room and a driveway for that $44. I still think it's a good deal, even without the mortgage tax dedcution.
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Thu Mar 01, 2007 1:44 pm GMT    Post subject: Reply with quote

davelew,

Out of curiosity, what happens to the numbers if you use a zero down, interest only loan? That's a horribly risky idea and I am in no way recommending it, but using the assumptions you gave, it seems like it might give you both benefits of nominally fixing your monthly payments and also investing the full down payment elsewhere (minus the difference in monthly costs). The problem is of course variance - how much real estate and stocks might be expected to deviate from their long term averages. That might be interesting to add to your model, using 1 or 2 standard deviations of historical data to come up with a guess as to how far the outcome might vary. (I'm guessing that would kill the zero down, interest only idea, if the implosion of the subprime market hasn't done so already.)

- admin
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steve
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PostPosted: Fri Mar 02, 2007 10:20 pm GMT    Post subject: back to the topic Reply with quote

The long-run analyses here are really, really helpful, and I'm certainly going to save them for that far-off day when I can afford the mortgage, tax, and insurance on a dwelling that isn't a tear-down in a neighborhood with good schools and not a hellish commute from Northeastern, where my wife and I teach.

Sigh... I sometimes feel as if talking about real estate right now is talking about the emperor's new clothes. Who the heck IS buying in this market, how can they possibly afford these hyperinflated prices, and just how leveraged are most of the purchases happening now? I'm curious whether anyone's done a longitudinal study of the last decade or so of purchases. I'd be most interested in the trend of ratios of purchase-price:income-at-time-of-purchase.

The trouble with adjusting purchase-prices against CPI is that CPI is a problematic number: it's already composed of more than 30% real-estate (valued as rental). So in a way, accounting for inflation with CPI is akin to accounting for house prices with rental prices... and what kind of sense does that make? To get a fair sense of the burden of house prices (and mortgages) we need to see house prices compared to incomes of buyers.

I certainly can't do what my father did in 1966, which was to un-enlist from the navy, pick up his first full-time job, and buy a house in a reasonably nice suburb of NYC. My wife and I can't even touch a condo in a nice suburb of Boston, let alone a modest single-family--and we've got 1 1/2 incomes.

What I'd suspect we'd see in a trend of house-price:income ratios is that income is trending down steeply against house prices; in other words, purchases are more and more leveraged, and buyers have bigger and bigger debt-loads relative to income, which says more than bubble to me. It says d-i-s-a-s-t-e-r. Foreclosure rates are only giving us a preview, I think.

Does anyone know whether anyone's collected data for such a comparison? (It would have to have been survey data, of course.)

Steve
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admin
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Joined: 14 Jul 2005
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Location: Greater Boston

PostPosted: Fri Mar 02, 2007 10:36 pm GMT    Post subject: Reply with quote

Steve,

Is this close to what you wanted for a price versus income comparison: http://www.bostonbubble.com/forums/viewtopic.php?t=141 ?

I actually think comparing home prices to rents would be a very good idea. If you view a property as an investment, then rents are the return you can expect. Also, most of the justifications that housing bulls use to rationalize high purchase prices would also imply that rents should be rising at around the same rate - if purchase prices are rising faster than rents, then something is wrong. For instance, I have heard the argument several times that condo prices in the city will continue to balloon because empty nest Baby Boomers are downsizing to reduce their maintenance chores and they want to be part of the urban culture. What I haven't heard adequately explained yet is why that isn't increasing rental demand and prices at a similar rate as well.

- admin
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Steve
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PostPosted: Mon Mar 05, 2007 1:01 am GMT    Post subject: Reply with quote

Admin,

Thanks!

What I don't quite get is the wide disparity between the figures you directed me to and the figures referred to on the "condo's are healthy" thread toward the end of the thread (there was a link there among the last several posts). Your figures are for Mass., and those figures purport to be for Boston, but being someone in the rent or condo market in the Boston area, the figures seem disconnected with reality: a 1.1 mortgage pmt:rent ratio? Are these people high? If the very 3-bed I'm living in now were to flip to a condo, I'd be house-poor at current prices (assuming 30yr, 7%, 20% down). I'm paying $1525/mo in JP. Maybe that's below-market.

(BTW, I'm not, as you've noticed, particularly well-schooled in economics, either macro or micro... but I've had the good luck to spend a lot of time with my wife's grandfather, who weathered the depression on Wall St... he's 97 & still plays golf. Amazing guy. Anyway, I've absorbed a certain amount of his skepticism about anything being "new," so Condo's dependence on a "new fundamental" to support his optimism sounds to me like someone who's just gotten a little snowed by a long uptick.)
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Mon Mar 05, 2007 1:13 pm GMT    Post subject: Reply with quote

Steve wrote:
Admin,

Thanks!

What I don't quite get is the wide disparity between the figures you directed me to and the figures referred to on the "condo's are healthy" thread toward the end of the thread (there was a link there among the last several posts). Your figures are for Mass., and those figures purport to be for Boston, but being someone in the rent or condo market in the Boston area, the figures seem disconnected with reality: a 1.1 mortgage pmt:rent ratio? Are these people high? If the very 3-bed I'm living in now were to flip to a condo, I'd be house-poor at current prices (assuming 30yr, 7%, 20% down). I'm paying $1525/mo in JP. Maybe that's below-market.

(BTW, I'm not, as you've noticed, particularly well-schooled in economics, either macro or micro... but I've had the good luck to spend a lot of time with my wife's grandfather, who weathered the depression on Wall St... he's 97 & still plays golf. Amazing guy. Anyway, I've absorbed a certain amount of his skepticism about anything being "new," so Condo's dependence on a "new fundamental" to support his optimism sounds to me like someone who's just gotten a little snowed by a long uptick.)


FWIW, I'd assume a 6% rather than a 7% mortgage at this point (30 year fixed mortgages at 5.75% are still not difficult to come by). I obviously don't know the particulars of your three bedroom (i.e., size, location, condition), but $1525 sounds well below market to me.

Anyone who has a good deal on rent is going to find it that much more difficult to justify a purchase.
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admin
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PostPosted: Mon Mar 05, 2007 2:09 pm GMT    Post subject: Reply with quote

Steve wrote:
Your figures are for Mass., and those figures purport to be for Boston, but being someone in the rent or condo market in the Boston area, the figures seem disconnected with reality: a 1.1 mortgage pmt:rent ratio? Are these people high?


If you are referring to the page at http://www.housingtracker.net/affordability/massachusetts/boston , it looks like they are using single family homes for the purchase price data and 3 bedroom apartments for the rent data. I would expect that to inherently bias the mortgage to rent ratio downward because (and this is a guess) the bulk of the single family homes are in the suburbs and the rentals are more likely to be in the city. As far as I know, most properties for sale in the city are condos, not single family homes, which means they are no included in that analysis. So you are seeing a comparison of purchase prices from the less expensive (relatively speaking) portion of the metro area with rents from the more expensive area. That may be why the number doesn't make sense to you if you are comparing buying and renting similar properties in a similar location, which is the right way to do it, in my opinion.

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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Mon Mar 05, 2007 2:53 pm GMT    Post subject: New fundamentals Reply with quote

Regarding "New Fundamentals":

Financial analysis has to change with the times. The underlying logic and discipline usually remains the same, but the "rule of thumb" inputs may change. For example if someone says "the rule of thumb is that you shouldn't spend more than 3 times your household income on a house" you have to ask yourself the surrounding financial context to that statement. Back in the day you typically had one earner. If you want your wife to stay at home you need to back off her income... When people made rules of thumb there was a surrounding context i.e. interest rate, inflation rate, growth rate, income level, and a whole host of costs such as heating oil, property taxes, etc. When the FED radically dropped the intrest rate, it led to the real estate bubble. People had no way to predict when or if the interest rate would go up or down. We didn't have the "When China sneezes the rest of the world catches a cold" thing. What I realized was that there was nobody, nobody that was out there to watch your back on this one. I found bloggers on sites like this one that offered real unbiased data (it does however tend to be bearish by nature but usually has the numbers to back the positions up) OFHEO didn't adjust their "rule of thumb" numbers, Mass Housing is a joke financially they could offer so much more. The MAR and NAR are either incompetent or liars. The NAR predicted a 6% home price increase in 2006. He is their top guy, the number one spot, all their best data makes its way to him. The past MAR president parroted what he said. Hell the President had the growing home ownership as one of his planks in his platform last time around. He didn't say anything about the risk of subprime lending did he? Where was the safety net, who was looking out for joe six pack with providing reliable information?

My whole point of being on this website is to inform people that right now you need to rely on yourself, you need to smarten up and assume that every time a realtor opens their mouth that they are lying or incompetent. I know that sounds harsh, but when their number one guy gets it completely wrong and it aligns with their financial interest, what do you think of the rest of the bottom feeders. I had old timers tell me that Revere used to have farms, I wouldn't call Revere a farm town now. So the "fundamental" "location, location, location" depends on how different locations evolve. Some places are past their prime. I think that everyone needs to have a personal financial plan and outline different time horizons, and make realistic projections on your salary. Before the bubble, salaries were growing really quickly, and intrest rates were dropping. Then you add in the baby-boom with their extra cash on hand to buy second homes and you have a bubble. You have to be realistic and can't make a plan based on the perfect scenario, you need to step back and look at the normal conditions to understand the "rules of thumb" and you can't pick and choose the best case scenario of this and the worst case scenario of that because it suits your spreadsheet. For all the wildcards you need an emergency fund and if you don't have an adequate one, wait or bite off less.

I think your grandfather is most likely a sharp guy and because he loves you and you can trust him, make sure you tell him all of your inputs and projections, let him see your goals, time horizons, spreadsheets. Garbage in garbage out sort of thing...
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PostPosted: Mon Mar 05, 2007 2:53 pm GMT    Post subject: Reply with quote

JCK wrote:


FWIW, I'd assume a 6% rather than a 7% mortgage at this point (30 year fixed mortgages at 5.75% are still not difficult to come by). I obviously don't know the particulars of your three bedroom (i.e., size, location, condition), but $1525 sounds well below market to me.

Anyone who has a good deal on rent is going to find it that much more difficult to justify a purchase.


Admin,

Yes, that's the link I was talking about. In addition to comparing apples and oranges, they also compared pre-tax, which is absurd. Presumably, if one were to look at the investment potential from rent for a property, one would have to include tax. And if one wants to consider disincentives to buy from the renter's perspective, if tax adds $300 a month to my payments, that's 300 a month no matter how you slice it. I don't know about most people, but 300 a month makes a big difference to me; I'm not going to start assuming bad debt on credit cards just so I can afford good mortgage debt.

Jck: Thanks for the mortgage figures. I suppose I was being needlessly pessimistic... I don't envision being a purchaser until a few years down the line, and I was estimating int. rates conservatively.

Ok, so my rent is below market. Isn't that the case for anyone renting and considering buying, unless they moved into their rental this year? My experience as a renter (in many locales, going on 20 years now) is that landlords tend, whether to keep some stability in occupants or just to be humane, not to raise rents at the same rate as the market, but to wait until a change in lease--a kind of de facto "rent control" that the market itself provides. So it seems to me that if we're discussing the likelihood of those who are currently renting to assume mortgages, we have to assume a significant number of renters in my position, not just a few here and there. So the median rental price for places on offer this year probably isn't that great an indicator for what the market as a whole (which includes people who have been renting in the same place for years) is actually paying in rent.

It all comes down to the purpose of the comparison. If you want some gauge of the potential rate at which people might buy, you need to know what the potential market is actually paying, and what their actual costs would be as buyers. If you're talking buying properties for investing, sure, you need to know what you'd make in rent right now from a property, and in that case comparing median mortgages to median rents on the market now makes sense. (But I think I'd include taxes even in that computation.)

I just want to make sure people keep in mind that "the market" is composed of people like me making really significant financial decisions. I'm going to continue to rent (even though I'm moving out of my below-market-rate JP rental into a low-end rental in Newton... there's another figure to add to Condo's "new fundamental"... people who thought they might be able to make Boston schools work for them, but on closer inspection realized NO F.'ING WAY) because I simply can't afford mortgage payments (even at 5.75%) plus tax plus homeowners insurance right now, and given that my wife and I are professionals on 1 1/2 incomes and have decent savings, (childcare takes a bunch), I don't think we're in the minority.

Steve
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Tue Mar 06, 2007 1:12 pm GMT    Post subject: Reply with quote

Steve,

I really don't know the mix of first time buyers vs. repeat buyers, or if most first time buyers are living in below market rate rentals or not. I would be curious to find out.

As you point out, the schools are a big issue. If you have or are going to have kids you're crazy not to consider this issue seriously.

JCK
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Cephme
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PostPosted: Thu Mar 15, 2007 7:22 pm GMT    Post subject: Reply with quote

I find myself in the same boat at about the same age and facing the same questions. My rent is about a half to a third of what I would pay a month to own and simply can not justify owning for myself. Likewise I have a very good relationship with my landlord and he has not raised my rent in the 4 years I have been in my current place. I will read this thread more in depth later, but at least it is good to see I am not the only one feeling the same pressure. Thanks.

Jason
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