That used to be true. I don't know about other places, but Chicago and Florida cap the property taxes of seniors. If anything, in florida there's a movement toward portability of one's taxes from one home to another. Homestead exemptions are having the opposite effect, Vulture. Rather than pricing seniors out, the tax advantages are keeping seniors in. My parents are a perfect example. They have a modest amount of cash and retirement inflow yet because of South Florida's real estate appreciation they live in a 1.5 million dollar home. Conventional wisdom would say sell, buy a less expensive home and pocket several hundred grand. However because they're seniors their taxes are less on their present home than a much cheaper home owned by younger people. Thus very few seniors see a viable alternative to "cashing out."
In Los Angeles affordability index is above 12 (price of the house/household income) if one makes 40K yearly he can qualify for 400-500K loan no money down. which tax bracket is it? by the way I bough my house in 97.
Well there is anecdotal evidence that some seniors are cashing out and moving out of state. After all, the spectacular price appreciation has enabled them to buy places for cash up in the Carolinas, Georgia, etc and still have money left over. Granted, to move in state and lose that tax basis would be a hassle. But again, as you know, one can still rent down there and live like a king.
Vhen, nice post. Clearly there's a substantial out of pocket savings in renting vs. buying. Mav and I have had this discussion many times and he's correct. However renting advocates miss two points. The "premium" that a buyer pays is a call on higher valuations. Secondly, real estate is a great hedge. Not necessarily against just run of the mill inflation. "Normal" inflation can cause an uptick in interest rates that will actually cause home prices to decline. That's why RE has usually done best during benign periods of inflation. Rather though, if we ever have hyper inflation, that million in the bank could quickly have the purchasing power of half a mil, if not worse. DIVERSIFICATION is key. No one should struggle to own. Renting is a time honored alternative. But for those who have savings and cash flow, buying is a primo prudent method of portfolio balance. Always remember that cash is a position and any position has risk.
Certainly the recent increase in available yield has made the swap appealing. When T-Bills were 1.5% the benefit of savings was exceeded by increased property tax liability. That's another reason why this uptick in rates will probably place additional inventory on the market.
im sure this is true but could you imagine trying to make that sort of a payment on 40k per year. i wouldnt want to try. jim
OT, Incorrect: I used the figure of $5000/year, which I gleaned from here: http://www.realestatejournal.com/buildimprove/20001003-fletcher.html The article mentions the case of $140,786 spent on maintenance and repairs to date for a house bought in 1968. $140,786 / (2006-1968) = $3700 / year. But that was in past prices. Inflation will increase the cost of repairs & maint; hence, the ballpark figure of $5000. I ran this by a coworker/homeowner who said it was probably a low estimate. Let's look at some big ticket items. My dad put a new roof on his house a few years ago for I believe $13k. Let's figure new carpets every 10 years at $10k a pop = $30k over 30 years. Painting the house every 10 years at $10k = $30k. That's a total of $73k over the 30 years, which averages out to $73k / 30 = $2433/yr. But then most homeowners are going to have to pop for a major kitchen and bath remodel. What, $25k, $30k? Dad has a termite problem -- no idea what he's paid for that. He's also got a pool, which costs to clean and maintain, and he's had to put in a few new pool heaters and cleaners. New shutters and drapes. Patio cover. Deck. Then there's the front and back yards, which need to be landscaped. A gardener comes by every week. And as you mention, furnace and AC. Not to mention that utilities for a house are higher for a house than for an apt. Maybe I'll incorporate that difference into my spreadsheet, if I can get good data, as I believe it's significant. Based on these round figures, I believe that $5k/yr avg is a reasonable estimate for maintenance and repairs on a home. My sense is that folks are taking out big 2nds to spend on upgrades. If you can provide me with better data for maintenance and repairs, please do. I neglected inflation on rent for the same reason I neglected inflation on property taxes: I figured they roughly cancel out. While we're on the subject, I used 1% for property taxes, which is too low. Here's an interesting article. http://www.cbpp.org/3-17-05sfp.htm If someone can find a good source for the national average residential property tax, please provide it. I haven't found it. OT, Not sure where you're getting your math but it's not from my posts. Repeating it here FYI: U.S. median rent: $940 Annual rent: $11,280 From my earlier post, the total cost of owning for 30 years is $667,812. The annual cost of owning is $667,812 / 30 = $22,260. Thus, if you rent, you save $22,260 - $11,280 = $10,980/yr. Since you aren't investing this $ in a home, let's say you put it in the stock market. The average return on the DJI Average from 1932-2002 is 7.8% (surprised?). $10,980/yr at 7.8%/yr compounded for 30 years = $832,984, assuming 30% cap gains tax applied yearly. From my earlier post, the appreciation profit minus the costs of owning the median house is $445,703. The profit difference in renting vs owning: $832,984 - $445,703 = $387,282 Thus, if you rent the median apt instead of owning the median house, and invest the savings in the Dow, you would earn $387k more after 30 years than you would by owning the house, assuming the historical trends. You point out that the average renter is poor. My analysis assumes that you have the financial means to buy the median home, but choose instead to rent the median apt, then invest the savings in the stock market. My figures indicate that the renter comes out ahead. You also seem to assume that the renter only has $10k to invest one time. I assume he has $10,980 to invest every year (from his rental vs home-ownership savings) and adds this amount to his portfolio yearly AND compounds his profits. I'll be updating my spreadsheet this weekend, with some of the details discussed in this thread, when I have more time, but I don't expect the conclusion to change. Thanks for your input.
Rent is 40% of the CPI. There can certainly be local fluctuations in rent but in the long term rent is guaranteed to be nearly stationary relative to inflation. By the way, locking in the price is exactly what I'm worried about. Who wants to lock in an unfavorable, unsustainable price? I think this is a bubble mentality... prices have been going up for long enough that people forget that prices can go down too. I agree that local variations mean that there are many people in the country who are still well served in buying real estate rather than renting. I also agree that, with historically normal price-to-rent ratios, buying makes more sense than renting. On the other hand, there are certainly times and places where renting is financially smarter than buying, and this is particularly prevalent given todays housing valuations in the US. Not to single anyone out -- but, in general, I'm suprised at how ignorant the posters here are to basic financial economics... discounted present value, opportunity cost, cost of capital, etc. Simplistic analysis like "renters are throwing away $x per year, owners are building equity" is what I expect from my mom, not from people who make a living in financial markets. Hopefully y'all can value a stock better than you can value a house. Martin
Annual maintainance reserve obviously depends on how expensive your house is and labor costs in your area. But here's an easy way to estimate a lower bound on maintaince costs. How long do you think it is before everything of value in your house will be replaced? The roof, the appliances, remodeled kitchen, remodeled bathroom, new paint, new trim, new furnace, repaired plumbing, etc. I'd say it takes about 50 years for enough work to go into a house that you could just as well have built a new one. If you don't do any of that work, someone is just going to have to tear down your house and build a new one anyway -- and that is going to be reflected in the price you get when you sell the house. So you can calculate a lower bound on your annual maintainance cost by taking the replacement cost of your house and dividing by 50. Martin