Rental parity on a 4/3 SFR?

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I know I can likely get shot for saying this, but I think the whole rental parity calculation is deeply flawed. The main benefit to the ownership equation that is left out is the fixed cost nature. Your payment is fixed for 30 years. Your property tax payment goes up 2% per year (or down 15% this year). Your Mello Roos payments are fixed. Your insurance, HOA go up about the level of inflation.



Renting comes with a 1 year contract that gets re-negotiated every year. I know rents are going down now, but Orange County has demonstrated a consisted 3% to 4% annual average increase in rents.



Do a Net Present Value calculation of those 2 payment streams and you'll find that long term rental parity over 30 years is met with an initial home payment that is something like 40% over the current rental amount.
 
BTW: I'm not posting this thread to indicate that "Now is the time to buy!" or "Irvine has hit bottom!"... I was just doing research and I found these numbers intriguing.



There is still that whole 20% down thing that some families can't afford so renting is still a good deal.
 
[quote author="IrvineRenter" date=1247101640]BTW, it was IPOP who first confirmed that you do not get the benefit of the full 37% marginal tax rate. It might feel like it to you if you already own a home, but you must compare it to renting to have an legitimate baseline.</blockquote>


If you can afford to buy a home in Irvine, you're probably already itemizing because of California's high tax rate. Since I'm already itemizing, any mortgage deduction is at the marginal rate. Provided I don't trip into AMT.

[quote author="irvine_home_owner" date=1247122007]BTW: I'm not posting this thread to indicate that "Now is the time to buy!" or "Irvine has hit bottom!"... I was just doing research and I found these numbers intriguing.



There is still that whole 20% down thing that some families can't afford so renting is still a good deal.</blockquote>


If you're getting 2% on $130K, buying a home is probably a good plan.



Keep in mind the calculator has another gotcha in it. Equity hidden in payment, that's the poison pill IMHO. At Irvine prices it's substantial. In your example, it's $130K down and another $500 a month on principle that is vaporizing. That's $500 REAL dollar coming out of your pocket. It's $500 real dollar that is an expense until that future date when you can sell the house or get an HELOC. But the reality is it's not $3000/month expense, it's $3500 a month out of pocket ONLY if you manage to tweak your withholdings to hit the numbers. If you don't, then it's more like $4000/month out of pocket each month with a nice tax refund and a bunch of wierd quazi random expenses repairing, painting, calling an electrician, fixing the cracked window from the bird flying into it. etc.
 
I agree that the rental parity calculation is flawed. You really need to price in risk. Especially in the low interest rate environment and what will happen to values if rates go to 8-10% and the good possibility that you will loose your job. That interest and property tax deduction will be significantly devalued if your income is cut in half. Given that the job market is likely to slide, giving up ones freedom to move easily into a cheaper rental and giving up a large portion of your nest egg to be stuck is a big risk.
 
[quote author="No_Such_Reality" date=1247134694][quote author="IrvineRenter" date=1247101640]BTW, it was IPOP who first confirmed that you do not get the benefit of the full 37% marginal tax rate. It might feel like it to you if you already own a home, but you must compare it to renting to have an legitimate baseline.</blockquote>


If you can afford to buy a home in Irvine, you're probably already itemizing because of California's high tax rate. Since I'm already itemizing, any mortgage deduction is at the marginal rate. Provided I don't trip into AMT.

[quote author="irvine_home_owner" date=1247122007]BTW: I'm not posting this thread to indicate that "Now is the time to buy!" or "Irvine has hit bottom!"... I was just doing research and I found these numbers intriguing.



There is still that whole 20% down thing that some families can't afford so renting is still a good deal.</blockquote>


If you're getting 2% on $130K, buying a home is probably a good plan.



Keep in mind the calculator has another gotcha in it. Equity hidden in payment, that's the poison pill IMHO. At Irvine prices it's substantial. In your example, it's $130K down and another $500 a month on principle that is vaporizing. That's $500 REAL dollar coming out of your pocket. It's $500 real dollar that is an expense until that future date when you can sell the house or get an HELOC. But the reality is it's not $3000/month expense, it's $3500 a month out of pocket ONLY if you manage to tweak your withholdings to hit the numbers. If you don't, then it's more like $4000/month out of pocket each month with a nice tax refund and a bunch of wierd quazi random expenses repairing, painting, calling an electrician, fixing the cracked window from the bird flying into it. etc.</blockquote>
Some of us aren't fortunate to have a household that has a second wage earner. Hell, I have a consulting job that may end by the end of the year. You honestly think I'm going to dump down most of my savings to buy a home in today's environment....HELL NO! Like I said, as soon as I get a stable job and owning a home is inline with renting one I'll be a home buyer until then I'm on the sidelines putting whatever money I can away (folks like me are only growing in ranks as the unemployment rate keeps going up).
 
[quote author="No_Such_Reality" date=1247134694]



Keep in mind the calculator has another gotcha in it. Equity hidden in payment, that's the poison pill IMHO. At Irvine prices it's substantial. In your example, it's $130K down and another $500 a month on principle that is vaporizing. That's $500 REAL dollar coming out of your pocket. It's $500 real dollar that is an expense until that future date when you can sell the house or get an HELOC. But the reality is it's not $3000/month expense, it's $3500 a month out of pocket ONLY if you manage to tweak your withholdings to hit the numbers. If you don't, then it's more like $4000/month out of pocket each month with a nice tax refund and a bunch of wierd quazi random expenses repairing, painting, calling an electrician, fixing the cracked window from the bird flying into it. etc.</blockquote>


Yeah, and you really should never extract that equity if you want to pay off your house and retire one day.
 
[quote author="usctrojanman29" date=1247136576]

Some of us aren't fortunate to have a household that has a second wage earner. Hell, I have a consulting job that may end by the end of the year. You honestly think I'm going to dump down most of my savings to buy a home in today's environment....HELL NO! Like I said, as soon as I get a stable job and owning a home is inline with renting one I'll be a home buyer until then I'm on the sidelines putting whatever money I can away (folks like me are only growing in ranks as the unemployment rate keeps going up).</blockquote>


Let me rephrase for SC.... What he really meant was "I will gladly overpay to buy in any neighborhood that has hot girls at every turn resembling a Girls Gone Wild video."
 
[quote author="irvine_home_owner" date=1247122007]BTW: I'm not posting this thread to indicate that "Now is the time to buy!" or "Irvine has hit bottom!"... I was just doing research and I found these numbers intriguing.

</blockquote>


I think you're right. When I was considering moving from an IAC apartment to a small house/townhome last fall I also used the same calculator and it looked like rental parity was there.



Of course, that was a comparison of asking rents to asking prices, and it was basically WTF rents matching WTF prices. Eventually, we decided not to move, so I didn't find out how low the rents could actually go. But all of the places that I looked at were always available, and agents were readily available at my disposal to show me the properties. There was no mention of other renters, competing offers, etc., and all of the properties had been on the market for a while. Quite a stark contrast with trying to find a rental place in a booming market.



The rent-to-own ratio can be a useful indicator, but I never took it seriously as a predictor of price trends. Assume that rental parity is there, and rents will follow prices up as well as down. If prices fall by 10% next year, rents will follow and you can negotiate your rent down, but if you have bought, then you are stuck with the 10% equity loss. That's a huge downside risks. In the opposite scenario, if you rent and prices go up, you can just move. If you buy and prices go down, you are trapped.
 
Two theories of why asking rents seem to be at rental parity with high prices:

1. An accidental landlord forced to rent his property will ask for a rent that is close to his mortgage payment.

2. Landlords know how to use rent vs own calculators too. They will plug in a ridiculous price and derive a matching ridiculous rent.
 
[quote author="graphrix" date=1247149874]http://i27.tinypic.com/adkcba.jpg





Rental parity happens. Keep in mind the 90s bust was no where near as bad as this bust.



Wash, rise, and repeat. It's like it is 93 all over again, only that 2011 and 2012 will make 95 and 96 pale in comparison.</blockquote>


Graph, apologize for following you around random threads, but did you get my PM? My sent box says nothing was sent.
 
[quote author="irvine_home_owner" date=1247117954]I used homeseekers.com to do my search and some 4/3s are actually 4/2.5s when you look at the details.</blockquote>


This makes a lot of sense. A 4/2.5 is about as generic a floor plan as you can get-two story with a half bath downstairs, full bath off the upstairs hall, full bath in the master, all bedrooms upstairs.



It also shows how much of an advantage a one story house is over a two story. For the most part, you would only "need" two baths on a one story, as the half bath isn't really needed-it's needed in the two story for guests and others who don't want to have climb the stairs just to take a leak. So, subtract 150 sq ft for the stairs, and 100 sq ft for the half bath, and, say, a 1 story, 4/2, 1,750 sq ft house has about as much functional space as a 2 story, 4/2.5, 2,000 sq ft house. Plus, no stairs to climb or vacuum, and one less sink/toliet to clean and have leak.



Of course, in places with small lots like Irvine, this is harder to pull off, which is why most Irvine houses are two stories.
 
[quote author="graphrix" date=1247149874]



Wash, rise, and repeat. It's like it is 93 all over again, only that 2011 and 2012 will make 95 and 96 pale in comparison.</blockquote>


That saying is so very.....1996. Today's hipsters use "<a href="http://www.irvinehousingblog.com/forums/viewthread/128/P3450/#116778">extend, pretend, and send</a>" nowadays.
 
[quote author="rtlguru" date=1247176646]Graph, apologize for following you around random threads, but did you get my PM? My sent box says nothing was sent.</blockquote>


Stalker! J/K... I got your PM, and I just replied to it.
 
The 2% lost in interest is fine today, but if you look at it over the length of the loan, you will make more than 2% with CDs.
 
[quote author="Roo" date=1247228968]The 2% lost in interest is fine today, but if you look at it over the length of the loan, you will make more than 2% with CDs.</blockquote>


If CD rates rise, you can bet there is probably inflation, economy is improving and rents will rise. Over the life of a 30 year fixed, the benefit of fixed mortgage payment will make a 5% CD return vs 2% insignificant.
 
You can buy the dogs of dow today and get an average yield of about 5% on dividends plus the upside/downside risk of the stock.



And as a nitpick, a $100,000+ plus down payment over a near term window of even a year or two does make a difference long term.
 
Do threads like these go stale because it's not bear friendly?



I would like to know if I'm in the ballpark about 4/2.5s getting close to rental parity in Irvine. I realize there is still the stigma of the down payment and possibility of losing much of that 20% because I still feel the market is declining but this does make a decision interesting for anyone on the fence between renting and buying.



In a year or so, I would imagine that the numbers would be more in line and maybe even favor buying because although rents are softening... they don't seem to be going down too fast. 4 years ago, rents for better Irvine 4/3 SFRs were at about $2700... they probably peaked at around $3200 in 2006/7... and they look like they are coming back down but my most recent search shows 4/2+ SFRs built after 1990 are $3000+.



And to answer the post about the lost opportunity costs of the DP and the principle payment... while this is true... some people put value in being able to "own" a home and not have to deal with a landlord... especially if they plan to stay for long-term.
 
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