Interesting housing analysis

Check out the math in this example of how out of whack the housing markets are/were in California.

Those are interesting figures.  I wonder how specific they are just to the areas of the country that are overvalued or if they would also apply to a normal real estate market.  Let’s replace some of the figures with my own figures and see what happens.

Our house was a fixer upper, but I would put the cost of purchase and rehab at $115,000.

We put $5000 down, used two split mortgages and then refinanced after repairs into one mortgage for 20 years at 5.75%.  Our payment is $836 per month with taxes and insurance included, based on a principal balance of around $86,000.  I’ll add in 2% of the principal balance for maintenance and that puts the house payment at $980.  The monthly tax benefit on this would be $392 (following the same formula application).  Net payment after taxes is $588.

I think it’s only fair to compare apples to apples when looking for a rental place.  This house is about 2 miles from my house and is close to the same type of house, although it has .5 baths more than mine but I know houses in that neighborhood do not have basements and we have hardwood floors, which I value quite a bit.  The rent on this house is $970, which you can tell is considerably more.

Just trying to make this work I found this apartment which is in a very desirable area of town, probably more so than where I live.  Even in that case it’s not all that compelling.  The price per month is $13 less, but it’s also 1 bedroom instead of 3 bedrooms.  And no yard.

I think given this information I can say that renting is only better than owning in certain markets and only when the market in that area has stayed reasonable on the price levels of the houses.  It’s a well documented fact that housing prices in CA were way overblown.  Rents have not gone up nearly as much as housing prices have.  Give the numbers in the example housing prices will need to come down quite a bit to make owning a more compelling option than renting in those markets.  I would suggest that this would probably also apply to the Phoenix, Las Vegas, Miami, DC/Jersey/NY and Boston markets.  Those areas seem to be the ones that experienced the quickest price appreciation over the past 10 years or so.

This also reinforces my belief that buying a house that is a fixer is the most advantageous way to buy a house.  You tear them up anyway to make them yours right?  You might as well buy it with that in mind.


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