The MSM makes it sound so simple- home prices have dropped, so it’s a great time for buyers to rush in:
For Aaron Carter, a musician who was struggling to fit a drum set, a piano and three guitars into his 600-square-foot apartment in Phoenix, the math on owning a home finally began to work in his favor.
Rent for the apartment he shared with his wife: $615. Mortgage payment for a home with twice the space: $760. And the interest on a mortgage is tax-deductible. So they jumped at the chance to buy some elbow room.
"We figured that everything together, getting more space, getting out of the apartment life and also just the prices right now, it just was the perfect time for us as a couple" to buy, said Carter, 20.
For Americans debating whether to buy or rent their homes, the scales are tipping toward ownership. Because of the slide in home prices, low interest rates and tax incentives, renters are realizing they could handle a mortgage for a just little more money.
So are the Carter’s are better off now? Let’s look at that purchase of the Carter’s now, shall we? [L did the research on this one. Thanks L!]
The Carter’s purchased this home in May for $101,000 and they got a mortgage for $99,170. They purchased the home in a short sale and paid asking price. It is located in Courtland Village and has 1,264 square feet.
L pulled up the listings for Courtland Village. There are eight homes for sale, and here’s what the square foot price is based on asking price:
The Carter’s home does not appear to have been competitively priced. Granted, features of the various homes could affect the square foot price, but it’s unlikely in this neighborhood that large amounts of money have been spent on upgrades. There are a lot of foreclosures in the area, but enough properties are priced lower to make me think they overpaid. My assumption based on the number of foreclosures in the area is that the general trend in prices is going to be down for awhile. [Gavels represent foreclosures]
A CMA (comparative market analysis) run by L gives a more likely value of around $78K for this property. It’s hard to know exactly without an appraisal, but L believes them to be underwater, as do I.
If the Carter’s can stay put for a long time and no major repairs crop up, perhaps they will be all right. Should they need to move, however, they are likely headed toward a huge ding on their credit and the bank is looking at another loss.
Mortgage payment vs. rent payment is not the only considerations when buying a house. The comparative price of the house, it’s condition, neighborhood trend and long term plans need to be taken into consideration.
I recently recall an article where a couple in a similar situation compared the rent payment vs. mortgage payment and said the situation was a "no-brainer". Any purchase so expensive it will likely take you 30 years to pay it off is not a "no-brainer". It takes serious research and thought even, no especially, in a "buyer’s market".
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twist:
as crazy as it sounds, many of those other homes will likely get multiple offers, and sales prices over list… yep, its as crazy out there under 100K as it was in 2005!
MORE FORECLOSURES THAN BUYERS
I believe that the foreclosure wave will outlast the buyer wave; fighting to buy now, for most is probably a bad idea.
Another problem with the article: “interest on the mortgage is tax deductible.” OK, but only if you itemize. Do you really think this couple (remember, living in a $700 apartment) has enough to itemize even with say $6K in mortgage interest to get past the standard deduction of what is it now, 11K? Nope, no way in h***, so NO they won’t likely be getting any mortgage interest tax deduction. [Slight edit. - t.]
For anybody interested: July Phoenix update:
about 8800 sales, median price 125K
8400 Notice of trustee sales
5125 foreclosures
2600 canceled foreclosures
AZRob-
THANK YOU for the numbers. Those are amazing, aren’t they? While sales are around 2005 levels, foreclosures are not. Everything seemed to be selling in 2005, so not a lot went into foreclosure.
With so many of those frenzied buyers being investors, with foreclosures continuing to run high and the upper end still cratering, it does not bode well for home prices.
I just can’t help but think of those car commercials that have the disclaimer “Professional driver on closed track”. I wouldn’t say that no one will get deals in this market, but any naive first-time homebuyer who doesn’t do their homework is liable to be burned big time.
“Another problem with the article: “interest on the mortgage is tax deductible.” OK, but only if you itemize. Do you really think this couple (remember, living in a $700 apartment) has enough to itemize even with say $6K in mortgage interest to get past the standard deduction of what is it now, 11K? Nope, no way in h***, so NO they won’t likely be getting any mortgage interest tax deduction.”
Thanks for pointing that out, Rob. It should be a standard caveat whenever a real-estate spin doctor or a musician start touting tax benefits. Even if they personally use a tax preparer, journalists should at least be familiar with the 1040 and the concept of the standard deduction.
The gavel maps always amuse me.
rob hit the nail on the head. most people don’t realize that it takes a mortgage of 165K at 5.75% and r/e taxes of $1500 just to get to 11K in itemized deductions (this doesn’t include AZ taxes which are typically insignificant for those buying something under 165K). so a married couple doesn’t get their first dollar of a tax break until they purchase something that requires a mortgage of over 165K. it ABSOLUTELY KILLS me when i hear people say “but think of the tax break.” realtors will tell you all of the time that “this will give you an 8K write off.” what they don’t mention is that if you itemeize then you will give up the 11K write off that EVERY married couple gets (and beleive me….people actually do itemeize when the standard would be more beneficial because they now own a home and assume they need to itemize).
oh yeah…..and even if you are just barely over the itemize vs standard deduction threshhold, it will prolly last 2-3 years since each year you pay slightly less in interest on your mortgage!!! my wife and i bought our house 5 years ago. we itemized for three years and are now taking the standard deduction. over those three years (standard was slightly less than it is now) we have saved about $1500 in taxes or $42/month. if you take the $1500 over five years it’s $25/month. HUGE BENEFIT!!! lol
On the other hand.. both sides are forgetting one big argument:
If you can afford it and are planning to stay there for a long time, then go for it.
The payment isn’t much more than their current rent, and it is twice the space.. that’s a huge thing. You can never look just at the numbers.
That being said, I gotta agree with Russ.. if they’re renting for that low they probably can’t itemize, so they probably don’t make much money, and they’d likely be better off continuing to rent and using the difference to build up a savings account.
It seems like a harder decision once you get under 100K. When homes are 500K, it’s easy.. a 10% drop in house price is an entire year’s salary (pre-tax) for the average person. When a house is, say, 90k, a 10% drop is still a loss, but it’s easier to stomach, especially if the house is substantially better than what you could be renting.
linenoise,
i agree. a friend of mine is goin through a similar situation (rent vs buy at the 115K price range). he is torn because he found a house (that he likes much better than the condo he is in). the numbers do make sense….but the down side is that if it does continue to drop in value then he will be stuck there. i’m sure many people “plan to stay there for a long time,” but nobody knows what there life’s situation will be a year or two from now. i know my family is stuck in our home (which we love and are happy to be “stuck” in) for a while. if we were renters though, i could go and and rent a larger home for what we are payin (baby on the way…lol).
AZSaluki-
I agree that it’s difficult to know how long one can stay in their home. For myself, we’ve grown to love Austin and I thought we’d be here for awhile. Mr. Twist though is being tempted by an employer that would require us to move.
While I disagree with Igor that this would be “tragic”, I’m glad that I’m in a month-to-month lease- it lets us be a lot more flexible in a tough economy.
One thing that I’m surprised nobody has considered when looking at the wild price variation here:
Those other houses that are priced substantially less are probably trashed on the inside.
They may be larger, but let’s consider that all the copper has been ripped out, the AC is gone, the kitchen has been removed, the water heater, the light fixtures, etc.
Can you imagine the shape that house #8 is in?
Sure, they’re “cheaper”, but that’s likely the only advantage here.
Since the house in the article is a short sale, the owners and realtor had every incentive to ensure it was fully presentable, and had all standard appliances accounted for.
I’d rather pay 101k for a house in livable shape right off the bat rather than 82k for a house that has had the interior gutted.
Renting obviously makes more sense for young people, especially with commissions and closing costs on a mortgage. You’re looking at $10k just to sell and move out of a $100k house.
So why didn’t their realtor do a CMA and tell them they were overpaying for the house?
How did the appraiser come up with a price so much higher than CMA?
Let me guess, it was an FHA loan too!
“Let me guess, it was an FHA loan too!”
And I’ll bet you the outfit that brokered that loan is no longer in business.