Does buying REALLY make sense? In this goofy real estate market there really are some costs associated with renting instead of buying a home. Opportunity costs but costs nonetheless.
Why are folks buying homes today?
1- They're cheap. It's going to go up in price. It won't be for awhile but still a good reason to buy .
2- You can write off your mortgage interest. That's not true for most home buyers today.
3- A fully-amortizing loan is like a forced savings account. Illiquid savings account but I'll buy that.
4- The US Government is bribing people to buy homes. We'll harvest that $8,000 tax credit.
Let's run some numbers.
June was considering a Pacific Beach condo for $278,000. She currently pays about $1,000/month in rent. She's considering this condo purchase with a VA loan because she's a veteran of the US Army. Her total payment, including the property taxes and HOA fee, would be about $2200. June's a nurse who makes $80,000. She's single so she currently takes the standard tax deduction of $5,700. She plans to hold the home for five years and expects to sell it for 15% more than today's price; she'll net $296,000 after sales expenses (in 2014).
What is the cost of NOT purchasing the Pacific Beach condo today?
1- Let's assume June's right about the appreciation. She stands to make $18,000 in five years; that's about $300/month.
2- June doesn't fully benefit from mortgage interest deduction. If she stays put, she can write off $5,700/year (479/month). She will have paid about $75,000 in interest over the next five years or $1250 per month. When we back out her standard deduction ($479/month), her benefit of buying the home is that she can write off an extra $771/month. She'll also be able to deduct her property taxes (289/month) for a total MARGINAL income deduction of $1,060. That saves her about $365/month in income taxes.
3- June will pay that loan down to $257,000. That builds equity up of about $350/month.
4- The effect of the $8,000 legal bribe is about $133/month, over five years.
5- June's closing costs are $6,000. Amortized over five years, that's an added expense of $100/month
June's opportunity cost of NOT buying, exclusive of appreciation, is $748. Subtract that from the $2200 payment and her payment "feels like" $1452. She gains $352/month by renting instead of buying.
The big question is...will June make 15%, over five years, by owning this home?
or...can June negotiate a lower price, by about $45,000, so that her monthly payment drops about $350/month? At $233,000, June is actually losing money by renting.
