So in December 2001 one of my best friends Tallman and I decided to get a place together. He would get a roommate and I would move into the city from Astoria, Queens. We were talking about renting — but I remember once, over beers, I suggested maybe we should buy instead? Tallman was fairly recently of law school, he didn’t have any savings, but I had my Roth and some Internet stocks.
But it all just seemed too complicated, we rented instead, and missed one of the great run-ups in real estate history. I held onto my Internet stocks and saw them crashing back down to earth.
Oh well — I’m not sure if I coulda scraped up enough money for a down payment, anyway. Coulda, wooda, shoulda, right?
Now, I’m sorta revisiting the question, though. Real estate seems vastly more expensive, but I think I might be able to tap into my Daily News 401(k) that I’m rolling over into Rollover IRA.
But is it really the right time to buy? Sometimes I peruse the Housing Bubble Blog for its cataclysmic stories of real estate collapse. That actually seems to mostly be happening outside of New York, alas, but it seems like a housing bubble here might slowly deflate rather than pop all at once.
There’s also just the question: is it really a good deal to buy rather than just rent and put your savings into stocks or mutual funds? The Times has a good article about this here, which notes that many people over-value their home mortgage deduction. Generally you’d compare it to the standard deduction, rather than no deduction. Also some people get hit by the alternative minimum tax and don’t see the full value of that mortgage deduction. Lastly there are tax-advantaged savings plans like Roths and 401(k) out there too.
However, the great thing about buying a home is that it’s a highly leveraged investment. No one’s letting you buy stocks at 10% down and 6% interest.
Anyway, I did some research on this and quickly realized most of the online calculators on this are way too simplistic to be useful. But I found one that is really great: Housemath. It’s very sophisticated and can be customized to the New York market.
I’ve also recently discovered a great NYC real estate site, Street Easy. Putting them together…
Using Street Easy I was able to find this co-op a few doors down from my Hell’s Kitchen apartment. It’s currently under contract; the asking price was $299,000 with $567 maintenance. I don’t know if it’s exactly equivalent to my little $1,407/mo. one-bedroom but it looks sorta close?
Anyway, running the Housemath calculator (link to this particular calculation), gave me this calculation:
Right away:
* Come up with: $40,149 to buy the place.
* Start paying $2,417 a month.
* Enjoy $1,656 from appreciation and tax savings.
* Regret not be making $355 a month, had you invested the downpayment and closing costs.When you sell, in 10 years:
* Your property will be worth $464,338, but, after paying the remaining mortgage, closing costs, commissions, and capital gains taxes, you will net $198,737.
* If you had invested the monthly payments, they would have been worth $348,420, and, you would have made $316,888 after capital gains taxes.
* If you had invested the maintenance payments, they would have been worth $137,918, and, you would have made $122,650 after capital gains taxes.
* If you had invested the property taxes, they would have been worth $39,023, and, you would have made $34,922 after capital gains taxes.
* If your invested the downpayment and closing costs, they would have been worth $108,684 and your would have made $93,709 after capital gains taxes.
* If you invested the FEDERAL tax savings, they would be worth $71,119, and you would net $64,423 after capital gains taxes.
* If you invested the STATE tax savings, they would be worth $19,486, and you would net $17,652 after capital gains taxes.The bottom line:
* If we add up all the good and the bad future values, we can say that this investment would be worth $287,356 less than if you had not spent any money and just invested in the market. Well, not quite, you would still have to live somewhere.
* By accepting the deal you described, you will essentially be spending $1,403 monthly.
* If this was rent and was increasing with inflation, your rent would start at $1,181.
Pretty neat, huh? Of course makes a lot of assumptions: 10% annual portfolio return, 4.5% annual real estate appreciation, and 4% inflation. All of which are kinda shaky assumptions. But it’s still a fascinating analysis.
If you assume I’d only live in the apartment for five years, BTW, it’s pretty different: total monthly costs of $1,538.62, and I could break-even by renting at $1,403.99. That’s mostly because it assumes over $10,000 in closing costs: title insurance, NY State mortgage tax, attorneys fees… it takes awhile to recover that.
But the calculator also shows an optimal time to sell is 8-12 years. That’s because long-term the stock market outperforms the real estate market. When your housing investment is no longer highly leveraged, you should put it on the market.
That house math site is pretty powerful. I’m surprised though that it doesn’t allow you to input your rent cost that you are avoiding or would have to pay to offset some of those gains from not buying.
And remember, I was flat broke coming out of law school. I had a few thousand in a 401k and an IRA from my pre-law school working years, but that was it. Perhaps I could have twisted the arms of my parents for some cash, but they had already been helping me get through law school, so I already owed them a good chunk of money. But yes, if somehow we had bought at that time we could have flipped it in two or maybe three years and each had enough from the appreciation for a downpayment on individual 1 bedrooms.
Yeah. Oh well, if I had bought Netscape stock in 1995…
[…] From the derek rose blog: […]
Thanks to all for kind words about HouseMath… I am the guy who put that site together single-handedly :).
I am always looking for suggestions and ideas and your input is welcome and appreciated. On the rental costs: The way I was thinking is that if we look at a house strictly as an investment that we buy and sell, it costs some money. It may make money, it may lose money, but most likely it will cost something. That cost is something I call “rent equivalent” at the bottom of the Summary tab. It costs you money, but you have a place to live. Did you have something else in mind?
Also, funny you mention StreetEasy. HouseMath was written in Ruby/Rail as is StreetEasy. I know that team from my meetings at the Ruby Users’ Group in NYC. I have been bugging the CTO of the company to let me have a go at their API the same way I do with Zillow… we talked, agreed, but have not moved much farther. Perhaps users’ requests could compel them 🙂
Hi Derek,
I’m a tax attorney hear in NY and I wanted to comment on this analysis. Nothing against anyone who wrote the program or anything but I do not think this analysis tells the whole story. Take care (I put my comments in parenthesis)
Right away:
* Come up with: $40,149 to buy the place.
* Start paying $2,417 a month.
* Enjoy $1,656 from appreciation and tax savings.
* Regret not be making $355 a month, had you invested the downpayment and closing costs.
(SURE–but I bet your apartment would appreciate more than $4200 per year, or at least equal to that)
When you sell, in 10 years:
* Your property will be worth $464,338, but, after paying the remaining mortgage, closing costs, commissions, and capital gains taxes, you will net $198,737.
(This is not true–, if your property is worth $464,338, you would pay NO capital gains because of IRC 121 which NYS and NYC also follow–you would not pay any taxes–as a single taxpayer, you may exclude up to $250K of GAIN on your primary residence)
* If you had invested the monthly payments, they would have been worth $348,420, and, you would have made $316,888 after capital gains taxes.
(As has been noted above, this ignores that must pay rent, if you do not own)
* If you had invested the maintenance payments, they would have been worth $137,918, and, you would have made $122,650 after capital gains taxes. (use the tax breaks after the maintenance payments to invest the extra money)
* If you had invested the property taxes, they would have been worth $39,023, and, you would have made $34,922 after capital gains taxes.
(also tax deductible)
* If your invested the downpayment and closing costs, they would have been worth $108,684 and your would have made $93,709 after capital gains taxes. (This may be true, but everyone who has purchased has made more money from owning over the course of 10 years)
* If you invested the FEDERAL tax savings, they would be worth $71,119, and you would net $64,423 after capital gains taxes. (Nothing would stop you from owning and investing the federal tax savings0
Please don’t think I have anything against buying a place. OF COURSE, you would still have to rent and that is the opportunity cost. Maybe I am not making it clear. You would still have to spend money on rent (I say it — you still have to live somewhere).
* Your property will be worth $464,338, but, after paying the remaining mortgage, closing costs, commissions, and capital gains taxes, you will net $198,737.
(This is not true–, if your property is worth $464,338, you would pay NO capital gains because of IRC 121 which NYS and NYC also follow–you would not pay any taxes–as a single taxpayer, you may exclude up to $250K of GAIN on your primary residence)
— well aware of that. Tax people have advised me on on how this works, and I do not take capital gains out when it is below the appropriate threshold (500K couple, 300K single) BUT consider it all a capital gain when the holding period is less than 2 years.
Please, correct me if I am incorrect, but that is something that I definitely touched on in my discussions with the attorneys. I just really want the site to be as accurate and true as possible.
If your invested the downpayment and closing costs, they would have been worth $108,684 and your would have made $93,709 after capital gains taxes. (This may be true, but everyone who has purchased has made more money from owning over the course of 10 years)
… BUT this kind of “EVERYONE had made more money….” talk is exactly why I created the site. Even in the last 10 years, it was not EVERYONE.
Hi Krill,
I thought Derek’s scenario was selling after 10 years (which is why i added the comment about capital gains).
As far as bringing sanity to the housing frenzy, I agree with you. As hard as it is to believe for some of us, this is just a large housing upswing–but its an upswing that has been going on for 10+ years. I am not aware of anyone who has owned an apt. in NY for 10 years who has not made some coin. I feel comfortable saying there is no one, unless of course they found themselves on top of a superfund site or somethng similar.
Anyway, please don’t feel attacked. I’m just a firm believer in apartment ownership. Your apartment is always your best investment (especially for normal middle class people like myself) which provides you equity and tax breaks.
I would only recommend not buying if someone truly cannot afford it.
Have a great day!
Thanks Sean, and I please don’t take any offense. I really do appreciate all the comments and as I said, just trying to keep things accurate.
What actually inspired me to put up the original site (a year or so ago) was when my wife and I were meeting with a Corcoran agent here in New York, who actually opened her mouth and said “You know, real estate is THE ONLY asset that ALWAYS APPRECIATES the moment you buy it.” The Berkeley MBA in me glared and said “Don’t go there, please.” Ergo, HouseMath 🙂
Krill, maybe the site should be more transparent about what all the figures are? Like it never really says how much you estimate people will pay in capital gains and other taxes.
Sean I agree, housing prices have been on the upswing for around 10 years. And before that there was a big bust … I found this interesting collection of headlines on the real estate crash of the late ’80s/early ’90s. It seems like unlike other places, prices in the NY market this time have been pretty resilient, though.
The site is trying to be as transparent as possible. That’s why there’s the HouseMath wiki (http://wiki.housemath.us). I specifically wanted people to know, in detail, where every number comes from. It has all the formulas, all the steps with numbers plugged in and examples. Again, I appreciate people poking at the math because that is the best way for me to make sure this is accurate — I want it to be fact, not emotion or guesswork.
I don’t know enough about American tax law to properly comment on the housing website. I will say my opinion is that if given a choice, I believe it’s always best to own your own home. I feel better paying a mortgage — investing in my own property — rather than writing a fat rent check to boost up someone else’s portfolio.
I bought my downtown Vancouver condo for $255,000 just over two years ago. With the seller’s market right now, it was just appraised at $680,000. If I move to a smaller city with a better buyer’s market, like Edmonton, I’ll be laughing and jingling change in my pocket.
Really, I don’t know anyone who hasn’t made money selling their home. I believe that you have the money for a down payment, that you should own, not rent.
another factor when owning is that you can make improvements that will increase the value of your apt. something as simple as painting or polishing hardwood floors or buying new appliances can pay for itself 10x over (plus you enjoy the benefits while living with them).
also your rent will increase every 1-2 years, possibly at rates around 9%.
Here’s a case against owning…
Down the street from me is a very nice condo that went on sale six months ago for $389,000. It didn’t sell, and they cut it to $364,000. It didn’t sell, and they cut it to $349,000. Last I checked a few weeks ago, that’s where it remains today.
Owning is great in a market that is going up, but can be very treacherous in a market that is flat or going down– which does happen. Boston is in the midst of that now, and if I bought that $349,000 condo today (which I could), it’s not at all clear that in two or three years, it would appreciate at least 6 percent (what I’d need to clear the realtor’s selling fee). I could either take a loss, or keep the condo for longer. And certainly if you plan to own your home for many years (say, 10 or more), you’ll be fine. But I don’t know that I do want to own my condo for 10 years.
Meanwhile, my rent has stayed flat at $600 or $610 since 2002 (splitting apartments with one or two roommates, in a very nice suburb of Boston). And as my income has gone up, I’ve been able to pour money into savings for that mythical downpayment I’ll someday make. Only this month am I upgrading to a nicer apartment of my own, at $1350 a month. I’ll still be able to sock away lots of money every month, and increase my downpayment fund by 25 to 30 percent. That’s going to buy me a lot more equity in a bigger house in another few years, especially if that $349,000 condo has only risen to $359,000 by 2009.
One thing that bugs me when people talk about real estate is the ‘housing bubble’ that can collapse. Stock prices form bubbles and collapse. Housing prices form balloons and deflate– slowly, over time, leaving you in agony if you’re on the wrong end of things. Massachusetts home prices soared in the 1980s and peaked in 1988. They then bottomed out 25 percent lower… in 1992. We’re seeing the same thing again, where prices peaked in 2005 and are sloooooowly drifting downward. Lord knows when it will end, but unless you’re planning to own your property until 2015, you take a lot of risks buying against the current.
“I don’t know anyone who hasn’t made money selling their home”
Yeah, but real estate has had a good run from like ’97-’05. Like Mofo says things weren’t like that in the late 80s-early 90s.
And, lo & behold, that housing calculator tells me that if I do indeed hold a home for 10 years, I’ll be saving $400 a month– but if I own it for only three, I’m losing $400 and should rent.
Yes, there are no definites about investments. You have to jump in and hope for the best because nothing always makes money. New York went through a slump years ago that was pretty brutal. People were just allowing banks to foreclose because the mortgage was more expensive than the apartment’s value.
While I can’t see continued increases forever and certainly there is some slippage, one friend who is in real estate investment says that demographic changes, in particular the aging of the baby boom’s children (what do they call that that), who I think are in their 20s now, is going to increase demand for housing steadily for the next several decades. Now they are still living in one bedrooms or with roommates, but when they start having kids, they will be looking for bigger places. Probably there will no decrease until the baby boom starts dying or at least selling off their second homes and moving full time to Florida or into nursing homes.