patrick.net

What I pay now is an obscene amount. I'm an FB. I've been an FB now for less than a year. Prior to that I was a JBR for over 12 years in the Bay Area. I don't expect my place to hold its value in the short term. It is small, rather new and in a great location. I can walk to Trader Joe's, Safeway, Albertsons, Target, (Whole Foods soon), Mervin's and Walmart. I'm only a two blocks from a Caltrain station too. The school district is quite good and my kids are both under 7.

But what I pay is affordable to me right now. It wasn't even close a few years ago. But I no longer have to deal with unresponsive landlords, mold infested bathrooms, and crumbling asbestos popcorn on the ceiling.

Low rent allowed me to save a huge amount of cash. I didn't dump it all into the house. I still have a decent rainy day fund. I never carried a credit card balance, and I still don't. The house is all my debt. But the rate is fixed and rather low by historical norms.

But I'm the demographic that you are competing against. I'm not a boomer. I'm a gen'Xer that saved and toiled for far too long to stay in this crazy Mecca of technology. I hope things level out a little. I waited for it to happen as long as I could stand it. But the rents where I live now are too high. I am satisfied to pay more and own it. My '06-07 property tax is already sitting in a CD waiting for October. And that's not the rainy day fund.

Well if I'm Ha Ha, it's 160/12 otherwise it's 1/3 take home income.

Rent: 1/2 of take home income - that's what I'm paying now
PITI: 1/2 of take home income after 25-30% down, and after tax breaks. Mortgage must be fixed interest and amortizing.

Take home income = Gross income - 401k (maxed out) - Taxes - ESPP (maxed out)
ESPP is where the savings for my kids' education start off.

Today, Zillow and my calculator tell me that PITI for the rather modest house I'm renting in West San Jose would be about 120% of my take home income, even after tax breaks.

My conclusions:
- I may never buy.
- If rents go up more than 10-15%, I cannot save anymore and will have to move away (or get a big raise if my company decides they must do what it takes to keep me here. Say hi to runaway inflation at this point).

I wrote:
Today, Zillow and my calculator tell me that PITI for the rather modest house I’m renting in West San Jose would be about 120% of my take home income, even after tax breaks.

Correction after doing the correct math: about 100% of my take home income after tax breaks.

Interesting question.

I am being paid to blog whilst renting. Each day of every month that I'm not making a mortgage payment I am making money. What a lot of people fail to realize is that even in a 30 year FRM the first ten years are "IO". I am being TOTALLY serious here. After 10 years in our last residence our initial balance of 130K went down by a whopping two thousand dollars! I am well aware that a comment like that will draw all kinds of fire and you know what? I couldn't care less. True, my home more than doubled in value from 1994 to 2004 but there certainly was no gaurantee of that. Never is, never was. When we take out the appreciation (yes, I usually put appreciation in parenthesis) we would have been able to pocket a cool two thousand dollars. Oh but wait, subtract our realtors 5% commission and we now have a hole!

My landlord, (and I just LOL every time I think of it) pockets the tidy sum of $457.34 after paying H.O.A's, taxes and a property manager. $457.34. On which, he must pay taxes. Assuming he paid cash (which I know for a fact he didn't) and he is able to collect rent each and every month this translates into a 3.23% return! Wow! A 3.22% return! Folks this is BELOW SIPC Insured Money Market Rates! With NO risk!

So, I ask you. Do you want to be in the Landlord business, or the Renter business? $850 X 12 = $10,200. So virtually all of the rent that we pay is covered by the standard deduction. (Married filing joint). 1099, "Self Employed" enables me to write off a certain percentage of my rent and utilities (just as if I "owned") further reducing the expense of renting. (Btw, if you haven't already, please claim that you have a home based business).

I realize that this "math" has been covered here many times, by many people. My "threshold of pain" is therefore substantially higher. My rent would have to basically DOUBLE for owning to make so much as "break even and hope for the best" sense! At some point we have to acknowledge that so many of the properties that we are surrounded by that are "completed but not sold" are VACANT. Vacant properties all around us. In Phoenix, Tucson, San Diego, Las Vegas and yes, (Portland, OR)! Completed? Finished? "Model Home"? You know what!? Whatever, they're VACANT! How can even the most ardent RE Bull have a claim in the world that my landlord has "pricing power"? I don't believe it and you shouldn't either.

Mike,

I wouldn't attribute the government with that level of superpowers. It seems to me a lot of attempts to hide trash under the rug, in the hope that it'll go away. It'll inevitably catch up when the trash starts to rot the planks on the ground.

I personally think means testing for social benefits is a necessary first step to correcting America's currently ridiculous old age and retirement package. Social security should be a safety net, not a substitute for disappearing private sector pensions. And giving old people unhindered access to free healthcare while many children here are denied cost efficient preventative care? Also ridiculous.

DinOR,

I'm not gonna attack you or "disappear" your comments. You brought up a great point. Most people in America do not live in the same house for 30 years or even 15 years, and most of the payment in the first years are interest on the amount borrowed. Conservative folks in the past have taken out 15 year interests or pay on top of the minimum, to decrease interest costs, but I fear the decrease in overall housing affordability is making that harder and harder for new home buyers.

However, I don't think we can completely ignore the inflation portion of that interest. Right now, inflation is by some calculation (Mike, I'll go with your numbers) running above the rate of fixed interest rate. The only problem is that the current housing market built in this boondaggle and then some into the prices.

Mike,

Beautiful post! I mean it!

By selling in 1998 (just as we irreversibly and forever screwed ourselves with tax laws that made NO sense) you missed out on the biggest asset bubble in human history! Bigger than Tulips, dwarfing the stock market bubble and imploding as we speak. Please to notice how "lackluster" your appreciation was PRIOR to 1998! Murphy's Law, you sell, then BLAM! I AM WITH YOU! I sold on the last day of 2003. I looked around, and NOTHING made sense. Not a lick. I suppose had we held out another year it would have paid for daughter #2's college AND daughter #1's wedding! Am I remorseful? No, I am not in the least. Since the current "owner" would have to struggle to break even on what he paid me my resolve remains firm and unflinching.

Mike, if you can (and I realize I am no more to you than Adam) would you please detail your "history of ownership" prior to 1998? This is a great "test case" for all of us.

DinOR,

Is DinOR daughter #1 getting married? (In which case, congratulations are in order)

astrid,

Much thanks and Happy Memorial Day. As we speak John Wayne is saving the Philippines from Japan (again).

Actually, I invite spirited debate on my last point. For me, the issue is all about taking "appreciation" or inflation out of the picture altogether (for purposes of illustration) to see if you still want to be a player. It's been debated and then some before but the truth is I tend to look at people (in a financial sense) as a business! Yeah, I know, I suck but if you don't visualize yourself as "Astrid Inc." who else will? Businesses gauge the market on a daily basis and aren't in the least bit timid about making decisions as to whether it makes more sense to rent or own. If (as Girgl suggests) she is FULLY funding her 401K by renting when it would take about 100% of her take home income to "own" where's the debate?

The reasoning I'm hearing in this thread is a direct example of why economic fundamentals will win out in this scenario.

* People cannot afford PITI on their incomes
* People can afford Rent on their incomes
* People fear rising rents will force them out of the area

Therefore, Rents will not rise unless wages also inflate and/or house prices come down. Everyone isn't going to sleep in the park and companies aren't going to just give up. In fact, this is the ugly head of inflationary cycles.

Companies are forced to raise salaries because of regional inflation. Then they have to charge more for their goods/services, which in turn causes more inflation. Then the Fed has to raise interest rates resulting eventually in job losses, thereby causing both inflation and stagnation. The rest is an academic exercise.

astrid,

Thank you! We were supposed to view the "estate" for the wedding on Friday but it was coming down like Manila in the rainy season. So I says, "Uh, so how's much is dis gonna run a fella"? I gets the "stink eye" from da boat of'm.

I suppose if we had 4 or 5 children (most of which were daughters) we could plead indigence. But when you only have 2 children and they're BOTH daughters (and Filipinas at that) weddings are a big deal. When one of my wife's co-workers daughter got married they got hotel rooms for the brides maids to change and a limo to deliver them to the ceremony. God help me.