Would you trade price appreciation for a chunk of your down payment?

[wiggin]

Not got time to see the video but I'd be curious to see the working out and especially if they've included capital repayments as a cost in home ownership.

I know my mortgage is ~£340 per month with interest of about £100 in that, but to rent my house would cost ~£700!

You spend $460/month on housing? Damn.

As for price-to-rent ratios, there are fairly sophisticated models that take the total cost of homeownership (including taxes, maintenance, mortgage, etc.) and compare it to the cost of a rental, minus the forced savings caused by paying down principal. Obviously the numbers are variable, especially because of the mortgage interest deduction that varies with your tax bracket and unknown property appreciation and inflation, but given reasonable assumptions quite a number of cities in the US have unfavorable price-to-rent ratios. The longer you hold onto your home, the better chance you have of coming out ahead, but in many models you always end up behind no matter how long you hold it.

I'd be leery. What if the home doesn't appreciate but loses value? You'd still be on the hook for paying back that initial 10%, plus the mortgage, even if it's underwater. And I wonder if a bank would be eager to approve a large mortgage, if the down payment comes with a lien like that?

It's a shame that "the utter dearth of affordable housing" leads to financial schemes like this....instead of more affordable housing.

They share in the loss as well - they get 25% appreciation, but subtract 25% of any depreciation from the initial 10%.

Oddly enough, I actually agree with your last point. I think that addressing financing is a bandaid for the real problem, which is constrained supply. I think that the relatively wealthy members of my community should work on lobbying the local government to ease planning restrictions.




Tonight, I went to a session some people organized with a rep from Landed. It was a fascinating crowd - about a third of the crowd was my friends, all professionals in their 20s and 30s who are essentially hopeless about the chance of buying in our neighborhood. The other two thirds was an older crowd, mostly people I knew who were much more established and interested in this as an investment (as well as a community initiative to make it easier for people like me to buy). The funny thing, though, was that all of the young crowd ran the numbers and realized that even with 10% 'free', we still wouldn't be able to buy. There was some discussion of upping it to 20% - i.e. the fund puts in 20%, we put in 10%, and we take out a mortgage on 70%. But if we're talking about a million dollar mortgage (on a $1.5 million home, which is probably a smallish 3 BR here), then adding up property taxes and the like and you're talking nearly $8k/month. That's simply unworkable when you factor in that most of us are paying tuition for 1-3 kids (figure $25k/year/child), are saving for retirement (figure minimum $36k/year), and actually need to pay our taxes and insurance premiums and grocery bills. Figure a family of 4 would be easily clearing 30k a month in spending/taxes. That means you'd need a minimum of $360k annual household income, which while feasible for two professionals is awfully hard to swing for most people. If you cut that mortgage down to a $4k rental in a 3BR, you'd suddenly have a bit more breathing room - not much, but at least some.

Long story short: it's not really the downpayment that's the problem - that just delays the purchase. It's the mortgage that can't be carried.

[GGT]

This is only anecdotal, but I recently sold my home (the place I bought for the best public schools for my kids). While the property gained value over time, after the money I put into it to keep it maintained, plus some updates, I basically came out even. And I'm okay with that - I wasn't looking to flip it for profit.

The school taxes doubled in the 15 years we lived here. I watched as elderly home owners *had* to sell, because they could no longer afford the rising property taxes. Sure, there were always new buyers, and some didn't even care about the high school taxes, and sent their kids to private school. But there's a curve that becomes a limit, and we're getting there fast.

I found a nice apartment where the rent is roughly what I paid in property taxes. Granted, it's 1/3 the size, with no garage or yard, but it's in the same damn school district! I will have the same public services at a much better price, as a renter. Looking back, I realize the reasons I bought a home were more cultural than financial. There was a stigma about being a renter vs an owner, even tho the real owner was a bank

[RandBlade]

You spend $460/month on housing? Damn.

Is that good or bad? My house was £124k to buy.

As for price-to-rent ratios, there are fairly sophisticated models that take the total cost of homeownership (including taxes, maintenance, mortgage, etc.) and compare it to the cost of a rental, minus the forced savings caused by paying down principal. Obviously the numbers are variable, especially because of the mortgage interest deduction that varies with your tax bracket and unknown property appreciation and inflation, but given reasonable assumptions quite a number of cities in the US have unfavorable price-to-rent ratios. The longer you hold onto your home, the better chance you have of coming out ahead, but in many models you always end up behind no matter how long you hold it.

I'd like to see the working out. Do you have taxes that apply to homeownership? Here all property taxes are paid by the property occupier not the owner, do you tax the landlord there?

One other factor to remember is that rent typically goes up every year whereas your mortgage (barring rate changes) is fixed at the time of purchase. If property doubles in value over a decade then ten years later you're holding an asset that's doubled in value but still paying based on the original price - if you're renting then your landlord will have asked for rent increases repeatedly over that decade. If you're looking at the interest-only part of the mortgage as the cost then as you've spent a decade repaying your interest part will have gone down.

[wiggin]

Is that good or bad? My house was £124k to buy.

That is incredibly good. Median home cost in my state is $400k, and that includes all sorts of dirt cheap rural areas.

I'd like to see the working out. Do you have taxes that apply to homeownership? Here all property taxes are paid by the property occupier not the owner, do you tax the landlord there?

There are a variety of models out there. The better calculators allow you fine grained control over e.g. opportunity cost returns, property taxes, etc. Lots of media organizations do this as well - IIRC the Economist runs a house affordability index every few months for major cities and there are a lot of others out there.

As for taxes, there are two basic kinds of taxes: The tax you might pay on capital gains upon selling your home (there are some exceptions for a primary residence, though) as well as annual property taxes you must pay irrespective of whether you live in the home. This typically comes out to ~1% of the assessed value each year, though there's a great deal of variation across municipalities in the US. If you're renting, you're not directly paying the tax though obviously it gets factored into the rent you pay.

One other factor to remember is that rent typically goes up every year whereas your mortgage (barring rate changes) is fixed at the time of purchase. If property doubles in value over a decade then ten years later you're holding an asset that's doubled in value but still paying based on the original price - if you're renting then your landlord will have asked for rent increases repeatedly over that decade. If you're looking at the interest-only part of the mortgage as the cost then as you've spent a decade repaying your interest part will have gone down.

The calculators account for this as well as net present value arguments. In many cities in the US it still isn't 'worth' it.

There are still intangibles that can make it a good idea rather than just looking at the dollars and cents, and it's possible to find bargains. I certainly plan to become a homeowner at some point, mostly because the availability of decent rentals in the larger sizes I'll need eventually just aren't that easy to find - that and it's nice to be able to modify (or build) a home to meet your particular needs, rather than feeling unable to change even small things without getting approval from a landlord.