Mortgage Rates- Confounding the Sheeple

[Serge_Tomiko]

Re: Mortgage Rates- Confounding the Sheeple

Some historical notes to compare to today:

Prior to the 1930's, US home mortgages were only 5- to 10-year loans, variable interest rate, required 50 percent or more downpayment, and a balloon payment at the end of the term for any remaining principal. Imagine trying to buy a house today under those conditions.

Housing was of course much cheaper. Probably the best place to see it is Brooklyn, New York. You can see thousands of houses occupied by the dock and factory workers that today sell for a million dollars. When they were built, a common man could afford them.

It took longer to get the downpayment, but that's what apartments were for. It's actually the same way now in NYC. Except, at the end of it all, you won't have half your house paid for. This kind of usury provides only temporary benefit to the original property owners and first generation. Once everything is inflated all to hell, you're much worse off than before the game started.

Also, a lot of people get very confused as to why the housing in Brooklyn is so nice. How could they ever have afforded such beauty? The answer is simple: When the housing market is controlled by the borrower, who always owned more of the house than the bank, he can be much more demanding for quality, beauty, and the things that really matter. The banks wouldn't care because they were never underwater. Today however, a bank would never underwrite such extravagance.

On a side note, even at several million dollars, it's not enough to build most of these houses. We don't have the talent anymore in many cases. Try calling someplace like Chubb for a quote for insurance on the reproduction cost of the nicer houses. It will cost a fortune.

[karim0028]

Re: Mortgage Rates- Confounding the Sheeple

Agree completely. Definitely not an "investment"! I just think for many like Ash, as well as myself, we are at a point where practical considerations
outweigh the financial ones. In other words, buying now vs later won't make that much difference. And from previous posts, I know ASH can afford it. To me at least, in the big picture, buying a house is worth it for the stability. I hate moving and I like the schools my kids are in. I have my home the way I like it. I have a home theater, workshop, etc. Things that are almost impossible to have if you rent. If not for these considerations, I'd be renting for sure. Most people refuse to see the REAL cost of ownership. All those little things that add up.

Awesome! I'm still trying to figure out where i'm at myself Not sure if i wanna stay in AZ or not..... Houses here are getting fairly cheap now.... ~ 160K for a 4 bedroom 2.5 bath close to major shopping centers, etc... Condo rentals in rental neighborhoods for 22K... So, im getting an itchy finger as well ;)

[flintlock]

Re: Mortgage Rates- Confounding the Sheeple

Make the best deal you can on the place you want to live, and don't be incredibly stupid about that...

I learned these lessons, frankly, there are simply too many variables and moving parts regionally to apply trends (even obvious ones) to your decision on your housing. I rather frantically sold my Houston house starting late 2007 after I moved to another city, based largely upon Itulip national trends and my own perceptions of the Houston bubble being slightly less than everywhere, but still a big bubble.

If I had simply held onto that asset and rented it, I would be WAY ahead today. Houston inner loop never dipped like the rest of the country, and rents went up pretty good due to national lending constraints for potential buyers. I imagine the cost of the suburban commute is so high that pushed inner loop prices and rents way up too. That was me overlooking factors that in hindsight clearly trumped itulip macro data and theories.

Now, I recently locked in a zero down low interest fixed 30 year note on brazos river front acreage and home, (exclusive private river access, and enough acreage to be called a ranch) which is fertile, fun, and pleasant with elbow room, but close enough to Houston that I could ride a bike or a horse if I had to...

I feel I got a pretty good purchase price, and am pretty well situated whether we go fusion utopia or mad max. If I ever DO have to sell, I anticiipate that the acreage, river front, upscale development direction, and low interest rate will work heavily in my favor in an increasing population/inflation environment.... but I wish I had kept the inner loop house and rented it as an ultimate hedge against the possibility of unobtainable or unaffordable transportation energy.

You are exactly right about RE being regional. My neighbor went the route you wished you had. She moved and refused to sell at the going prices. The house sat empty for a year and then she rented it another year at well below her cost. Finally she was able to sell it by owner financing(risky) at about 10% less than she was offered 2 years ago. By my calculations she is down at least $50k from where she'd be if she just sold it. Not to mention the hassle. And trust me, as someone who does a lot of work for landlords, renting homes can be a big hassle if you are not of the right temperament for it.

[karim0028]

Re: Mortgage Rates- Confounding the Sheeple

Make the best deal you can on the place you want to live, and don't be incredibly stupid about that...

I learned these lessons, frankly, there are simply too many variables and moving parts regionally to apply trends (even obvious ones) to your decision on your housing. I rather frantically sold my Houston house starting late 2007 after I moved to another city, based largely upon Itulip national trends and my own perceptions of the Houston bubble being slightly less than everywhere, but still a big bubble.

If I had simply held onto that asset and rented it, I would be WAY ahead today. Houston inner loop never dipped like the rest of the country, and rents went up pretty good due to national lending constraints for potential buyers. I imagine the cost of the suburban commute is so high that pushed inner loop prices and rents way up too. That was me overlooking factors that in hindsight clearly trumped itulip macro data and theories.

Now, I recently locked in a zero down low interest fixed 30 year note on brazos river front acreage and home, (exclusive private river access, and enough acreage to be called a ranch) which is fertile, fun, and pleasant with elbow room, but close enough to Houston that I could ride a bike or a horse if I had to...

I feel I got a pretty good purchase price, and am pretty well situated whether we go fusion utopia or mad max. If I ever DO have to sell, I anticiipate that the acreage, river front, upscale development direction, and low interest rate will work heavily in my favor in an increasing population/inflation environment.... but I wish I had kept the inner loop house and rented it as an ultimate hedge against the possibility of unobtainable or unaffordable transportation energy.

cbr, im curious, i was interested in possibly moving to TX, i saw the prices for houses in Austin (i hear its beautiful), very cheap compared to anywhere else, but then i looked at the property tax and i thought i was smoking really good wacky tabacky.....

6-7K/yr prop tax on a 150K home in Austin? Is that normal? Bc that to me sounds worse than a mortgage! A mortgage for the most part is constant and fixed, a prop tax is at the will of the pricks in session... Is there a prop tax loophole that i am not aware of in TX?

Here in AZ, prop tax for a 250-350K house is about 1700-2K...

[ThePythonicCow]

Re: Mortgage Rates- Confounding the Sheeple

I think we need information on how many people actually itemize. Someone told me once that even with a mortgage, most don't itemize.

But even many of those who do not itemize will not realize that the mortgage interest deduction won't help them. The real estate agent making the sale will inform the prospective buyer that interest is deductible, which many will presume is a "good deal - less taxes!". They will not know if they have taken or will take the standard deduction.

[cjppjc]

Re: Mortgage Rates- Confounding the Sheeple

The deduction as a factor in purchasing a home is way overrated. Most people don't put much though into it. The same holds true for the buy low at a high rate, as opposed to the buy high at a low rate. People for the most part are going to do what they they are predisposed to do. How often do you surprise yourself with a decision you make?

[zoog]

Re: Mortgage Rates- Confounding the Sheeple

I think we need information on how many people actually itemize. Someone told me once that even with a mortgage, most don't itemize.

I can't answer this question directly, but let me try to answer it indirectly in a more complicated way.

The standard deduction for 2010 for married filing jointly is $11,400. Using ssa.gov data (for 2009, the latest available), the median income is $26,261.29. Putting two of those together results in a household income of $52,522.58. With the personal/dependent exemption of $3650, and an average of 1.89 children, the exemptions take the household taxable income down to $45,624.08.

There are many things that can be included when itemizing deductions. To simplify, I will only consider two things that most people with a mortgage would itemize: the mortgage interest and state income taxes. A third item that would surely be included is property taxes, but I simply cannot compile the property tax rates of every city and town in the nation.

The way states calculate income taxes varies wildly. Three states have no income tax at all. Some states use one percentage rate for everyone. Most have brackets, but the break points and percentages are considerably different.

Using the income figures above, I made simple calculations for each state using the appropriate percentage, then took the median of the results: $2646.20.

This leaves $8753.81 for mortgage interest to beat the standard deduction.

Now on to the mortgage. The 2010 average 30-year fixed rate was 4.69%. For the interest paid in the first year of the mortgage to equal $8753.81, the mortgage would have to be $187,980.75. This is roughly at the top end of the range for 2010 median home prices according to NAR data.

Of course, the amount of interest paid goes down every year. If this was the 30th year of their mortgage, using the same rate, they would only pay/itemize $291.53 in interest.

Thirty years ago the 30-year mortgage rate was about 14%. In order for the interest paid in their 30th year of the mortgage (2010) to equal $8753.81, back in 1980 they would have had to take on a mortgage of $856,533 with a median household income of $17,700.

[Master Shake]

Re: Mortgage Rates- Confounding the Sheeple

I can't answer this question directly, but let me try to answer it indirectly in a more complicated way.

The standard deduction for 2010 for married filing jointly is $11,400. Using ssa.gov data (for 2009, the latest available), the median income is $26,261.29. Putting two of those together results in a household income of $52,522.58. With the personal/dependent exemption of $3650, and an average of 1.89 children, the exemptions take the household taxable income down to $45,624.08.

There are many things that can be included when itemizing deductions. To simplify, I will only consider two things that most people with a mortgage would itemize: the mortgage interest and state income taxes. A third item that would surely be included is property taxes, but I simply cannot compile the property tax rates of every city and town in the nation.

The way states calculate income taxes varies wildly. Three states have no income tax at all. Some states use one percentage rate for everyone. Most have brackets, but the break points and percentages are considerably different.

Using the income figures above, I made simple calculations for each state using the appropriate percentage, then took the median of the results: $2646.20.

This leaves $8753.81 for mortgage interest to beat the standard deduction.

Now on to the mortgage. The 2010 average 30-year fixed rate was 4.69%. For the interest paid in the first year of the mortgage to equal $8753.81, the mortgage would have to be $187,980.75. This is roughly at the top end of the range for 2010 median home prices according to NAR data.

Of course, the amount of interest paid goes down every year. If this was the 30th year of their mortgage, using the same rate, they would only pay/itemize $291.53 in interest.

Thirty years ago the 30-year mortgage rate was about 14%. In order for the interest paid in their 30th year of the mortgage (2010) to equal $8753.81, back in 1980 they would have had to take on a mortgage of $856,533 with a median household income of $17,700.

To be fair, you would also have to include the property taxes as well, since you can only deduct those if you own a home and itemize. That will add at least another $1500 - $3000 to your deduction.

[Master Shake]

Re: Mortgage Rates- Confounding the Sheeple

I think we need information on how many people actually itemize. Someone told me once that even with a mortgage, most don't itemize.

Well, those people are morons for not taking advantage of an option that will save them money.

Also, as I just posted in another reply, you also need to include the property taxes paid, as you can deduct them when you itemize.

[don]

Re: Mortgage Rates- Confounding the Sheeple

The deduction as a factor in purchasing a home is way overrated. Most people don't put much though into it. The same holds true for the buy low at a high rate, as opposed to the buy high at a low rate. People for the most part are going to do what they they are predisposed to do. How often do you surprise yourself with a decision you make?

Most buyers of anything long term in America have been conditioned to think on a monthly basis. When they ask how much is it going to cost, that's what they're asking.

[Shakespear]

Re: Mortgage Rates- Confounding the Sheeple

have been conditioned

Good. It implies that there is no rational thinking involved.

[flintlock]

Re: Mortgage Rates- Confounding the Sheeple

Obviously the mortgage interest deduction is a bigger factor on more expensive homes. Eliminating it would have a devastating effect on the high end market.

[don]

Re: Mortgage Rates- Confounding the Sheeple

Good. It implies that there is no rational thinking involved.

As much as possible has been taken out of the equation.

[wayiwalk]

Re: Mortgage Rates- Confounding the Sheeple

State income taxes, and property taxes are a big deal in NY/NJ. They are a driver and I'm sure the portion of mortgagee's in these two state that don't itemize is very low.

[zoog]

Re: Mortgage Rates- Confounding the Sheeple

To be fair, you would also have to include the property taxes as well, since you can only deduct those if you own a home and itemize. That will add at least another $1500 - $3000 to your deduction.

Sure, but as I said, every single town, or at least every county in the country uses different calculations for property taxes. There are 3141 counties! Not only that, but property taxes can vary within the same city even for two houses with the same market value.

According to one source I found, median property taxes by state vary from $150 to $6350. Another source says the national median is 2.85%. If the median family in my calculations bought with 20% down (however unlikely that may be), then they bought a $234975.90 house, which at 2.85% would be $6696.81. That's higher than the upper end of the other source. Or using the NAR national median for Q3 2010 of $177,900, it would be $5070.15.

Point is, I don't trust the limited data I can find to make a reasonably accurate calculation for median property taxes. But yes, ideally, that should also be included and can be a significant contribution.

If I was getting paid for this, I'd collect all the data necessary to run a study on what effect state income taxes and local property taxes have on median home prices per community. But as someone else in the thread said, it's doubtful that most people put any serious thought into the tax savings calculations when they decide to buy a home.