WP: Home prices hit lowest level since April ’09 in double dip (except for DC area)

[techboy]

The tax break on the mortgage interest is the single biggest reason that home ownership is a better deal than renting. It has nothing to do with getting a return when you sell. How could you not even mention the tax deduction?

I didn't mention the tax deduction because for most people, it doesn't provide nearly as much benefit as they think.

The standard deduction in 2010 for a married couple filing jointly was $11,400. Unless you pay that much, in interest, in a year, you don't even break even.

Even if you do, you only gain a benefit for whatever amount you pay beyond it.

The only way this really helps is if you have at least $11,400 of other itemized deductions you'd be taking anyway. Most people don't.

Even then, you only get a percentage of that amount as actual savings, perhaps 20%.

Does 20% of the amount of interest paid over $11,400 sound like a big benefit to you?

This is another case of people exaggerating the benefits and underestimating the costs.

[GibbsFactor]

Someone explain this one to me... An end unit town home a few down from mine was bought exactly a year ago for 335, now back on the market for 320. Doesn't make sense to me outside of unforeseen circumstances with the buyer.

Why take that 15K hit in a year?

[techboy]

Someone explain this one to me... An end unit town home a few down from mine was bought exactly a year ago for 335, now back on the market for 320. Doesn't make sense to me outside of unforeseen circumstances with the buyer.

I suspect unforseen circumstances with the buyer.

[Stew]

Someone explain this one to me... An end unit town home a few down from mine was bought exactly a year ago for 335, now back on the market for 320. Doesn't make sense to me outside of unforeseen circumstances with the buyer.

Why take that 15K hit in a year?

maybe the previous owner trashed the interior?

[HSW]

I didn't mention the tax deduction because for most people, it doesn't provide nearly as much benefit as they think.

The standard deduction in 2010 for a married couple filing jointly was $11,400. Unless you pay that much, in interest, in a year, you don't even break even.

Even if you do, you only gain a benefit for whatever amount you pay beyond it.

The only way this really helps is if you have at least $11,400 of other itemized deductions you'd be taking anyway. Most people don't.

Even then, you only get a percentage of that amount as actual savings, perhaps 20%.

Does 20% of the amount of interest paid over $11,400 sound like a big benefit to you?

This is another case of people exaggerating the benefits and underestimating the costs.

Remember your target audience. We were discussing homes in DC. Go back and "google" the median home prices and then see what the average interest payment would be for one year. Your numbers do not add up. Anyone can google numbers and try to pretend they are a math genius. That does not mean that the numbers make sense.

[The Evil Genius]

I didn't mention the tax deduction because for most people, it doesn't provide nearly as much benefit as they think.

The standard deduction in 2010 for a married couple filing jointly was $11,400. Unless you pay that much, in interest, in a year, you don't even break even.

Even if you do, you only gain a benefit for whatever amount you pay beyond it.

The only way this really helps is if you have at least $11,400 of other itemized deductions you'd be taking anyway. Most people don't.

Even then, you only get a percentage of that amount as actual savings, perhaps 20%.

Does 20% of the amount of interest paid over $11,400 sound like a big benefit to you?

This is another case of people exaggerating the benefits and underestimating the costs.

Between property taxes, state income taxes paid, and interest, most newer (like 15 years and less) homeowners in metropolitan areas should easily clear that threshold.

FYI - on home interest alone we exceeded that threshold this past year. And we are in year 6 of a standard 30 year $228k home loan, even with paying an extra $200-300 on the principal each month.

Everything we paid in state income and property taxes last year was extra deductions. Neither of which (obviously there would be no property taxes without the home), we would have been able to claim deductions for.

[techboy]

Anyone can google numbers and try to pretend they are a math genius.

I don't need to pretend. I am a math genius.

Seriously, this is not a case of a suddenly informed opinion supported by a little convenient googling. This is an issue I've been reading about for a long time now, because it's a big topic in investing circles (especially as it relates to how it affects diversification and potential REIT and other real estate investment).

The New York Times has a really interesting Buy vs. Rent Calculator. A lot of people are surprised by the results when they use realistic numbers (i.e., not assuming huge growth in home values that are historically and theoretically untenable).

Another angle can be found in Fed Economist: Housing Is a Lousy Investment. An excerpt:

Putting aside the fact that home prices have fallen dramatically, she says several factors make homes a lousy investments:

It is an indivisible asset. If you own stocks and bonds and suddenly need a little cash, you can sell some of your stocks or bonds but not all. With a home, on the other hand, “you can’t just slice off your bathroom and sell it on the market.”

It is undiversified. You can buy stocks or bonds in industries or countries all over the world. A home is a bet on one single neighborhood.

Transaction costs are very high when you buy or sell a home because of real estate agent fees, mortgage fees and moving costs.

It is asymmetrically liquid, meaning it’s easy to get money out when home prices are going up. (You just take out a bigger mortgage.) But it’s hard to take money out when prices are going down because refinancing becomes more difficult. Put another way, the leverage that you have in your house with a large mortgage means your investment does well in good times but could be lousy in bad times.

It is highly correlated to the job market, meaning that home prices in a neighborhood tend to rise when the job market is improving in the area and fall when the job market is worsening. This means that your main financial asset provides the smallest cushion to you when you might need it most.

This is not to say it doesn't or can't make sense to buy a house. I own my house. I'm just trying to point out that a great many people seriously overestimate the value of a house as an investment. This is encouraged by the government and others with a financial stake in ensuring people believe the myth.

[Predicto]

I didn't mention the tax deduction because for most people, it doesn't provide nearly as much benefit as they think.

The standard deduction in 2010 for a married couple filing jointly was $11,400. Unless you pay that much, in interest, in a year, you don't even break even.

Even if you do, you only gain a benefit for whatever amount you pay beyond it.

The only way this really helps is if you have at least $11,400 of other itemized deductions you'd be taking anyway. Most people don't.

Even then, you only get a percentage of that amount as actual savings, perhaps 20%.

Does 20% of the amount of interest paid over $11,400 sound like a big benefit to you?

This is another case of people exaggerating the benefits and underestimating the costs.

I agree with your general principle, but there is some bad math here. You are also assuming that people are in a low tax bracket and live in a low cost city.

More importantly, you are assuming that people have no other deductions, so that mortgage interest is their only way to match the 11.4k standard deduction. In reality, state income taxes are deductible, and so are property taxes, and so are charitable donations, and some other stuff. Im our case, our itemized deductions are two and a half times the standard deduction - before the mortgage interest is even added. Thus, we use every penny of the mortgage deduction, and it comes off the top - the portion of our income where we are taxed at the highest possible rate.

So, for us it is not 20% of the interest above 11.4k. It is more like 33% of all of the interest. It makes a huge difference - at least until we give some of it back due to Alternative Minimum Tax grrrr....

[techboy]

So, for us it is not 20% of the interest above 11.4k. It is more like 33% of all of the interest.

You are not most people. You fall into this category:

The only way this really helps is if you have at least $11,400 of other itemized deductions you'd be taking anyway. Most people don't.

[Predicto]

You are not most people. You fall into this category:

So do many, many people in the DC area. Which is kind of what this thread was about, at least at the beginning.

(but you are right, I missed that disclaimer... :doh: )

[The Evil Genius]

You are not most people. You fall into this category:

On a $250k loan, how can you not have that much interest alone if you are in the first 10 years of ownership?

And that doesn't even count the added property taxes and state income taxes you can count....

250k loan, 5% interest, 360 payments, in year 10 you would paying roughly $10,300 in interest alone.

[techboy]

So do many, many people in the DC area. Which is kind of what this thread was about, at least at the beginning.

1. I reserve the right to change the topic at any time in pursuit of whatever point I wish to make.

2. You are correct that there is a larger percentage of people in the DC area for whom the mortgage deduction is significant than in the country as a whole (I'm one of them, though my mortgage is comparatively small).

However, many is not most, and there are a large number of people who severely overestimate the value of the tax deduction.

Not all of us are fortunate enough to be in the 33% tax bracket, qualify for the AMT, and have real estate in a prime area of San Francisco (just imagine where you'd be without the Proposition system, huh?).

[Predicto]

Not all of us are fortunate enough to be in the 33% tax bracket, qualify for the AMT, and have real estate in a prime area of San Francisco (just imagine where you'd be without the Proposition system, huh?).

In a state with good schools, good roads and a much lower income, corporate and sales tax? :whoknows:

You know, like California used to be.

[techboy]

In a state with good schools, good roads and a much lower income, corporate and sales tax? :whoknows:

But probably living somewhere else.

[Predicto]

But probably living somewhere else.

Nah. I really love living here. It is worth every dollar.

Anyhow, it's not like you needed the stupidity and rigidity of Prop 13 to lower property tax rates. Other states manage to do it in reasonable fashion (well, except New Jersey). If it was repealed, my overall taxes would not change that much. Property tax would go up a fair bit, but income and sales would go down a lot.

The real loss in revenue comes from Prop 13's application to businesses. If they paid their fair share in property taxes, California could eliminate the corporate tax altogether, and businesses could compete on an equal footing. Fat chance of that happening.

[Popeman38]

On a $250k loan, how can you not have that much interest alone if you are in the first 10 years of ownership?

And that doesn't even count the added property taxes and state income taxes you can count....

250k loan, 5% interest, 360 payments, in year 10 you would paying roughly $10,300 in interest alone.

Well, in the DC area not many people get a house for $250K, even after the burst. Townhouses in Ashburn are still going for $315k+ now, but if you bought early in 2006 (or from 2004-2006), you payed between $350k-500K. For townhouses. Your math should tell you that everyone of these people hit $11.4k every single year....