Monday, April 10, 2017

Should You Buy a Home in Los Angeles or Rent? 2017 Update


With Los Angeles Mortgage Rates Still at 4.15%, and Home Prices Still Increasing, Buying Is Still Better

In 2013, we started following a typical Westside home worth $650,000. We now have data through 2017 and while every situation is not the same, the results are pretty clear in this analysis. Buying is better!
 According to the rental value of that home was $3150 a month in 2013.  The estimated mortgage was $2441 based on 20% down and 3.75% 30 year fixed mortgage.  Property taxes and insurance would add another $730.  Maintenance might be $500.  So total out of pocket was around $3700 in 2013.
The tax advantage in the 25% tax bracket would come in at around $800 month, so the net advantage to buying was around $250 a month that year. If the house was purchased in 2013, there would have been at least $6000 in closing costs. We’ll spread those over 3 years. That would result in another $166 per month.
Rent vs buy in 2013.  About even.
Zillow says the house is now worth $795,000, for a gain of $145,000. Last year the interest was 3.75%.  Today interest would be 4.5%. Total monthly mortgage would be estimated at $3129 now vs $2441 a year ago. All of these estimates are from, and we can't totally rely on their numbers.  In fact, the rent number seems suspect, as it has dropped from $3150 to $3125.  Government statistics for cost of living specifically associated with rental of a primary residence showed a 2.7% increase in the LA area.  Even so, that would only boost the rent by $90.  My gut tells me that rents are up and that the 2.7% number might be more in line with reality.   If this was a new purchase, there would be a slight bias to the renter of around $300 a month. However, if the home was purchased in 2013, the owner just made $145,000. The renter could have put the 20% down payment in an investment and made 6% on the $130,000 or $7,800.
Rent vs buy in 2014. Cash flow benefit to the renter.  Wealth increase huge win for the buyer
Zillow now says the house is worth $840,000. And increase of $190,000 over the last two years. The rent is up from $3150 to $4000 per month. Markets don’t always act like this, but the tenant would likely be subject to these increases and would now be paying $4000 for rent vs the $2700 they would still be paying for mortgage, property tax, insurance, and repairs if they had purchased in 2013. They would also have a $190,000 capital gain on their $130,000 down payment. The purchase in 2013 would have been a huge success. Of course this capital gain would be offset by costs of purchase and costs of sale if the increase was to be realized rather than just on paper. If we used 10% or $83,000 for that number, we are still $50,000 ahead by the end of year two. In other years this could have gone the other way.
The current mortgage based on a 20% down payment and 4% interest rate would be $3208 with another $900 for property taxes and insurance. Add in $500 for repairs and the total is approximately $4700. Tax savings would be $1000 using the same criteria as above. So the net cash cost per month is $3700 vs rent of $4000.
Of course, every house in every neighborhood will have different results, but Zillow has done an analysis by neighborhood that predicts how long it will take to break even on a purchase vs a rental. Their system is not very sophisticated and does not take into consideration appreciation.
We skipped a year, but how is that same house doing in 2017. Zillow says that the house is now worth $970,000 and the rent is likely to be $4000.
For the owner who purchased in 2013, his out of pocket is now $2900. He has a capital gain of $320,000 which would be reduced by about $50,000 for real estate fees were he to sell. The gain would still be at least $270,000.
The renter who put his $130,000 into an investment returning 6% compounded would have made $34,122.
Owner out of pocket $2900 vs renter out of pocket $4000
Owner ROI $270,000 vs renter ROI $34,122
So, what about buying that home today? Is it still a good deal? With 20% of $194,000 down and a 4.15% mortgage, the monthly payment including taxes and insurance, would be $4700. Add in the $500 for maintenance and subtract the tax IRS advantage of $1200 per month and you have $4000 per month out of pocket, just about equal to the rental amount. The closing costs of $10,000 would result in a the buyer paying about $300 per month more than the renter in the first year. But by year three it is likely that the monthly rent would be up another few hundred dollars, and in year four the amortization of those closing costs would be over (based on our idea to amortize them over 3 years.)
After four years of running this experiment, and even with a supposedly overheated seller’s market in Los Angeles, it seems that buying just makes way more sense than renting. We can imagine scenarios where this would not be the case. The housing market is subject to downturns just like any market. It is possible to imagine this home dropping by $300,000 if there were a typical drop in market values like 1999 or 2008.
Even then, these markets correct, and over time the likelihood is that the home will continue its upward valuation curve. On the other hand the market may continue strong and deliver another $100,000 or so in appreciation over the next three years.
A major issue in the current market is whether you can even get a mortgage in Los Angeles.  We can help you with that.  A short complimentary conversation will allow us to give you plenty of direction on your eligibility and what you can afford.  Call Bill Rayman at 424-354-5325

New Contact Information for Bill Rayman
Bill Rayman Home Mortgage
12121 Wilshire Blvd
Suite 350
LA CA 90025


Friday, March 31, 2017

The Federal Reserve and Your Mortgage Plans - Rates Still Low in 2017


Interest Rates Down After Fed Hikes in March 2017

Some might consider it bad form to start an article with the bottom line, but we'll take that chance. The bottom line is that mortgage interest rates have dropped during late March. No one guessed this would happen after the Fed raised rates on March 15, 2017. Almost no one expects these low rates to continue.

Here is the "why"

The Federal Reserve wants to increase interest rates on regular borrowing while the economy is improving and unemployment is reasonably low. They don't want the economy to overheat, and raising rates is one way to keep the economy from getting ahead of itself and potentially causing inflation above the Fed's goal of 2.5% per year.

However, housing continues to underperform. Housing starts are low for both single family and apartments. There is a severe shortage of residential units and this is driving the cost of housing to crazy levels in many cities. The Fed wants to encourage home ownership, so they have not liquidated their enormous holdings of mortgage-backed security bonds. By holding these bonds off the general market, they are artificially reducing the supply, thus driving up the cost. With bonds, as the cost increases the yield, or interest rate, decreases.

While we would expect mortgage interest rates to more or less parallel Fed rates as they increase, this stash of bonds is keeping the rates lower than would otherwise be the case. But that's not all.

"Why" part 2

All bonds, including the ones mentioned above, tend to be a safe place to store your money if you're worried about the economy. Therefore interest rates trend up if expectations for the economy are positive, and trend down if folks get worried. In other words people would rather have their money in a safe place, even if the return on investment is lower.

Mortgage rates are based on bond rates. (There are other factors, too, such as competition.)
The bond market was trending up, as were mortgage interest rates. The Trump effect has seen the market go up 30% since election day, one of the largest 5-month gains in history. The hope of investors was that he would fix Obamacare and create a more business friendly tax code. When the Congress took the "repeal and replace bill" off the table, the market swooned a bit. Some of the money that came out of the stock market made a dash for the bond market, driving down yields.

Now what?

As the Republicans regrouped at the end of March the market settled down, getting fresh optimism from expectations that the Republicans might fear a serious loss of confidence in their governing abilities if they don't get some promises filled soon. Over the next few weeks or months, the market is likely to move based on those two issues. Certainly there are dozens of other influences that could completely change the direction of the market at any moment, but the success or failure of the current administration to do something on those two issues will be huge.

If you are in the market for a home, an investment property, or need to refinance for any reason, this is very likely your last stab at rates around 4%. Call Bill Rayman immediately to get the paperwork going at (323) 682-0385.

An interesting extra tip

If you need to sell your Denver home very quickly, contact They have investors waiting.