Each month Prudential California Realty publishes Market Trend Reports for San Diego. We find that both people considering the purchase of a home and likewise those considering listing their home for sale, want information that they can use to help make the buying or selling decisions. This is a good source of information regarding trends in the Real Estate market. This report is also provided for the upscale market.
Should you Rent or Buy?
A few minutes ago I sent this Rent vs. Buy presentation to a client who is relocating to North San Diego County. I think that this is a presentation that bears consideration. I certainly welcome different points of view, so please tear this thing apart. Remember, I already said that “Cash Flow” in not a factor in this presentation.
A few weeks ago I was holding an open house at which I met a couple of Physicians. They were coming to this area and were going to be here for only three years. When I asked why they were not going to just rent their reply really made me think. The said that they could rent for about $3000/month or buy a similar home for about $500,000.00. In the three years that they were going to be in the area they figured that they would pay out $108,000.00 in rent. The way they looked at is was that if they bought for $500,000.00 they would put $100,000.00 down and have a monthly payment of around $2600.00. At the end of the three year period they would sell and probably get most of their initial purchase price back. (We have to remember that CASH flow is not a factor in their argument).
The formula that they used for the return of their initial purchase price went something like this. If they were able to sell for the same price that they paid, then after paying all of the costs to sell they would wind up with about $462,500.00. They used 7.5% as an estimate of what their costs to sell would be. Then if they applied the savings in income tax, things like the interest deduction, property tax deduction, depreciation of the portion of the home used for business, etc. Their cost of owner ship would be even less. When I presented the argument that interest is a tax deduction vs. tax credit and that their tax savings would be their effective tax rate as it applies to their interest expense their response was that if they pay 4.0% interest their total expense would be around $42,000.00 over the three years, maybe less. Their effective tax rate is 35% so they save $14,700.00 on Federal Income Tax plus what they save on their state taxes. The same theory would apply to the Property Tax expense.
Anyhow to make a long story short, these folks figured that if they sell the home for exactly what they paid ($500,000.00) they would loose $37,500.00 in sales costs, $27,300.00 in interest after the federal tax formula is applies, and $10,725 in property tax (again after application of the federal tax formula). There for they feel that after adding up all of the after tax expenses they would spend about $75,525 as a true cost of ownership versus $108,000 actual cost of renting. They also figured that if the prices were to drop an additional 5% during the time that they own the home they would loose an additional $25,000.00 and still they would break even.
The 2011 HomeDex Annual Report was just released this week. We always look forward to this annual edition as it reflects the entire year as opposed to the month over month reports. Because the entire year's sales volume is used, there is a more accurate portrayal of what took place in the Real Estate market during the past year.
It is pretty easy to be a 'Monday morning quarterback' when we read this sort of report, the real challenge is to firgure out what will happen to the market in the months or even the years to come. The fun thing about all of this is that even when we are in the middle of the heat of the market we usually do not know what really happened until about three months have passed.
Here are a couple of high lights from this years annual report:
The median price for a North San Diego County single-family detached homes sold in 2011 was $430,000. The represents a 6.52% decline from the 2010 price, which was $460,000. The 2010 price of $460,000 was up $50,000 from the 2009 price of $410,000. And, the 2009 price was down 9.69% from the 2008 price of $454,000.
Even more interesting is that Fallbrook (92028 zip code), Oceanside (92054 zip code), Rancho Santa Fe (92067 zip code), Solana Beach (92075 zip code), and Carmel Valley (92130 zip code); all showed an increase in the median price over 2010.
The median priced single-family attached home in North San Diego County dropped 4.13% to $232,000 from $242,000 in 2010.
HomeDex is provided by the North San Diego County Association of Realtors
Click on this link to view the entire report. 2011 HomeDex Annual Report
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