To make myself feel better I ran the rental vs. purchase numbers for the Folsom and EDH market. Please keep in mind these are very generic numbers.....nothing scientific or even methodical . They looked about right for what I have been seeing in terms of rentals and current home prices.
The idea was to figure out what the break even rental price was for a given house price (based on monthly payments). Then to figure out how much current house prices would have to drop to get to the rental break even point.
It was a very encouraging exercise. Based on this it looks like the market will need to come down around 30%. Of course rental prices can also rise, but with all these rentals on the market...I actually think rents are going down right now.
There is a range of rental sizes as well as current for sale listing prices for each break even point. For example, you can rent a house with 1900-2200 square feet for around $1800 a month. This monthly payment (fully loaded with taxes, tax breaks, etc.) would buy you a house for $320,000. However you can't purchase a house at this price. For approximately the same sized house, you would have to pay around $425,000 to $475,000. Which means prices would have to drop almost 30% for the break even and current market to match.
A big part of the differential comes from the interest you earn on your down payment (which I accounted for as a $ 275 reduction in monthly rent).
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Last month we made up a little spreadsheet for ourselves, too. It worked out a little differently, but the conclusion was clear: much cheaper for us to rent for now.
Even my wife is back-pedaling on the house shopping, and focusing more on finding a nicer place to lease for the coming year (we realize now we can do better than where we are). It helped, by the way, that I showed her how our "buyer's" agent had been mis-representing local sales numbers to her, to try to scare us into acting.
We did the same thing as well. We rented a place that's amazing for a fraction of the mortgage amount. We put the proceeds from our sale in a CD and are basically living off of the interest being generated.
A buyer's agent mis-representing sales numbers??? Say it isn't so!
We're not all that way :-)
Your model works under the following conditions...
1. If you have the disipline to not touch that down payment $
2. Rents stay the same
3. House prices stay flat or drop.
If you have a 10 year time horizon, the model does not work.
Check your effective tax rate with your CPA
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