Thursday, February 26, 2009

Whose Guidelines?

On the internet, calculators abound for "how much house can you afford," or "rent versus buy."

But there are many many ways to do these calculations. Recently the government has come out with some guidlines, suggesting that payments of 31% of pre-tax income are manageable. But even in that case, what exactly is a "payment"? PITI (principle, interest, taxes, insurance)? Or just P&I? Other guidlines I have seen are PITI no more than 28% of take home pay.

Most of the sites with these calculator are trying to sell you something banking or financing related. They also tend to have much looser guidelines and built in assumptions, so it's tough to find a non-biased opinion about the best parameters. Some of the calculators I have seen go so far as to obscure biased assumptions, i.e. using a default tax rate of 31%.

When I compare rent verus buy, I look at PITI, minus tax deductions (interest and taxes), plus maintanence (varies by the age/condition of the house). Yesterday's WSJ article on renting versus buying suggested that only PITI is compared to rent.

So I am curious what guidelines others follow?

15 comments:

sacramentia said...

I think this is the wrong way to look at it. No more than 2x annual income in debt so you have a good margin of error. Follow that rule and the rest will work out fine.

RV6Flyer said...

We may have had an overly simplistic method when shopping, but we used ITI. If we are renting, we are saving cash each month. If we are paying principal, we are effectively saving cash each month (assuming no price declines). So either a "principal" addition needs to me made to the rent, or just taken off the mortgage side of the equation.
As far as maintenance, in previous homes we have always just taken the tax savings and applied that to home repairs and upgrades, so I don't add the tax benefit in.

RV6Flyer said...
This comment has been removed by the author.
Husmanen said...

I use PITI when comparing to rent.

I calculate as if I owned my dream home and something unforeseen happened and I would have to rent it out for a period of time. I would have to cover the PITI, at a minimum, each month. Obviously, this does not include any tax deductions or maintenance costs.

The deductions probably outweigh the maintenance costs, depending on the age/condition of the home. But as the deductions are reduced the maintenance may increase. I will have to think about this one.

I might try RV6Flyers idea and see what I get.

Also, I treat my rental like we owned it, up to a point. the 'incidentals' are covered by me (anything under 200 USD). I have an ulterior motive - don't want to be the last straw to push the LL over into foreclosure - she is already underwater by over 120k now. Just one more thin wafer... :-)

Husmanen said...

A possible reduction in the interest tax deduction in the new stimulus package. Could impact the higher end and their PITI calculations.

"... Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments."

http://online.wsj.com/article/SB123559630127675581.html?mod=article-outset-box

PeonInChief said...

There's no really good rule on this. First the 25-31% rule only really works for middle income people. Low- and moderate-income people can't really afford to pay that much and still meet their other expenses. Also the tax deduction is much less valuable to those who pay at the 15% rate.

I think the 31% is really just the maximum viable percentage. It just might work for some people, but it's fairly precarious if a household has, or will incur, any other major debts.

PeonInChief said...

And has our blogger moved yet?

Deflationary Jane said...

CEPR
http://www.cepr.net/calculators/hb/hcc.html

RV6Flyer said...

CEPR

I don't get it Jane. So I put the value of home I am going hypothetically purchase and hold for 10 years and still discounts it by 57%? Allah help us all if we have another 57% to go over the next 10 years.

Husmanen, good point on having to rent out the house if all goes bad or life happens. Looks like I might be taking a job in SF writing credit policy: either I commute 2-3 hours every day, or wifey finds a job at UC Berkely and we move back to Pac Heights and rent out our place here.

Buying Time said...

"And has our blogger moved yet?"

Yup...we are even 90% or so unpacked! Primed and painted the garage, and put down an epoxy too (ourselves of course). It really looks fantastic. Next up, sealing grout, weatherproofing the fence, and trimming out the mistletoe out of our oak tree.

I have to admit, I really missed the feeling of satisfaction from working on a house project. You get to immediately see the results of your labor....as opposed to my day job, where I merely create bytes.

Thanks for asking.

PeonInChief said...

The CEPR calculator was put together before the crash. They were estimating a 56% decline in this area--and that means they may actually be right. I don't think they have time to fix the thing, so use the calculator at patrick.net if you need one.

And I'm so glad that our blogger is getting everything ready for the BBQ.

alba said...

Congrats to AB and the family! Nice words in the SacBee for you Landing. Well done!

alba said...

...you and Landing...

goalie4 said...

Wow. A little off-topic but I just found your blog. My wife is in the Sacramento area right now looking around. We are moving from the DC area as well (VA burbs.) Looking forward to reading about and learning from your experiences.

Thank you!

Cmyst said...

Congrats,AB! I am impressed. We also moved - to another rental, this time in Cameron Park. EDH rentals were too expensive if they were in decent shape, and we're exactly 3 minutes further up the Hwy 50 corridor and it's actually taking me 15 minutes less time to make it to my work territory than when I had to make my way down EDH blvd.
The thing is, we're totally thrashed. The move has taken us 2 weeks of mostly 8 hour days spent packing and cleaning, then moving boxes into our new 3 car garage (which is now entirely filled with boxes). And we had help last Sunday, with friends and grown kids moving the heavy stuff. To never have to do this ever again would be so fantastic. It is amazing to me that you moved, AND applied sealer to your garage (which implies you got YOUR boxes into your house!)and painted, and..
Holy moley. I've been living on Advil!
I'm with Husmanen on the incidental renting expenses. It is a relatively inexpensive way to build up good tenant karma -- plus, sometimes it is cheaper in aggravation and quicker to just fix something instead of trying to get your landlord to do it. And it shows "pride of rentership". It's still YOUR home, and reflects on you. One of the reasons we put in long hours on our yardwork, even though the landlords were supposed to be doing it, was that the yard was so beautiful and we felt so awed by it. I nearly cried spending my last minutes in it yesterday, seeing all the crocuses and daffodils and rosemary blooming like they do every spring, and realizing that this Easter my grandkids will not have this wonderful flowered personal retreat to hunt their eggs in. Our landlords literally kissed us when they did the walk-through. One back-breaking fortnight for Renters, one huge leap in mojo for Renter-kind!