I thought it might be interesting to dig into a real life example of just how much money a bubble-believing home buyer would have lost by purchasing a home during the insanity of the housing bubble in Seattle. What better example to use than our favorite Ballard home that just sold?
Wherever possible I’ll be using actual numbers from King County records. When real numbers aren’t available I’ll let you know, and use reasonable estimates.
On the surface, it would seem that the owner of this home didn’t do all that bad. Bought pre-peak for $431,200, sold this month for $423,400. Hey, that’s only a loss of $7,800, right? Not quite… Let’s dig into the gory details to find out the real costs of owning this home.
Our Ballard bubble buddy initially purchased his abode on April 28, 2005 for $431,200. He put just $26,940 down (6.25%), and financed the rest in two loans: One for $344,960 (80% of the purchase price), and one for the remaining $59,300. We don’t know for sure what kind of interest rates he got on these loans, but let’s assume that he got the prevailing rate at the time of 5.86% on his primary loan, and a few points higher on his piggy-back mortgage at 7.50%.
Before we add on taxes and insurance, the total monthly payment on this 2005-purchased Ballard home is up to $2,452. I’ll assume insurance costs about what I’m paying, which is $45 a month. For property taxes, the King County website only goes back to 2009, so I took the average of the 2009-2011 tax bills for this home to arrive at an annual tax cost of $3,868 ($322.33 a month).
So we’re looking at a grand total monthly payment of $2,819 a month out of the gate.
| Year | Interest | Std. Ded | Tax Saved |
|---|---|---|---|
| 2005 | $18,424 | $10,000 | $4,319 |
| 2006 | $24,301 | $10,300 | $5,880 |
| 2007 | $23,984 | $10,700 | $5,680 |
| 2008 | $26,208 | $10,900 | $6,246 |
| 2009 | $23,967 | $11,400 | $5,479 |
| 2010 | $23,637 | $11,400 | $5,386 |
| 2011 | $23,287 | $11,600 | $5,232 |
Let’s figure out the income tax deduction. Let’s assume that our Ballard buddy had $7,000 in other deductable expenses and was in the 28% tax bracket ($139,351 – $212,300 for a married couple as of 2011) To figure out how much they saved, we need to add up their interest paid and other deductable expenses, then subtract each year’s standard deduction (since they would have gotten that deduction even if they were filthy renters), and multiply the total by their tax rate. The table at left shows how this savings breaks down each year.
Grand total tax savings: $38,222
In February 2008, the two loans were refinanced into a single loan with a new balance of $412,500. Since that sum is $23,383 more than what the balance of the two separate loans would have been by that time, I’ll assume the closing costs (and maybe a vacation?) were simply financed in. With interest rates at the time at 5.92% and the new, increased loan principal slightly offsetting the rate reduction on the piggy-back that was folded in, the monthly payment actually calculate out to be the same: $2,819.
I should also point out that for closing costs on the initial 2005 loans, my conservative estimate is $3,600—Bankrate’s average for a $200k loan in Washington State. They would most likely have been higher than that in reality.
| Item | (Cost) / Gain |
|---|---|
| Down Payment | ($26,940) |
| Closing Costs | ($3,600) |
| Principal | ($37,664) |
| Interest | ($165,847) |
| Property Taxes | ($26,431) |
| Insurance | ($3,690) |
| Income Tax Savings | $38,222 |
| 2012 Sale | $423,400 |
| Principal Payoff | ($389,979) |
| Buyer’s Agent | ($12,702) |
| Seller’s Agent | ($12,702) |
| Excise Tax | ($7,536) |
| Grand Total | ($225,469) |
The table at right shows all the costs and gains between April 2005 and February 2012 for owning this Ballard home, excluding maintenance and any possible buyer concessions at sale (e.g. seller-paid closing costs, misc. repairs, etc.), which there’s really no good way to estimate.
Note that even though the home was sold for just shy of its original purchase price ($7,800), the owner did not actually come that close to “break even.” Ignoring all the ongoing costs of ownership and just comparing the starting money (down payment plus closing costs = $30,540) to the ending money (sale proceeds minus loan payoff, agent commissions, and taxes = $481), we get a total loss on this home of $30,059.
But that’s not even the most interesting question to answer… $225,469 over 82 months comes out to a total monthly cost of $2,750. Let’s compare the monthly costs and total 82-month cost of buying this home to the alternative: renting.
I found three comparable three-bedroom homes currently for rent near this home in north Ballard, priced at $1,750 (mirror), $1,695 (mirror), and $1,725 (mirror). If we average those three together, we get a monthly rent of $1,725. Working backward from today using Seattle’s Rent CPI (series CUURA423SEHA), a rent of $1,725 today translates to a 2005 rent of $1,382. Between April 2005 and February 2012, the total rent paid would have been $131,735.
Bottom line costs on this “nearly break even” Ballard home between 2005 and 2012:
- Owning: $225,469
- Renting: $131,735
Advantage: Renting by $93,734.
Dang. That’s a lot of money to burn just for the “pride of ownership.”
+30
RE: Pegasus @ 93 –
My politics, economics and other personal issues aside (I may be an ass and a cheap shot artist, but I’m hardly a defender of America), I may previously been a bit too cryptic so I’ll be more direct. In you’re comments, you seem to envision yourself as a defender of justice for the common man similar to a Woody Guthrie or a Tom Joad. But your rhetoric, coupled with personal attacks comes off at times, at least in my opinion, as bitter (if not hateful), paranoid, self-righteous, and bullying. Those attributes to your comments aren’t helping your cause. I acknowledge that it may be fun and emotionally satisfying to call Kary a gaping void surrounded by a sphincter, but unless done with a hint of whimsy it makes you appear insensitive and cruel, as opposed to a true champion of justice for the common man like a Woody Guthrie or a Steinbeck hero.
Two further comments:
1. This isn’t a defense of Kary. He’s contentious, pompous and arrogant, not particularily admirable qualities, which sadly, both you and I probably share to some degree.
2. I may disagree with you in that I believe the millions of borrowers on the liar loans were every bit as bad as the bankers, but that doesn’t necessarily make me your enemy. I just disagree. Your real friends are the ones who tell you what they think, not the ones who blow smoke up your Krismer.
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RE: One Eyed Man @ 1 –
What are you talking about?
Kary challenged me about home prices in the 1980s. His claim is that prices were higher in the 1970s, and I reminded him of the 17% interest rates. Then both you, and Kary began nit picking dates, and times that had nothing to do with the fact all three transactions I mentioned were able to be paid in cash.
Cash was king. 17% interest also paid hefty returns on savings. In the 1980s there was cash in the hands of individuals. Stock portfolios were booming, savings rates were high, there was equity in housing. There was cash, that we don’t see today.
So from the affordability point of view, how many people today can afford to pay cash? That’s the point. How many people can save up $250K to pay cash for a house.
In the 1980s I was able to pay $36K cash for a house by Carkeek Park. I wouldn’t be able to pay cash for a house today, in a good neighborhood, and my income is considerably higher.
How can you people not follow simple reasoning?
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RE: The Desponder @ 89 –
It was on 17th, between Denny and John. So just a little south of Thomas. People moved to Capitol Hill in those days partly because it was cheap.
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RE: One Eyed Man @ 101 – Haha. I don’t envision myself as a defender of justice for the common man similar to a Woody Guthrie or a Tom Joad or any Steinbeck hero. Thanks for imagining some grandiose plan that I must have to save the world. I don’t and that is why I don’t try to be sensitive or do I feel the need to do things to ingratiate myself with the readers here to be thought of as a true champion of justice. I am well aware of what my posting persona is here and I choose to keep it that way for a reason. I simply like to dispel myths that seem to dominate and are purposely spread throughout our corrupt society to enrich a select few at the expense and detriment of our entire nation. If someone learns something along the way or it makes them cogitate so be it. And yes I like to push Kary’s buttons every few weeks. I know it is simple entertainment for me and annoying to others. We all have our vices.
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RE: Pegasus @ 104 – Fair enough, we’ve all got our vices and everybody’s entitled to their opinion. But to be clear, I wouldn’t suggest that anyone ingratiate themselves to anybody. However, its probably tough for people (especially arrogant people) to objectively evaluate what you post if you’ve not only challenged their opinion, but also emotionally charged the dialogue by baiting or belittling them, or otherwise making them defensive.
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RE: One Eyed Man @ 105 – Perhaps ingratiate was a poor choice of a word, I should have used endear. I purposely choose not to do that in order to win a reader’s approval. Maybe I just enjoy, too much, confronting the purveyors of myths by baiting them, whatever their motives; and watching them spit and hiss. Probably my best judge, my spouse, says I am an asshole by nature. Probably right…I am too old to change.
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RE: Pegasus @ 106 – Those whom the gods wish to destroy, they first make mad. Or was that Republican?
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Dorothea @ 51. I’ve never sold a property so I’ve never payed a 10% transaction cost even once. Yes, I think I’m smart, I have a degree in Mechanical Engineering from the UW and yes I think I’m smarter than most people who have the term ‘playa’ in their vocabulary. I bought my first house in ’91 for $45K cash of my hard earned money. Bought my 2nd property for $155K cash again… and I’ve continued on from there…. so there’s no risk and I’m not juggling anything. It’s called wealth building. Now my $500K house I just bought was previously tax assessed for $1.1M, I put down $200K of my hard-earned cash… the remaining mortgage is small and paid for by the income off the other properties…. so i essentially have no mortgage and plenty left over… so still building on my wealth…. people are always looking for the downside when they see someone succeed… there is no downside, I just win….. I win buy collected rent from people like you…. there’s nothing else to the story….
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RE: Blurtman @ 107 –
You have gods? And here I thought you were some kind of godless left wing radical.
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Schadenfreude or is it, “we who are so wise and farseeing sneeringly pity the foolish masses?”
Whatever, gets you through the day.
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RE: One Eyed Man @ 101 –
Badda-Bing, Badda-Boom!
I admire a man who can spell, something I still aspire to.
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Tim,
If the bottom is here or near, do you believe home prices will increase at or above the rate of inflation for the next 7 years?
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The author is misinformed regarding rents circa 2005. We were considering renting vs buying at the time and there was nothing for rent in Ballard comparable to a $431k home for $1725/mo. Where those rents were available (e.g. White Center), house prices were $100k less. Which promptly blows the author’s equation apart.
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By David Losh @ 2:
You need to learn to read too. Simply asking you when something occurred isn’t a challenge. And what I said was that I got priced out of houses between 1977 and 1978. Again, go back to the link and look at what was happening with prices at that time.
I wasn’t in the market for property in the 80s, and I didn’t say I got priced out forever. Just that by not buying in 1977 I had to buy a condo rather than a house.
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RE: Hey @ 113 – I think you’re overestimating the quality/size of a “431k house.” We’re talking about a fairly small (1,520 sqft) 3-bed, 1.75-bath house. And one of those bedrooms is in the basement without an egress window.
You’d have to average $2,750 a month in rent in this scenario just to break even with the costs of owning this home, so it’s a bit of a stretch to say that adjusting the rent “blows the author’s equation apart.”
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By Pegasus @ 4:
I didn’t see you in that light at all. I see you more as someone too willing to accept anything that supports what you already believe, or anything that comes from certain sources. That’s why you think the recording of an assignment of deed of trust is important in Washington.
Here’s a tip. Whenever someone says that the price of something would be X if Y were not the case, or the the “fair value” is X, they’re lying, or at least have more confidence in their abilities than they should.
If they say the price would be higher or lower if Y were not the case, that is okay. But whenever someone tries to quantify a precise number as to the effect of something else, they can’t really do that in almost every instance.
This is my favorite example of how gullible Americans are as a society.
http://blog.seattlepi.com/realestate/2009/08/06/have-we-become-a-nation-of-the-extremely-gullible-its-on-the-internet-it-must-be-true/
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By Hey @ 13:
I’ve been wondering about that, but haven’t had the time to check it out.
Just because some rents have been going up, that doesn’t mean that all rents have been going up at the same rate.
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RE: Kary L. Krismer @ 114 –
I can read, and you are again nit picking phrases, for reasons that make no sense.
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RE: J Hammy @ 108 –
That much real estate handling sounds like a lotta work. If you enjoy that then you are lucky! If you do not enjoy it, then I would caution that life is short. If you have a spouse who likes that kind of lifestyle, then you are even more lucky!
For most people, time spent on other parts of their lives preclude the scenario that you describe.
(Just so that you don’t think I am coming from a totally different background, I have undergrad Mechanical Engineering degree from MIT and Masters in Mech Eng from Carnegie-Mellon.)
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By J Hammy @ 108:
Indeed. What more can you say.
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By David Losh @ 118:
You call it nitpicking. I call it lack of reading comprehension. Learn to read, and then it will make sense.
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RE: Kary L. Krismer @ 116 –
Seriously? Your favorite article on the subject…was written by you? I almost choked on my coffee. :) I guess I should have expected that when I clicked on the link, but for some reason it took me by surprise.
Thanks for the Monday morning chuckle.
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RE: ARDELL @ 122
WTF. Why cannot people here read simple English? I did not say something was my favorite article. I said something was my favorite example of how Americans are gullible. That something was the bank study referenced in my blog piece. Rather than repeating the entire story, I linked to my piece which told the story.
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By kfhoz @ 19:
Some people do enjoy that sort of thing. Some buyers look for fixers just so that they do the work fixing them up. Sometimes with early 20th century houses those projects can last over many years. Fun, fun, fun–if you enjoy that sort of thing.
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By whatsmyname @ 69:
Where did you get $26000? TheTim estimated costs at $3,600, and the owner refinanced for $23,383 than their mortgage balance, neither of which is the number you quoted.
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RE: Steve @ 125 –
From Tim’s post:
“In February 2008, the two loans were refinanced into a single loan with a new balance of $412,500. Since that sum is $23,383 more than what the balance of the two separate loans would have been by that time, I’ll assume the closing costs (and maybe a vacation?) were simply financed in.”
The $3,600 appears to be closing costs for the original loan. I’ll cop to being off nearly $3,000i; but Tim treats the $23,383 higher refi number as an expense when he does the math. So that overstated cost is only $18,000 – Thanks for noticing.
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you just LOVE kicking a guy when he’s down. sheesh. that seems to be what this site is all about. a whole lotta “i told you so” and “you’re an idiot.” nice.
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RE: tina @ 127 – I can see how this post would appear that way to someone who doesn’t know the history of this particular house and its former owner’s connection to this site.
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RE: The Tim @ 28 – Perhaps a link would help. I’ve been here a while, but I don’t know what you’re talking about.
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RE: Kary L. Krismer @ 129 – “Laughing Laughing Laughing Laughing Laughing”
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RE: tina @ 127 –
Karma for all the snooty quips about idiot renters who were too dumb to start climbing the equity ladder. You remember that, right? Remember “oh- you rent?” said with perfected superiority and more than a little derision? It’s like the circle of life . . .
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