Help a dunce with real estate

Those last 5 are very major parts of any house (except brand new) maintenance budget, should have them included. Probably closer to 6-7%.

I didn't do the numbers because if I don't think about the repairs, they will fix themselves or I will learn to live with them.

Chip

Predictability of government would be a big help in budgeting.

That is a fair and very valid question!

Well it pretty much has been true for us. As we moved from Atlanta to Boston, we had to pay double the price, and accept a smaller house in a more unfasionable area. but the cost of maintenance items is pretty much double here as well. We had our house painted in Atlanta for about $2500, here it cost us $6000. Most parts are only a little more expensive, but the labor is a killer. Finishing a full basement (~1100 sqft) in Atlanta was around $7000. Here finishing one with less than half that square footage is over $11,000, and we are getting cheaper finishes.

I do a lot more work on the house myself than I did in Atlanta, even though I make a lot more money in Boston. Trivially, you can see the difference just by looking at our neighbors. In Atlanta our neighbors were a doctor on one side and a lawyer on the other. Here I have a landscaper on one side and an electrician on the other. Each of them is living in a $500k house. At least $500k when they bought a few years ago. If an electrician and a landscaper are netting over $100k a year, landscaping and electrical work are going to cost a lot more than they do in a place where a landscaper would be lucky to get $35k and an electrician $50k.

I am pretty sure there is no such update. Site

?testId=article:interrupt:106919&cellId=3made reference to a 2006 study by the WSJ and mixed it directly withquotations from the 1998 article. It seems like "2006" was some kindof odd typo.

I prefer to evaluate expenditures in terms of hours worked for goods and services received. Compare your Atlanta income/$2500 vs. Boston income/$6000 I would not be surprised if they are quite comparable.

Interesting, it's almost as if the tax code makes sense...

For tax purposes, you depreciate real property over 27.5 years, implying that it gets used up to the point of being scrap over that time period. That's just the structure, not the land. 1/27.5 is 3.6% per year so in Tax-Accounting Land you'd need to invest 3.6% of the structure's value per year in capital improvements, just to tread water. Given the typical ratio of structure value to land value, seeing annual costs equal to 3% of total purchase price is consistent with the depreciation rules. Could that be a reasonable amount to budget for?

The other rule of thumb your figures reminded me of is that on average, "reasonable" home prices are about 3X incomes. It kind of fits with that

9%-of-purchase-price figure you observed for PITI plus upkeep. If the home price was 3X your income, those 9% costs would represent 3 X 9% 27% of your income. Factor in utilities & whatnot and total housing costs would be in the low-30%'s range (of income), which in most budgets is about as high as you want to go to allow for other spending and saving.

-Tad

not capital improvements, repairs.

It is important to take into consideration how inflation affects different categories of expenses. The costs of roofs, repair of the plumbing, utility bills and many other household expenses will rise to varying degrees with inflation, but these items are a relatively small part of a family's total expenses. The person who retires without owning a home faces the possibility of large future expenses because of increases in rent. That overshadows everything else. Other items like cars, food, and clothing are irrelevant because those expenses are the same whether one owns or rents.

Another point to bear in mind is that a house is potentially a source of income for the owner, because it can be rented to tenants. Or, part of the house or a room or two can be rented for extra income. That should be considered in the own vs rent equation. As I recall, some years back a formula for estimating a reasonable price for a property was 100 times monthly rental income. So, if a house could be rented out for 2000 per month, a reasonable purchase price would be 200,000. That formula wouldn't work in most places today, but the principle is the same. Where land is expensive, rents are usually higher too.

I have an interesting theory and I say this as a 33 year old homeowner:

What if the housing bubble forces rent downwards? So many rentals available that competition drives the prices below inflation?

On the other hand, a lot of people who were formerly homeowners with subprime mortgages will be looking for a place to live, and that demand may drive prices upward. I can't predict how the two opposing trends will come together. I guess there is going to be a re-shuffling of who lives in what kind of accommodations and who owns those accommodations. But I have no doubt about my choice in the matter. I want to be an owner, not a renter!

Me too. I enjoy the ownership perks like privacy, good neighbors, location, etc. But it does come at a price that renters do not face. For example, few renters have endured a 2010 like me that included a new furnace/ac with duct work, new riding mower and cleanup (fallen trees, broken fences, etc.) after a major storm.

So home ownership requires higher cash flow than renting. For that reason I occasionally recommend it to clients as the ultimate downsizing when retirement cash flow is insufficient.

(Notice how I tied this in to financial planning?)

and how long will that potential situation last? And how long will that 33 year old need a roof over his head?

That is a good plan for someone who truly needs to downsize in retirement, certainly if it is the only alternative to serious financial hardship. I guess the crux of the matter is that, when all expenses are taken into consideration, not everybody can afford home ownership. By the same token, not everybody can afford to invest in the stock market.

My objection is to blanket recommendations that it is better to rent than to own, as a result of calculations based on currrent insterest rates, current prices of houses and repairs, current rental prices, etc. Those "strategies," it seems to me, involve a lot of questionabe assumptions, and I would bet that in the long run they do not work out as well as Grandfather's advice to get into your own home as early as possible.

I tried to find a decent place in this thread to add the latest from me. I saw a bit of peeling paint on some trim, and it quickly turned into $1000 worth of trim around the house. When they pulled one rotted board off, a section of exterior wall needed to be replaced. Total bill $7000. And we were due for a painting in the spring ('11), $5000. I'm starting to think the 2%/yr is as good a number as any. A bit low for a small house, a bit high for a $1M home, but a great starting point. Joe