Interest Rate Roundup

Sunday, September 10, 2006

Buy vs. Rent insanity in South FL

Good Sunday afternoon -- I hope you're all enjoying your weekend as much as I am. I don't normally post on weekends, but I just had to after reviewing our local newspaper's "Residences" section. That's the weekly real estate insert with all the local home listings.

Anyway, I've known for a long time how out of whack the overall "rent vs. buy" relationship was in my neck of the woods. You can rent many properties for 1/3 or 1/2 the cost of owning (mortgage payment + taxes + insurance + maintenance), even AFTER factoring in the tax advantages of homeownership.

But even I'm shocked at how egregiously overpriced some property appears to be, based on rent vs. buy calculations. Take a look at this advertisement for a house in Jupiter Inlet Colony, a small, tony town just north of the Jupiter Inlet here in South FL. It's a "charming 2 BR beach cottage" listed at $985,000. But the print ad in my local paper says it's "for rent or sale." How much is that rent, you ask? $2,000 a month.

Now this is where it gets fun. Let's just assume that a potential buyer can actually come up with 20% down -- or $197,000 -- and that he wants to use a 30-year fixed rate loan. We know that in today's "Frankenstein Financing" world, few people actually do buy homes that way. Instead, they're forced to use neg am loans ... option ARMs ... I/O mortgages ... 80/20 loans ... and other assorted garbage.

But again, I'm trying to be generous. Right now, a 30-year jumbo FRM (remember, you're borrowing 788,000, which puts you above the Freddie Mac/Fannie Mae conforming loan limits, thereby requiring you to get a jumbo loan), runs around 6.25%-6.5%. The payment using the lower rate -- for principal and interest only -- would be $4,852. Yes folks, that means it would cost 143% more a month to buy than rent.

But wait, as they say in the Ginsu knife ads, there's more! You'll also get the privilege of paying property taxes on this fine property. I checked the local local property appraiser's web site -- the property was last purchased for $800,000 in May 2005. 2005 taxes therefore came to $13,590, or $1,133/month. So now we're up to $5,985 a month.

And in case you haven't heard, we have hurricanes down here in Florida. Lots of 'em in recent years, in fact. So homeowners insurance is off the charts. Given that the property was built in 1957 ... and it's a stone's throw away from the ocean ... you're probably looking at something astronomical. The square footage is listed at 2,401. Assuming a $130/SF rebuild cost (what I was told is a reasonable standard here when I recently shopped for a new homeowners policy), you're looking at $312,130 in needed coverage. I'm going to take a conservative guess that such an amount of coverage in the location we're talking about for such an old house would run $6,000 a year. That's another $500/month.

Grand total: $6,485/month -- 224% more than it would cost to rent. Put another way, buying is TRIPLE the cost of renting here!

Of course, you'd be able to deduct some of the real estate taxes and mortgage interest paid as a buyer. But even factoring that in, ask yourself: Does it make financial sense by any reasonable stretch of the imagination to buy in this situation? I think we all know the answer. And this example is far from the only one here in South FL. Bottom line: Either rents (and the incomes to pay them) will have to skyrocket, or house prices will have to fall, to restore any semblance of normalcy to the market. Which do you think is more likely?


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