Tag: home ownership

This post will be a quick update to our original buy vs. rent spreadsheet post, given changes in the economics of housing due to the Tax Cuts and Jobs Act from late 2017. First, a quick review of how the original sheet worked: we had taken the main costs and benefits of home ownership as inputs and calculated what IRR you effectively were earning on your down payment:

Major changes to the spreadsheet include:

1. Mortgage interest is now only deductible for the first $750k. We adjust the formula for the tax benefit of the mortgage interest deduction to include an if statement that checks if the mortgage balance is above $750k. If so, the tax benefit is limited to deducting interest on the $750k.

2. The value of the property tax deduction is likely lower due to the cap on state, local, and property tax deductions at $10k.

3. The standard deduction is much higher: $24k for a married couple for 2019 versus $12,700 in 2017. This makes it more likely people end up just taking the standard deduction, which means the property tax deduction is not used, or could make the part of the mortgage interest that is under the $24k cap not useful.

We’ll work on both of these problems together, with some simplifying assumptions. First, we’ll ask users to input their income, average tax rate, and other federal tax deduction items (charitable giving, etc), and whether they are married. This will give a sense of whether they were already at the $10k SALT cap, and therefore implies the property tax deduction wouldn’t be worth anything to them. Also, only the portion of the mortgage interest that puts the user above the standard deduction is worth anything, so we add that logic in as well:

(36 hours later…)

Okay, we kept running into complicating factors, and the formulas we’re now using for the mortgage and property tax deductions have gotten very convoluted (check out the formula below that calculates what portion of the mortgage interest deduction is not really a marginal benefit because it was needed to put you over the standard deduction). Here’s what we have, rather than try to explain it step by step, try walking through it yourself, or if you have a better solution, let us know!

Check out the spreadsheet here: home buy vs rent complex 2019 update

An application of our IRR based Buy vs Rent spreadsheet

Based on a casual look at the economy, things are going pretty well –  unemployment is down and GDP growth is strong. So it would seem to make sense that U.S. home prices are up about 3.5% so far this year, right?

But if we rewind the clock by a year, many of the economic factors involved in owning a home in the U.S. have gone the wrong way:

• Mortgage rates are up to 4.41%, from 3.77% exactly one year ago for 30Y fixed.
• Mortgage interest is only deductible up to $750k in principal, down from $1 million one year ago.
• Federal marginal tax brackets are slightly lower (making the value of the mortgage interest deduction smaller)
• State and local taxes (including property taxes) are now only deductible up to $10,000.  (although this is complicated by the possibility you were paying AMT last year and weren’t able to fully deduct state and local taxes anyways…)

Let’s use a spreadsheet to compare the values of three hypothetical houses in California – today versus from one year ago – based on changes in mortgage rates, marginal tax rates, and mortgage interest deductibility requirements.  Continue reading “How much “should” house prices be down in California?”

Is it better to buy or rent a house? Advice on this problem comes in all shapes and sizes, from the dogmatic idea that homeownership is the American dream, to some more nuanced methods like calculating the price to rent ratio. What would you do if you found a great house and are deciding whether to buy it or keep on renting? *Note: We’ve updated this analysis and spreadsheet, given changes in the economics of housing due to the Tax Cuts and Jobs Act from late 2017. For the latest, please see A 2019 update of our House Rent vs Buy IRR Spreadsheet

Continue reading “Make a Buy vs Rent calculator spreadsheet”