A wise person once said that when the price of renting vs. owning your own home was equal, prices were at their comfortable median. Lately, I have been saying that when it is less expensive to own vs. lease, it is a good time to buy. Apparently, a lot of people don’t see things this way.
The prices of condos are still coming down, albeit very slightly, about 3 to 5 percent this year, and the price of rents are still going up. Rental rates have increased approximately 10 percent since 2010. The factors contributing to this situation are greater demand for housing combined with apprehension about the future of home values.
There will come a time when most people will no longer be concerned about dropping home values. They will only consider what makes the most sense for them at that moment. When this change comes it will be quick and no one will realize what has happened until a few months of sales all of a sudden show an increase in values. At that moment, it will no longer be a great time to buy.
Given this dramatic surge in lease values, I am pretty sure that we are near or at the bottom of condo values. Since it is impossible to know where the exact nadir is, you have to target your purchase as close as possible. And I think we are close. At any rate, things are moving so slowly that if you get a sound buy now it will still look sound six months from now.
If you are considering buying a condo in the next year or so, now is a great time to do it. A 1,300-square-foot two bedroom condominium north of Wilshire Boulevard (arguably the most desirable condo neighborhood in Los Angeles County) will cost you about $600,000. You will pay about $3,000 to lease the same property. With 10 percent down and a loan of $540,000, your total monthly cost with a 4.5 percent interest rate, $300 a month in dues and the typical 1.25 percent property tax, will be approximately $2,950 — not including funds that go toward your equity.
The average state and federal tax rate professional people who buy properties like this have is typically around 33 percent. The mortgage interest of $2,025 and property taxes of $625 after the tax savings is $1,749. When you add the homeowner’s dues of $300, you have an effective monthly cost of $2,050; saving you $800 to $900 per month over leasing.
The stock market is incredibly risky and it is difficult to discern where the value resides. A collective madness has descended on the gold market; meanwhile, a far more tangible commodity, real estate, has plunged in value. It takes some courage to buy a home. However, when before tax advantages it is even with renting, and after tax advantages the savings are dramatic, it’s not nearly as difficult.
Take a virtual ride into outer space via Google Earth and look back at where our tiny part of the world is. You should be able to see just how special the dirt is that we inhabit. You can be uncertain of a lot of things, but this is just not one of them.
Simon Salloom is a Santa Monica resident and a realtor at Partners Trust Residential Brokerage. To learn more about Simon or respond to this article go to http://santamonicarealestatesearch.com/