Beware Local Papers Hyping Homeownership

posted on February 20th, 2014 filed under: Financial Responsibility, Real Estate News

Today’s Miami Herald includes a puff piece claiming that it’s still cheaper to buy than rent in Miami, based on the latest nationwide report by real estate data-crunching firm RealtyTrac.

Miami Real Estate -- Herald -- Buy Versus Rent (2014-02-20)

Do not take that report at face value. The methodology RealtyTrac used for its nationwide analysis has major flaws as applied to the Miami market.  From the RealtyTrac website:

To calculate the monthly house payment, RealtyTrac assumed a 20 percent down payment, a 30-year fixed interest rate of 4.46 percent for homes purchased in the fourth quarter of 2013 and a 3.35 percent 30-year fixed interest rate for homes purchased in the fourth quarter of 2012.  Also included in the monthly house payment is a 1.04 percent annual property tax rate, 0.40 percent of the purchase price in annual maintenance costs, 0.35 percent of the purchase price in annual home insurance costs, and subtracting the tax benefit from the mortgage interest deduction and property tax deduction using a 30 percent income tax rate.

For a Miami home-seeker, these assumptions are laughable.  They bear no relation to reality in Miami:

  • The assumption of a 1.04% property tax rate is way too low, generally speaking.  The rule of thumb for property taxes in Miami is closer to 2%.
  • “0.35% in annual property insurance costs”?  Good luck with that.  Florida has the highest property insurance costs in the nation.  Rates vary radically depending on location, year of construction, storm-protection features and other variables, but for purposes of a market-wide generalization, anything less than 1% of home value is probably unreliable.

Even the assumptions not affected by local realities are questionable:

  • Not everyone can muster a 20% downpayment and thereby reduce their monthly mortgage payment by the magic of borrowing less in the first place.
  • A very small portion of the population is in the 30% income-tax bracket that yields a tax-deduction benefit.  According to the IRS (Pub. 1304, Table 3.4), less than 5% of the population was in the 28%-or-higher tax bracket in tax year 2011.  And remember, a portion of the benefit from the mortgage-interest deduction is illusory, because you actually save money only to the extent that the itemized deduction exceeds the standard deduction.  Particularly for lower-income buyers of lower-priced homes, there may be no benefit to itemization at all.

As always, the question whether it’s cheaper to buy or rent depends on your specific circumstances.  REF Real Estate will be glad to help you estimate the true costs of buying versus renting a home in Miami.

Whatever you do . . .

Don’t Believe the Hype.

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posted by // This entry was posted on Thursday, February 20th, 2014 at 9:13 am and is filed under Financial Responsibility, Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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