SHOULD I RENT OR BUY IN REDDING/SHASTA COUNTY?
HOME LOANS, SHASTA COUNTY
October 31st, 2008
Real estate agents are frequently accused of saying “it’s a great time to buy or sell”, regardless of how the housing market is really doing. For a renter considering a purchase, the current economic turmoil can cause confusion when trying to make a clear decision regarding a major investment such as a home or income property purchase.
The newspaper reported recently that the median price for a home in Redding has decreased to $212,750. Based on this information, let’s compare renting vs. owning a home at this price point. Let’s assume a home at this price will rent for $1200/month. Let’s also assume a buyer wishes to make a minimum down payment and wants a 30-year fixed rate loan.
The days of securing a loan approval with no money down and no verification of income are long gone. 
Anyone buying today should have a job, good credit and money saved for a down payment and closing costs. Full underwriting approval from a lender is a must in today’s market.
Utilizing city or county down payment assistance programs will not be factored in to this analysis, but may be a viable option for some first-time buyers.
FHA requires only a 3% down payment with a fixed interest rate at around 6%. The buyer would need about $6,400 down and payments will be $1,237/month. Add $260/month for taxes and insurance. The payment including principle, interest, taxes and insurance (PITI) is roughly $1500/month. The buyer should also budget $8,500 for closing costs including loan fees, title insurance, escrow fees, impounds, etc.. The seller can help with some or all of the closing costs and the down payment can be gifted to the buyer from a family member. At first glance, renting seems to be the better deal!
However, home ownership allows the buyer/borrower to take advantage of tax laws that reward owning your own home. Mortgage interest, property taxes and some upfront loan fees are tax deductible. In this example, the buyer can write off $12,382 in interest and $2,400 in property taxes yearly. That’s almost $15,000 total! Let’s assume the buyer is in the 28% tax bracket. That works out to $4,139 in net tax savings or $344/month. The net monthly payment for owning the median priced home in Redding is just under $1200/month. Sounds like a push!
The federal housing recovery package recently signed into law temporarily grants first-time buyers a $7,500 tax credit. Efforts are underway to expand this to all home buyers and to eliminate the requirement to pay the credit back over 15 years.
Add the fact that historically, real estate appreciates over the long run. Even if you conservatively estimate 3% per year appreciation, the home buyer could gain more than $30,000 in appreciation over a 5 year period. That works out to another $500/month in equity accumulation. Now, the advantage clearly falls on the side of home ownership. During this 5 year period, the renter will have handed the landlord $30,000 for rent with nothing to show for it (other than a nominal tax credit for renters).
Renters that become homeowners in their 20’s have a good chance of owning a home free and clear before they retire. One third of all homes in the US are owned outright. Renters will continue to pay rent until they buy or die. Retirees can utilize a reverse mortgage to supplement their retirement income with accumulated home equity. In a sense, the home is paying you back the money you invested. Handy homeowners can further enhance their investment by making improvements that add value (sweat equity).
Rents rise over time; buying with a fixed rate loan assures a homeowner a steady payment that will not increase over time. From time to time, a homeowner will need to replace or repair items that wear out. Renters can call the landlord and avoid the expense, but they may also see a rent increase or may be asked to move if the owner decides to sell the property. Renters that make improvements to their dwelling benefit the landlord.
Besides providing shelter, a home purchase can provide peace of mind and the ability to control your own destiny. Renters are at the mercy of their landlords, and instead of having an asset to add to their retirement portfolio, they fund their landlords retirement! The decline in home prices reported in the paper today has opened the door to home ownership for many Californians, especially Redding and Shasta County residents where the median price is more than $100,000 below the state median price!
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS GMAC
QUARTER CENTURY LOCAL REAL ESTATE EXPERIENCE
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