Articles for ‘Home Ownership Costs’
Thursday, November 3rd, 2011 by Sari Levy
When you are purchasing a home, it is important to understand the economics of the home and property taxes are a huge factor in the equation. So, just how do you figure out what your taxes will be?
It is not a good idea to simply look at what the current owner is paying because there are many variables. In Chicago, we typically tell our clients to expect a tax bill at about 1.5% of the purchase price. In Du Page County, the range is from about 1% in Oak Brook all the way up to nearly 3% in Glendale Heights. Oak Brook is home to many large corporations and of course Oak Brook mall which helps keep property taxes low.
So, how did we come up with the 1-3% range? Below is the formula used in Du Page County to calculate property tax.
Du Page County Tax Calculation
- A home’s fair market value: $5000,000 – Fair Market Value is defined as the amount a buyer would be willing to pay for the property.
- Tax assessor’s adjustment: $500,000 x 33% = Equalized Asessed Value – In Du Page county, the assessor uses of 1/3 of a homes fair market value in determining DuPage County property taxes.
- Equalized assessed value: $165,000 – This is the adjusted fair market value of your property used for property tax calculation purposes.
- Property tax rate: 5% **Rates vary by city as indicated in the table below – 5% used as a simplification for example.
- Property tax calculation: $165,000 x .05 – Equalized assessed value multiplied by a property tax rate of 5% .
- Total property tax : $8,250
Du Page County Real Estate Property Tax Table
||As % of purchase price
||Elk Grove Village
||Oak Brook Terrace
In communities where there are more than one township, the higher of the tax rates is shown in the table above.
Wednesday, February 24th, 2010 by Gary Lucido
It’s hard enough to time investments. Finance theory says it’s impossible and there is plenty of evidence to prove that it can’t be done. So it should come as no surprise that timing a home purchase would be even more difficult.
As I’ve said before, I don’t think people should think of a home as an investment. If it were, it would be the only one that regularly springs leaks, begs for a makeover, and falls apart over the course of 30 years (maybe sooner depending upon your builder). Regardless of what the National Association of Realtors would like you to believe, a home is simply a lifestyle purchase, with some pretty hefty financial considerations. Therefore, the timing of when to buy a home should be largely influenced by lifestyle goals.
That doesn’t mean that there aren’t times when it’s prudent to wait for homes to “go on sale” – such as the last few years. But trying to pick the absolute bottom of the housing market is a fool’s errand. And it’s not just because you don’t know where the price of housing is going. You also have to figure in the impact of mortgage rates, which can have an even bigger impact on the cost of housing than the price of the house.
Let me demonstrate. Consider the purchase of a $500,000 home with 20% down and a 5.1% mortgage. Your monthly payment would be $2,171.80. However, if mortgage rates go up by 100 basis points to 6.1% then the price of the home would have to drop to $458,386 in order for you to have the same monthly payment with the same down payment. That’s an 8.3% price drop. So you have to ask yourself what is more likely at this stage: that housing prices will drop another 8.3% or that mortgage rates will go up by another 100 basis points? How about another 200 basis points?
Look at where Chicago housing prices are right now relative to their long term trend. I’m not saying that they are a steal but they are certainly fairly priced relative to where they have historically been. Now look at mortgage rates. Recently they have been at the lowest level in the past 50 years! I pulled the data below from the Federal Reserve and since that series doesn’t go past April, 1971 I estimated the prior data back to January, 1962 (light blue line) based upon the rate on 10 year treasuries. That estimate is a bit crude but the conclusion is still the same since 10 year treasuries are now at lower rates than they were in 1962.
Actual And Estimated 30 Year Fixed Rate Mortgage Rates
But what about this debate that rising interest rates will depress home prices? Well, let’s look at the period from the 60s to the 80s when 30 year rates went up from around 5% to 18%. According to the theory, during that period, home prices would have dropped by almost 52%! Well, they didn’t.
I’m trying to avoid repeating the realtor’s mantra of “now is the time to buy” because it really does sound lame and self-serving. However, the fact of the matter is that current conditions are extremely favorable for buying.
Thursday, February 4th, 2010 by Gary Lucido
As part of my ongoing rant about the high condo assessments in Chicago I’d like to revisit a topic I covered a while ago – what is the appropriate tradeoff between price and assessments? In that previous post I got into some fairly esoteric finance details about discounted cash flows and perpetuities that may have made the decision process seem a bit unreal. However, in discussions with a current client, I came up with a more concrete analysis that looks at what the impact of different assessments might be for a typical buyer with a finite time horizon.
In the example below I look at a theoretical high income buyer facing a choice between two condos, with one condo having assessments that are $100/month higher than the other. Given that the buyer is only going to live there for 5 years, the question is how much more can the buyer spend on the condo with lower assessments and still have the same monthly expenses, if the mortgage rate is 5%. In addition, are there any other economic considerations?
|| $ 500,000
|| $ 541,311
|| $ 2,684
|| $ 2,906
|5 Year Average Monthly Interest
|| $ 2,006
|| $ 2,172
|| $ 600
|| $ 500
|5 Year Average Assessment
|| $ 637
|| $ 530
|After Tax Annual Cost
|| $ 23,047
|| $ 23,047
|5 Year Appreciation @
|| $ 79,637
|| $ 86,217
|| $ 6,580
I factored in the buyer’s tax bracket because of the deductibility of mortgage interest. The impact of the deductibility is to make mortgages more attractive relative to assessments for high income buyers than for lower income buyers. I made a few simplifying assumptions as well: that assessments and the value of the condos would go up with the rate of inflation, assumed to be 3% per year and, that for purposes of this analysis, we could just look at an average of the monthly interest and assessments.
The conclusion is that you could spend an additional $41,000 on the condo with the lower assessments, have the same monthly after tax monthly expenses, and end up with an additional $6,580 of appreciation at the end of 5 years. In other words, think long and hard before signing up for a condo with high assessments.
Wednesday, November 18th, 2009 by Gary Lucido
Let’s assume that after adjusting for all the factors in my earlier post on comparing Chicago condos with different assessments you are still left with a choice between two condominiums that have different assessments. How do you then factor in that difference – especially if the condo with the lower assessments has a higher price?
Let’s start with a simple approach for making that comparison, based upon an example where the difference in assessments is $100/month and your mortgage interest rate is 5%. In that case the extra $1200/year in assessments is approximately equal to the interest you would pay on an additional $24,000 purchase price ($1200/.05). In other words, for the same monthly outlay you could afford a $24,000 more expensive home or buying the home with a $100/month assessment is equivalent to spending an additional $24,000 on a home. In fact, most buyers intuitively take this into account by looking at their total monthly outlay in terms of mortgage, taxes, and assessments.
That’s the basic concept. It gets more complicated (doesn’t it always?)
First, there’s the tax benefit of a mortgage. If your marginal tax rate is 25% then the after tax cost of mortgage interest is really 3.75%. So that $100/month is really equivalent to paying an extra $32,000.
But I’m not done. It gets even more complicated. Really complicated on this round. In fact, it gets downright scary. Let’s say you believe that your assessments are going to go up because of inflation – maybe 3% per year on average. Wellllllll….now that’s equivalent to paying an extra $160,000 (1200/(.0375 – .03)!
OK. You’re not going to believe that and, while it’s accurate, it’s not totally correct so I better explain. The formula I used above is for what’s called a perpetuity. In other words, it assumes you are going to live there forever. Of course, that’s not true. In fact, you will either die (sorry, but it’s true unless you are a teenager in which case you believe you are immortal) or move before perpetuity comes. So what you really need to do is factor in the increases that will occur while you are living there using a technique called discounted cash flow, which is too complicated for me to get into right now but, in a simplified form, it’s actually the basis for all the formulas I’ve been kicking around here. Basically, it averages out the increases you are likely to experience while living in this place and it comes up with a number far closer to $32,000 than $160,000.
But here’s the point: an extra $100/month really adds up over time and the longer you live there the more of a burden it’s going to become. So think twice about buying a place with a higher assessment unless it’s a lot cheaper.
Monday, November 9th, 2009 by Gary Lucido
A bit more than 20 years ago we bought our first home in Evanston – a condo with electric heat. After we got our first winter electric bill I knew we were in trouble. The cost of heating our 2 bedroom, 1 bath condo was so outrageous that I thought something was wrong with the system. I swore never again to own a place with electric heat.
That’s why I was shocked to discover that a luxury building, built in Chicago in 2005 and under consideration by two different buyer clients, has electric heat. Well, it was under consideration until we found out about the heat. Just to give you an idea…the December 2008 electric bill for a bit over 2100 square feet was $950! If it had had gas heat I bet it would have been under $300. Both of my clients said essentially the same thing to me: “What the hell was the developer thinking?”
When you have electric heat you might as well be running a bunch of space heaters because they use the same basic technology – resistive coils. Electricity runs through high resistance metal coils and, in the process, generates heat. You see, there is a fundamental inefficiency in turning electricity into heat because at the beginning of the whole chain is a power plant where they generate heat to create kinetic energy (a spinning turbine) which creates electric power. Then the electric power has to be reconverted back to heat at the other end. Of course, at each step of the process there are losses, including transmission losses along the way. So the whole thing is very inefficient.
And while I’m on the subject…eventually they are going to figure out that plugging a car into the electric grid suffers from the same basic flaw because you will be reconverting the electricity back into the kinetic energy that was spinning that turbine at the start of the process. And electricity is not cleaner if 50% of it is produced by burning coal. What’s next? Turning food into auto fuel?
But I digress.