Rent vs. buy: Aliso Viejo

30 Trofello Lane in Aliso Viejo is both for sale and listed as a rental as well. The property has been on the market for about five months, so chances are, it's probably listed for more money than buyers are willing to pay, considering its listing description seems to indicate that this is one heck of a place:

"Live and enjoy in this highly desirable gated community in aliso viejo. This one of a kind home features dual master suites, two-car direct access garage, professionally landscaped backyard and so much more! Conveniently located near schools, shopping, restaurants, wood canyon trails, toll roads, and parks."

Let's assume anyway that the asking price for sale and rent are both right on the money, and let's also assume someone is set on taking possession of the property and is trying to decide whether they should buy it at the full asking price of $515,950, or if they should rent it at the asking rate of $2,150 a month.

Total exact monthly costs to rent: $2,150

Monthly costs to buy (assumes 20 percent downpayment, 30-year fixed loan from Countrywide at 6.484 APR). The potential buyer would also need to have $103,190 for the downpayment, which is significantly more than the renter would need in the way of a deposit.

$2,541 - Monthly mortgage payment
$283.50 - Monthly property tax payment (Estimate is based on current taxes of $3,402, but taxes will increase significantly considering this property last sold for $193k in 1998. We assume the mortgage tax deduction will offset this)
$179 - Monthly HOA dues
$100 - Homeowner's insurance (estimate)
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Total estimated monthly costs to buy: $3,103.50

Based on this rough math, it would currently cost about $950 less per month to rent instead of own this property. Remember, though, that ownership requires the buyer to have a hefty sum saved up to cover the downpayment and any associated closing costs.

Ring any bells?

Here are some excerpts from a September article in the Los Angeles Times written by Michael Kinsley with the headline " The Heat's On in Housing: Too Many Americans Are Banking on Their Equity."

Some notable quotes, with emphasis added to especially key points in bold:

"The good burghers of Yonkers, N.Y., say that they are not racists for opposing the construction of public housing in their middle-class neighborhoods. They say that their real concern is real-estate values. Actually, I believe them. Or at least I find it plausible.

"According to one Yonkers real-estate agent, a three-bedroom house purchased for $18,000 to $30,000 in the mid-1950s would sell for 10 times as much today. For these homeowners, this unexpected bonanza is their nest egg. (Nationally, real estate is 60% to 70% of the average person's net worth.)...the real significance of the Yonkers episode may be to illustrate again how our society is being twisted and torn by the enormous run-up in real-estate prices.

"The main reason to think a real-estate crash might be coming is the huge gap between the cost of owning a house and the cost of renting one. For two decades, house prices have gone up twice as fast as rents. A four-bedroom house in a fancy Washington suburb might cost $500,000 (up from $400,000 last year). That house can be rented for $2,400 a month. Figuring everything, the cost of buying a house in Washington is more than double the cost of renting one.

"Why would someone pay twice as much to live in the same house? Yes, there are tax benefits, but not nearly enough to explain the differential. The romance of home ownership may be part of it. However, the main reason is clearly the belief that prices will keep going up. When today's price is simply a bet that tomorrow's price will be even higher, you have a classic speculative bubble. As investors in pyramid schemes throughout the ages have learned-and as stock market investors were reminded last year-the 'greater fool' theory can't be right forever."

I purposely didn't mention the exact date of the article - that's because this was written for the Sept. 24, 1988 edition of the Times - just as the housing market was heading into a slump. Many of the points the article makes are eerily similar to what we're seeing played out nowadays.

Think history can't and won't repeat itself?

The numbers still don't add up

A while ago, we profiled the prospect of owning vs. renting in a Northwood Pointe neighborhood in Irvine. Quick summary: Not a good idea to buy there right now.

This time, we're looking over in another Irvine area: Westpark.
The red X in this picture is 112 Costero Aisle, 92614. It's for rent on Firstteam.com for $1,800 a month.

Here are its stats:
2 beds, 2 baths, 844 sq ft
From listing: Model perfect!!! 2B 2B 1 car garage and 1 carport! Designer carpet, chiseled tile floors, crown molding, base boards, wood shutters, recessed lights, scraped ceilings, finished garage w/granite floors, washer and dryer included. Large patio with trees, next to a large park, close to pools & tennis. Inside laundry (Washer and Dryer included)Property available for occupancy effective AUGUST 1, 2007. MUST SEE HOME!! THIS IS A LOWER UNIT PROPERTY IN A GREAT LOCATION!

Your total monthly cost to rent: $1,800

The house graphic in that above map is 105 Alberti Aisle #323, 92614.
Size: 2 bed, 2 bath, 850 sq ft (built 1987)
MLS: S493361 (20 days on Redfin)
Current asking price: $424,900
Sales history: 06/15/2004: $403,500
12/27/2001: $217,000
10/15/1997: $132,500
05/14/1993: $143,000
01/12/1993: $160,305
07/14/1989: $161,000
11/17/1988: $134,000
From listing: Fabulous Buy! Popular Penthouse Floorplan in Beautiful Westpark! Immac ulate Condition! Light & Bright! Newer Wood Laminate Floors! Large Living Room w/ Fireplace! French Doors Open to Den/Office/2nd Bedroom! Convenient Indoor Laundry! Vaulted Ceilings! Spacious Private Balcony/View Deck! Excellent Location in Complex Near Community Pool/Spa, Garage & Carport! Truly One of Irvine's Best Locations! Close to Shopping/UCI/Employment Centers/Freeways/Parks/Bike Trails/Etc! Must See this Beauty!

Now for the monthly costs for owning, with the premise that a buyer is paying full asking price and putting 20 percent down.
$2,130 Principal and interest (6.375 percent interest rate, per ZipRealty.com-provided rate on a 30-year fixed loan)
$185 HOA dues
$409 Property tax (this number is based on current taxes and would increase slightly, but we're going to stick with this lower figure anyway)
$100 Insurance
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Your total estimated monthly cost to own: $2,824
Amount you save each month by renting instead of owning: $1,024

When numbers don't add up

Welcome to Collage, an attractive 211-unit gated condo complex in Irvine's Northwood Pointe (92620 ZIP code).

It's right in between two excellent schools - Canyon View Elementary and Northwood High.

Plus, there's a community pool. It was closed recently because there was some vandalism to the pool furniture, and some broken glass ended up in the pool. The yellow caution tape is finally gone.

Other than the fact that this neighborhood suffers from an extreme parking problem (50 open parking spaces for more than 200 units, plus the fact that hardly any residents use their garages appropriately for parking cars), it's a great place to live.

But not if you're buying these days.

Let's take a look at some numbers:

2300 Timberwood, a Plan 1, sold March 13th, 2007 for $434,000, according to Zillow. This was the second time this unit sold in the past two years. It went for $400,000 in January, 2005. Assuming 6 percent selling costs, this owner only netted about $8,000.

Plan 1 is the smallest in the complex and is a 1,001 square-foot 1 bedroom plus den, 1 bath and 1-car garage model. That's a selling price of $434 per square foot.

As you can see from these two pictures below that were fused together, it's got a nice balcony, plus some nice space inside:

Here's how much this little beauty would (roughly) cost you per month:
$2,194 Principal and interest (Assuming 20% down, 6% interest rate on a 30-year fixed loan)
$168 HOA dues (Costs vary from listing to listing. This is the lowest value I saw)
$295 Property tax ($3,543 paid in 2006; this figure will go up next year because of the sale)
$100 Insurance
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Grand total: $2,760 per month

So, what if you're renting?

520 Timberwood (the same Plan 1) was recently listed for lease at $1,750 per month. I also know that some of those models are being rented for even less, but we'll stick with that $1,750 figure.

The difference between renting and owning this model in Collage is currently about $1,010 per month. Not too much in the way of recent appreciation, either.

Of course, you do get a break on taxes from paying mortgage interest. But let's be honest - hardly anyone is putting that extra money into savings. Instead, it's going to the leased Mercedes or that second trip to Hawaii.

Imagine what you could do with an extra $1,010 month by not owning a condo here right now.

Want to read about an interesting saga in this neighborhood? Check out this entry from the Irvine Housing Blog.