By Jake Provonsha
Express readers recently benefited from a portfolio manager's perspective on the math relating to deed-restricted housing. It struck me that a moderate-income person with no financial cushion to help him along must use a much sharper pencil in working the same math problem. I like a couple of the assumptions that Mr. Larry Helzel made, however. First, he laid out an economic scenario for a moderate-income family. That is an important point. Working as a team, two incomes can sometimes make possible what, for a single income, would be impossible. Secondly, he gave the working couple $20,000. Nice.
At this point, things began to slightly unravel. For one, the 10 percent down would be $22,000 not $20,000. In figuring the costs of getting into this house, a careful fireman or nurse would figure in closing costs, appraisal and origination fees, which usually amount to about $3,000, for a total investment of approximately $25,000 and a mortgage of $198,000. These minor omissions are perhaps understandable. After all, a fireman does math everyday as he, or she, figures pump pressure and adjusts quickly to achieve desired flow and a carpenter cuts rafters and stairs on a regular basis; there's certainly math in that. I'm not sure what exactly a portfolio manager does but he may not be used to that kind of calculating.
Mr. Helzel's assumption that this loan will be 6 percent (interest-only) may not be realistic these days, so I'll assume the current commonly quoted 30-year fixed interest rate of 6.8 percent ($1,276 per month), I'll use his figure for property taxes ($101 per month) and add estimated ownership costs of maintenance, mortgage insurance, homeowners insurance and HOA dues at $163 per month for a total monthly payment of $1,540. After five years, using the same assumption of 3 percent per year appreciation, and a 28 percent tax benefit for mortgage interest deductions, the sales price of the home would be $255,040, less loan payoff of $185,750 (because as a normal mortgage, some principal was paid down) and less the required Housing Authority transfer fee of 4 percent ($10,202), our example couple has cash in hand of $59,089 and an effective net cost of housing of $672 per month (all cash outflows minus cash inflows).
Had our couple decided to rent instead, and saved the difference between ownership monthly payments and rental monthly payments, they would have been better off. For $1,100 per month, our couple could rent a two-bed/two-bath condominium in Ketchum/Sun Valley, or a three-bed/two-bath single-family home in Hailey (based on Express classifieds 8/16/06—126 rentals available—numerous at these prices or less), thus saving $440 per month in housing costs. If our couple invested these monthly savings and their assumed down payment and closing costs of $25,000 in a U.S. Treasury bill based mutual fund at 5 percent (essentially risk-less), compounded monthly, then at the end of the same five years they would have cash in hand of $57,728 and an effective net cost of housing of $325 per month. (all cash outflows minus cash inflows).
So the cash in hand at the end of five years is about the same for renting versus owning a community house, the effective monthly costs of owning the community house are much higher, the potential community house appreciation is capped by CPI or 4 percent (with no limit to the potential decrease in value), compared with an essentially riskless investment which is available as cash at all times. Hmmm ...
Don't get me wrong; I want community housing to work. I'm proud to be part of the proletariat. I've been a member of the United Brotherhood of Carpenters and a blue-collar guy most of my working life; but when I go into the title company for a closing with $20,000 and find out I need $25,000, it's a very big problem. When I sit down on the first of the month to pay my bills and I've planned on $1,101 for housing (Mr. Helzel's figure) but I really need $1,540—that's a big deal. Moderate-income people like me have to be cautious about investing. Sometimes we need good advice from, oh, I don't know, say a portfolio manager, to help us avoid undue risk.
God, it's a jungle out there.
Jake Provonsha is a retired carpenter who has lived in the Wood River Valley for 36 years.
