How Much Will NYC Decline...

LICC, I've seen that one particular apartment, but you specifically forgot this part: "What was your inside price?"

Probably 30% below market price.

You also don't even know what apartment it is. You're guessing.

Then: "south of 96th street which is considered prime Manhattan."

Not on Park Avenue in 1968. It was borderline Spanish Harlem.

"Spanish Harlem was one of the hardest hit areas in the 1960s and 1970s as New York City struggled with deficits, race riots, urban flight, drug abuse, crime and poverty. Tenements were crowded, poorly maintained and frequent targets for arson. In 1969 and 1970, a regional chapter of the Young Lords ran several programs including a free breakfasts for children and a free health clinic to help Latinos and poor. The Young Lords coalesced with the Black Panthers and called for Puerto Rican self-determination and neighborhood empowerment. Today the Latin Kings are prevalent in Spanish Harlem."

Then: "the taxpayer's marginal rate would be 25%. When determining the after-tax cost of owning, you would use 25% to determine the benefit of those deductions received for the mortgage interest and property taxes. Were it not for the deductions, you would be paying 25% or higher in taxes on that income."

No dude. The taxpayer's marginal rate is 25% AFTER the deductions, not before. The portion of those deductions applied to income ABOVE $78,851 is 28%.

The way you did it - besides being wrong - does understand the actual tax benefit. Because you're trying to defend the indefensible.

Then, dude, on your "example," go back ten years earlier to 1958 and you will see that prices barely changed. Just like if you pick 1988 - 2008 you will get one annual percent increase; pick 1998 - 2008 and you'll get a different one, because prices fell precipitously from 1988 to 1998.

And if, as I predict, prices fall 50%, your 9% per annum increase falls to 4.5%, which adjusted for inflation is precisely the long-term mean.

steve, you have officially become the Titanic with how far your reputation has sunk with the marginal tax rate/effective tax rate issue. If you remember, this whole issue came up when discussing an owner's after-tax monthly cost of owning when comparing it to renting. Using a lower rate incorrectly would understate the benefit and overstate the after-tax cost. Using the marginal rate is the most accurate way and can only understate the benefit in situations where the deductions bring a person into a lower tax bracket. Using the effective rate as you propose, which will always be lower than the marginal rate, is just incorrect.

steve, three-bedroom co-ops on the UES 40 years ago were selling in the $30-$40k range. We know how much they sell for today. Dismissed.

"with the marginal tax rate/effective tax rate issue"

Enough. You are Titanically wrong.

"Using the marginal rate is the most accurate way and can only understate the benefit in situations where the deductions bring a person into a lower tax bracket."

"the most accurate way" and "can only understate the benefit"

How can it be accurate to understate the benefit? BIZARRE!

"Using the effective rate as you propose, which will always be lower than the marginal rate, is just incorrect."

One, it won't always be lower with AMT, and two, DO THE NUMBERS, get back to me.

Yes, on three-bedroom co-op in Spanish Harlem sold 40 years ago for $30-$40k. Fully agreed. In Spanish Harlem.

steve, now you are becoming more and more strange. Just look a few comments up, there are the numbers. The numbers show you to be obstinately wrong. And again, AMT does not affect the mortgage interest deduction. The effective rate won't always be lower than the marginal rate? Are you kidding with that? Even with AMT on other deductions, the marginal rate will be higher than the effective rate at the 28% bracket and above. I am almost enjoying seeing you tank like this. You obviously know how blatantly wrong you are but you're trying anything possible not to admit it. Funny.

"now you are becoming more and more strange. Just look a few comments up, there are the numbers."

The only numbers up there are mine. You do this calculation, tell me what the tax benefit is.

Dude, you make $85,000 a year. Tax brackets:

$0 to $8025 - 10%
$8026 to $32,550 - 15%
$32551 to $78,850 - 25%
$78,851 to $164,550 - 28%
$164,551 to $357,700 - 33%
above $357,700 - 35%

He pays:

$5,000 in property taxes
$5,000 in mortgage interest
$5,000 in state and city income tax

Because you can't.

"The numbers show you to be obstinately wrong."

No - it shows the tax benefit is precisely what you deny it is: the blending of the two marginal rates to equate the effective rate.

"And again, AMT does not affect the mortgage interest deduction."

Never said it did.

"Even with AMT on other deductions, the marginal rate will be higher than the effective rate at the 28% bracket and above."

Not true, because it is phased out so therefore your effective rate will fall with increasing income above a certain threshold.

www.taxes.state.mn.us/legal_policy/revenue_analysis/2007_2008/house_files/hf1367(sf1893)_1.pdf

So - do the calculations on the problem above (which you've failed to do so far) tell me what the tax benefit is.

gentleman what is the bottom line here?

Bottom line is, we're in a real estate crisis, and anyone owning anything is losing money right now...

"Bottom line is, we're in a real estate crisis, and anyone owning anything is losing money right now"

Define losing money EW. I own a few properties and haven't lost a nickel. How about you? How much have you lost YOY by renting? How about through investing all of that down payment money in the market? How's that going for you?

From a buyer's perspective, how has the real estate crisis affected Manhattan's sales price range of negotiability.

Very few people will actually lose money anywhere but on paper. People who bought after 2004 will probably break even, though not with transaction costs. The people who will lose big-time are the ones buying in new condo developments, especially the ones with tax abatements - they'll likely not recover their purchase price for a while.

Everybody else will be fine, as long as they're not forced to sell.

"How much have you lost YOY by renting?"

This tired old argument JM? If you needed a place to live a the peak of the market, you were better to rent. If you bought at the peak of the market you will likely lose your shirt. It's that simple.

And nowhere does LICC do that calculation....

> Define losing money.

I thought it was simple... you have less money than you did before you lost it....
;-)

> How about you? How much have you lost YOY by renting? How about through
> investing all of that down payment money in the market? How's that going for you?

Excellent, thank you. I've had some swing months, but my net worth has actually gone up each quarter without fail for a few years now...

> From a buyer's perspective, how has the real estate crisis affected Manhattan's sales price range of > negotiability.

The anecdotes have said that folks are willing to negotiate, but are still holding fast on some low ball offers (and then often end up lowering ask near that point anyway). UrbanDigs has said that there is some flexibility, but not enough... yet...

EW can you quantify that in percentage terms

steve, you cannot just change the definition of effective rate in hopes that people won't notice you are wrong. The effective rate is not a blend of the two highest marginal rates. It is the amount of tax dollars paid as a percentage of your income. Since we have a progressive tax rate system with multiple brackets, you cannot use the effective rate to determine the mortgage interest deduction benefit. The marginal rate must be used, and even that will understate the benefit in certain cases. You are getting pathetic with this, just drop it if you don't want to admit you are wrong.

"The people who will lose big-time are the ones buying in new condo developments, especially the ones with tax abatements - they'll likely not recover their purchase price for a while."

At least you are getting more specific steve. I may not be able to argue that one.

"I've had some swing months, but my net worth has actually gone up each quarter without fail for a few years now..."

Those swing months are a bitch, volatility can really put a hurtin on folks. Some people are really better off tying up that equity in something long term, such as real estate.

Oh, and just because your net worth has increased, does that mean you are making good investments? Is your net worth increasing because you are saving more or because of acceptable returns? My guess is that if you have had some swing months, you are barely breaking even on the investment front. EW, you may want to try a rent vs. buy analysis with a negative return on your investments, it may convince you that anytime is a good time to buy real estate just by keeping yourself from investing it. Real estate can be a good defensive strategy for folks like you.

JuiceMan, didn't someone establish 60% returns per year, year after year, means a good track record?

When the pendulum swing too far in one direction (housing bubble), it doesn't just swing right back to the middle people. It will "overswing" to the other direction (housing bust) before settling in the middle.

This is what happened when the Internet bubble burst. It is what will probably happen when the housing bubble bursts.

P/E ratios were out of whack with Internet Stock prices, just as how Home prices today are out of whack with Rental prices. The adjust will not be exact and stop right at equilibrium. There will be an "over-correction" before equilibrium is found.

This is the same behavior with the Internet bubble where people would not believe how much Internet stock prices would fall. Similarly, people do not yet believe how much home prices will fall. Human psychology never changes. If there's one thing we learned, it's that people act and behave the same way over time. From the Tulip bubble, to the Florida housing bubble in 1925, to the DotCom bubble, to the current Real Estate bubble- extremely consistent behavior. The end result is always the same.

Love how Peter Schiff had the ballz to tell this to 1,000 mortgage brokers all the way back in 2006:

http://www.youtube.com/watch?v=6G3Qefbt0n4

Watch the entire 8 parts- it's worth your time. This guy was shorting sub-prime using credit default swaps back in 2006. Lovely.

"you cannot just change the definition of effective rate in hopes that people won't notice you are wrong."

Never did.

"The effective rate is not a blend of the two highest marginal rates."

It is the amount of tax paid with respect to income earned.

"It is the amount of tax dollars paid as a percentage of your income."

"Since we have a progressive tax rate system with multiple brackets, you cannot use the effective rate to determine the mortgage interest deduction benefit. The marginal rate must be used, and even that will understate the benefit in certain cases."

Do the calculation and get back to me, dude. You can't - you lose.

"At least you are getting more specific steve. I may not be able to argue that one."

I've been saying that for MONTHS, JM. Where have you been?

"Similarly, people do not yet believe how much home prices will fall."

Fully agreed.

LICC: forget the polemics & BS - just do the calculation that you're afraid to do, & get back to me.

Loser.

Oh - let me make one concession to LICC, loser that he is: I will say "effective marginal rate," which is what it is, but maybe that will make him man enough to do the calc.

But I doubt it.

steve, I did the calculation in the posts above. Put on your reading glasses and look at them. You still can't explain in any sensible way why your position is correct. Because you can't and you look more and more dysfunctional every time you try.

If I'm a loser, then you were just made to look like a total fool by a loser. I'm not sure how a person is a loser when they show how a rude, obnoxious, delusional man is making completely wrong statements and stubbornly won't admit it.

Dude, if you did the calculation, repost it below - b/c you didn't. You can't. You're wrong. The benefit is at your blended rate when all of your deductions cause you to cross into a higher bracket; some deductions are taken at the higher rate, some at the lower.

Your "methodology" takes them all at the highest rate. Wrong. Because you can't get to that lower marginal rate without including ALL deductions, which is why they all must be calculated the same.

Just fess up rather than spewing hateful projections.

Sure, I'll be glad to re-post the information. Your scenario was:

Fine. You make $85,000 a year. Tax brackets:

$0 to $8025 - 10%
$8026 to $32,550 - 15%
$32551 to $78,850 - 25%
$78,851 to $164,550 - 28%
$164,551 to $357,700 - 33%
above $357,700 - 35%

You pay:

$5,000 in property taxes
$5,000 in mortgage interest
$5,000 in state and city income tax

Therefore, in steve's example, the taxpayer's marginal rate would be 25%. When determining the after-tax cost of owning, you would use 25% to determine the benefit of those deductions received for the mortgage interest and property taxes. Were it not for the deductions, you would be paying 25% or higher in taxes on that income. If anything, I would be understating the benefit because all your deductions brought you into a lower tax bracket. Your flawed theory would use the effective rate of 20%, which wrongly understates the benefit of the tax deduction.

Thanks again for proving my point for me. You are dismissed.

You now seem to be possibly changing your position to say that you should use a blended rate of the top two marginal rates if deductions take you into a lower tax bracket, and not blend in the lower rates paid based on the lower income brackets. You would blend the actual marginal rate with the higher marginal rate the taxpayer would have paid if he didn't have the deductions. This of course is not the effective rate, as you wrongly have said to use all along. Even better, using the blended rate of the top two marginal rates actually supports my argument, because it gives an even bigger benefit to the mortgage interest deduction. I was simply using the actual marginal rate paid, which would understate the benefit slightly.

Keep trying to spin your way out of this, because you just are making yourself look worse and worse.

You call that a "calculation"? LMAO!

You didn't even get the marginal tax rate right - it's 28%.

Calculate = add / subtract / multiply / divide. I don't see any of them in your post.

Lame.

Do the math, get back to me. And use the correct marginal rate.

steve, your memory must be going, because we discussed this already. The marginal rate is the rate applied on the last dollar taxed. After the deductions, it is 25%. The marginal rate is not a rate that was never applied to any dollar taxed. How many very simple things are you going to get wrong? I thought I would get tired pointing out your stupid errors over and over, but so far I'm still fine.

steve, your reputation is already torn to shreds. For your own good, if you are not going to admit you are wrong, you should just drop it already.

Do the math, get back to me. And use the correct marginal rate.

Do the math, do the math, do the math. Show me PRECISELY how to calculate the exact tax benefit in that instance, and what that benefit is.

Do that math.

LICComment, these figures don't matter much when the value of your LIC property goes down and your equity is negative.

It's pretty easy steve. If the person were renting and did not have the $10,000 in mortgage interest and property tax deductions, he would be taxed on that $10,000. In your scenario, the person's taxable income after deductions is $70,000. Without the deductions, his taxable income would be $80,000. That extra $10,000 in income would be taxed as follows: 25% on the first $8,850 (amounting to $2,212.50) and 28% on the remaining $1,150 (amounting to $322). The rate to use to determine the actual benefit of owning is 25.35%, which is higher than the actual marginal rate. I was advocating using just the 25% marginal rate, which if anything understated the benefit but is entirely more accurate than using an effective rate. You have said all along that the effective rate should be used. In this scenario, the effective rate is 20% on all income and 23% on taxed income, which would incorrectly understate the benefit of the deductions. The difference between the marginal and effective rates could be even greater for those in the 33% or 35% brackets.

I guess simple math is too difficult for you steve.

> LICComment, these figures don't matter much when the value of your LIC property
> goes down and your equity is negative.

That is the big point, and the one that seems to be completely missed. All rent/buy calculations are tossed out the window when buying includes a 10% or 20% drop, leveraged...

"his taxable income would be $80,000"

No, it would be $85,000.

But I'm glad to see you finally fessed up to the fact that some of the income is taxed at 28%, some at 25%, which is what you denied. Here is exactly what you said:

"when you use the effective rate, you are blending the portion of your income that does not get taxed, the portion taxed at the lowest rate, the portion at the next lowest rate, and on until you get to the highest rate applied to you. At any high bracket income, which applies to the buyers we are discussing, there is no way that your itemized deductions take you from the top bracket down to the lowest rate. This is why you have no clue what you are talking about."

"would be taxed as follows: 25% on the first $8,850 (amounting to $2,212.50) and 28% on the remaining $1,150 (amounting to $322). The rate to use to determine the actual benefit of owning is 25.35%, which is higher than the actual marginal rate."

I won, because it makes no difference whether you do the calculation at the effective rate or the effective marginal rate - the numbers will be different but the effect is the same. They're just two ways of looking at the same thing because - in some instances, people with large amounts of deductions - you can go all the way down to the 15% rate, unless AMT kicks in.

Glad you finally relented - the blended rate that a few posts up you denied was used, is EXACTLY what you had to use.

Case closed.

steve, I know you are trying anything possible to not look stupidly mistaken, but that was pretty pathetic. The fact is that if your marginal tax rate is 33%, and you pay $6,000 in monthly mortgage interest, your after-tax monthly cost is $4,000. This is based on your marginal rate. If your deduction moved you from the 35% bracket to the 33% bracket, your after-tax monthly cost is even less because you will have even more tax savings. For you to use an effective rate of less than 33% to determine the after-tax cost is idiotic.

Also, his taxable income would be $80,000 because he still has the $5,000 deduction for state and city income taxes that you gave him. Your memory really is going.

Come on steve, come back with something even more stupid to try to keep yourself from admitting you are wrong.

LICC: "when you use the effective rate, you are blending the portion of your income that does not get taxed, the portion taxed at the lowest rate, the portion at the next lowest rate, and on until you get to the highest rate applied to you. At any high bracket income, which applies to the buyers we are discussing, there is no way that your itemized deductions take you from the top bracket down to the lowest rate. This is why you have no clue what you are talking about."

"his taxable income would be $80,000 because he still has the $5,000 deduction for state and city income taxes that you gave him."

You make $85,000 a year. Tax brackets:

$0 to $8025 - 10%
$8026 to $32,550 - 15%
$32551 to $78,850 - 25%
$78,851 to $164,550 - 28%
$164,551 to $357,700 - 33%
above $357,700 - 35%

You pay:

$5,000 in property taxes
$5,000 in mortgage interest
$5,000 in state and city income tax

Your taxable income is your taxable income, dummy. Deductions are taken from taxable income.

"For you to use an effective rate of less than 33% to determine the after-tax cost is idiotic."

You are confusing what you would call the effective rate and the effective marginal rate. Either way you do the calculation you come up with the exact same answer, the exact same amount of tax paid. The rate will be different, but the effect is the same.

"If your deduction moved you from the 35% bracket to the 33% bracket, your after-tax monthly cost is even less because you will have even more tax savings."

Perfectly correct.

"Deductions are taken from taxable income."

Seldom right and wrong again steve. First you calculate your Adjusted Gross Income, then you subtract your itemized deductions, and the result is your taxable income. Internal Revenue Code sec. 63. This is personal taxation 101. The mistakes from steve just keep on coming . . .

Steve - you seem to have contradicted yourself. In your example, using blended marginal rates when a deduction forces your taxable income to cross tax bands (which seems to me to be the correct answer), gives a higher dollar amout than if you used the effective (i.e. average) tax rate, which would be a lower rate in a progressive tax regime. Earlier you were arguing that you should be using the effective rate, rather than the marginal rate (blended or otherwise). Looks to me like you argued yourself in a circle.

Ultimately, the only thing that matters is the dollar value of the tax deduction, and a common criticism of your posts is that you tend to underestimate it.

"First you calculate your Adjusted Gross Income"

Exactly, and state and local taxes are deducted after AGI, on the back of the form. FYI.

no, cmtsuk, what happens is that the effective rate will change with each deduction, whereas the effective marginal rate will not - it changes only when you cross the threshold. That is why either will give you the proper answer, just by applying different percentages.

The problem with using only the effective marginal rate is that it applies to all deductions and all income, so to get to the effective marginal rate you need to pick a specific order in which to apply the deductions, but you can't because you need to apply them all at once.

If you don't see that, here's a problem. See if you can answer it:

You make $10,000.

You have $3,000 in deductions, thus:

1) $1,000 in mortgage interest
2) $1,000 in property taxes
3) $1,000 in margin interest.

The tax brackets are:

$0 to $7,000 = 0%
$7,001 to $8,000 = 10%
$8,001 to $9,000 = 15%
$9,001 to $9,500 = 20%
$9,501 to $10,500 = 30%

at which rate to you apply each of these deductions:

1) $1,000 in mortgage interest
2) $1,000 in property taxes
3) $1,000 in margin interest.

It has no answer if you just use the marginal rate, which is what LICC and others were arguing. The effective marginal rate will give you the correct answer assuming your tax bracket does not change. When it changes your effective marginal rate changes, but the fault in LICC's and others' logic is that they were choosing to apply mortgage interest at the new, higher marginal rate, but that is unrealistic because they only way you can reach that new, higher marginal rate is through the combination of all your income and deductions.

If you don't believe me, answer that question above using income of $11,000 and adding another tax bracket of $10,501 - $12,000 = 40% and a $500 deduction for margin interest.

You will see that the effective marginal rate goes up, but on which deduction do you apply it? Just margin interest? Just mortgage interest?

You can't make that allocation, which is why only the effective tax rate works consistently.

"a common criticism of your posts is that you tend to underestimate it."

I don't underestimate it at all. What I do do is say that some formulas for evaluating housing prices use it (imputed rent) and others don't (rent-to-price ratio). I say that if the historical rent-to-price ratio is 12x annual rent = price, and that ratio does not explicitly include the tax benefit (which it doesn't) then you can't go back and include it.

Where it IS included - imputed rent - then you CAN (and must) include it. There, however, because of the defects in LICC's reasoning, they use the effective tax rate so as to give equal weight to all deductions.

Also, with the imputed rent method you do get a multiple greater than 20. The ratio between the two methods is actually the same, they just measure things in different ways.

steve, I think you acknowledged that you were wrong in saying that deductions are taken from taxable income, although you didn't say it quite that way. As for the rest, give it up steve, everyone can see that you don't know what you're talking about and that you changed your argument in the middle of the discussion. You made mistakes, you were wrong. It happens, just let it go . . .

Marginal vs. Effective Tax rates.

LICC and stevejhx, you guys are arguing in circles here. For a calculation of the tax benefit associated with a mortgage, you always use your MARGINAL TAX rate(s). You NEVER use your effective tax rates. LICC, in the example that you guys have belabored, 25% is not the tax rate to apply. Steve's calculation of using (for $15k of deductions) part 28% and part 25% is correct. The marginal tax rate is applied for each dollar of deduction at that bracket's tax rate until the income moves to the next bracket, at which point that lower bracket's tax rate is applied, and so on. So the total "marginal tax benefit" is neither at a 28% nor 25% rate, but at a blended average. However, for someone making $80k, their effective tax rate would be far lower than the blended 25%/28% rate used. So applying that would be incorrect as well. LICC the 28% is not a theoretical tax bracket. If you did not have those deductions, you would be paying 28% on that last bit of income.

The reason effective tax rates are used in many studies on a regional/national basis is because it is the easier number to observe and it also holds as a decent enough proxy for the tax benefit to a large group of people who are at all different income/tax brackets. Rarely does government data/census give marginal tax data for a population because it depends so much on deductions, circumstance, demographics, etc. So to APPROXIMATE, most studies apply the effective tax rate. However, this is NOT the theoretically correct way to think about the tax benefit for an individual. Ultimately, as I've said before, the tax benefit is simply the amount you would save on taxes by having the mortgage deduction- which is by definition calculated on a marginal basis.

"I think you acknowledged that you were wrong in saying that deductions are taken from taxable income"

No. I am correct. You cannot take a deduction from income that you don't pay tax on.

"everyone can see that you don't know what you're talking about"

I think I proved amply that I do. You use the effective tax rate. You can use the effective marginal tax rate ONLY if it does not change your tax bracket. You can NEVER use the marginal tax rate.

"and that you changed your argument in the middle of the discussion."

No, that was you. "Blended rates," remember?

If I'm wrong, LICC, answer this:

You make $10,000.

You have $3,000 in deductions, thus:

1) $1,000 in mortgage interest
2) $1,000 in property taxes
3) $1,000 in margin interest.

The tax brackets are:

$0 to $7,000 = 0%
$7,001 to $8,000 = 10%
$8,001 to $9,000 = 15%
$9,001 to $9,500 = 20%
$9,501 to $10,500 = 30%

at which rate to you apply each of these deductions:

1) $1,000 in mortgage interest
2) $1,000 in property taxes
3) $1,000 in margin interest.

Steve - you did not acknowledge my statement that you had changed your argument from use of effective (i.e. average) tax rates to use of marginal (whether blended or not). Essentially, you have (whether you realise it or not) actually come into agreement with LICC.

Your latest example, although I am aware it is intended for illustrative purposes, is designed to obfuscate, because your deductions would have taxable income deducted down through several tax bands. Yes, you could make the deductions large enough or set up the tax bands close enough to each other, and you could then easily construct an example where the deductions take your taxable income down through all the tax bands. Then, of course, you would be right that valuing a deduction using the highest marginal tax rate would be wrong, since your deductions take you through several marginal rates.

But this is the real world, Steve. For most people, the deduction only impacts them at their highest tax band, or perhaps the highest 2 tax bands. That should generally be the case, because most people will limit their spending on mortgage payments to a fraction (maybe a third or a quarter) of their disposable income - something you yourself argue should be true. Working out the dollar impact on their tax bill can therefore, in most cases, easily be calculated with the marginal tax rate.

Furthermore, Steve, for the most part I actually agree with a lot of your analysis and pessimistic view of the market. But your frequent episodes of intellectual inconsistency, tired analysis based on exaggerated assumptions and inability to cut to the chase on a lot of these matters makes you a very tiresome contributor to this forum. Furthermore, given how much of your life you seem to spend on this board, one simply has to wonder about the state of your mental health.

steve, you have devolved to such a low intelligence level with this discussion it is amazing. Just look at the words - TAXABLE income, which is the income amount upon which you apply the tax rates to determine your taxes payable. A taxpayer has above-the-line and below-the-line deductions, all are taken before you get to the taxable income number. Itemized deductions are subtracted from AGI to get to your taxable income. You do not calculate your taxable income and then deduct from that.
steve, you had argued forever that you should use an effective tax rate to determine the mortgage benefit deduction. Once it finally sunk in to you that you are wrong, you changed your argument to say that you should use an "effective marginal" rate, which is something you just made up. Special K agrees with me that you never use the effective rate, and I agree that the best calculation is the total marginal tax benefit. I've said all along that using the marginal rate is not always perfect but it is more accurate than using the effective rate. Using the marginal rate also only understates the benefit compared to the total marginal tax benefit, so I am not enhancing any numbers by using the marginal rate.
Now, instead of admitting you are wrong, you go back to your meaningless made up hypothetical with made-up tax brackets. We just looked at everything in detail with actual current tax rates, but you are trying for any cover that you can. You are getting more and more pathetic . . .

"Steve - you did not acknowledge my statement that you had changed your argument from use of effective (i.e. average) tax rates to use of marginal (whether blended or not). Essentially, you have (whether you realise it or not) actually come into agreement with LICC."

No, I don't agree with LICC and I didn't change my argument. It remains the same. To appease LICC I said that given the breadth of the tax brackets in the United States, the effective marginal rate could be used in some - if not most - cases. I tried to placate him.

"Your latest example, although I am aware it is intended for illustrative purposes, is designed to obfuscate, because your deductions would have taxable income deducted down through several tax bands. Yes, you could make the deductions large enough or set up the tax bands close enough to each other, and you could then easily construct an example where the deductions take your taxable income down through all the tax bands. Then, of course, you would be right that valuing a deduction using the highest marginal tax rate would be wrong, since your deductions take you through several marginal rates."

That is exactly what I did - placate LICC.

His prior argument - that I still disagree with - was that the absolute marginal rate should be used. That is wrong. The most accurate rate is the effective rate.

""effective marginal" rate, which is something you just made up"

"Results 1 - 10 of about 15,900 for "effective marginal rate"

So much for "just making it up."

"Using the marginal rate also only understates the benefit compared to the total marginal tax benefit, so I am not enhancing any numbers by using the marginal rate."

You are if you use the top rate.

"You are getting more and more pathetic . . ."

:)

To bring this all into perspective, in general, the after-tax monthly cost for someone with a 33% marginal tax rate (on the last dollar taxed) for an $800,000 mortgage, including mortgage payments and common charges and property tax, or maintenance, is around $5,000 to $5,500 (with approximately $3,700 attributable to the mortgage payment). So if you are paying $4,500 or more for a place that you could buy in the $1 million range, it may very well make sense to own. steve has contended that an apartment getting $4500 rent is worth no more than $648,000 to $810,000, based on his price-rent ratio. I've pointed out that he doesn't take into account the tax benefit, that whenever he has commented on the tax benefit that he has used the wrong rate (effective instead of marginal), and that he doesn't give enough weight to the fact owning allows you to stabilize your long-term monthly costs to a much greater extent than renting, because rents will go up more than common charges over time. Basically, valuing an apartment renting at $4,500 at $648k to $810k is just way too low. The number is more like $1 million plus.

"So if you are paying $4,500 or more for a place that you could buy in the $1 million range, it may very well make sense to own."

Not based on imputed rent or price-to-rent ratio.

"steve has contended that an apartment getting $4500 rent is worth no more than $648,000 to $810,000, based on his price-rent ratio."

Agreed.

"I've pointed out that he doesn't take into account the tax benefit,"

I do on imputed rent, do not on rent-to-price ratio.

"that whenever he has commented on the tax benefit that he has used the wrong rate (effective instead of marginal)"

You just lost that one.

"and that he doesn't give enough weight to the fact owning allows you to stabilize your long-term monthly costs to a much greater extent than renting, because rents will go up more than common charges over time."

True - if the prices are the same. But if you are assuming as I am that prices will drop, you are locking yourself into a long-term money-loser.

"Basically, valuing an apartment renting at $4,500 at $648k to $810k is just way too low. The number is more like $1 million plus."

Never has been until 2003, and it won't be again in the future. Sorry. (And again, you post no proof.)

Moreover, LICC, do the calculations the way your bank or landlord would do them: 28% of total income in housing costs (they don't count the tax benefit of mortgage interest or property tax, FYI) or 40% of monthly rent.

Tell me what you come back with: a person who pays $4,500 a month in rent cannot afford a $1 million apartment at 28% of his total income. Can't be done.

Steve, you pay $4500 a month in rent, right? Can you afford a $1 million apartment?

steve, so you think the only people renting $4500 apartments are those with incomes that would qualify at the 28% level?

"Can you afford a $1 million apartment?"

Yes, but I can also afford more than $4,500 rent, which requires $215,000 in income. A $1 million property with an $800,000 mortgage is $5,870.12 + $1,000 in CC & $1,500 in tax = $8,370.12. For the bank to give you financing on that would mean you would have to make ($8,370.12 * 12) / .28 = $358,719.43

Quite the difference. That's why what LICC says is non-senso: banks don't count the mortgage interest deduction.

"so you think the only people renting $4500 apartments are those with incomes that would qualify at the 28% level?"

What?

"steve has contended that an apartment getting $4500 rent is worth no more than $648,000 to $810,000, based on his price-rent ratio."

the inverse of the price-rent ratio is the rental yield (annual rent/apartment price). here is some data on rental yields in upper and lower manhattan.

http://www.globalpropertyguide.com/North-America/United-States/Rental-Yields

the lower the yield, the more "expensive" buying is relative to renting. i agree that manhattan real estate is poised for a fall. the return one gets from buying is just too low at current prices. At $648k, annual yield is 8.3% and at $810k, its 6.7%. Don't know if prices will fall to an 8% type of yield, but certainly something in the high 6% range seems reasonable. the primary reason people were willing to buy at such low yields were: 1) easy credit with no/little money down and dirt cheap after tax financing of ARMs. put another way, over the medium term you wouldn't buy an asset with leverage yielding a return of 4% if your after-tax cost of financing was much higher than that return and 2) people expected price appreciation that was implicitly caused by ever-increasing rents, which was in turn caused by strong employment and income growth in nyc. When either one of those falls away, prices have to drop, leading to an increase in yields and a decrease in P/R ratio. Both of those are now ancient history and in my mind, rents are likely to be flat to decreasing while prices will drop much more.

steve, you constantly bring up rent prices v. sale prices and say it is half the cost to rent than to buy. My showing the after-tax cost shows that most often you are wrong, again. Now that we have established that you are incorrect, you do a classic steve move and try to re-direct the discussion to bank requirements. That is a different issue.

The math only holds if there isn't major reduction in value.... factor in a 10% decline, and just about no buy/rent factors toward buy...

In a real estate crisis, its pretty hard to argue for buy...

By the way steve, two people who hardly ever comment came onto this board to state the obvious - you are wrong. Undeniably wrong. And that you changed your argument, you obfuscate, exaggerate assumptions and are intellectually inconsistent, and that you are tiresome.

"My showing the after-tax cost shows that most often you are wrong, again."

No - because you forget more than half the variables in the equation, pick only the ones you want. Add back in the risk premium, the opportunity cost, the cost of maintenance (as in repairs, upgrades), and expectations of future price increases / decreases, and you will see that your numbers are absurd.

"with a 33% marginal tax rate (on the last dollar taxed)"

Are we back to that? You can't give special privilege to one tax deduction over another; remember, I forced you to use the "blended" rate, as you called it. So go back to that. Your way of doing it is akin to me saying, "My bank pays me 1% interest, but Discover gives me 3% cash back. Therefore, I get a better return from Discover."

It's nonsense.

Special_K, I've linked to that website before, and it shows the same thing in a different way: the ROI on investment real estate is currently too low to attract investors given the risk.

"two people who hardly ever comment came onto this board to state the obvious - you are wrong."

Prove it. Find me a widely-accepted theory on the proper price level for housing, and plug in the numbers. Stop making up your own. It's getting tedious.

steve really does live in a fantasy world. He changed his argument when he saw how foolishly wrong he was, and now he says he "forced" me to use the blended rate, which actually supports my position even more that the after-tax monthly cost of owning is in line with rents in the majority of cases.

Steve, I am wondering if there is a way out of this stalemate about taxes. I'm sure you will agree that when an individual is comparing buying a unit versus renting it (or something comparable) they should take their tax return for the year and figure out what the net impact of owning this unit during that period would have been. The marginal impact of any deductions (which may cross over several tax brackets) would then be deducted from the total cost of ownership (mortgage payments, RE taxes, maintenance, repairs, etc.) and compared to total rent.

That is to say, I understand the macro-economic view of using effective tax rates, but an individual analysis wouldn't and shouldn't work that way. An individual rent-v-buy analysis truly isolates only one variable. This is different than saying the macro-economic impact of the mortgage interest deduction is the sum of all of these marginal analyses, which I agree it is not.

However, Steve, I agree with you that most people overstate the tax value of ownership. I am not a tax expert (as you will see!), but I am guessing that most people who can afford to buy a place in Manhattan are probably hit by the AMT, which means that real estate taxes are not deductible. Also, the AMT imposes flatter tax brackets and therefore reduces the value of marginal deductions. Finally, the mortgage interest deduction only extends to the first $1,000,000 of a mortgage (irrespective of AMT), which is less than a great deal of the mortgages taken out on Manhattan condos in the past few years.

"but I am guessing that most people who can afford to buy a place in Manhattan are probably hit by the AMT, which means that real estate taxes are not deductible."

Thats just plain incorrect. The level of deductibility is reduced but its not eliminated just because you're subject to AMT.

TA, I was relying on TurboTax:

http://turbotax.intuit.com/tax-tools/faq_on_the_alternative_minimum_tax/article

"In calculating the AMT, you cannot take itemized deductions for state and local income tax, real estate taxes, and personal property taxes, even though these are deductible on your regular return."

Vic Parise Beleives in certain areas like further north will decrease 25-40%
In more central city blocks 15-32% decrease and shabby make shift apartments on the market will decrease 20-35%.
This is just a therory.

yes--in calculating AMT, which such caluclation is made after deductions have already been made to your regular return. Just because you are subject to AMT does not in itself eliminate the state/local tax deduction. that would be absurd.

TA, thanks for the correction. I'll restate my original argument, which I think still has a lot of validity:

However, Steve, I agree with you that most people overstate the tax value of ownership. I am not a tax expert (*I've proven this*), but I am guessing that most people who can afford to buy a place in Manhattan are probably hit by the AMT, which means that real estate taxes *may not be fully* deductible. Also, the AMT imposes flatter tax brackets and therefore reduces the value of marginal deductions. Finally, the mortgage interest deduction only extends to the first $1,000,000 of a mortgage (irrespective of AMT), which is less than a great deal of the mortgages taken out on Manhattan condos in the past few years.

We're still going round and round the original point. If the market declines anywhere near where most folks on this thread have projected (all but one saying at last 15%, and that one saying 10%), then rent/buy is VERY heavily slanted towards rent no matter which variables you pick.

A leveraged 10% loss is HUGE.