Expense-Based
Residential Real Estate Analysis
The purpose of this report is to teach prospective home buyers how the Adkins Residential Home Valuation Analyzer accurately assesses the costs associated with owning a home.
Analytical Assumptions
In order to illustrate the utilization of the expense-based analytical methodology built into the Adkins Residential Home Valuation Analyzer, the following assumptions were utilized. The assumptions used to conduct the expense-level analysis play a critical role in the analytical process. Therefore, the prospective home buyer must use assumptions that reflect his specific circumstances in order to make a prudent home purchase decision.
The Seven Homeownership Costs
In order to facilitate the expense-level analysis, the Adkins Residential Home Valuation Analyzer allows the prospective home buyer to assess the following seven costs. Each cost is expressed as a percentage of the home purchase price or in a specific currency amount. The Analyzer provides narrative guidance to help determine the most accurate cost variables.
Total Impact of Homeownership Costs
Based on the expense-level methodology and assumptions utilized, the home would need to appreciate by 7.70% ($15,402) during the first year after purchase in order to offset the costs associated with owning the home. Total home ownership costs represent 31% of household income for the first year of a 30-year time horizon.
| Expense-Based Methodology | ||
| Home Expenditure | Cost as % of Home Price | Dollar Cost Amount |
|---|---|---|
| Maintenance Costs | 1.00% | $2,000 |
| Homeowners Insurance | 0.50% | $1,000 |
| Private Mortgage Insurance | 0.55% | $1,100 |
| Transaction Costs (7 Yr. amortization) | 0.86% | $1,714 |
| Closing Costs (7 Yr. amortization) | 0.21% | $429 |
| Property Taxes (28% federal tax rate) | 0.93% | $1,860 |
| Mortgage Interest Expense (fixed rate loan; 95% debt) | 4.24% | $8,487 |
| Subtotal | 8.30% | $16,590 |
| Less | ||
| Mortgage Interest Tax Shield (single homeowner) | 0.33% | $668 |
| Property Tax Shield (28% federal tax rate) | 0.26% | $521 |
| Subtotal | 0.59% | $1,188 |
| Required Annual Home Appreciation Rate to Offset Home Ownership Costs | 7.70% | $15,402 |
| Percent of Household Income ($50,000) | 31% | |
Expense-Based Results Over a 30-Year Time Horizon
By utilizing the analytical methodology above, the Adkins Residential Home Valuation Analyzer generates the results of the expense-level analysis over a 30-year time horizon. The results of the comprehensive analysis are illustrated in the table below.
| Expense-Based Results Over a 30-Year Time Horizon | |||||||||
| Month | Cumulative Cost | Annual Cost | % of Price | % of Income | Month | Cumulative Cost | Annual Cost | % of Price | % of Income |
|---|---|---|---|---|---|---|---|---|---|
| 12 | $15,402 | $15,402 | 7.7% | 31% | 192 | $203,138 | $9,879 | 4.9% | 20% |
| 24 | $30,700 | $15,298 | 7.6% | 31% | 204 | $212,741 | $9,603 | 4.8% | 19% |
| 36 | $45,894 | $15,194 | 7.6% | 30% | 216 | $222,055 | $9,314 | 4.7% | 19% |
| 48 | $60,976 | $15,082 | 7.5% | 30% | 228 | $231,067 | $9,012 | 4.5% | 18% |
| 60 | $75,943 | $14,967 | 7.5% | 30% | 240 | $239,763 | $8,696 | 4.3% | 17% |
| 72 | $90,788 | $14,845 | 7.4% | 30% | 252 | $248,128 | $8,365 | 4.2% | 17% |
| 84 | $105,507 | $14,719 | 7.4% | 29% | 264 | $256,148 | $8,020 | 4.0% | 16% |
| 96 | $117,949 | $12,442 | 6.2% | 25% | 276 | $263,805 | $7,657 | 3.8% | 15% |
| 108 | $129,428 | $11,479 | 5.7% | 23% | 288 | $271,085 | $7,280 | 3.6% | 15% |
| 120 | $140,487 | $11,059 | 5.5% | 22% | 300 | $277,969 | $6,884 | 3.4% | 14% |
| 132 | $151,394 | $10,907 | 5.5% | 22% | 312 | $284,439 | $6,470 | 3.2% | 13% |
| 144 | $162,141 | $10,747 | 5.4% | 21% | 324 | $290,477 | $6,038 | 3.0% | 12% |
| 156 | $172,723 | $10,582 | 5.3% | 21% | 336 | $296,061 | $5,584 | 2.8% | 11% |
| 168 | $183,115 | $10,392 | 5.2% | 21% | 348 | $301,173 | $5,112 | 2.6% | 10% |
| 180 | $193,259 | $10,144 | 5.1% | 20% | 360 | $305,788 | $4,615 | 2.3% | 9% |
Application of the Expense-Level Methodology
Given the results of the expense-level analysis, the first two questions the prospective home buyer should contemplate are: "What is the likelihood that the home will appreciate at a rate that will offset the estimated costs associated with owning the home?" and "What is the likelihood that the home will appreciate by the interest rate amount required to offset these costs?"
To answer these questions, the prospective home buyer should visit the Federal Housing Finance Agency website to determine historical home appreciation rates in his geographic locale. If homes in the community do not appreciate by 7.7% per year, the prospective home buyer has several options to make a more prudent purchase decision:
The third question the prospective home buyer should consider is: "What is a prudent percentage of household income that should be spent each year to offset the seven costs associated with owning the home?" The traditional view holds that it is not prudent to spend more than 30% of household income on housing. In this example, the calculated percentage is 31% for the first year — exceeding the 30% threshold. According to the results of the expense-level analysis, home expenses will be at or above the maximum level of household income for six years, and will not decrease to 25% of household income until the eighth year after purchase.