Without question, the best way to
make people love you politically is to throw Tootsie rolls into the
crowd. In lieu of sugary treats, making an impassioned plea for education is a close second. No one wants to see their kid grow up to be a potato head, right?
Today we’ll be exploring the mathematics behind the US housing market
over the last thirty years to determine how smart we really want our
kids to be. If you can successfully complete (or at least understand)
the accompanying quiz you’ll have a more thorough understanding of
economic realities than every Ivy League professor (including Nobel
Laureates) active in government and mainstream media.
Question #1 – Joe and Mary Twelvepack, an average
American couple, buy the average American home in 1980. They pay the
average American price ($76,400) and take out the
average American mortgage. 29 years later, they sell the home to another
couple for the 2009 average American price of $270,900. How much did they profit from the sale (assume the mortgage has been paid in full)?
A: If you said $194,500 ride the pony, big guy.
Author’s note: If you only aspire to be as intelligent as Uncle Sam wants you to be, STOP HERE.
Question #2 – According to the BLS, cumulative inflation from 1980 to 2009 was 160.36%. a)What is the simple inflation adjusted value of the house? b)How much of the Twelvepack’s profit was the result of inflation and c)how much was their profit after inflation?
a) $198,915.04 ($76,400 * 2.6036)
b) $122,515.04 ($198,915.04 – 76,400)
c) $ 71,984.96 ($270,900 – $198,915.04)
C’mon, chin-up buckaroo. The Twelvepacks still made money. Beating inflation is the name of the game, right?
Well, there is one other factor we should probably consider: The
effect interest rates had on the value of the Twelvepack’s “investment”.
After all, re-fiing the house at ever lower interest rates is how they
paid for Mary’s boob job, Joe’s rehab, that boat in the driveway, and
the kids’ braces. God knows it wasn’t their ability to earn more.
Question #3 –The average 1980 mortgage was 14.005%
APR (13.74% w/ 1.8 pts.) and the couple that bought it, the Fourpacks,
got 5.1015% APR (5.04% w/ 0.7 pts plus cool cash from Uncle Sam) Their 30-year fixed mortgage payments are $1471.10. a)How big of a mortgage would that payment get if interest rates were the same as in 1980? b)How much of the Twelvepack’s “profit” can be directly attributed to the change in interest rates?
a) $124,206 (you’ll need Excel to calculate this if you’re not Korean)
b) $146,694 ($270,900 – $124,206)
Question #4 –So there you have it. 74% of the
Twelvepack’s gain can be attributed to the 9% drop in interest rate.
When you strip out the interest rate effect, the house underperformed inflation by more than 60% over 30 years (and
that’s excluding all other costs associated with the American dream),
which of course means this wasn’t actually an investment at all. How
many Americans understand this?
A: Not many.
Somehow the mathematical realities of the US housing market have
completely escaped the education-loving American public as they continue
to assume that the next thirty years will yield results similar to the
last thirty. Utterly freaking impossible. We can’t drop
mortgage interest rates 9% again (currently 4.4%), but we should expect
houses to continue to underperform inflation.
Despite our perception, the earth turns. That’s what makes day and
night, and that’s why it seems like the sun travels through our sky. It
took human beings more than 2,000 years to fully embrace that truth.
Teaching your children that houses are good investments (‘cuz look how
it worked out for you) and they’re lucky to have such low mortgage
interest rates is about as enlightened as sacrificing them to Moloch so
the Sun will continue to rise.
Right now, the powers that be are bazooka-ing tootsie rolls into the
crowd at an unprecedented rate. So if your child asks you, “Who’s gonna
pay for all this?” maybe you should just say, “Shut-up and eat your
paint chips, kid.”
#000000;">“The more deflation [sic] the elite, champagne economists throw out there to convince people “your tax dollars really can keep that anvil up in the air,” the more we’re gonna be stuck in the mud for years and years and years….”
#000000;">“The ultimate result of shielding men from the effects of folly, is to fill the world with fools”
#000000;">~ Herbert Spencer
U.S. Home Prices:
30 year fixed mortgage interest rates: