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.”
***
“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….”
~ Rick Santelli (more top-shelf Rick)
“The ultimate result of shielding men from the effects of folly, is to fill the world with fools”
~ Herbert Spencer
***
Sources:
U.S. Home Prices:
http://www.census.gov/const/uspriceann.pdf
30 year fixed mortgage interest rates:
http://www.freddiemac.com/pmms/pmms30.htm
Inflation:
What would the average cost have been to rent over that same timeframe?
He forgot insurance, upkeep costs (new roof perhaps, new appliances over time, various repairs, property taxes...). That RE investment is a fool's game as you need to factor in TOTAL COST OF OWNERSHIP.
Then factor in the simple cost of renting.
Subtract TOTAL cost of the home/ownership MINUS what the cost was if one chose to rent during the same period of time.
Well he forgot the mortgage deduction, a positive contribution over the last 30 but sure to be removed in the near future if politicans are serious about debt reduction.
speaking of writing off interest and property taxes on one's personal income. (and forgive my ignorance, have always been a renter). Are these both 100% deductible? If so, the bank is still making a ~90% return on the principal over the life of the loan. If the individual is writing this off, but the bank is still getting paid, where is the money coming from? Uncle Sam?
If that's the case, is this a direct transfer from tax payer to banks so they make mortgage loans -- giving them our money to lend back to us?
Gary,
You can only think this if you think that the money is "Uncle Sam's" money to begin with. That line of thinking goes along with the line "A tax cut is a cost to the government," and "We can't affort the Bush tax cuts."
So, the banks get their pay and Uncle Sugar offers a "discount" on confiscatory tax structure to stimulate certain behaviors favored by Bawney Fwank and Chris Dodd (D-Countrywide).
- Ned
(full disclosure, Bawney used to be my congress-critter until he got gerrymandered away, thank the gods)
OT-gerrymandering was invented in the Commonwealth of MA-Governor Gerry's salamander; was reminded of this as I went to the wrong precinct's desk today to vote in the Primary.
What does a tax write off have to do with the bank getting paid?
Getting back money that uncle sam stole from me in the first place? Sans this deduction, how low would rates be? Would it encourage savings, rather than borrowing, and further reduce rates? How low would home prices be without such incentives? If we are going to talk about tangential costs/benfits, we must talk about it them all. How would this afffect prop taxes (also deductible)?
With these supports removed, how much are my Cap Gains now. Speaking of Cap Gains..oh shit!....there is another incentive (gift) we forgot about. That parting gift from Clinton, which encouraged flipping, and asset velocity. Wouldn't PV=MT essentially apply to any asset, and not just money itself?
Point being, this article missed a lot of intervention that skewed prices, and encouraged mis-allocation over the last 30-40 years.
Except for the fact that most people don't realize that the actual benefit of this is only equal to the difference in your itemized deductions minus the standard deduction. $11,400 for married and $5,700 for singles. Just another sham to get the sheeple into housing.
"Hey you can deduct interest, but we won't tell you that unless it is above a certain threshold, you are getting the same deal as everyone else"
But, but ....
http://www.youtube.com/watch?v=hn5EP9StlVA
Yup. 4% per year is the crude estimate for upkeep. Owning a house is about as profitable as having kids.
You sound as if renting is far cheaper then buying a home. You think the landlord in all his benevolence is just eating the cost of maintenance and taxes, oh and NOT turning a bit of profit?
lmfao
+9000
Note: Raising interest rates to 10% would annihilate the housing market. A total collapse..deflationary to the max.
yes, but consider the upside: then we could drop mortage rates all over again.
viva le bubble!
What housing market? Aren't you aware that housing is now fully in the political realm?
Politicians will set housing interest rates negative, if they want to, regardless of what any market rates might be (if they still exist).
Kinda off topic but :
http://www.lewrockwell.com/gatto/gatto-uhae-11.html
The Underground History of American Public Education
The thesis I venture to submit to you is as follows: That during the past forty or fifty years those who are responsible for education have progressively removed from the curriculum of studies the Western culture which produced the modern democratic state; That the schools and colleges have, therefore, been sending out into the world men who no longer understand the creative principle of the society in which they must live; That deprived of their cultural tradition, the newly educated Western men no longer possess in the form and substance of their own minds and spirits and ideas, the premises, the rationale, the logic, the method, the values of the deposited wisdom which are the genius of the development of Western civilization; That the prevailing education is destined, if it continues, to destroy Western civilization and is in fact destroying it.
I realize quite well that this thesis constitutes a sweeping indictment of modern education. But I believe the indictment is justified and here is a prima facie case for entering this indictment.
I was in Skool more than 10 years ago and we learned pretty stupid things, but from what I hear today goes on there especially in the younger grades, I would be shocked sitting in a classroom even being an adult
A few years ago, my son failed his Activism class in high school because he challenged all of their assumptions. Otherwise, it's the easiest A in the curriculum.
Good for him.
I had my son suggest going down to help the border patrol track illegals here in AZ for a community service project credit, his teacher didn't care for that one.
Activisim?
Why live in a school district with such crap courses?
+1000 - and much of the rise in college tuition costs <could> be attributed to government subsidization of tuition. Governments, banksters, corporations all in bed to create debt slaves...
Very few are aware of just how much the government is meddling in higher education at this point.
I find it ironic that the administration's student loan takeover scheme has caused so much trouble and disruption for students whose loans are suddenly ping-ponging between servicers every 3-4 months. Many, and in some fields most, of these students are recent grads who find themselves butting heads with various bureaucracies when they can't make their payments.
And yet after months of this nonsense, the new Income Based Repayment scheme is finally functioning. It's scaled to take into account both your income and your payment amount; all one must do is (1) not already be in default and (2) meet the ratio requirements pertaining to gross disposable income and monthly payment amount.
What this means - Let's say you started school several years ago. Let's get you a moderately price state school education and a private master's degree. Call it $120,000 in student debt, about 2/3 of which is at 8.5%. Say you're lucky and land a job, and now you're making $40,000 a year. Your monthly payment amount is somewhere between $1600 and $1800 a month.
This describes, roughly, quite a few people I know, though $40k a year is optimistic.
With IBR, the monthly payment drops to less than $300 a month. After 25 years of payments, the balance is written off. Currently, you'd be on the hook for taxes on the write-off, but that will (a) likely change by then or (b) it's just not going to matter anyways for other reasons. So who gives a shit. The student borrower ends up hardly paying more than the principal, and the government eats about $200,000 in interest.
The student would have to be making roughly $160,000 a year to fail to qualify for this program. Virtually anyone can qualify for this with typical student loans, as long as they're (1) not dead (2) remember to apply for them. It appears that this is the new normal.
If you're a civil servant, it gets even better. After 10 years of payments like this, they'll write the rest off tax free.
The way payments are calculated, generally speaking - no more than 15% of your gross disposable income, defined as gross income minus 1.5x your poverty level. Soon this changes to 10%, instead, obviously resulting in a ~30% lower payment for individuals with otherwise identical loan situations.
This is all obviously fucking insane, but I certainly do not expect any of the students to say no to this. I'll leave it to someone someone else to tell us how this will effect the higher education bubble, and what it means to the govt's balance sheets in regards to all the loans they've gobbled up.
Say who were Obama's top campaign contributors?
1) University of California - $1,591,395
2) Goldman Sachs - $994,795
3) Harvard University - $854,747
The rest is here:
http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00009638
Shouldn't everybody's "education" involve figuring out how you're gonna pay for shit? (like "education")
Apparently not.
gotta add beyond petroleum to your list. - Ned
Don't know where you get your information. This program really is just for people who are barely scratching by. Using the IBR calculator and under-assuming our annual income (120,000), I would still be rejected from the program for my student debt - $50,000 (remember, it's only for Federal loans).
But, yes, gov't guarantees etc. allow education costs to outpace reality.
I have no kids. But if I stop sacrificing the kids of my neighbors, you're telling me the sun will continue to rise?
Hmm...I don't know what to think!
Well your 'unborn' kids where already scarificed by the system since you dont have them the effect is the same, if someone came to my house to take my kids for sacrifice I would kill them or die trying but through economical in(diss)insentives they can make you not have children at all or only 1 or 2 when you would normaly have 5, spooky if you think about it long enough
Most americans understood this : it was affordability and having a nicer home for the payment, as well as a tax haven that pushed home ownership and construction. Oh. and lets not forget how wall st and big builders profited ... keeping wages dirt cheap and maximizing the selling price.
Now show me another place on this planet better! Why do you think everyone south of the border was coming into the land of the free?
Segestan-
was???
- Ned
Wow I learned something new today! Could you offer and educated advice if it would be better to rent over the next 30 years or buy?(before I can calculate this myself)
Some things that will make home prices go up:
1. inflation
2. plentiful jobs so someone can buy your home
3. interest rates going down significantly. They are presently sub 5%
4. more demand than supply
5. real estate taxes going down
Some things that will make home prices go down
1. deflation
2. depression and no jobs
3. interest rates going up
4. shortage of houses
5. real estate taxes going up
You will know housing has bottomed out when the monthly cost to rent is close to the complete monthly cost to own a home.
The answer is RENT, unless you have a compelling, non-economic reason to own a home.
Further, time is on your side. When housing starts to increase in price, it will do so slowly and you will see a few quarters of increasing sale prices if the homes are not somehow subsidized by the FEDS.
Some people incorrectly chase low interest rates on homes. The problem with this is that the true value of the home is at what people can afford when rates are "normal", say 10%. Would you rather have a 10% mortgage on a 100,000 home? or a 5% mortagage on the same home if it was worth $200,000. Your mortgage payments are the same (approximately), but your future values are much different. BTW, most people stay in a home about 7 years; many cities are broke and have to raise taxes; and the true inventory of houses on the market is skewed on the low side by banks holding inventories off the market.
Amen
That's NOT a cow.
How do you know it's not a cow? Cows have horns
Maybe it's a witch!. I'll weigh her.
the advantages of renting are priceless for some people (such as myself) who are interested in not being tied down to any one given place or being handcuffed to any long term financial obligation.
No repair costs.
Not affected by flux in housing market.
Walk away whenever you want.
and no temptation to dig into a deeper hole by taking out a HELOC...because you can't.
I like life simple...and debt free.
Correction...there are repair costs...they are part of your rent payment whether something breaks or not you still pay them. Same with grounds maintenance & upkeep, insurance etc. the landlord ain't payin it out of the profit or he closes the doors. No sweat, he'll do something else.
It's all in there, it's just not broke out on the bill...not doggin ya...just sayin, nobody rides for free...and shouldn't.
"It's all in there, it's just not broke out on the bill...not doggin ya...just sayin, nobody rides for free...and shouldn't."
Gas, Grass, or Ass...Nobody Rides For Free.
bumper sticker
Tattoo'
An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.
Laurence J.Peter
Who says you can't walk away even if you buy? Jingle-mail - it's all the rage nowadays!
An interesting development...
"Real IRA threatens to attack British bankers
The Real IRA has threatened to attack British bankers and their companies describing targets in England as a priority."http://www.telegraph.co.uk/news/uknews/terrorism-in-the-uk/8003234/Real-IRA-threatens-to-attack-British-bankers.html
A potential black swan?
Someone needs to start the revolution...
"However, security experts have doubted whether the group, which has only 100 activists, has the resources to carry out its threats."
LOL, don't underestimate the power of one...
The last people you want leading the charge are these shit cunts. http://en.wikipedia.org/wiki/Omagh_bombing
probably british inteligence was behind this, as with many of the "IRA" bombings. Not a fan of the IRA, just have come to learn most of the terror attacks are carried out by govt players...
First reaction is 'bollocks', but I'll keep an open mind.
Links?
Former prominent Republican U.S. Congressman and CIA official Bob Barr stated that the U.S. is close to becoming a totalitarian society and that elements in government are using fear to try to bring this about.
Republican U.S. Congressman Ron Paul stated that the government "is determined to have martial law." He also said a contrived "Gulf of Tonkin-type incident may occur to gain popular support for an attack on Iran."
Former National Security Adviser Brzezinski told the Senate that a terrorist act might be carried out in the U.S. and falsely blamed on Iran to justify yet another war.
http://www.wanttoknow.info/falseflag
A "few" links for iota.
Thanks!
But I meant in relation specifically to British intelligence acting under the guise of the IRA.
That's my thought. It's just another instance of the oldest trick in the book, "Let's you and him fight!"
False flag! Get your false flags here!
this assumes everyone refi s (apparently more than once); it ignores the tax deduction for mortgage interest; it ignores benefits of leverage; it ignores that everyone needs a place to live.
is the author arguing everyone should rent?????????
Think he's just pointing out not to think of your house as an investment (unless you rent it out for positive cash flow). Great point that everyone needs a place to live-but not beyond their means..
Agreed.
And there is one more reason why Mr 12pack should NEVER consider a house as an investment: it is not diversified. I am assuming that Mr 12pack is not loaded. He should not take a concentrated, leveraged bet.
Saying that because real estate has done well historically, then you should buy a house is just like saying that because the stock market has done well in the last 100 years, then you should buy a few stocks. Not a market-average index fund, mind you: but a concentrated, leveraged bet on a few stocks. For Mr. 12pack that would be inappropriate financial advice.
To pursue the analogy further, whoever bought a house in Detroit placed a leveraged bet on GM (probably without knowing it), in Allentown a bet on the steel industry, in Rochester a bet on Kodak and Xerox etc. etc..
Mr 12pack may want to buy a house for a gazillion of reasons, but he should never be told that it is an "investment".
In addition to "not diversified," a house cannot be easily "liquified" (profitably or not) in a deflationary scenario in which "stuff" is losing its value and cash is gaining buying power.
(Not denying the hyperinflationary argument, either, but at least for the short-term, I'm going with a deflationary scenario in which fiat double-ply temporary gains buying power).
I have rented since selling my house here (Las Vegas) in 2004 and haven't regretted it for a day. I got out maybe a year before the market topped, but I didn't leave much money on the table.
If I lose my job, I can relocate immediately. If I had an underwater house to get rid of, how could I accept a job offer elsewhere without having to -- ta-da! -- mail the keys to the bank?
Not necessarily. I was only trying to illustrate that houses appear to be a great investment when interest rates keep moving lower. The best time to buy is when prices are low (rates high) and sell when those conditions reverse. The opposite will surely yield disastrous results. In other words, this isn't a good time to buy no matter what the NAR says (they've got TONS to sell).
If you accept that where you live is not an investment and understand things like even with todays ultra-low rates, it still takes about ten years to pay down 20% of the principle on a 30 year, that should make decisions easier.
Agreed.
And there is one more reason why Mr 12pack should NEVER consider a house as an investment: it is not diversified. I am assuming that Mr 12pack is not loaded. He should not take a concentrated, leveraged bet.
Saying that because real estate has done well historically, then you should buy a house is just like saying that because the stock market has done well in the last 100 years, then you should buy a few stocks. Not a market-average index fund, mind you: but a concentrated, leveraged bet on a few stocks. For Mr. 12pack that would be inappropriate financial advice.
To pursue the analogy further, whoever bought a house in Detroit placed a leveraged bet on GM (probably without knowing it), in Allentown a bet on the steel industry, in Rochester a bet on Kodak and Xerox etc. etc..
Mr 12pack may want to buy a house for a gazillion of reasons, but he should never be told that it is an "investment".
PS Pretty much everything appears to be a great investment when interest rates keep moving lower.
These guys missed the sale part of the program:
http://finance.yahoo.com/news/Bank-Repossession-of-Homes-cnbc-1047161091.html?x=0&sec=topStories&pos=main&asset=&ccode=
Can you say: "epic fail". Sure you can.
Its pretty ridiculous that they managed to 'profit' at all. A house is consumption, goddamnit, not investment. And if they profited from buying a consumptive, wasting asset, then someone lost value, ie: purchasing power, by lending to them.
Basically this couple has been given $200k worth of purchasing power, free 'equity' in the past few decades, for doing something of absolutely no value -- merely 'consuming' the asset.
Does anyone actually believe this "money for nothing", or "free money" system is acutally sustainable? Hell no.
Praise Mao and may Hillary have mercy on your mortgage rates.
Kiss the pinky ring of --- 'King Abdullah Bin Abdulaziz Bin Abdulrahman Bin Faisal Bin Turki Bin Abdullah Bin Muhammad Bin Saud ...
Not Hillary, but Chris Dodd who has sponsored S1619:Livable Communities Act of 2009.
It's a whole new part of HUD that is set to provide mortgages and lots of other fun and surprises (like the dismantling of bankrupt state and local govs.).
Enjoy living in your new "Region" citizen!
God that is so hot.
I'm sick of having to work for a living.
I'm glad people like you have productive jobs so people like me can live in free housing, drive free cars, eat free food, attend free college, and download free porn.
Praise Dodd and may Fwank grant you the blessings of 10,000 government contracts.
The boomers will need their jobs until they're in the grave, so the younger generation won't need to worry about acquiring skills for any employment anyway. Their stategy at this point seems to be to saddle the youth with as much debt as possible to enable themselves to at least have plenty of Viagra throughout their remaining years.
When I get old, I'm going to use the AARP to lobby for the civil right of personal "massage" therapists.
I have a right to force your kid to provide me with quality pros in old age.
But the kids need money ... Student loans now at $829 Billion.
The chart within article is unreal but I can not post it ...
Student Loans, Gateway Drug To Debt Slavery
http://consumerist.com/2010/09/student-loans-gateway-drug-to-debt-slavery.htmlYes yes yes!
That's the point I was getting at! In order to succeed you need an education...a good education requires debt, so you can earn more, so you can get a bigger house and take on more debt...because these things always work out here in America, so don't think about it too much, start borrowing now!
thank you for vividly illustrating the effects of inflation for brain challenged americans....so now throw in taxes and upkeep to compute the final irr....and don't forget that mewing whiny response - but our house is our home - we didn't buy it for its investment value....(right)
and using the conservation of wealth principle, who benefitted the most from this economic transaction. if you answered banksters and government, then you earn more points.
I thought the captcha was hard ....
I made a grilled cheese sandwich for lunch today and when I pulled off the grill it had an image of Madonna slipping the tongue to Whoppi Goldberg with George Stephanopoulos staring at them eagerly in the background...
Now that's gotta be worth something...
Was George eager for the dripping cheese? - Ned
In the interest of good taste, I hope you mean the cottage cheese on the back of Whoopi's legs.
lol, no, I don't think that would taste good; George might, though. - Ned
In that case, I'm not sure anything "dripping" from Madonna is suitable for slopping hogs.
yes, we do have some taste. Although that rusty guy keeps trying to expand my currently svelt figure and invite me into his house for a smoke.
I think he's just like all the others.
- Ned
Why junk somebody for a one-liner?
I thought that was funny, Contra!
Not that what you saw isn't Ok but I think I may hurl shortly. BTW does a negative captcha number mean we'll have deflation.
They are kind of like tea leaves aren't they?
ZH is all seeing man
Not that what you saw isn't Ok but I think I may hurl shortly. BTW does a negative captcha number mean we'll have deflation.
They are kind of like tea leaves aren't they?
ZH is all seeing man
Sorry, but I do not understand:
if they bought a house for ~ $76K and then sold if for ~ $270K, how come their profit is ~ $194K? I mean: I assume that $76K is the sticker price of the house, but that is not what they actually paid for it. I suppose that to find out what they really paid one should know their down payment and the the terms of their mortgage loan, right? Am I missing something here?
"If you only aspire to be as intelligent as Uncle Sam wants you to be, STOP HERE. " I c you stopped reading there lol
No, I did not stop there. The profit is overstated.
These dudes paid way more than $76K for their house.
Regardless of taxes, improvements, insurance etc etc.
Real estate is probably an even worse investment than the article suggests.
The only serious way to analyze the problem is to compare the cost/profit of owneship to the cost of renting. And the cost of ownership includes the interest paid on the loan.
Duh.
Of course you're right, George. I was only trying to illustrate the overly-simplistic way too many people think about the housing market.
I guessed something like that. But I would respectfully suggest that ZH readers are a bit smarter than Joe 12pack, are we not?
Surely. But how many people go around saying, "I paid $55K for this place - now it's worth $355 - Conclusion: Houses are great investments and I'm a super-genius!"
I was poking fun at that mindset.
Another quibble with article:
"When you strip out the interest rate effect, the house underperformed inflation by more than 60% over 30 years"
How can you strip out the impact of interest rates to determine the house underperformed inflation? You could say "without the interest rate impact, the house may not have outperformed inflation". Confusing causation and effect.
The article stimulates a good conversation, but could benefit from more detail/rigorous analysis...
Even though this is just a short, somewhat silly article, it was the result of more than 30 hours of research (and one agitated wife). I beat the snot out of the data and I can assure you, with or without rate changes, houses underperform inflation. If you are to believe the Fed's story as to why they were unconcerned about house prices, given their "price stability" mandate, it is because they chose to ignore prices and focus on monthly payment. The monthly payments never kept pace with inflation (I mean not even close) because of wage stagnation combined with more rapidly rising costs of things like insurances, education etc. plus new expenses (child care, cell phones, internet).
The relationship I couldn't wrap my head around was that interest rates are supposed to fluctuate in response to inflation and perhaps I'm missing some kind of skewing factor in that synergy.
If you want to see the spreadsheet for yourself, just leave a comment on my blog and I'll be happy to email it to you.
BTW, if I did any more detailed/rigorous analysis, I'd be suddenly single.
Mark - appreciate the work you put into this. By my comment, I was reflecting a collective thought throughout the string that maintenance, depreciation (remodeling), taxes, etc. are not figured in. I don't think it would be possible to do this, per se (there might be something out there where this is done, but dunno that anyone in the corporate world would want to show the fallacy of home ownership).
I agree about your concept on home ownership - it's a loser over time. It's a part of the bankster/government kleptocracy to create debt slaves. I'm just not sure you can boil the relationship done to numbers over time, especially with all the various factors involved (remodels, maintenance, etc.).
I'm not aware of a focus by the Fed on monthly payments (perhaps as expressed as 'affordability'?). I think they just boggled the whole affair, since everyone loves a good bubble - until it pops. Agree that monthly payments rose more then inflation - that's the hollowing out of the middle class.
Interest rates have been held down artificially in a serial manner to inflate various bubbles to avoid a politically painful recession - and because the end-game of a fiat currency fractional reserve banking system is always failure. The 2000's were the Fed doing the final bidding of the banker owners - siphoning off huge profits and salaries and bonuses in a last gasm of greed. Oh, and CPI was much higher than published, see shadowstats.com.
Again, thanks for the article. It's a great concept. I just think it might be one of those collective calculations that has too many factors to be done accurately enough to sustain scrutiny...
George, I think you are on to something. If the author would also consider interest on mortgage, taxes and a house's upkeep, the math would change significantly.
You just allocate these costs as the equivalent of 'rent'.
They gotta live somewhere while this asset is gaining or losing value.
Prof.
"You just allocate these costs as the equivalent of 'rent'."
That is how Greenspan was doing it in the CPI calculation: "rent-equivalent."
- Ned
(OT-which Dover?)
I hate to bicker with another darn good post here at ZeroHedge, but you forget to include the YEARS worth of primary mortgage insurance you had to buy, the property taxes you paid every year, and the the new furnace, new roof, and new insulation you had to buy just to be permitted to sell the place as a now environmentally friendly home -- plus the mandatory new "Energy Star" rated windows, doors, and appliances you were required to install -- under penalty of being legally restricted from selling your house.
Add that up, and you're badly in the red.
The property taxes alone took your ROI negative.
Yes your right, but the only way to not pay property taxes is to live in a cave(I think, maybe?)
.
God I miss school. That paste is sooooo tasty. <Lickchops>
It sure was! Horse hooves are yummy!
I loved the smell of rubber cement. You?
It is the dawning of the age of aerosol....
Thank you Mark, after reading your letter to Timmay yesterday and checking out your blog, I meant to suggest you contribute to this site if you have not yet already.
Figuring in the interest they paid on the loan, repairs, insurance, and current depreciation-
They lost their a**
Yes...therefore you will be assimilated for no other reason than asking a simple question expecting a simple answer...so says "thy banker"...
Housing is heavily subsidized, obviously. As a result, in many situations the delta between renting and owning is narrowed sufficiently that it's close to a wash, especially if you actually pay off the mortgage.
What renters don't pay in mortgage interest or maintenance they pay in extra taxes because of no write-off, or no nifty dead cat housing market bounce tax credits, and then of course at the end of their lease they own nothing.
Without all these subsidies it would not make sense to own, but then again without all these subsidies housing prices would be lower and the balance would be favorable once again.
Property managers still have to pay property taxes and maintenance, so if their special tax situations were removed also (the Rental P&L game is endless fun), there would be a new equilibrium between the two.
It is interesting that a homeowner WITH a mortgage gets a deduction, a homeowner like me, without a mortgage dosent. This drives customers to the banks.
Interesting? I think it would be more appropriately called total bullshit. The system is very obviously geared toward encouraging people to overleverage themselves and stay in debt up to their eyeballs at all times.
That being said, I would still take having no mortgage in a heartbeat. It ironically would make a good Mastercard commercial:
- Not having a mortgage interest deduction, $15,000 dollars
- Not owing criminal banksters a single fucking penny despite the federal government needling you in every possible way to do so, Priceless!
Plus, how many times have you heard some idiot financial advice type (or just some idiot) say something like "having a mortgage is good, because you get a tax deduction".
I've had to explain to people that having a tax deduction is great and all, but not having to pay the interest on debt is somewhat better.
You're leaving out the latest "recommendation" from brokers in the US. If you own your home, they'll now suggest you take out a mortgage on it so you can buy MUTUAL FUNDS with the proceeds. One of them tried it on my mother-in-law. As amusing as that would have been to watch, it's some sick shit!
That really is some sick shit!
Isn't that precisely what Howard Ruff suggests in his book? He didn't provide any documentation to back it up, but he said most "wealthy" folks who can afford to purchase their home with cash still mortgage it to the hilt and invest the proceeds in profit-generating activities vs profit-decimating things like home ownership. I'm a habitual renter, so I wouldn't know.
The problem is, the sales pitch for ownership is that a home is an investment. Most rational people would not buy securities on time and pay them off over 15 or 30 years. They instantly realize that the increase in value is eaten by the interest on the loan. Americans, do not make that connection. They have not developed the critical thinking skills necessary to identify when they are being sold a bill of goods. Furthurmore the Twelvepacs, like most people, are unable to tolerate delayed gratifiction and they want it (whatever it is) now. It's a perfect storm, and why we have what we have.
One BIG math error in your answer to Question 2(a): 160.36% accumulated inflation requires that you multiply their original purchase price of $74k by 1.6036, not 2.6036. The result is that the "inflation-adjusted" value of the house in 2009 was $122k, not $198k. And, therefore, their "real" profit was $149k, not $72k.
With that one error corrected, they made a real profit of about $5k after 30 years that was not the result of declining interest rates. But there is one other error. The other $144k of profit is real money in their pocket. Yes, had they rented and bought a $50k, 30 year bond yielding 14% they could have earned the same profit without the house. But how many ordinary Americans can buy such a bond with 20% down? Correct, bucko, ZERO. By definition, the only Americans who can buy a bond on their personal credit are not ordinary.
Once you throw in the huge tax benefits from ownership, buying still makes sense --- but only for those who have very secured employment, plan staying in their home for at least 7-10 years, and who can buy in today's market for less than the cost to build.
Are you saying that 20% accumulated inflation is actually deflation? Saying there was 20% accumulated inflation over, say, 3 years, multiply the cost of the microwave you bought for $100 by 0.2?
There's definitely a pretty major math error somewhere.
Sorry, 2.6036 is the right number. Think of it: when you say that inflation is 3% you do not mean that the final price is 3% of the initial one. It is the initial price plus an extra 3%. So you multiply the initial price by (1+0.03). Similarly here you multiply by (1+1.6036).
If inflation was 100%, then the 74k would double, wouldn't it? -cos you add (1.0 x 74k) to the original 74k.
He just used shorthand to save time (make 160% into 260% and avoid adding the original sum back into the answer.
It's good to see the numbers clearly laid-out, and I agree completely with the author's point, which I take to be that a house is a bad "investment vehicle."
However, this piece doesn't bother to make mention of the fact that the 'packs families did have to live SOMEWHERE during all those years, so a lot of the loss on "investment" can be viewed instead as a survival overhead.
Great points generally, but it's blindly one-sided enough to look like propaganda.
Please don't misunderstand my intent.
I was just trying to write a short, amusing article - not a book. Your point that shelter costs money - no matter what, and weighing that, was beyond the scope I was shooting for.
I was trying to make the point that a lot of people who think they made a killing with their house have no idea what the driving force was (lower interest rates).
10-4 on scope & intent. I think many here read this and start pricing the vectors of housing options. I think it's safe to say that a renter could be in just as much a pickle with paying for all the cost factors (PITI, repair, landlord costs/fees, etc) as opaque payment that logically should be more than owning given all PITI notions are equivalent.
Nice article... Now do the other side of the equation! hehehe
Unfortunately too many people still say/think "but we want to own our OWN HOME," not realizing that usually what they've done is just switched landlords.
But when the bank is your landlord, YOU get the privilege of taking care of everything.
I just looked at it again and you are correct. 160% requires multiplying by 2.60, not 1.60. I also checked the inflation calculator.com and found the inflation-adjusted price through 2009 to be $190k.
Now I can go back to eating those paint chips. Mmmm.
Follow up quiz for those still paying attention.
Joe and Mary are now 51 years old and decide they want to rent, not roll over to a new house.
How much will Uncle Sam (and their State if they are so unblessed) tax them on their profits?
lmfao... "Crapital Gains"
damn...owning a house is just retarded...
answer to question #1 is wrong, you're not accounting for closing costs on the way in and commission on the way out. $177K max, probably even less
The analysis is interesting on CRE, becuase on an after-tax basis the one who really makes out is Uncle Sugar. By the time you pay cap gains, get taxed on accrued depreciation deductions, figure in the brokerage commish and sales fees/costs, etc, you make JACK on a risk-adjusted basis, after-tax, after inflation.
No cap gains tax on sale of primary residence under those circumstances
watch the REIT index as this insight becomes more and more common. - Ned
Your assumption is based on the purchase price and not on the Cash the people used to buy the house. If they put 5% down on $76,400. they would have "invested" $3,820. Now recalculate the return.
What if they rented the property? At $76,400. the normal return is 10% of the value so for assumption sake, lets say they got $7,640. per year for the 29 years. This is assuming that the rents would not increase from the $76.400. They would have received $221,560. in rents.
Now recaluclate the return on a property.
You have to take into consideration that the Owner did not pay rent somewhere else. So, if you use the rental value of that property against the Owner living there then it is a GREAT investment.
HOLY CRAP. Yeah, let's look at the down payment and totally forget 30 years of monthly payments! And sure, let's also forget they paid about $225,000 including INTEREST. And sure, let's forget they paid tens of thousands of dollars in property taxes. And sure, let's forget they paid tens of thousands of dollars in upkeep on the house, and who knows how many thousand hours mowing the lawn and performing other chores (their time is worth nothing, right?).
Yeah, let's compute the "return on investment" only based upon the down payment! Hahahahaha! You really MUST be a real-estate agent, or somehow one of the leaches that suck off homeowners to come up with such a notion.
I hope nobody is stupid enough to believe your lies.
So, let us say that they did not buy the house. They put the $$3,820. in the Stock Market and rented a place to live. How did they make out? Plus, you have to calculate the yearly increase in rent.
No, maybe they did not have to pay the property taxes or mortgage payments but they had to pay rent. And you better believe that if property taxes went up so did their rent.
So, tell me how much money would they have if they invested $3,820. in the Market 29 years ago?
of course they pay property taxes and mortgage interest. Does the landlord eat that? No, he's a CRE type, leveraged to the hilt and able to walk away if the thingie implodes on him. So his rent roll has to cover all of the same costs, plus some extra cash flow and maybe he accounts for the tax costs with a markup on them to come to the rental sell price.
- Ned
Time is the factor that jumped out at me. I assumed that everyone else would catch the need to factor in taxes, rent, upkeep etc. And I knew that someone would point out that if you rent you are paying taxes, upkeep and sometimes even some utilities. But for me the big difference is when the washing machine stops working I make one phone call and then go back to whatever I am doing. Since I have good landlady the problem is resolved in short order and I did not have to price repairmen, wait at the house for them to show up, deal with the billing etc.
One phone call I am done.
Z
Unless I skimmed that silly article too quickly, I didn't see them account for the interest on the mortgage, 30 years of property taxes and other fees. Added together, these are enormous.
In fact, they lost value on the house, but on paper they made a big profit. So when they sell it (which is the only reason to even ask "how much is it worth today"), the predators-that-be will tax them on the $200,000 profit, even though they actually LOST value on the house, all things considered.
Even before the housing bubble and crash, real estate was not a "no brainer". Yes, it was possible to make significant profits in real estate investing (mostly due to the enormous leverage that normal folks cannot access for any other investment). Probably 10% to 20% do well with real-estate, just like the stock market.
Thanks, saves me from having to say it.
The Housing "profit" is a mistake and therefore renders the answerer inept.
The real profit, if any after adjusting for inflation, interest paid, and maintenance, taxes and new roofing, and opportunity cost on the lost $74,900, it looks like nothing but 6X original price number would result in a real spendable cash profit, and with that they need to subtract from that profit the cost of new housing since I figger they aren't gonna live in a tent.
An equivalent house like the one they left will likely eat up $300,000.
Looks like those using a single house to make money are unlikely to even break even.
when they sold the house (after all the fees) they made nothing - end of story.
Why - well if they had to buy it back the following day it would cost them more than they collected (after costs). housing supports only the leaches that suck the dollars. Those that pay just keep paying until they fall off the perch - and you never 'own a home'. stop paying property taxes and see how long you 'own' it.
you home is ultimately owned by the state in perpetuity - keep picking cotton, field monkeys.
There's the amount you get if you rented out the property, which would make it an investment. Then there is the amount of rent you save by not paying that if you lived in the house, which should be deducted from the mortgage payments each month. This assumes that you don't prefer being homeless, or someone else's burden (like your parents).
The article completely ignores rental costs.
This article shows the folly of central planning (herding Americans toward home ownership) but it doesn't tell the whole story of residential real estate since 1980 which has certainly meant different things for different people. The bottom line is that all real estate is not created equal. It never has been and it never will be. So, averages be damned.
Comparing the average this vs. the average that and then coming up with -60% ROIC over 30 years again does little more than underscore why the government push to push home ownership on everyone in America no matter what - was a really dumb idea. After decades of Great Society type programs that tried to foster real wealth creation for certain segments of the U.S. population, vastly expanding home ownership seemed to be the silver bullet that appealed to political types across the spectrum. After all, the numbers don't lie - right? Americans who owned their own homes were, hands down, wealthier (as a group) than those Americans (as a group) who didn't. This had to be a lay-up. What could possibly go wrong?...The American dream and all that.
Well, it wasn't a lay-up but a brick that missed the net and the backboard because all real estate is not created equal.
Think about whatever your stereotype is for a young, smart, well educated person. When S/he gets out of college does S/he scrape up whatever money S/he can ASAP and buy the first house -any house- S/he can? No, of course not, that person finishes up self-investment - graduate school, career building, marriage, whatever and then, THEN S/he (typically) buys the best house in the best locale S/he can afford because that's where the best value is.
But why? If home ownership = wealth building why not rush out and buy the first house you can afford, right after college and get that much richer, sooner??
Well, because all real estate is not created equal.
As bad as things are, you'll notice that by and large residential real estate in the most established suburbs, close to the biggest and most important cities have retained most of their market value a whole lot better than four year old McMansion tract housing out in sunny El Whereverio has.
Also, I can't think of another asset class since 1980 that has been the source of more individual wealth building success stories than residential real estate. It's actually pretty hard to go out and get rich using your skills and smarts but EVERYBODY can name a hand full of people who became rich, by accident or design via residential real estate. I mean, you're using someone else's money at subsidized rates to build your own mini-empire. In how many other areas, for any length of time, has the average Joe been able to have a decent shot at comparable returns since 1980?
So, as a man with frostbitten feet whose hair is on fire might say: averages ain't everything.
Wall Street People just do not get Real Estate. They try to explain it every which way to Sunday and still do not get the concept. But, one thing is for sure. Your House will not have a Flash Crash so some Banker can make $500,000. in a minute. Wall Street people just do not understand or would not have the patience for Real Estate as it takes years to make your profit. They want everyone to put all their Money into the Market that they control at will. As from the Flash Crash they can take your Money and your value in a nano second. Not so much with Real Estate.
Real Estate has been the greatest wealth creator this Nation has known. The only problem came with the Bankers offering equity loans for Consumers to consume. The change in the Credit Card laws were you could not deduct your Credit Card interest caused people to put unsecured debt on their homes. Then with the credit crisis they lost their homes. If they still had it on the Credit Cards they would still have their homes. Yes the Government seems to change the laws to allow the Banks to steal your wealth.
Wall street gets realestate. They are interest in how fast they can suck the equity out of it.
For a real eye opener do some historical housing costs using silver prices.
"And, Class, now that we have examined inflation, in our next excellent discussion, we will introduce the concept of "Net Present Value" and examine social implications of familial divorce on the total housing market."
- Ned
I don't recall anyone ever teaching me about the time value of money until graduate school. Moreover, I don't recall anyone ever teaching me how to answer these kinds of real estate questions. I had to figure it out myself.
Now, let's just assume that most Americans do not finish graduate school (a fair assumption), how are they supposed to know how to answer these questions? The answer is their broker, mortgage broker and banker will help them see the " answer".
No wonder they don't like the idea of Elizabeth Warren running a Consumer Finance Agency that they see as a way to write more comic books.
I am reading A Bubble That Broke the World. Written in 1932 after the first crash, it is uncanny how events then are mirrored today with one important difference, China is the creditor nation instead of the US.
One stunning similarity is how all the bankers uniformly testify that Joe six pack is ultimately responsible for causing the bubble and ensuing the meltdown. The "innocent bankers" were merely performing their sacred role of satisfying public demand for risk and charging a commission for doing so. Those Fabrice Tourre hearings are one big deja vu folks. Wall Street making a market in blatant fraud and deception...
If you want the book (I highly recommend it), you can download it for free here:
http://mises.org/books/bubbleworld.pdf
William,
You are really touching on what I was talking about - this stuff isn't that hard to understand mathematically, but it's never taught! It's ninth grade math at best, but no one ever shows you how to apply it, you have to figure it out for yourself.
I just get pissed because we give education a lot of lip service (and a lot of money) but in so many ways, they're just prepping us to be greater fools. The most important decisions of our lives, and our futures are trusted to some vague touchy-feely notions.
And BTW, I love your art!
I have been reading such analyses by economists and financial experts for years. Every single one of them demonstrates that buying a house is a lousy investment and you would be much better off renting and investing the money you save.
So how come I know 100 people who have made money owning their own home, in most cases it is the biggest financial asset they have? While I know one person who has made as much or more by renting and investing?
Exhibit "A"
+100000000
The vast majority of mom and pop landlords do not charge enough to cover the whole nut. I've met very few in my 25 years of residential and multi-unit property management that have positive, regular monthly, free cash flow. The people that do have been at it years and years and purchased the properties decades ago. Mostly in college towns and larger cities.
Deadbeats, filthy tenants, special assements, building permit fees/inspection, code violations, roof, water heaters, siding, plumbing, mold, flooded basement ally against the property owner. Houses are trying to return to the earth. I consider home ownership the equivalent of yacht ownership. Is it financially better to rent a yacht or own it? Unless you're Larry Ellison, its a no brainer.
Property tax deduction for most is a cruel joke. It will likely cover your lawn mowing or snow removal service for the first 10-15 years. Can you imagine how much it will cost you out of pocket to mow your lawn in 25 years when the deduction nets you $8 dollars a month? Oh, but you'll do it yourself after work won't you. The do-it-yourselfers are the worst because they ended up do-it-yourselfers BECAUSE they're trapped in negative cash flow.
do-it-yourselfers are stupid and fall off ladders cause they are cheap, bitch.
Some great comments here, and a nice article, but to play devil's advocate, say the 12pax put down 20% (~15k), and that their payments, taxes, upkeep, etc., were the equivalent of a monthly rent payment. (When I bought a house, it was because I could get a far nicer place for the same monthly payment, but this probably differs quite a bit). When the principal is paid and the house is sold, they get their 15k back, plus ~255k more, less taxes (which I won't try to estimate because I've slept since I paid them). They put 10% down on a million dollar house, and they walk away with over 100k. Is that just the paint chips talking? What have I missed? I made a good chunk of money on my house, but I worked an awful lot to fix it up.
No capital gains tax on your primary residence (up to $500,000 for married filing jointly).
The "catch" is that they now have $900,000 in debt and their payment is $4560 (4.5%) a month (probably $6500 with taxes utilities etc.) if something bad happens, they will burn through that cash in less than three years.
but it gets worse....
What if interest rates go to 7% (which is still very low)? that $4560 payment doesn't buy a 900K mortgage anymore, it buys a $687K mortgage so how much can they get for the house? 800K maybe? and the cost of selling that home is probably gonna be $60K. They're broke and moving in with their kids.
If interest rates go back to 9% (the thirty year average), $4560 would buy a $567K mortgage. Are the twelvepacks gonna cough up $300 grand to get rid of the house? Could they if they wanted to? Is the bank gonna take the hit? They didn't last time. So we're all going to pay for their ignorance.
Well said Mark. That's exactly why I rent now. I like owning a house because I like the freedom to construct as I please, but I can't take the risk when interest rates and housing prices are largely controlled by forces outside the free market.
sorry, dbl post. Edit: As long as I'm wasting your time with this post, here's a fun fact: a google search for "Gold bitchez" returns 682 hits, while the search term "gold bitchez" -zerohedge returns only 243. ZeroHedge Bitchez!!!
That's the best use of a double post I've ever seen!
Economic climates and personal dispositions are constantly changing, undermining this article. Sure, I owe 12 more years on an extremely modest 15 year mortgage (not near being underwater). Bachelor's degree with no student debt. No car payment, no credit cards.
Assuming that current, general course of personal debt to remain constant, will I be a fool on my 40'th birthday for owning my home and being totally debt free from a bankster?
Absolutely not! Three things that make you exceptional:
1) No student debt.
2) Buying within your means
3) 15 year mortgage.
I'm gonna guess you could have spent twice as much and took out a thirty year, but you didn't fall into any off the traps. I'll bet somebody, somewhere screwed your head on right.
Just out of curiousity, you must have friends with $75k in student loans, financed cars and mortgages bigger and of longer duration. What do you think of their decisions?
Maybe I missed this in the comments but can someone explain to me how the price of a house goes up with an increase in rates? House prices don't move inversely to rates, the cost of financing does. If I were to buy a house for all cash, what difference does a 4% or 14% mortgage rate make the price? Similarly, by the logic of those that believe in the inverse price to home value relationship, if I decide to buy a house with a mortgage at 4% because I think rates will go up in 15 years when I plan to sell the house, then shouldn't I expect the price of the house to go down because rates are higher? That doesn't make sense. Again, the value of the asset does not depend on the financing cost of that asset.
House prices are highly correlated to 30-year bonds. If the price of 30-year bonds goes up, so will houses. And vice versa. This correlation was pretty consistent until recently with quantitative easing. When QE is withdrawan, the value of bonds will likely suffer the same reversion as the value of houses has been suffering.
Now, to answer your question, you'd rather invest at 14%, then at 4%, all things equal, because, at 14%, rates are likely to come down, but at 4%, there's a higher probability of rates going up.
Rates going up on a 4% investment means a capital loss, and rates going down on a 14% investment results in a capital gain, if you mark-to-market.
Here it is:
$2000 a month gets you a $419K mortgage at 4%
$2000 a month gets you a $169K mortgage at 14%