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:
... can someone explain to me how the price of a house goes up with an increase in rates?
You have it backwards. The house price generally goes down as rates go up. Imagine you are selling a house. The buyer can only afford $2000 a month payment. As interest expense eats up a bigger part of that monthly payment (as rates go up), the price of the house (the amount financed) has to decrease so that the total payment (principle plus interest) does not exceed $2000.
The opposite happens when rates fall. A smaller part of the $2000 is taken up by interet expense, so the amount financed (the price of the house) can rise.
Which is exactly why now is not a good time to buy. QE is merely manipulating mortgage rates so unsuspecting young people will jump into the market teased by low monthly payments. When rates return in a few years to 7% (the long term average), the price of their home will have fallen by 20%, forcing them to walk away from their down payment or trapping them in their starter home. With employment so sketchy, now is not the time to set down roots that can turn to chains.
Well said! They're piling rocks on the wrong side of the scale.
A residence should be a roof over one's head, a good school district to send your kids to.
Anyone who views their residence as an investment gets whatever the have coming to them.
The unschooling movement grows:
http://www.theglobeandmail.com/life/family-and-relationships/back-to-sch...
Most people I know (I'm German, dunno if education is any better here), when calculating houses even in the most simplistic way, take into account the price to rent. In fact, not "wasting" the money paid to rent seems to be the #1 motivation to buy houses over here.
I.e. value of home + rent not otherwise paid over time - expenses for aquisition.
Even assuming lowly figure, of just 400 USD rent "saved" (or aquired when renting out) every month over 30 years would account for 144,000 USD
And yes, there are cost for maintaining the house, insurance etc. but then rent also would go up with inflation, there are tax deductions, etc. etc. Also I'm not saying this is going to work again from now on, but over all the 12pack family's decision to buy the house in 1980 certainly wasn't an outrageously bad one.
Oh and just for the record: I never had any credit since I was 24, I have enough liquidity to buy a 5 bedroom house without credit and yet I'm living (and always have) in a rented appartment.
Suffice to say I personally loathe debt and being dependent on banks, but still I think the 12pack have made a choice which turned out fine for them (with a house in Detroit and a Hurricane it may have turned out disastrous though).
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
--wrong place--
Good luck with your permaculture ventures in your rental.
Interesting response to article from a parenting site:
http://www.thekidsvillage.com/content/dont-let-american-dream-turn-night...
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The Light Bulb
So, you’ve got your basic vortex tuner, which algebraically reduces out the re-direction of linear time in the dc bus, which is increasing the complexity and number of simultaneous equations, running in parallel within the symbiotic relativity circuit and a temporary bridging mechanism to acquire unique nodes out of a dc bus, running off an algorithm that distills analysis into unique relationship kernels, with a compiler that aggregates and disaggregates the kernels, seeking resonance with the local environment, like prime numbers. The algorithm will seek, automatically resulting in intuition.
Emotional intelligence is a bullpen of unresolved behaviors, which will ultimately point to unique nodes, again through algebraic reduction, to re-boot the algorithm with additional parameters should it end computation with no resolution, appearing as a lock-up. Changing locations, circulation, creates angle shift, like enzyme action to capture a substrate. Finally, a random parameter generator safeguards the system.
In net, analytical space is maximized as parallel vertices capture unique components of the ac wave from the dc bus and, when it makes a copy, it slightly alters the dc original, creating the necessary incremental dc adaptation, leading to positive feedback amplification, which automatically triggers planetary fulcrum action to grow the negative rail, in a symbiotic relationship. If the ac wave fails to form, an error occurs, and the signal automatically, temporarily, swings to the negative rail, in relative time, which acts as a bridge.
The primary difference between individual minds is the number of frames taken over linear time and the frames chosen, which is a function of the learning algorithm, which a function of exposure to a distribution of learning algorithms. Dead-end algorithms, like expert systems, fill up memory fast, resulting in same analysis of replicated data, the self-fulfilling prophesy, loading the spring. It’s like radio stations in a community, which depends on the number of new bands, which depends on circulation. New bands may have no effect, affect a marginal addition to an existing station, or trigger a new radio station.
GDP is a dc bus positive feedback loop, and the global corporate HR function has shorted the ac signal, leading the Fed to amplify the failing dc voltage, in a series circuit of positive feedback amps, in a cycle, pumping all the legacy assets out of the pipeline, and blaming the market messengers with the invert, accelerating the liquidation (If you are over 40, with assets, and are locked out of the job market, what happens to your assets?). In a distribution of self-sufficient economies producing unique surplus for trade, the system would automatically re-boot the affected economy when the capacitors were discharged, leaving the nucleus relatively intact. This is not the case with a global IC chip of replicated enterprise systems subject to planetary variability.
HR simulation of the ac signal with different colored people, who all think alike, acting as ropers, engaged the planetary fulcrum, adding it to the rail over relative time. The Fed is increasing voltage at cost to current, accelerating discharge, inflating assets prices on the balance sheet at the cost of deflating real operating income, carrying the misdirection in global central bank operations, sovereigns. Hyperinflation occurs when the population recognizes the economy is a dead end.
The global economy is bankrupt. Any remaining notional value in the markets represents the probability of the analog engineers installing a bridge at the abutment, which depends on a new enterprise system, because the community capacitors in the old pipeline dried out from disuse, as the global HR system completely shorted the economy.
Agency at the end of enterprise life is like a thrift store, where the employees take the best stuff home, and leave the junk on the shelves at excessive price. Basically, the American Enterprise System has been fired already, but it keeps showing up to work everyday out of habit, as individuals, and individuals in larger and larger groups, abandon the system in relative time.
“if the fundamentals are understood …if the fundamentals are not understood…”
Attempting to isolate the electron, rules it out of the circuit, resulting in discharge. The electron does not suffer from lack of choice as a result. Its choices increase, because the sub-fulcrum collapses into many new sub-fulcrums. They assumed supply, like they always do, when they built the load, because it draws amps … until it doesn’t. The whole trick to the bridge is being able to jump out of linear time. Talk is one thing; doing is another.
I found lots of interesting information here. I love zerohedge.
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