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The Fallacy of Homeownership – Why Do People Believe The Myth?

Tyler Durden's picture




 

Submitted by liberta blog,

In our previous article we explained why buying a house is often a very silly financial decision, especially for people who are young, or those that have a low net worth.

In this article we're going to explain why we think people are so infatuated with the idea of buying and owning a house, even though, if you look a the facts, it goes against many of the investment principles they believe in and hold dear.

But first, I need to address one of the myths about buying residential property...

Myth #1: Buying a house is a way to beat inflation

The theory is:

It is worth borrowing a huge amount of money to purchase a house because, not only will your property appreciate in value over time, your loan amount will also decrease in value in record time, partly because you are paying off a bit of your loan every month and partly because inflation eats away at the value of the amount you still owe!

And it is true – borrowing R1,000,000 to buy a house may seem like a scary amount right now, but a few years later, R1,000,000 will be considered a small amount of money.

If you would like to see just how effectively inflation destroys the value of money over time, plug a few numbers into the inflation calculator and see for yourself.

I have to admit: this theory makes for a very convincing argument.

But it is not.

The elephant in the room

The hole in the buying-a-house-is-a-way-to-beat-inflation-theory is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.

If you take out a loan, you pay more in interest to the bank, than you gain through the devaluation of the amount outstanding on your loan due to the effects of inflation.

The only real winner in this equation is the bank who was kind enough to grant you a loan to buy your property.

And when I say winner, I really mean it, because not only is the bank earning an above inflation return on the money they lend to you, they also create the money they lend to you, right there on the spot, out of thin air.

If I had to behave like a bank and you were a customer to whom I was granting a home loan, it would be pretty much the same as if I had a printing press in my basement, where I would quickly print up R1,000,000 in counterfeit currency to lend to you, make you sign a contract with dire consequences to yourself should you ever miss a loan payment and then, to make sure I get the best deal possible, charge you an above inflation interest rate on the counterfeit money I lend to you.

If you or I behave like this, it is called a scam and, of course, it is illegal.

When banks behave like this, it is called fractional reserve lending and, whether you like it or not, it is perfectly legal.

The wonders of fractional reserve banking

I know what you’re thinking.

But this is no conspiracy.

The fact that commercial banks create money when they grant loans is not a secret.

Not at all.

In fact, commercial banks create over 90% of all the money that circulates in our economy. It is just the way the system works.

If anything is suspicious, it is the fact that everybody uses money, but almost no-one understands where the money they use comes from.

How to make money from a Residential Property Boom

Once you understand the way the system works, you’ll understand that one of the best ways to make money out of a residential property boom is not to invest in residential property, but to invest in commercial banks that grant loans to people who buy residential properties.

During a residential property boom, banks are creating massive amounts of money out of thin air and lending it out, with interest, to many many customers who are lining up to buy the rapidly appreciating residential property.

If you own a part of the banking action, you can make a lot of money while the boom lasts.

There is only one problem with this approach: like all good parties, it eventually comes to an end and, the next day, you wake up with a massive hangover.

Booms usually lead to bubbles, and bubbles eventually pop. When bubbles burst , the very same banks who were raking in record profits just a few months prior to the bubble bursting are all suddenly bankrupt. A good example is the 2008/2009 housing bubble collapse.

But have no fear.

There is an even better way to make money out of a residential property boom, with just about zero risk:

At the start of a housing boom, find a job with a commercial bank and negotiate your salary in such a way that your bonus is linked to the profits the bank makes on residential property loans.

Trust me. It’s a slam-dunk.

So, who is spreading the propaganda?

This is pure speculation, but since bankers are the main beneficiaries of the fractional reserve banking system, I won’t be at all surprised if they are also the main players responsible for spreading propaganda about the home ownership myth I have attempted to debunk with these articles.

And if you’re a banker, who better to get on your side than the government?

Much has been written about the way politics work (especially in America), how lobbying costs money and how big business is the main contributor to political campaigns, so I’m not going to add my own thoughts here.

What I will say is this: if these concepts are new to you, perhaps it’s worth re-reading this article one more time. Perhaps click on some of the links and watch the youtube videos to make sure you understand everything.

Then, if you just want to feel patriotic and inspired, take a look at the video below. I’m sure you’ll love it. It nearly drove me to tears. Heart wrenching stuff.

Over to you

When, after many years of being an investor, I finally figured out how the monetary and banking systems work, it massively changed my perspective on investing.

Since the money we use is something that affects everybody on a daily basis, I find it astounding that so very few people understand where money comes from. I encourage you to do your own research. Reach your own conclusions.

 

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Thu, 03/27/2014 - 17:12 | 4600264 synergize
synergize's picture

A little too simplistic ...

(1) you're assuming that on the long-term the banks current interest rates (lets say 3, 4, 5% - yes I know someone with a nice 3% 15 yr loan) are going to stay below inflation - if they dont then you ARE making money.

(2) You're ignoring the tax break that people get for interest payments - the society is geared towards debt.   Add that tax break in (on the tax payer backs i'll note) and the interest rate is much lower than advertised

Thu, 03/27/2014 - 17:38 | 4600339 Notsobadwlad
Notsobadwlad's picture

Since this is pretty much a repeat, it is looking more and more like a shill piece for the buy to rent funds ... such as Blackrock.

Let's say you have the choice of paying $1400 on a mortgage or $1400 in rent. On the mortgage a small but increasing amount goes into principle, which should theoretically over the long run sit idle but increase in value approximately with the rate of Fed created inflation (this is currently much higher tham a bank savings account)... and on the rest, which is interest you get a 1:1 tax deduction against ordinary income. On the other hand with the $1400 rent, you basically just flush it down the toilet every month, never to see it again. It only benefits the rentier class.

If buying was not a good investment then there would not be buy to rent funds. Don't do what we do, do what we say, so that we can make money... typical banker b/s.

Thu, 03/27/2014 - 17:48 | 4600406 Skateboarder
Skateboarder's picture

This is the very exact reason Skateboarder's dad wants to throw down for a 750K house in a banana market, even though nothing at all makes sense.

We pay 3K in rent every month. That's a lot of fucking money going right down the john, every month after next. Unless hyperinflation or SDRs take over soon, housing prices will continue to escalate, come whatever recession or depression. It's an inherent attribute of the exponentiation of monetary supplies.

The only thing that hasn't gone up is wages, in the last two decades / home-price-doubling-cycles.

Would you rather 'own' a home and be able to someday sell it for a [diminutive] profit, or just flush the money down the toilet in rent? Not everyone can go Galt / live off the land / be a prepper extraordinaire. Everyone needs a pad. Housing is one of those things that people call bollocks on once realizing the nature of the banking system, but there is still reason to buy property, the main one being competition and the surefire doubling of home prices every ten years, at least in Silicon Valley.

Thu, 03/27/2014 - 18:07 | 4600454 fonzannoon
fonzannoon's picture

My PITI is 3k a month, so figure same as your rent. Goes up a little every year obviously. We bought the piece of sh....house... for 515k. I have refinanced twice (original rate was 6.875%) so I have started the 30 year clock over twice even though the interest rate is lower. I figure between principal and interest I will pay about 875k when it's all said and done and that does not include the thousands of dollars for basic upkeep. But still I get the idea that no one is stamping their feet on top of me or smoking below me. It's nice to be in a free standing home. I can rent out the basement for about 1k a month to a crackhead if I need to. So that helps.

There is something to be said for renting a house and not forking over the downpayment and keeping it in the S&P 500 instead. Because if we all think asset prices will go up forever then that goes for the stock market too. Everyone is in a different situation in terms of location etc. and has to decide accordingly.

Thu, 03/27/2014 - 19:38 | 4600748 jbvtme
jbvtme's picture

that bush gene pool could use some diversity...

Thu, 03/27/2014 - 19:45 | 4600777 jbvtme
jbvtme's picture

i haven't had a mtg, car loan, health/life insurance, homeowners insurance or heavy car insurance in thirty years. i drive eight year old cars and have been renting for six years.  oh, and did i tell you i have been retired for eight years?  not bragging. when i was un my twenties i asked a few guys my age the secret to success.  they pretty much agreed that being self employed and staying out of debt were the keys. americans are slaves to the zio bankers. the bars on the windows of their houses are imperceptible.

Thu, 03/27/2014 - 22:47 | 4601367 boogerbently
boogerbently's picture

What do the "rich guys" do ?

Fri, 03/28/2014 - 08:54 | 4602058 N2OJoe
N2OJoe's picture

What is better, owning or renting? What a ridiculous argument!

 

The obvious answer is:

Foreclosure squatting!

 

Make friends with an electrician who can turn the power on for you, and you're good to go.

Fri, 03/28/2014 - 08:55 | 4602065 jbvtme
jbvtme's picture

not rich. frugal. stay out of debt and develop your own ideas

Thu, 03/27/2014 - 22:31 | 4601323 The Deacon
The Deacon's picture

I not very bright, sorry.

If over 25 years I buy a home and pay essentially DOUBLE the value of the home with interest included (don't forget taxes and maintenance), I still end up with only one home after paying for 2.

If I rent A HOME instead, I only 'pay for one' over my lifetime, but pay no taxes or maintenance.  I also have more free cash slow...and MUCH greater mobility.  I am free to go where the jobs are....if such a place exists!

So, besides price appreciation (NO guarantees)  and paying rent beyond the 25 year amortization, what is the monetary downside to renting?

Fri, 03/28/2014 - 01:42 | 4601641 Notsobadwlad
Notsobadwlad's picture

Yes, over 25 years you buy a home and own a home and it might cost two times the purchase price. If over 25 years you pay rent, you STILL pay for a home twice over and you own NOTHING. Do you really think that you are not paying for interest, taxes and maintenance through your rent? Is there a magic tax and maintenance fairy where you live?

Fri, 03/28/2014 - 02:13 | 4601659 Gusher
Gusher's picture

Notsobad, thank you for writing the obvious so I don't have to. You wrote: "Do you really think that you are not paying for interest, taxes and maintenance through your rent? Is there a magic tax and maintenance fairy where you live?".  Love it!  Right on!    Folks, if you have steady reliable income, buy the damn house. Better in numerous ways including the stability it gives your family.   Nuff said.

Fri, 03/28/2014 - 10:00 | 4602282 Blue Dog
Blue Dog's picture

It's always more expensive to rent than it is to own. Our mortgage is $550. It would cost $750 to rent a comparable house.

Fri, 03/28/2014 - 14:25 | 4603242 Black Warrior W...
Black Warrior Waterdog's picture

In California, your statement is considered bullshit.

Thu, 03/27/2014 - 23:01 | 4601410 post turtle saver
post turtle saver's picture

silly rabbit, you're supposed to refi _and_ cut the clock when you do it... 30 year, pay 10, refi to 15, cut 5 and keep paying principal down at the same rate...

sure it's a game but you gotta be good at it

Thu, 03/27/2014 - 18:12 | 4600475 kaiserhoff
kaiserhoff's picture

Shallow and silly article, and just plain wrong on many points.  My daughter recently refied to a 3% 15 year fixed loan.  Tax deductable which makes the real rate under 2 percent.

Does this clown think the inflation rate is sub two percent?

Thu, 03/27/2014 - 18:21 | 4600499 fonzannoon
fonzannoon's picture

I am not defending the author but your daughter is absolutely an anomaly. Most people can't afford a 15yr mortgage payment even at 3%. I'm 37 and none of my friends can afford a 30yr fixed at 3% without some serious help from their boomer parents. Maybe not with the mortgage but definitely with the upkeep.

Thu, 03/27/2014 - 18:28 | 4600539 kaiserhoff
kaiserhoff's picture

Yes, she lives a town of about 100,000.  Prices in the cities, especially DC have gone nuts, but it's easy to forget, it hasn't always been this way.   For decades anyone with a job could buy a house for about one quarter of his take home pay.  We would get back to that if the Fed ever quits central planning.

Thu, 03/27/2014 - 18:31 | 4600553 fonzannoon
fonzannoon's picture

I hear you man....but I believe in 2008 we got a peek behind the curtain, and we were staring at the end of the financial system as we know it. Everyone (almost) decided to go this route and we will travel it till it ends. But when it does I don't think anyone will be buying a house like they did 30 years ago. It will be something very different and probably scary as shit.

Thu, 03/27/2014 - 18:48 | 4600596 kaiserhoff
kaiserhoff's picture

I've starred at the same abyss, and all it means to me is that the the richest of the banksters lose a shit load of money.

I'm OK with that.

 

Thu, 03/27/2014 - 18:52 | 4600607 fonzannoon
fonzannoon's picture

I am pretty sure they will be just fine. They have ripped off enough wealth already to last them a few centuries at least.  

Fri, 03/28/2014 - 07:11 | 4601838 Doña K
Doña K's picture

I hear and understand every argument you guys make and most have logic. One thing that no one mentions is that after 30 years, houses are worth very little after paying twice as much, and with the interest and the maintenace even more.

If you now want to sell the 30 year old house what can you buy with the appreciated value that everyone is talking about? just another 30 year old house.

Rentals give you more flexibility, more opportunity and the savings from not having to pay interest, maintenance and taxes can be saved and accumulate wealth. Based on the fact that per square foot of buying versus renting, renting is cheaper by far and you don't need the extra room that you sometimes get with houses.

If you have strong feelings about ownership, stability and need proof of self worth, then go ahead and buy but don't argue with others passionately that buying is better.

Someone asked: What do the rich people do? The answer is: anything they want. It does not matter to them. Cost comparison is the last thing they care.

Fri, 03/28/2014 - 00:39 | 4601570 DYS
DYS's picture

You think they EVER lose?

 

Think again.

Thu, 03/27/2014 - 23:02 | 4601415 post turtle saver
post turtle saver's picture

see above

Thu, 03/27/2014 - 19:15 | 4600674 Boondocker
Boondocker's picture

my credit score is crap because we don't use credit  cards or auto loans and my interest rate is 3,25% thru bank of asses

Thu, 03/27/2014 - 18:55 | 4600617 WhackoWarner
WhackoWarner's picture

I agree totally.  Why pay rent if you have a down payment large enough to make your monthly mortgage less than current rentals?

I also point out that many people, like me, bought a house cheap, cheap.  I have the roof over my head paid for silly. Inflation?  Bring it on.

Thu, 03/27/2014 - 19:01 | 4600637 fonzannoon
fonzannoon's picture

why not rent a house and use your downpayment to buy PM's?

Thu, 03/27/2014 - 20:13 | 4600892 TinF0ilHat
TinF0ilHat's picture

I rent due to the fact I wont have to pay the 28k to replace the roof, or the $500 to the plumber to fix the broken pipe, or spend thousands a year on lawn maintenence, or fork over $8000 for a new fucking A/C.  I save the money that I would be spending on upkeep on PMs.  And plus you never really own your home, You have to pay your lot rent to uncle sam........

Thu, 03/27/2014 - 20:54 | 4601032 effendi
effendi's picture

Who is dumb enough to spend thousands a year on lawn maintenance? Unless you rent an apartment then you still need to mow the lawn as either an owner or renter. 

We rent a house, purchased a lawn mower and whipper snipper for under $500 and they will last perhaps 5 years. The petrol and oil to operate them will cost us $40/year. So all up it will cost $140/year.

Plus I mow my neighbours lawn at $20 a time so I will make $300/year. 

Fri, 03/28/2014 - 10:04 | 4602297 Blue Dog
Blue Dog's picture

You pay for lawn maintenance. It's priced into your rent. Just like property taxes.

Thu, 03/27/2014 - 20:59 | 4601049 greatbeard
greatbeard's picture

>> or fork over $8000 for a new fucking A/C.

Tell me a fuckin about it. My AC just went south on me.  The tech recommended I forgo a quote and check out used ones on Craigslist.  He said putting it in was pretty easy.  He said he doesn't mind seeing the upper class folks forkin over ridiculous dollars for a new unit from his company, but there's just no sense in it for low end scum like me.

I got on Craigslist that night.  Found a Carrier, great unit, used, from a commercial building, just what I needed.  $395, plus about $100 of miscellaneous, and I've got a very nice unit that should last another 12 or so years.

Thu, 03/27/2014 - 21:07 | 4601071 fonzannoon
fonzannoon's picture

I paid $8,800 for central A.C a few years ago. I refuse to turn it on but from what I read it should work well if I ever decide to turn it on, which I won't.

Thu, 03/27/2014 - 22:35 | 4601335 The Deacon
The Deacon's picture

Peanuts paid and a commercial unit to boot.   Sweetness! 

Nice to know there are still some kind people out there.

Thu, 03/27/2014 - 19:18 | 4600677 Freddie
Freddie's picture

The problem is there are endless numbers of factors in the equation.  Any possible profit or happinees of home ownership has caught the eye of the county who owns your land.  You don't really own it.  The bank owns it and if you pay it off - the county owns it.  And those hard(ly) working city and country employees need golden pension plans.

The shit is never ending.  Well with inflation, you keep ahead cause the value goes up due to inflation.  This means that door, window or piece of wood will cost more in the future and it will.  The problem is shit breaks all the time and maint on many houses is not that cheap. 

Skateboarder is in Calif - so the whole thing becomes an even bigger mess.  Insane property costs, taxes, water, energy, out of control state govt, invasion of illegals. Calif was paradise but the libs really destroyed it.  many of them were from NY, PA, NJ and Baltimore like mafia princess Pelosi.

Thu, 03/27/2014 - 19:22 | 4600696 fonzannoon
fonzannoon's picture

Good to see you Freddie, I'm drinking back in black IPA tonight.

Thu, 03/27/2014 - 21:01 | 4601057 greatbeard
greatbeard's picture

>> home ownership has caught the eye of the county who owns your land.

You pay the county their pound of flesh wether you own or rent.  In general, the same piece of property, renters pay more to the county than owner occupants.

Score one for ownership.

Fri, 03/28/2014 - 01:18 | 4601622 NaN
NaN's picture

Skateboarder, I know what you mean.

Fri, 03/28/2014 - 01:40 | 4601638 chiswickcat
chiswickcat's picture

Rent vs buy. In most places you can rent a much nicer residence for the same amount of mortgage equal mortgage payment. If I buy, and I want to keep my monthly cost the same I would have to live in a property half the value. Therefore, by renting only what you need gives you the chance of having surplus cash at the end of each months to invest in other ways...

Fri, 03/28/2014 - 04:42 | 4601754 Tom_333
Tom_333's picture

Why should you buy a house?

To live in. Wat otherreason is there...?

Thu, 03/27/2014 - 17:33 | 4600349 Bluntly Put
Bluntly Put's picture

I thought it was a bit simplistic as well. The article fails to address the idea of secured loans, that is collateral for the loan in case of default is title to the property. Almost all theories of fractional reserve lending avoid the distinction.

I'm no banker or ecnomist but it seems to me that avoiding the discussion of "secured lending" is in a way downplaying the entire racket. When banks make secured loans it is in their interest to slant the price of the collateral in their favor. It also becomes immediately apparent why banks got bailouts from the fed in terms of both ultra low interest rates, and monetization of their creative securities as other banks probably are using them as collateral themselves.

I'm convinced banks don't print money out of thin air, they print money out of confidence we give them in their accounting system. It's no mystery to me why both government accounting figures and major bank accounting figures are dubious at best. They have to maintain the illusion everything is growing and expanding to keep the whole game of interleveraged promise balls in the air.

 

Thu, 03/27/2014 - 18:03 | 4600442 AccreditedEYE
AccreditedEYE's picture

This article is from Blackstone.. They'll do anything to scare sheep out of buying and not renting from them.

Thu, 03/27/2014 - 17:37 | 4600363 SilverIsKing
SilverIsKing's picture

Agreed on both points.  How does a bank raise rates on a fixed rate loan?  Nonsense.

Thu, 03/27/2014 - 18:57 | 4600620 Robot Traders Mom
Robot Traders Mom's picture

Yes, it is too simplistic and reads like a marketing piece.

Even right now, real inflation is much higher than the 5% on a 30-yr fixed. Inflation will most likely be around 20% when the government finally lets CPI officially pass 5%. 

Home ownership is bullshit. Literally the one argument that is hard to defend is being a debtor on long-term agreements. Nobody wants to be a creditor on this stuff (read: Ocwen). 

Why they chose to make the inflation argument out of so many others is beyond me...

Thu, 03/27/2014 - 19:14 | 4600668 Stuck on Zero
Stuck on Zero's picture

Yep, simplistic.  Why would you ever rent when you could get a better place at 0% down with zero personal risk?  The upside is all yours and the downside is the banks (taxpayers).

 

Thu, 03/27/2014 - 19:41 | 4600760 Event Horizon
Event Horizon's picture

Bullhockey,,   my house has gained 1.2 million (no cap gains here) in 12 years... 300% and no mortggae

my neighbor rented for 3 years and lost 72 grand in rent... waiting for a crash and the market moved up 30% so he lost more in opportunity

Location, location, location....timing, timing, timing

Thu, 03/27/2014 - 20:10 | 4600879 juslen
juslen's picture

luck luck luck

Thu, 03/27/2014 - 20:16 | 4600909 Event Horizon
Event Horizon's picture

it would be luck if it was only my house, it isn't

Thu, 03/27/2014 - 19:47 | 4600798 cornflakesdisease
cornflakesdisease's picture

Working class people's little homes don't give them tax brreaks on the interest except for the first few years.  Then the regular exemptions are better.  We all ain't rich.

Thu, 03/27/2014 - 21:57 | 4601213 Hammer Down
Hammer Down's picture

Too simplistic indeed. I have no argument against his take on fractional reserve banking. Most people on here are well aware of how the banking system works however and attacking the idea of home ownership to make that point isn't necessary. Banks price based on par to earn a spread when they sell the loan to MBS packagers. The days of holding the loan in house are long gone, so right off the bat his inflation argument is nonsense. Owning a home is most definitely the smarter move exactly because of the inflation hedging and principle reduction; unless rents are substantially lower and the return possibilities on the difference are greater than the leveraged returns from home appreciation. That's a tall order. Speculating in a bubble market? That's a different story altogether

Thu, 03/27/2014 - 17:11 | 4600266 fonestar
fonestar's picture

fonestar will stay in his attic thanks.

Thu, 03/27/2014 - 20:20 | 4600922 deflator
deflator's picture

 Tried to give a +1 but the page said, "an error occured".

Thu, 03/27/2014 - 19:06 | 4600269 fonzannoon
fonzannoon's picture

.

Thu, 03/27/2014 - 17:12 | 4600270 IridiumRebel
IridiumRebel's picture

<---------- because they are stupid
<---------- because it's a nest egg

Thu, 03/27/2014 - 17:13 | 4600272 nightshiftsucks
nightshiftsucks's picture

Nonsense,If I pay my house off,retire at 65 and live to 85 then that's 20 years with no house payment,just property tax.How can it be cheaper for someone to rent to me and make a profit ? I bought my first place for 88k and sold for 125k,bought second one for 192K and sold it for 365K,the house I live in now I paid 400k and the houses in the area are going for 750-800k.I know it's a bubble but it's worked  for me.

 

 

Thu, 03/27/2014 - 17:18 | 4600293 cesarsp_us
cesarsp_us's picture

thats what my parents are doing 

Thu, 03/27/2014 - 17:50 | 4600384 NoDebt
NoDebt's picture

That's what I've done.  Paid off that mortgage as fast as I could (double principal payments every month can shorten your 30-year to less than 15 years and save you hundreds of thousands in interest) and I've been living minus that monthly payment for years now.

None of it made my house an "investment", however.  I never thought of it like that, though I'm sure it's worth more than what I bought it for.  Say I sell it for more than I paid.  And then what?  I gotta go buy somebody else's overpriced pile of sticks to live in.  Or pay rent to somebody else forever (who has to cover their own mortgage plus taxes plus repairs PLUS EARN A RETURN, RIDING ON MY BACK).

No, my house's primary function is as my HOME.  I like living there.  I like the neighborhood.  I like the school district.  I like being able to work on my old cars in my garage.  I like that the kids can ride their ATVs around on the property.  I like that I can plant a garden.  I like that I can do pretty much anything I want to the place.

Is it a "ball and chain"?  Yeah, in a way, I guess but it's calmed me down a lot and taught me a sense of community that renters rarely experience.  I also take good care of the place because it's mine and I don't want things to slide into disrepair (which costs twice as much to fix as regular maintenance does).  No castle, but she's got a damned sight more curb appeal than when I bought her.  It's not JUST the money side, which could be debated endlessly, it's the soft benefits that sometimes go overlooked in these discussions.

If you like the house, you like the community and you could see yourself staying there a while, you're probably better off buying it.

Thu, 03/27/2014 - 18:26 | 4600520 83_vf_1100_c
83_vf_1100_c's picture

Bought our country home on a 15 yr mortgage. Fixer upper so we got a good deal and have 5+ acres of land and only one person close enough to call a next door neighbor. Been paying a bit extra every month and it will be ours (minus the damned prop tax/insurance) in a few months 2 yrs early. My kids ride dirt bikes. I build cars and bikes in the yard. We have done a lot of DIY fixing up so it is looking good and we had fun doing it and taught the boys some real world skills along the way. I can move friends/family in for however long I want and not be in default of my rental contract. The owner can not decide he wants to sell it and kick us out with 30 days notice. No HOA to charge me fees and write me up if I forget to close the garage door at night or don't take in the trash can on schedule. No yearly rent increase. I take the kids out back and shoot skeet and .22LR, no cops come screaming up the driveway. Yes, I am tied to the land/house but my situation makes that very OK. I've rented, I've bought 2 houses. Fuck renting! YMMV. My biggest concern is what we will do with the surplus money from that paid off portgage in May.  Oh yeah, hte HVAC is on it's last legs. It's always something.

Thu, 03/27/2014 - 19:45 | 4600782 cornflakesdisease
cornflakesdisease's picture

Until your gov takes your land to build a toll road for some European consortium.  Right Rick Perry?

Thu, 03/27/2014 - 19:13 | 4600600 Dinero D. Profit
Dinero D. Profit's picture

Betweem '96 and '06 I sold four houses, -Atl. GA, Irving, TX, Hells Kitchen, NYC, and Tuscaloosa, Al.,,-and I pocketed $500K profit. 

You can't do this renting. 

 

Thu, 03/27/2014 - 17:19 | 4600295 Rentier88
Rentier88's picture

Exactly article is nonsense...

Plus, if you own one small rental property or even rent out part of house you own it covers your taxes and utilities...

Thu, 03/27/2014 - 17:41 | 4600375 fonzannoon
fonzannoon's picture

True, until your drug dealing renter stops paying rent and the laws make it impossible to get him out. 

Everyone on here including myself is generalizing too much. For something to make sense it usually is a specific situation that someone doing their due dilligence has uncovered. It works out for some people, not so much for others. Same as it ever was.

Thu, 03/27/2014 - 18:44 | 4600569 deflator
deflator's picture

 It is easy to generalize in RE discussions because location, location, location. The government being so heavily involved in the past few decades makes it more difficult to have everyone on the same page.

 Many people look at '82-2008 overal RE charts and assume that home prices will always eventually go up and go up big. If we zoom out and look at longer timeline charts we can see that home prices do not go up, a home is not an investment, a home is a place to live.

 What has gone up big and is here to stay as far as owning a home is higher property taxes because of ever growing governments and higher costs for materials for maintenaince because of globalization. Landlords will be hard pressed to squeeze enough blood from their turnips for these ever increasing costs because wages will no doubt remain stagnant to falling.

Thu, 03/27/2014 - 17:24 | 4600317 Greenskeeper_Carl
Greenskeeper_Carl's picture

ya, but what happens when they decide to raise those taxes to absurd levels? It may sound crazy, bot insolvent govts looking for money do crazy things. They decide that big house means you are wealthy, so they decide to take some of your welath. My biggest problem with it is that you never really own a house or property. You could have paid it off a decade before, but if you don't give the govt their cut of your money, men with guns will take you out of 'your' house, shot you if you resist, then sell it and keep the money. As long as that can happen, you never really 'own' your property. You are merely renting it from the govt

Thu, 03/27/2014 - 17:35 | 4600356 nightshiftsucks
nightshiftsucks's picture

I live in Ca. so I don't have to worry about tax increases.

Thu, 03/27/2014 - 18:56 | 4600618 Citxmech
Citxmech's picture

The problem w/Prop 13 is that the tax rates on new purchases have to make up the difference for the loss in revenue - so tax rates for new purchases go up faster than states where everybodies rates go up.  

Thu, 03/27/2014 - 19:18 | 4600683 moneybots
moneybots's picture

"The problem w/Prop 13 is that the tax rates on new purchases have to make up the difference for the loss in revenue - so tax rates for new purchases go up faster than states where everybodies rates go up."

 

The problem with prop. 13 is that the government saw rapidly rising property values as a cash cow in the 1970's.  Tax payers revolted.  From an article posted recently on Zero Hedge, home owners may have to revolt again.

 

 

Thu, 03/27/2014 - 17:46 | 4600393 TuPhat
TuPhat's picture

The is mostly shortsighted and therefore wrong.  If they raise property taxes then all rents will go up as well.  If you want a place to live you will be the one paying those taxes.  I  am retired and own my house.  The others at work my age can't reitire yet because they either are still paying on the loan or they are renting.  The ones who are renting will never be able to afford retirement.

Thu, 03/27/2014 - 18:09 | 4600465 Greenskeeper_Carl
Greenskeeper_Carl's picture

I didnt say its never smart to buy a house, I just said you never truly 'own' it. Nothing you said refutes that, since what i said was true. There was an article on here a few days ago, about a 'mansion' tax in britain. The tax will at first only tax very large homes, like 2 million plus, as an axample. Most people won't care because most people don't own 2 mil plus home. That is how the camel gets its nose under the tent. Pretty soon that cut off it 1 million, then 500 K, and so on, until it encompasses everyone. Failure to pay will result is arrest and seizure of your house.All that being said,  I will probably stil buy at some point in the future, but i believe we are in for another huge correction. Interest rates can't stay this low forever, and when they go up, home prices are going to plummet

Thu, 03/27/2014 - 19:49 | 4600804 bonderøven-farm ass
bonderøven-farm ass's picture

Kelo vs the City of New London.

We're all subjects now......bitchez!

Thu, 03/27/2014 - 18:21 | 4600511 Incubus
Incubus's picture

you buy your house,

 

you get dementia

 

you end up in a nursing home.

 

but who was house?

 

good game, chap.   Old age isn't kind these days.  You can only lose the game.  Waste your best days enabling a rotten system and when you think you're going to collect, they'll end up taking your entitlements from you through big pharma/med/health.

 

You are just sheep.  We're sheep.

 

Until people grow some balls and break a few skulls, this will be the matrix that we must exist in.

Thu, 03/27/2014 - 19:10 | 4600660 logicalman
logicalman's picture

You don't own stuff, stuff owns you, if you let it.

If you decide to buy a house, as many have pointed out, you never really own it.

If you want to know who really owns your house, stop paying property taxes and you'll find out pretty quickly IT AIN'T YOU.

There's a huge commitment to it, so it's hard to walk away.

I've lived in a rented apartment for quite a while now, and due to limitations on rent rises for sitting tenants, I pay way under the market rate, AND, I can walk away any time with minimal cost (a month's rent).

Metals, skills and a food stock seem like a good combination to have.

On a long enough time line.........

I try not to take part, but at least when I'm drawing my last few breaths I'll be able to say to myself that, on balance, it was a good ride.

Thu, 03/27/2014 - 19:10 | 4600642 deflator
deflator's picture

 If they raise property taxes then all rents will go up as well. 

 You can't get blood from a turnip. If wages are stagnant to falling, people will find other ways around paying higher rents such as communal living like in Mexico.

 We are not in the '82-2008 lower left to upper right in home prices chart. Many homeowners and renters are in full collapse mode while the status quo is cashing bigger checks than what was possible during the greatest of booms.

Thu, 03/27/2014 - 17:26 | 4600320 fonzannoon
fonzannoon's picture

I like that this article explains how money is created. People still don't get it. So it's worth seeing it repeated as often as possible.

If you look at housing prices they basically rose a little bit every year for a long long time and then prices went substantially higher with the credit boom that began in the 1980's and popped in 2008. Since then we are watching central planning try to reinflate the asset bubbles while the beautiful deleveraging is making the middle class barf up their homes and cause downward pressure. Eventually somethng will give and i'm pretty sure the deflationary forces will win out in housing. Especially now that Yellen seems fine turning her back on real estate. 

I don't know anyone who could live 20 years in a house and only pay property taxes. My money pit costs me a shitload every year just in upkeep.  Nice job with your flips though nightshift. That's impressive. 

Thu, 03/27/2014 - 17:38 | 4600368 nightshiftsucks
nightshiftsucks's picture

If they let property prices decline then the local/state govts will take a big hit.They will prop up housing and stocks to the bitter end.

Thu, 03/27/2014 - 17:43 | 4600380 fonzannoon
fonzannoon's picture

Again we are living in the middle of a battle between the great reflation and the great deleveraging. I don't see how it can end well although I am convinced it can go on longer than anyone on here imagined it could.

Thu, 03/27/2014 - 19:07 | 4600653 nightshiftsucks
nightshiftsucks's picture

I agree and I know that both of us have been wrong.What do you think Fonz,will they let deflation happen or will they print to the bitter end ? I think they print but I could be wrong,maybe the third option is war ?

Thu, 03/27/2014 - 19:21 | 4600691 fonzannoon
fonzannoon's picture

I think deflation is the one thing they won't let happen, but that does not mean it won't happen anyway. But my point is we can have deflation and inflation at the same time, depending on what we are talking about. I don't think they can inflate us out of this without losing the handle. But they are doing a pretty good job of covering up the massive amount of people who already disappeared below the surface while the rest of us continue to tread water and make pretend we don't see the guy next to us drown.

Thu, 03/27/2014 - 17:27 | 4600329 dexter_morgan
dexter_morgan's picture

So long as you don't live in a state like Illinois, where many seniors won't be able to afford those property taxes, then what you say is exactly true. Lesson, get the hell out of bankrupt states and you s/b fine.

Thu, 03/27/2014 - 19:43 | 4600768 cornflakesdisease
cornflakesdisease's picture

My Dad sold his house because renting a two bedroom apartment was cheaper then the property taxes on his small Cape Code salt box, not including upkeep, insurance, etc.

Thu, 03/27/2014 - 17:31 | 4600340 Pool Shark
Pool Shark's picture

 

 

Nice anecdotes; too bad your fortuitous timing doesn't work for everyone. Had you bought between 2002 and 2006; or in 1990; or in 1979, you wouldn't be so happy.

Also, did you include the costs of maintenance, landscaping, yard work, Homeowner's insurance, or renovations in your calculated 'profits'?

 Here's the reality:

http://awealthofcommonsense.com/wp-content/uploads/2013/02/Real-Home-Prices.png

A house is a place to live, NOT an investment...

 

 

Thu, 03/27/2014 - 17:45 | 4600387 outofideas
outofideas's picture

It can also be productive. You can grow food from its backyward which can be a segnificant amount if you do it wisely. You can run a buisness from your house. You have control over a lot of what happens to your home.

No it is not an investment, but it can be a hell of a lot more then a cardboard box you live in.

Thu, 03/27/2014 - 18:22 | 4600512 Pool Shark
Pool Shark's picture

 

 

You can rent a place and still do all those things you just listed.

 

Thu, 03/27/2014 - 19:01 | 4600632 Citxmech
Citxmech's picture

The landlord can also kick your ass out.

Thu, 03/27/2014 - 19:41 | 4600762 cornflakesdisease
cornflakesdisease's picture

No, thanks to liberal laws, it's near impossible.

Thu, 03/27/2014 - 19:41 | 4600761 cornflakesdisease
cornflakesdisease's picture

Thank you!

Thu, 03/27/2014 - 18:03 | 4600443 malek
malek's picture

If you can sell your 400k house for 800k at age 65, so let's say worst case after taxes you get 600k cash out of it, you would be able to pay $2500 rent a month for the next 20 years if your cash pile doesn't pay a single cent of interest over that time.

Thu, 03/27/2014 - 19:03 | 4600641 WhackoWarner
WhackoWarner's picture

What we did as well.  Found a place in the area we wished to retire.  Paid very little for a very well built box with 1/2 acre.  Paid off.  Still doubled in value (even though lost 30% last few years).  Fixed it up; grow our own food. Pets no problem.

Only thing we need to worry about when we retire is prop taxes, upkeep.  I am not going to be endlessly paying some landlord's investment plan.  If pensions go down the hole how will any of the many many people worldwide be able to afford rent in an climate of continuous inflation.

Average house rental here is $750/month for a 3 bedroom, 2 bath home.  BUT if you had a down payment you could buy the home with a 25 year mortgage and likely pay half that per month.

Depends on the market.  We are rural.

Thu, 03/27/2014 - 19:40 | 4600758 cornflakesdisease
cornflakesdisease's picture

So does Russian Roulette until the guns fires and your dead.

Fri, 03/28/2014 - 03:27 | 4601711 kwality
kwality's picture

It's cheaper because they get a tax break and/or government subsidy a la Section 8 to rent to the masses in preferred classes including veterans, disabled, indigent, member of the Senate, etc.

 

Thu, 03/27/2014 - 17:16 | 4600283 10mm
10mm's picture

A house is supposed to be shelter, not a short term investment. It's another ball and chain racket.

Thu, 03/27/2014 - 17:17 | 4600285 cesarsp_us
cesarsp_us's picture

idunno here is silicon valley you spend lots of money on a house or spend lost of money on rent, i choose house

Thu, 03/27/2014 - 17:22 | 4600310 nightshiftsucks
nightshiftsucks's picture

Exactly,I live in the East bay,just looked up rents.I could rent an apt 500sf less than my house and the payment is way higher than my mortgage.

Thu, 03/27/2014 - 17:17 | 4600288 Seasmoke
Seasmoke's picture

Perhaps if you look at a house as a piece of paper. But you do need a place to be secure in. Believe me, I understand the theft by banksters and property taxes , but renting doesnt protect you from them either, so I prefer to own and not rent.

Thu, 03/27/2014 - 17:22 | 4600308 Rentier88
Rentier88's picture

love clowns that put the property tax thing with owning house.  What they don't think us as landlords factor that into the rent?  Taxes go up you can be damn sure your rent from me is going up too.

Thu, 03/27/2014 - 18:08 | 4600460 Big Brother
Big Brother's picture

It depends on where you live.  I'm going assume my landlord is taking a loss on the collective row of houses, one of which I live in.  A third of them are vacant because there are not very many who would rent and pay his set rate.  The local school system passed a referendum (property tax increase), but my rent did not rise.  Every year he offers me the same rent.  I have not had a rent increase in three years.

I'm a clown that puts the maintenance and insurance thing with owning a house.  I'm insurred for $25,000, costing me $100 a year (renter's insurance), and I guess I've paid for a few light-bulbs that have burned out, but that's it.  I prefer the ability to be semi-mobile at least to the extent I can move once a year.

Thu, 03/27/2014 - 19:38 | 4600751 cornflakesdisease
cornflakesdisease's picture

I agree 101%.  My rent is 35% less then the cheapest mortgage in a crappy neighborhood in my area + my apartment is brand new, energy efficient, and has insurance, water, and untility bills that are 50% less then a small house + I can move if I want in a heart beat.  I save the difference and invest it.  Housing here is disposible thanks to urban sprawl, so great neighborhood often turn to crap 15 to 20 years later.

Thu, 03/27/2014 - 19:34 | 4600734 cornflakesdisease
cornflakesdisease's picture

Try renting in Houston, where 50% of the people don't pay their rent, rich or poor.  Takes about 3 to 4 months to get them out + the $$$$$ of damage they do.  I do home remodeling.  It's all I see and they have it down to an art form.

Thu, 03/27/2014 - 17:26 | 4600322 Bioscale
Bioscale's picture

It depends who you rent from. 

I would not feel protected with a 100k mortage from banksters, they own "your" house. Taxes are not an issue here locally, it's one of those crazy stupid things belonging to american exceptionalism.

Thu, 03/27/2014 - 17:19 | 4600296 fzrkid
fzrkid's picture

I thought republicans were against using tax payer money for social programs like paying those pesky expensive down payments.

Thu, 03/27/2014 - 17:23 | 4600314 NOTaREALmerican
NOTaREALmerican's picture

Not true.    The Red Team is not against all social programs, this is liberal propaganda.

The Red Team is only against girly social programs.    Big-House is a manly social program because a man's house is his castle.  

Thu, 03/27/2014 - 18:22 | 4600514 Big Brother
Big Brother's picture

Oh man, I remember being a independent mortgage broker back in 2006.  The government through FHA had a first-time homeowner's program that could applied to the buyer through approved builders.  The builder could offer "gifts of equity", which even in my young mind at the time gave me pause for thought: 

Either

1.  The builder's house is worth (actual_price) - (gift_of_equity) = 100%*(Bank_funding), which is pretty close to a basement printing press, but more of a balance sheet formality; and only serves to shift the appraiser's numbers, or it screws with the bank auditors numbers because when the bank thought they hand 100% loan-to-value, they ended up 80% loan-to-value.  This shift would have prevented the necessary risk-premium reflected in the interest rate or added private mortgage insurance.

2.  The builder's house is worth (actual_price) = 100%*(Bank_Funding) + (gift_of_equity)Big-house [Franklin Raines comes to mind, but I think he played for the Blue Team]

Anyway, social programs for housing distort market pricing, causing over-building and unsafe lending practices, which inevitably lead to bubbles and their popping.

 

 

Thu, 03/27/2014 - 17:21 | 4600305 NOTaREALmerican
NOTaREALmerican's picture

And, don't forget, that any money you borrow now can be repaid inflationary dollars.   After all,   everybody is going to be making much more money in 10 or 20 years, so it makes sense to borrow as much as you can when you are young and pay it off later as you get promotions and salary increases.

Anybody remember that wisdom from the 70's?  

Thu, 03/27/2014 - 17:35 | 4600354 Pool Shark
Pool Shark's picture

 

 

It was a great 'theory' that didn't work out too well in practice...

 

Thu, 03/27/2014 - 17:23 | 4600309 Snoopy the Economist
Snoopy the Economist's picture

It's all about timing. I agree now might not be a good time to buy because the prices may see pressure over the next 10 yrs or so.

If you think inflation will dramatically increase then a house may be a good choice if the buyer can keep their job and keep up the payments - especially with a 3.5% loan as it is now.

But too many people buy way more house than they can afford and spend way too much on other materialistic crap so they will never be able to pay it off.

Sure property taxes are always there but the alternative is to always rent and pay even more in the long run there.

Thu, 03/27/2014 - 17:28 | 4600334 fonzannoon
fonzannoon's picture

Don't you think when it comes to inflation/deflation that there is a better chance we get deflation in housing and inflation in food/energy/healthcare etc. going forward?

Thu, 03/27/2014 - 19:32 | 4600728 cornflakesdisease
cornflakesdisease's picture

Wait until the baby boomers start croaking and their is a glut of houses no one wants because of the neighborhoods and the energy consumption.

Thu, 03/27/2014 - 20:33 | 4600959 RobertC
RobertC's picture

As long as the price is right, SOMEONE will come in and fill the void...

Thu, 03/27/2014 - 21:39 | 4601159 deflator
deflator's picture

 Just look at Detroit, Flint,MI, Gary, IN etc. where houses are for sale @ $1.oo and there are no buyers.

Thu, 03/27/2014 - 17:22 | 4600311 ronron
ronron's picture

wonder how many houses the writer has for rent? buy the worst house in the nicest area. pay it off fast. never move up.

Thu, 03/27/2014 - 17:24 | 4600316 pig lipstick
pig lipstick's picture

I'm not sure I am buying the themes of this piece. The first main theme is "interest versus inflation."  I would think anyone that has enough savings to buy a home understands that a bank make a profit and to do so the bank is betting that the rate they charge will exceed the rate of inflation.  I also dont buy the idea that people buy a home to beat inflation.  This might be a secondary, at best, reason, but people buy homes for much bigger reasons than this. For instance, they want a place to call home and raise a family.  i would hardly call this a "fallacy."

In addition, I fail to see how the fractional reserve system has anything at all to do with a "fallacy" of home ownership.  This is an argument for another article.  Not saying I disagree with the complaint that banks are 'freeloaders,' but this is the way it is. What's the alternative?  How do you propose loans are made available if the money to loan was 1 to 1 with cash holdings on a bank balance sheet?  This "thin air" argum,ent sounds REALLY good, but this cannot change.

Thu, 03/27/2014 - 19:34 | 4600733 NickVegas
NickVegas's picture

"How do you propose loans are made available if the money to loan was 1 to 1 with cash holdings on a bank balance sheet?"

 

I guess a place to live would then reflect both the cost of building and the owners ability to pay for the house. I know it's crazy, free market and all, like it was, I don't know, 50 years ago, no one had a mortgage. It's all banker bullshit. No one should be allowed to counterfeit without total transparency and for the good of the overall society. Sorry banker guy.

Thu, 03/27/2014 - 17:28 | 4600331 KickIce
KickIce's picture

Because until recently it was not a myth.  First, we used to have a middle class and it was not uncommon for our parents to work 20+ years in the same location and then retire there.  Second, until recently the latest generation used to feel that their lives would be more prospersous than those of the previous.

Thu, 03/27/2014 - 17:28 | 4600333 seek
seek's picture

When home prices are in a bubble, yes, it's stupid to buy. And they've been working hard to keep prices in a bubble and thus make it a dumb decision.

However, when prices aren't in a bubble, it's a no-brain-required decision if you know you're not going to relocate. A old fellow I used to talk to pointed out one of the bigger life decisions you should make early on is to either choose where you live, or choose your career. If you choose career, plan on relocating several times throughout your life, and a home purchase doesn't make as much sense.

In my case, and the case of my parents, and their parents as well, we all chose where to live, and every one of us stayed in one place long enough to pay off a mortgage and be left with nothing other than taxes and an asset that has increaded in value (my place, bought around '90, is worth about 2.5X what I paid. My parent's place bought in '54 is worth 25X what they paid, and having lived through the 70s inflation my parent's mortgage payment was a joke at $114/mo in the early 80s.)

But there's a bigger issue at play than just finances. If you've rented for any duration of time, you've learned landlords are mostly assholes, and if it's been multi-family housing like apartments, neighbors are assholes too, and having freedom from both has value to most people. Freedom is actually a really big factor in home ownership.

Thu, 03/27/2014 - 19:30 | 4600723 cornflakesdisease
cornflakesdisease's picture

Until you have neighbors from hell and can't move and are trapped, which happens all the time.  Freedom?  Todays house are 8 feet from the next, at least the ones working class people can afford before the neighborhoods turn to poo and everyone moves away.  Home ownership all depends on a lot of variables that are different for everyone.  No one I know who owns a house, is happy completely or even at all.

Thu, 03/27/2014 - 19:56 | 4600833 Snoopy the Economist
Snoopy the Economist's picture

cornflake: There are plenty of homes that are separated by an acre or more. Don't choose to live in a noisy dangerous city. I relocated due to a job 3 yrs ago (got a great deal on my new home) and have only met one of my neighbors so far and I don't hate them. It's location, location, location.

Thu, 03/27/2014 - 17:29 | 4600335 withglee
withglee's picture

The hole in the buying-a-house-is-a-way-to-beat-inflation-theory is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.

These articles by the clueless are getting scary. The comparison of interest rates to inflation rates is immaterial. As long as inflation is greater than zero, you're foolish not to buy ... as soon as possible ... and borrow as much as possible.

Here's why: Say you borrow 90% (conservatively low). That means you have 10% skin in the game but you get 100% of the appreciation. Say we have the Fed's recommended 2% inflation (over history it has been 4% ... over my career, more like 6%). Say you're paying 6% interest.

At 2% inflation, the price of the house will double in about 36 years. At 6% it will double in about 12 years. Let's stay with the conservative 2%.

Because you have 10 times leverage (you put in 10% but get 100% of the appreciation), you're effective INFLATION benefit is 10x2% or 20% (at 6% it's 60%). So you're paying 2% to 4% for money and making 20% to 60%.

And consider the alternative: You're renting. You build zero equity, but make your landlord's payments for him. And if he is leveraged, his ROI can be close to infinite.

How can someone write an article like this and not mention leverage?

This is probably the number 1 reason we don't have a properly managed Medium of Exchange where INFLATION is guaranteed to be zero. There is no leverage. Qui Bono? Not bankers and investors.

And if you wonder how the banks get by with the puny 4% they charge? Their leverage is a minimum of 10 times and more likely 30 to 50 times. They're getting 40% to 200% return on their money.

And if they're doing derivatives, they're making up to 300 times leverage or 1200%. Actually, they're making infinite return because they have no skin in the game and no downside risk ... as TARP and QE have shown us.

Thu, 03/27/2014 - 18:23 | 4600484 GeoffreyT
GeoffreyT's picture

You've fallen into the same trap as the one that makes Boomers think property is a terrific idea; they bought houses with 30-year fixed money in the 60s, and the 1970s inflation (plus real wage growth) saw their (fixed) mortgage outlays shrink as a proportion of their take-home pay.

By the end of the 70s their mortgage repayments were tiny relative to their budgets, and the nominal value of their houses had more than doubled.

 

So they thought they were geniuses, and advised their children that they could never lose buying property. They forgot one thing: variable mortgage rates. That will kill your "leveraged property 'magnate' is genius" trope, stone motherfucking dead.

 

As to the specifics of your example: re-do the calculations on the basis that the mortgage is fixed for three years, and resets at an interest rate 200 basis points above prevailing rates. Guess what? You're broke pretty quick.

 

The place we rent last changed hands for $1.3 million 18 months ago; we rent it for $650 a week. So the landlord is getting a 2.6% gross return, plus any capital appreciation (why would there be any appreciation on an asset that only yields 10 bp above the overnight cash rate?). The property taxes, rates etc on our place must be of the order of a third of the rent (that would have property taxes, rates etc at 0.7% of property value).

In other words, we're not even paying the owner's interest bill (and if he bought it all cash, 2.6% is not the best deal you can get on a "bar-and-a-half": there are deposit accounts here that pay 4.5%).

 

The difference between our household and folks who buy property: we know how to perform rudimentary calculations and obtain estimates of the sensitivity of those calculations to changes in the key variables underlying the calculations... whereas 95% of the population can't calculate a percentage (I'm not making that stat up: look at any Adult Literacy and Lifeskills survey - less than 5% of the adult population scores at 'level 5', which is roughly equivalent to 8th grade maths and in no wise includes the ability to forecast future changes in interest rates).

 

(I should point out: I mentioned that a gross yield of 2.6% is 10bp above the overnight cash rate. I'm in Australia, and the overnight cash rate is 2.5%)

Thu, 03/27/2014 - 18:19 | 4600492 malek
malek's picture

Are you seriously trying to tell ZH readers that leverage is always a good thing???

What happens if you can't pay your mortgage anymore?
What good is market value appreciation if you're not planning to sell? (And if you sell, what do you do with the gains? Buy more houses with 10x leverage?)

Some people can be hit with a 2x2 over the head many times by ZH articles over the years, figuratively, and they still learn nothing.

Thu, 03/27/2014 - 19:26 | 4600709 cornflakesdisease
cornflakesdisease's picture

Thank you.

Thu, 03/27/2014 - 19:47 | 4600795 withglee
withglee's picture

Leverage under inflation is a good thing for more people than a bad thing. It's a bad thing for all people if you have deflation.

Re: If you can't pay your mortgage. What happens if you can't pay your rent any more? Just like any transaction, your best advantage is on the buying side ... not the selling side.

You are in your worst position in the beginning when it comes to riding out the bumps. After that your position gets better and better if  you are buying rather than renting (unless you experience deflation). If you sell, you have the issue of net cash (assuming you're not upside down). Do what you please with net cash. Probably better to buy somethng else with it than use it for rent. In some cases you can make an even trade and avoid the sell/buy transaction altogether.

Fri, 03/28/2014 - 00:31 | 4601561 malek
malek's picture

Spoken like a true (Keynesian) shill.

What happens if you can't pay your rent any more?
Are you really that dense? I move into something where I can afford the rent, all the way down to the trailer park, and I lose nothing in the process besides negligible moving costs.

Just like any transaction, there is risk involved, especially if you even bind yourself for 30 years. Your blind faith that there will always be a bigger fool to sell to when you need to, or the Cargo Cultists will always manage to stave off deflation (actually: disinflation) or at least be able to re-inflate back to previous levels in the medium term is misplaced.

Thu, 03/27/2014 - 17:30 | 4600337 DOGGONE
DOGGONE's picture

NOT adjusting home price histories for inflation is a GIGANTIC CON done to the people by the establishment! Look at this from the Aug. 2006 New York Times.
http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2....
Look at 40 years, 1958-1998. NO real price change! BOTH home prices AND CPI-U rose by a factor 5.6!
The establishment says "F___ the people!".

Thu, 03/27/2014 - 17:41 | 4600376 nightshiftsucks
nightshiftsucks's picture

Location,location,location.

Thu, 03/27/2014 - 17:30 | 4600338 teslaberry
teslaberry's picture

owning your own property is not a myth, it is a matter of how your ownership interacts with the system that is set up to guarantee no one displaces your ownership through force by using their own force---i.e. the STATE. 

 

our state taxes the shit out of property relative to incomes. 

it also regulates the shit out of how you use your property . 

 

and worst of all for zh, it also forces people who rent and own outright to subsidize the mortgage issuers and mortgage takers by deductiing mortgage interest off income. it SHIFTS the tax burden onto those who do not borrow money to live somewhere they own. ( you sure as hell don't get interest deductions on money you borrow to pay rent----like indentured servants) 

so there you have it folks. it's not that homeownership is bad per se. it's just a rigged game. forcing you to borrow money, so banks can make money issuing money , and off course the gov takes its cut on each issuance through the mortgage tax 

 

ITS THE TAX BURDEN STUPID. 

 

Thu, 03/27/2014 - 18:02 | 4600438 withglee
withglee's picture

ITS THE TAX BURDEN STUPID.

Renters pay the tax burden ... and the insurance burden, not the landlords. Compare on square foot basis what you pay to rent a house and what your total PITI would be in a similar house in the same neighborhood. You'll find rent is higher than the PITI you would be paying if you were buying. If you get into multi-family dwelling, it's much higher.

Thu, 03/27/2014 - 19:24 | 4600702 cornflakesdisease
cornflakesdisease's picture

Not where I live.  Renting is always $400 to $700 less then owning (renting from the gov), not including all the repairs, HOA, etc.

 

Thu, 03/27/2014 - 17:31 | 4600343 RSDallas
RSDallas's picture

Bad article.  Don't quit your day job, if you even have one.

Thu, 03/27/2014 - 17:36 | 4600351 buzzsaw99
buzzsaw99's picture

factless worthless lopsided woefully incomplete analysis filled with assumptions, generalizations, and baseless ignorant opinion. not saying the author is wrong, just a lazy moron.

Thu, 03/27/2014 - 17:35 | 4600355 Smegley Wanxalot
Smegley Wanxalot's picture

By this fucking idiot's logic you should never buy anything. 

Thu, 03/27/2014 - 17:38 | 4600365 fonzannoon
fonzannoon's picture

The best thing to do right now is to find a vacant property and squat there for as long as you can. But no one ever mentions that as an option. 

Thu, 03/27/2014 - 22:48 | 4601372 Big Brother
Thu, 03/27/2014 - 17:36 | 4600359 Obama_4_Dictator
Obama_4_Dictator's picture

Because they are good little sheep, that's why

Thu, 03/27/2014 - 17:36 | 4600360 Atticus Finch
Atticus Finch's picture

You can flip a house and make significantly more than the amount paid in interest.

Thu, 03/27/2014 - 17:37 | 4600362 Talleyrand
Talleyrand's picture

Why? All that and lack of imagination. Who knows what that house, that neighborhood, that city, even this country will look like in ten, twenty, thirty years? One thing for sure, to the local .gov it will look like a big, immovable property tax cash cow.

Now, a well-provisioned sailboat on the other hand...

Thu, 03/27/2014 - 19:21 | 4600694 cornflakesdisease
cornflakesdisease's picture

get's crushed in a hurricane.  Your screwed like the rest of us.

Thu, 03/27/2014 - 22:00 | 4601217 Talleyrand
Talleyrand's picture

No hurricanes south of 12 degrees North.

Enjoy your walls and your winters.

Thu, 03/27/2014 - 17:42 | 4600377 Jackagain
Jackagain's picture

I've said for years that you never are really are the property owner. You pay rent (property taxes) or you are thrown off their (not your) property.

 

Slaves (debt slaves) are not allowed to own property. If you owe 10K in back property taxes on a 300K home, they throw you out and sell the house to another slave and keep ALL the money.

They don't take the 10K plus expenses and give you the rest....that's because you don't own the property. They'll only say you own it if there's a liabilty suit against their property though.

 

Works the same was with mineral rights....

Thu, 03/27/2014 - 18:06 | 4600450 withglee
withglee's picture

Control of property is far more important than ownership. You can control a property and not own it (i.e. don't have it free and clear yet). Borrowing to buy and renting out a property is a way to control it and not own it. There is much higher leverage in control than there is in ownership.

Thu, 03/27/2014 - 18:24 | 4600521 Herd Redirectio...
Herd Redirection Committee's picture

"leverage"

That word again!

Thu, 03/27/2014 - 18:40 | 4600576 withglee
withglee's picture

Don't go through life without knowing about it. And for darn sure, don't use it to buy a depreciating asset as the negative multiplying effect is just as big.

Thu, 03/27/2014 - 17:43 | 4600381 Heroic Couplet
Heroic Couplet's picture

The only way to put more Americans into a home is to LOWER the cost of the home. A house is worth the wholesale cost of the supplies marked-to-market in the lowest-cost country on planet Earth, probably India and China. The housing bubble is for the benefit of the private bank cartel, so if the private bank cartel is losing, no one cares.

Detroit offers a prime real estate opportunity to keep a running account of how the private bank cartel is getting screwed. Send a running account to the Michigan Senators and House members. Given there are 10 finance sector lobbyists on Capitol Hill for every one Member of Congress, they'll get the point.

Thu, 03/27/2014 - 18:08 | 4600458 withglee
withglee's picture

Never borrow to buy a depreciating asset. Detroit is still depreciating.

Thu, 03/27/2014 - 17:46 | 4600389 yellowsub
yellowsub's picture

I know someone selling a house and the prospective buyer is getting an FHA loan.  They are putting down the bare minimum laughable 3.5% on a $300k+ mortgage and the property tax here is around $10k...

 

 

Thu, 03/27/2014 - 18:20 | 4600500 withglee
withglee's picture

A $300,000 house would typically rent for over $3,000 per month. At 4% inflation that house would double in about 18 years. Over that 18 years, the rental would go up at about 4% also and would double. Thus, to rent the same house you would start out paying $3,000/month and end up paying $6,000/month after 18 years. 

If you bought it, your principal would go up slowly at first, quickly in the end. Your interest would go down slowly at first, quickly in the end. Your insurance and taxes and property value would go up just like inflation and rent.

If you buy right and leverage right, you can buy for about the same amount per month that you pay rent in the beginning, and much less than rent in the end. Once you have it paid off, you can drop the insurance if you want ... typically 1/3 of your total payout. You'll no longer be paying principal or interest. You'll only be paying taxes (also about 1/3 of your total monthly payout). Thus, in the end you'll be paying 1/3 what you would be paying to rent (all going to taxes), and you could sell the house for nearly 3 times what you paid for it with a 25 or 30 year mortgage. If you rented, you could just move out and your landlord could sell it for 3 times what "you" paid for it.

This isn't rocket science folks.

Thu, 03/27/2014 - 22:06 | 4601221 deflator
deflator's picture

A $300,000 house would typically rent for over $3,000 per month.

Where does a 300k house rent "typically" for 3k? Washington D.C., San Francisco? How about Flint, MI where millions of dollars homes built by GM executives don't sell at any price and nobody can afford to rent them because of the ridiculous high property taxes and high maintainance costs that rocket scientist landlords want to pass on to non-existent renters?

Thu, 03/27/2014 - 17:47 | 4600398 Jstanley011
Jstanley011's picture

The biggest myth I see around these parts is about fractional reserve banking, that it "creates money out of thin air." No it doesn't.

For example, a mortgage. The bank just so happens to have a lean on the house against the money it loaned. If that money isn't paid back, the bank will seize the asset and liquidate it.

Which means that fractional reserve banking is asset-backed. Which is why the system becomes vunerable when assets get pumped then dumped, but that's another discussion.

Thu, 03/27/2014 - 17:49 | 4600408 Jackagain
Jackagain's picture

Yeah...and backed by money they created out of nothing.

Thu, 03/27/2014 - 18:23 | 4600516 withglee
withglee's picture

No. Created by a "promise to complete a trade" backed by the marketplace with interest collected equal to default experience. All we have to do is get rid of the Fed and their INFLATION take. And get rid of the government and their propensity to roll over their trading promises (i.e. default on them).

Thu, 03/27/2014 - 17:59 | 4600434 Jstanley011
Jstanley011's picture

What's the alternative? Every dollar loaned out is backed by a dollar of gold in a vault? Uh, no. That's a prescription for economic malaise if there ever was one. IOW, "Back to the Middle Ages."

It just so happens that there would have been no Industrial Revolution without fractional reserve banking, where loans can be made on the possibilities in the production of assets, rather than on a limited supply of hoarded bullion.

Luckily, despite the pandemic misunderstanding of it, fractional reserve banking ain't goin' nowhere. Thank goodness.

Thu, 03/27/2014 - 18:33 | 4600556 Herd Redirectio...
Herd Redirection Committee's picture

Limited supply of bullion?

It costs $4 to dig an ounce of silver out of the ground!  (old ZH joke)

I think thats the point of using PMs to back currency.  The limit increases slowly.  Also, might want to look into 'Bills of Exchange'.

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