patrick.net

This example matches my Mom's house perfectly, almost to the dollar, though of course she didn't sell in 2009.

From the original:

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

This may be true but it is missing the fact that this interest rate lowering 1983-2003 was what got us inflation in the first place! This same inflation bailed out homedebtors and totally screwed renters (I have been renting since the mid-80s, grrr).

Just for fun I've modeled this ownership.

$76,400 starting loan balance, 14% 30 year in Jan 1980, serially refi'd into new 30 year mortgages in 1983 (12.5%), 1986 (10%), 1994 (7.5%), 2003 (5%).

Total interest paid is $120,000, total property taxes $27,000 (assuming Prop 13 protection). Both are net 30% tax credit.

So for $147,000 in interest and taxes we get an average cost of ownership of $412/mo over the 30 years.

$30,000 was still owed on the home in Dec 2009, so there was a $220,000 profit on $46,000 in total investment (principal paydown).

I have no idea what kind of point this author is trying to make. ~$200,000 profit on a $1500/yr investment, a cost of ownership half or less of renting. Sign me up!

We can’t drop mortgage interest rates 9% again (currently 4.4%), but we should expect houses to continue to underperform inflation.

Oops! I found his point. Can you spot the mathematical error?

Rates fell from 14% to 5%, a 64% drop. Gee, how can rates fall 64% from 5%?

Bueller?

Here's a hint:

The funny thing is 2.35% rates would in fact send the $270,000 pricepoint to $430,000.

According to my stupid spreadsheet, $76,400 @ 14% has an average monthly TCO of $900/mo, and $270,000 @ 5% and $430,000 @ 2.35% come in at ~$1100/mo.

I don't know this area. But a quick look on Redfin shows that there may be better deals now.

http://www.redfin.com/CA/Antioch/1936-Evergreen-Ave-94509/home/748261

Home prices here seem so low.

Bap33 says

good point … but, not being afraid of something because it is very unlikely doesn’t make it less dangerous. I could see Barry, and those who think like Pelosi and B.Frank, having the balls (sic) to try to remove term limits for Prez. All it takes is “a good crisis”. Right? Then we be having some of those unelected dic-taters too. lol
it could happen

While were at it, everyone be very afraid of a meteor crashing into earth and destroying everthing.

There's actually a real chance of that happening in 2015, unlike the bizarre socialist hysteria.

good point

I'm kinda seeing the Mayan 12/21/12 thing looking like a good time to end this poop.

@Nomo,
Could be you trust me to be respectful, and vice versa (?). lol

Could be some of the newer conservos are better adversaries for you? lol

Dude ... we could sit and sip coffee and talk about houses any time. Or other stuff.

Buying averaged $400/mo in interest and taxes over the 30 years.

Rent would have been $1000/mo on average let's say ($500 in 1980 and $1500 now), so that $600/mo diff over 30 years works out to around $200,000 money saved buying.

From that deduct $20,000 in incidentals: new roof, $10,000 in other maintenance. Altogether buying put you ahead ~$400,000 over renting. Compared to the $1500/yr in actual property investment, that's pretty awesome!

The dude's question whether buyers today will see that sort of appreciation is an open one. The 1980 ~ 2009 example follows the Early Boomer moving from age 30 to age 59. That was the run-up, what may follow is the run-down.

>>$76,400 starting loan balance, 14% 30 year in Jan 1980, serially refi’d into new 30 year mortgages in 1983 (12.5%), 1986 (10%), 1994 (7.5%), 2003 (5%).

>>~$200,000 profit on a $1500/yr investment, a cost of ownership half or less of renting. Sign me up!

Lets assume that you used an IO loan.

You pay interest of about 257% over the loan. (14x3 + 12.5x3 + 10 x 8 + 7.5 x 9 + 5 x 6) after the serial refinance.

You sell the house for 270,900 and pay 76,400 and pocket the difference of $194,500

You paid 76,400 x 2.57 over this time = 196348

So you lived free in the house (assuming prop taxes + maintenance vs. the tax deduction is a wash).

Amortization does not matter - for eg if you paid $1000 principal in the first(1980) , year you lost the returns on that $1000 if you had invested it all this time.(1981 to 2009). That returns would hold close to your rates you refinanced if invested in bonds but much more if you invested in S&P (700% gain). So doing this I/O calculation has a bias, if any, towards the buy side.

If you take realistic maintenance costs, and the investment gains forgone, the benefits would even less.

Calculations like these should be in real terms. $1 in 1980 is not equal to $1 in 19994 is not equal to $1 in 2009.

I just noticed that the house was sold at 410K back in 2005, then it sold at 115K in 2009 to, you rentalinvestor, I guess.

I've never been there, so bare with me. But WTF happened to that area?

^ yes, I can confirm that the tax value of IO financing does wash out with the after-tax property tax, insurance, and $20,000 of maintenance.

But free rent is nothing to sniff at!

You say the S&P returned 700% since 1980, but due to the 10% refi in 1986 and the general inflation of the 80s, in the late 80s IO had a cheaper per month cost than renting ($636 vs. ~$800) So the rent strategy can only put money into the market 1980-1985, after that it is taking money out of the market.

From 1980-85 the renter saves $18800 vs buying. This will expand to $331,000 by 2009 going with the S&P's CAGR.

However, from 1986 through 2009 the renter has to cough up an extra $172,000 to live.

The pure rent strategy thus nets $160,000.

But because IO was cheaper than renting 1986 ~ 2009, the IO buyer could have put THOSE savings into the market, yielding an extra $284,000 from the S&P over that time, over and above the $200,000 he also netted on the house.

Edit: oops, forgot the $200,000 IO interest payments.

Rent: +$160,000.
Buy: +$284,000.

Spreadsheet here :)

https://spreadsheets.google.com/ccc?key=0Av516pXK_I7HdFZhZW10cEg3ZHJ2SUt6Yk9Lc2I5T0E&authkey=CJiSh_IJ&hl=en#gid=0

^ that's probably not entirely right. The renter has to pay $354,000 in rent 1980-2009 while the IO strategy has a net housing cost of $0 thanks to the home appreciation covering the IO cost.

The only way to really model this is to include the person's entire investment strategy, not just this differential.

So let's say the dude has $12,000 less the housing expense to throw into the market in 1980, and this $12,000 rises 5% per year until it hits ~$49,400 in 2009.

In 2009 he will have $1.462M in the rent case and $1.416M in the IO case, for a rent strategy advantage of $46,000 in investment gain.

But the IO strategy does have $200,000 in home equity, for a $150,000 advantage.

I think I learned something with this, what, I'm not sure.

Oh, I know. Instead of playing Pac Man I should have been investing in the S&P. $1000 invested in 1980 would have been worth $31,000 in 2007.

Important announcement: Bap & Nomo have won the 1st. Annual Rodney King "Why can't we ... why can't we ... all ... just .... get along?" Award. I'm going to have to sign off for now. I'm afraid tears are going to short circuit my keyboard.

Oh Come on, Look at the WSJ top ten reasons, I am still laughing so hard, I had to re read it to make sure they actually put that in print.... LOLOLOLOLOLOL Ya, Lots To Choose From, Low Rates, Save on Taxes, LOL, It will be YOURS! (I guess you will ignore the bank) Inflation protection (that is like rain coat in AZ) Oh and lets us not forget the killer, Sooner or later, the market will clear. LOLOLOLOL Yea, sooner or later... alright sounds like some solid reasons.... NOT Did they really run this in the paper version? Wow

Is Mr. Arends sponsored by the NAR? We're in one of the "far-flung" areas of CA, and unless we get another industry or prison soon, nobody's going to have the income to buy our pretty country club mansions and subdivision "estates."

Nomograph says

Many desirable areas near employment opportunities have already seen major drops and are unlikely to go much further.

Really? I think you may be right if you are assuming rates will remain super low. What do you think may happen if there is a 2% hike in 2 years(I see that happening if and only if economy gathers some steam)? What if rate remains same but employment picture never improves(I see this more of a possibility than the previous scenario)?

Nomograph says

Bap33 says
Dude … we could sit and sip coffee and talk about houses any time. Or other stuff.
You and I have had some pretty fierce knock-down drag-outs over the years, but the truth is I think you are one of the most clever and insightful people on this forum. I enjoy reading your posts, and I respect your opinion a great deal. I’m usually only a ass to people I think are worthy intellectual adversaries.
I love you, man.

How sweet, you two. But, having read rayray's post, you coulda done it a lot sooner. :)

Nomograph says

I’m usually only a ass to people I think are worthy intellectual adversaries.

Ouch.

Logic: A ---> B does not imply ~A--->~B, but it does imply contrapositive ~B--->~A

That is you can only conclude that if you are not intellectually worthy, he would not be an ass. But Nomo, you know how Ellie feels about you. Maybe you need to be get a little rude with her.

Or he could just talk dirty. :)

He said he's an ass to worthy intellectual adversaries... It appears to me that I meet 2/3 of his criteria. Since I'm not an adversary for the most part, I know in my heart that he likes me (blush). But I've sneezed a lot of liquids from his snarky comments that came out of left field.

Nomograph says

I’m actually just trying to get down Bap’s pants. Jealous much?

No, I'm over it. But it was touch & go for a second there.

This entire excercise is predicated on the concept that one would never have to change jobs or move. Not very likely in today's world.

elliemae says

Or he could just talk dirty.

Nomograph says

That’s my specialty. Hit it and quit it, don’t babysit it.

Thanks. I'm gonna need a shower, tho. :)

get down my pants ..... an interesting undertaking. Caution: I'm commando at all times. Except for when I'm wearing my wedding/funeral/Christmas dockers - my wife demands that I wear chones under those.

I respect anyone who can defend their position sans personal attacks. That's why Clarence13 is such a dueche bag.

minus transaction costs

Yes, it WAS a great time to buy a house. Back then. That does not mean it is equally good now because circumstances are very different.

If you have done the right thing and actually saved up some money, the best thing you can hope for is HIGH interest rates. It brings competition among buyers down because the "how-much-a-month" idiots disappear from the equation. House prices drift lower, and while you pay more interest, it is on a much smaller principal amount.

It isn't 1979 anymore, so IMHO using that as an example to prove anything - either way - is ridiculous.

If you read the original post, you would realize the author was attempting to make against the case of "A home as an investment".

A home and the payments you pay on a home are at best a forced savings tool. Don't forget you also have to pay interest on a mortgage, substantial interest over the life of the loan.

4. It'll be yours.

Wow, that guy is really stretching just to reach the magic number 10. And like Rob said, this list would have been no different a few years ago.

It's all about the J-O-B-S.

If Japan is any guide we're heading back to 1997, nominal.

The mid 90s saw the invention of the internet, mass deployment of WIndows 95 PCs, cheap gas, growing trade with China, NAFTA, etc. save the economy.

But post 1997 it was all bubble, all the way down.

I like you both, especially when you talk dirty this way.

Bap33 says

Caution: I’m commando at all times.

I once worked with a woman who refuses to go naked at all. Not to bed (she lives alone) and certainly not after she gets out of the shower, she grabs a towel. Ugh.

Just another sprout journalist with nonsense articles.

Brett Arends is an American financial journalist. He writes a column for the Wall Street Journal[1]. He has written a book about personal finance, Storm Proof Your Money.[2], and a book about sports gambling, Spread Betting: A Football Fan's Guide.

Before joining the Wall Street Journal, Arends wrote a financial news column for the Boston Herald and TheStreet.com, the financial website chaired by Jim Cramer. Arends received a Best in Business award from The Society of American Business Editors and Writers in 2007 for his columns at TheStreet.com.

Well I am not a housing bear type but this article is ten points of BS all of which are refutable.
who cares about interest rates? It is a non-factor since a large number of purchases are cash .

thomas.wong1986 says

Just another sprout journalist with nonsense articles.
Brett Arends is an American financial journalist. He writes a column for the Wall Street Journal[1]. He has written a book about personal finance, Storm Proof Your Money.[2], and a book about sports gambling, Spread Betting: A Football Fan’s Guide.
Arends writes a column of personal financial advice that appears twice a week online at the Wall Street Journal and a column for MarketWatch. He also writes a financial news column once a week for MarketWatch.
Before joining the Wall Street Journal, Arends wrote a financial news column for the Boston Herald and TheStreet.com, the financial website chaired by Jim Cramer. Arends received a Best in Business award from The Society of American Business Editors and Writers in 2007 for his columns at TheStreet.com.

We should just find out how his finances are? Is he owning?

Troy says

If Japan is any guide we’re heading back to 1997

Nope can't compare US with Japan. We are the super power.

bubblesitter says

Troy says

If Japan is any guide we’re heading back to 1997

Nope can’t compare US with Japan. We are the super power.

We are the superpower.

We also have a younger population, a growing population, a population that, in spite of everything going on right now, still tolerates immigration (unlike Japan's) and a population that is still making babies faster than we are losing population. We have abundant natural resources, too.

Yep, we are not Japan.

sybrib says

bubblesitter says

Troy says

If Japan is any guide we’re heading back to 1997

Nope can’t compare US with Japan. We are the super power.

We are the superpower.
We also have a younger population, a growing population, a population that, in spite of everything going on right now, still tolerates immigration (unlike Japan’s) and a population that is still making babies faster than we are losing population. We have abundant natural resources, too.
Yep, we are not Japan.

With no offense to Hispanics, are you referring to illegal aliens babies by any chance? LOL.

Those babies are Americans, even if you don't like their color. ***If*** we can ever organize them to vote regularly, they'll outvote the Tea Partiers.

sybrib says

We also have a younger population, a growing population, a population that, in spite of everything going on right now, still tolerates immigration (unlike Japan’s) and a population that is still making babies faster than we are losing population. We have abundant natural resources, too.

All that is irrelevant. If we are so hot how come we're running a $500B/yr trade deficit. Having trillions in natural resources aren't going to do us any good if somebody else owns them.

Immigration isn't going to save us. Maybe save California's labor-intensive agriculture, but farming is such a small part of our current GDP, ~1% last I checked.

Why do we need more population when U-6 is pushing 17%. Looks like we could safely lose 1 out of 6 people here if you ask me.

Babies are consumption not production, not until they turn 18-25 and replace existing labor in the workforce.

Just think what our UE rate would be if the government weren't spending $5.5T this year. Hello??? I drive this point into the ground here but the import of this number simply bewilders me. If that $5.5T were going all into paychecks, that would be 55 MILLION jobs at $100K/yr apiece. That's about 1 out of 2 households having a VERY well-paid government employee. Where the hell is all that money going??? Interest on the debt is only around $400B so that's still over $5T in gov't spending.

We'd be lucky to be Japan now. I'd trade our macro-economic situations, I think. Not that our problems are not less solvable than theirs (I prefer our problems) but our POLITICS is what is fucked here. This nation has not the first clue why everything blew up last decade. Half the country will lay most of the blame on government -- CRA, GSEs, Clinton -- but that wasn't 5% of the cause. Our coming disaster is simply sheer stupidity. We are the stupidest people on the planet. Well, 2nd to Turkey if public acceptance of "Darwinism" is anything to go on.

sybrib says

Those babies are Americans, even if you don’t like their color. ***If*** we can ever organize them to vote regularly, they’ll outvote the Tea Partiers.

Drive 100 miles outside of the Bay Area area all the way to up to Montana down to Texas and across to North Carolina. YOU will see a difference. The Bay Area is not representitive of the thinking of many many Americans.

^

Outside of the coastal enclaves, this map can tell you where the dependent minorities live in this country.