The Great Housing Bamboozle: A Look Behind The Numbers Shows Home Ownership To Be A Poor Investment
Guest post from regular contributor Mark McHugh. The numbers are not pretty for house debtors, myself included. Can it really be this bad?
---
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:
http://data.bls.gov/cgi-bin/cpicalc.pl
##
Check out Mark's blog:
---
---
Message from the founder:
Click here for the most important video we've ever published at the Daily Bail. If you agree, post it all over the internet. Email it to everyone you've ever met. Use your imagination. Thank you.
---
Sep 16, 2010 at 12:52 PM
Reader Comments (32)
Bank Repossession of Homes Sets New Record in August
http://finance.yahoo.com/news/Bank-Repossession-of-Homes-cnbc-1047161091.html?source=patrick.net#y-article-hd
http://finance.yahoo.com/news/Home-Price-Double-Dip-cnbc-3384069348.html?source=patrick.net#y-article-hd
http://globaleconomicanalysis.blogspot.com/2010/09/home-prices-drop-in-36-states-beazer.html?source=patrick.net
http://www.housingwire.com/2010/09/13/freddie-mac-estimates-home-sales-to-fall-another-23-in-3q?source=patrick.net
http://www.foreclosuretruth.com/blog/sean/want-to-know-when-prices-will-rise/?source=patrick.net#header
http://www.9news.com/news/article.aspx?source=patrick.net&storyid=152976&catid=339#article-header
That is a dramatic change from last year, when most properties were vacant by the time of a foreclosure sale.
"Borrowers are savvy now and they know that once they lose the house, they can milk the system for time and cash," said Peterson, a managing director at the Sacramento private-equity firm Praxis Capital Inc., a large buyer at trustee sales in seven Northern California counties.
http://www.americanbanker.com/bulletins/-1025519-1.html?source=patrick.net#most-emailed-list
What "The 25 Most Expensive Homes" Reveal About the U.S. Economy
http://www.contracostatimes.com/top-stories/ci_16073782?source=patrick.net&nclick_check=1
http://www.seattleweekly.com/2010-09-15/news/you-can-get-a-mortgage-for-no-money-down-again/?source=patrick.net#top_stories_header_title
http://blogs.forbes.com/robertlenzner/2010/09/15/goldman-sachs-economist-predicts-housing-in-u-s-wont-recover-until-late-2013/?boxes=businesschannelsections
JP Morgan said 2014 yesterday...
I expect it will be longer...7-8 more years of flat to declining prices...
Love that "Mr Housing Bubble" graphic!
http://www.businessinsider.com/the-great-housing-bamboozle-2010-9
You should probably go over there and respond to the many comments...
Great stuff...
Just curious.
The primary driver of house prices is interest rates, period. You can say I cherry-picked data, I really didn't. 1981 to 2010 would produce even more dramatic results. You're welcome to make your own spreadsheet and do your own calcs.
There is nothing in the data to suggest that housing can ever outperform inflation over more than a couple years. The couple years it did (and only slightly) is what we think of as the "bubble". If something doesn't beat inflation, it's no an investment.
If you're really, really smart, you'll realize that the reason houses underperform inflation is because real wages have been stagnant for a long time and will continue to be so.
The article is not an indictment of home ownership nor did it aspire to compare owning vs. renting. But if you stretch to buy that McMansion for 500k, thinking it's gonna payoff big someday, bon voyage!
We live in a world whAre the sun dont come up on many bad people. Hang on, 2011 is just around the cornner.....
I really DO want to be smarter than Uncle Sam, so I need to understand this...
In Question #2 you said "cumulative inflation from 1980 to 2009 was 160.36%.
Then in the answer (part a) you have: $198,915.04 ($76,400 * 2.6036)
My question - Where did you get that 2.6036? I "get" everything else except that figure.
Hope you'll clarify so I can be smart, too!
Inflation of 160.36% (or 1.6036). and you have to add 1 to get the right number. If inflation was 100%, meaning prices doubled, you multiply by two (1 + 1).
Unless you lived in the house while you rented it out, your comment doesn't make sense. And even if you did, what's your point? The point of Mark's article is that buying a house to live in is NOT an investment. The article is NOT called "The Great Landlord Bamboozle".
Your house might not be a good investment depending on when you bought it but it is still an investment. If there is an expectation of profit, it is an investment by definition? Is that a reasonable expectation? I guess that all depends on the knowledge of the investor, timing and a little good luck. Is buying Van Gogh’s The Fields (Wheat Fields) an investment if all you want to do for a while is look at it on your wall?
House depreciation is more relevant when you have a rental property (long term asset) but I think that it is important to understand that a house does depreciate in value due to use. This is so often overlooked by the homeowner until they file a claim with their insurance company (they get it).
Dr. P, the title of the article calls it a “poor investment”. Isn’t this similar to argument many are having with regards to gold these days? Maybe a home is still a sensible way to protect your net worth in the long term. Maybe we just change location location location to something a bit more contemporary like location location and bubble-timing.
$2,000 a month gets you a 420K mortgage at 4%
$2,000 a month gets you a 169K mortgage at 14%
You need to understand that before you go home shopping and factor that in to your decision. That's really all this article was about. I've found time and time again, otherwise educated people have absolutely no idea what effect interest rates have on the "price" of a house. So before you go passing "wisdom" on to the next generation maybe you should understand that.
Another thing we need to understand is the amount of deficit spending going on to keep the "values" of homes and 401(k)'s up. It's been about 500 bucks per person, per month for more than two years now.
Now ask the average family of four if they're willing to pay $2,000 a month (on top of the mortgage) to keep their house and 401(k) values up. What do you think they'd say?
It's easier to stick your kids with the bill, right? If you don't understand this, don't give me any of that "education is the key!", crap. Go back to school, and don't even think about trying to stick me with the bill.