Yohannon (yohannon) wrote,

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The Myth of the Home as Wealth Builder/Protection

It was really hard listening to the crap that used house salespeople spewed at us during the housing bubble run-up -- hearing so-called "professionals" insist, with a straight face, that "real estate only goes up" when it went DOWN during the early 90's (so it's not like they didn't have a modern era example to draw on) was enough to make me physically ill.

Let's pretend the bubble never happened for a second, and start things over with the 1997 run-up in prices.

Case-Schiller researched the history of home prices from 1880 (no, that's NOT a typo) until 2006 (which happened to be near the top of the insanity). He discovered that, after adjusting for inflation, the average appreciation for a home was .4 %.

That four tenth of a percent. Annually.

So, take the home I'm living in now. It last sold (to my current landlords) for 240,000 dollars in 1997. Thanks a handy inflation calculator, we discover that comes to 315,727 in 2009 dollars. So, just to make back what you spent in 1997, the house value would have to increase by about 75K. Well, that doesn't seem so bad until you realize that the average appreciation of .4% brings your house value to about 331K -- which means you made a whopping 16K in 12 years, or about $1,300.00 a year.

Ooooo - we're rich!

Except that money isn't real until you sell. Assuming you get 331K, your real estate professional used house salesman demands 6%, which comes to... um... $19,860.000. You just lost over 3K already.

Well, THAT was no challenge.

So let's get aggressive with appreciation. The aforementioned Case-Schiller notes the best appreciation rate was 1987 to 2007 years at self-assessed values -- a whopping *2* %. You'll notice that includes the near peak run up as well, without the subsequent sharp drop. Treasury bonds have averaged between 3.5 to 4.7% annually for the previous 100 years, so let's split the difference and say housing values should only have risen 3% a year. Now we're looking at 437.5K. Let's just take that 6% off right now -- 411,250. In case you're wondering, that's up 79K in adjusted money. You made 8K a year!

No so fast -- you forgot about property taxes. At least in California, you're looking at tightly controlled assessments, a legacy of the legendary Prop 13 from the 70's. Conservatively you're looking at about 2K a year on average. 6K works, right?

Okay, remember my recent tirade about banks "renegotiating" principal downward, and how banks could have already re-made their money (or at least a good sized chunk) by the time they foreclose on your ass anyway. How much money do you think you've spent on your mortgage for 12 years?

Let's see, let's assume a best case scenario... unnaturally so. Assume a fixed rate 30 year mortgage at 3% (which would have been near impossible in 1997) with a 20% down-payment of 48K. That's a 1200 a month mortgage... 12 years times 12 months, 144 months... that comes to 172,800K. Let's add on that 24K in property taxes... woo, 196,800.

"Hey!" I can hear you say already, "You get that back when you sell!" -- uh... not based on those amortization tables. After 12 years your balance would still be:


No, that's not a mistake. You just spent 172K, you still OWE 180K. But hey... You have 411,250 from that sale, so you've made 238,450! 19,870 a year. Finally, some real cash!

Of course, there are myriad other expenses involved in your little purchase. And of course the biggest fly in the ointment of all:

The Market SUCKS.

This little fantasy is based on everything working at least sensibly, without the negative side effects of bubbles. This house has dropped to 575,000 as of today, and it's literally dropping over a grand a day here now. At about 40K a month, we will hit that 437.5 "best of all SANE worlds" price point in about 3 1/2 months.

And it will KEEP DROPPING.

Okay, so will it adjust to that more sensible number, 331k? Yes, it will. I see that price point by Late 2009 or early 2010.

And it will KEEP DROPPING.

Folks, the bottom is going to be around 240K. 2013ish. And that's only if people forget the real problem with housing prices, the instigator of this mess in the first place.

All that horrible number crunching you've just slogged through? You will have spent 172K for 60K "profit". Total. 5K a year.

Buying a house is one of the most stressful things you will ever do in your life. This is not just the opinion of someone who has been through that mill, that's an established fact. 1200 a month is STILL a doable rent in the bay area -- if you kept that 48K (remember? You had 48K for that down payment. if you save 200 a month, you would have made a whole lot more than 60K after 12 years.

Buy a house because it fits your life. Buy it because you want to do shit that you simply can't do in a rental, to fit your family's, your tribe's life. Buy it for the right fucking reasons.

Because if you think for one picosecond that buying a house is the way to become rich, retire, or otherwise "build equity", you're an idiot. No, really. You're only giving money to the merciless douchebags that got us into this epic clusterfail in the first place, all for the chance to get some of it back someday.

Unless they screw you out of your money when you put it into hock again because it worked out so fucking well the last time you thought your house was an ATM machine. You know... back in 2007?

Unless you're buying with cash, you're renting money from the bank at such a high cost that you would HAVE to foment a little frothy bubbly goodness to get house prices high enough to make it all back. The only way to prevent another bubble from happening is to reduce prices to a point where you can purchase the house outright. If the 240K bottom comes up too quickly... say, early 2012 or (god help us) 2011, then the new bottom looks to be the bottom of the last nadir, 1994, about 189K. Why, yes, I just said that housing prices, in terms of actual 2009 dollars, will hit 20 year old levels by 2014.

I can't overstate this: The very industry that caused this crisis has also signed it's own death warrant (as a viable business option, he hastens to add!). While Obama notes that "stabilizing real estate prices" is vital to the economic health of this nation, in reality the only thing it would be healthy for is the bankers. From the beginning mortgages put constant upward pressure on prices -- the sub-prime mortgage debacle blew the intricate semi-legitimatized ponzi party wide open, accelerating the process. Stimulus or no, the end result, an economic reset of almost apocalyptic proportions, is a matter of blind, dumb luck. Oh, it will hit that 240K, for sure -- any further and I get a "reply hazy, try again later" from the crystal ball that are my little spread sheets and odd math.

And I'll need to account for deflation in my crunching.
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