Pop quiz, hotshot. Let’s say you had $100,000 on January 1st 2008.
Which of the following “investment” methods took the largest loss in 2008:
- 20% down payment on a $500,000 SFH in King County.
- S&P 500 index fund.
- Cash under the mattress.
…
And the answer is… A!
According to the NWMLS, the median price of single-family homes in King County dropped 9.2% from January to November (the latest data available). When your $500,000 house lost 9.2% of its value you lost $45,978, or 46% of your $100,000 “investment.”
Had you put the money into an S&P 500 index fund, you would have lost $37,585, or 38% over the course of the year.
Also keep in mind that the loss for the home purchase is generously not taking into consideration all the money that was thrown away every month in mortgage interest. At January’s prevailing rate of 5.76%, that is another $22,900 down the drain.
Cash under the mattress wins as the safest investment of 2008. ;^)
Scotsman » Jan 1, 2009 at 1:19 pm
Real Estate- the investment that just keeps on taking, umm, tanking?
Sniglet » Jan 1, 2009 at 2:00 pm
I suspect that things will be similar in 2009. Putting $100,000 in cash under the mattress on January 1st 2009 will have done better than either stocks or real-estate by January 1st 2010.
David Losh » Jan 1, 2009 at 2:13 pm
Why would you give the blood sucking lender your hard earned dollars? That makes no sense. The “investor” makes a return of interest income. The “investor” borrows the money at 2% and lends it to you at 4%, keeps 1% and the servicer keeps 1%. Holy Cow, what if the “investor” made 5% or 6%.
The laws were changed years ago to give the “investor” the right to take the property. That’s the “investors” hook, they collect fees and interest income and take back the asset to resell if it doesn’t work out. That was the reasoning behind 100% financing.
The investor is in parethesies because it ultimately ends up being some mega land trust financial engineer. There are so many people along the way looking for a hand out it’s shameful. Give them nothing. We already gave them our tax dollars.
Scotsman » Jan 1, 2009 at 2:57 pm
Ah, its come to this- a mortgage calculator for:
Should I stay or should I go?
http://www.payorgo.com/
Alex » Jan 1, 2009 at 3:04 pm
Unrelated comment, but I had to put this in here: this video deserves a front-page mention in Seattle Bubble, I think:
http://www.youtube.com/watch?v=bNmcf4Y3lGM
Hitler’s “translated” words actually sound a lot like something that The Tim would write! Or maybe he *did* write that :) . Regardless, it’s a blast to watch! pay attention to how he’s about to lose his “Camaro SS”.
Gene » Jan 1, 2009 at 3:44 pm
Even taking into account interest, the numbers are still generous, unless you had no closing costs…
pfft » Jan 1, 2009 at 4:41 pm
Will any realtors who tried to scare people into buying make a very public apology?
Alex » Jan 1, 2009 at 6:12 pm
There’s three other factors in this calculation – which don’t really change the final numbers, but ah well, here’ they go:
1) The value of the shelter provided by the home – that is, the amount saved by not having to pay rent. This must be figured as the rent for the *median property* – not a small apartment. In King County in 2008, I’d claim that’s roughly 2000 a month – which more or less matches the amount spent on mortgage interest;
2) the fact that montly mortgage interest is tax-deductible – which comes out to be close to 500 a month that the “investor” gets back at the end of the year.
3) property tax and insurance… but those are roughly canceled by the benefit provided by item #2 above.
los » Jan 1, 2009 at 6:45 pm
Alex…don’t forget to offset that rent against the payments you made on that home during the year. Something Tim seems to have forgotten.
mikal » Jan 1, 2009 at 6:51 pm
He lives for free and expects the same for all others. Everyone has a sugar daddy.
Sean » Jan 1, 2009 at 6:55 pm
If you think of your home as solely an investment, especially a short term one then you should rethink your financial planning.
Having stated that, this quiz could’ve been trotted out in 2006 and you could’ve seen double digit returns by flipping some real estate. Unsustainable, yes, especially in hindsight but many people made money in those years.
waitingforseattletocool » Jan 1, 2009 at 7:04 pm
I have to disagree with you at least semantically.
I haven’t lost on either my real estate or my stock investments at all in 2008.
My returns were the worst on record, but I didn’t sell either of them and don’t expect to sell for the next 15 years.
It is not a loss until it is realized.
Scotsman » Jan 1, 2009 at 8:50 pm
Step one is to stop lying to yourself. An unrealized loss is still a loss. That doesn’t even get into the concept of opportunity costs.
What makes you think anything is coming back?
waitingforseattletocool » Jan 1, 2009 at 9:13 pm
Scotsman
I bought my first house in 1992 for $200K with 10% down ($20K)
At the peak, some fool would have bought it for $580K.
If it sold today for 15% under market value, it would sell for $425K.
Even with a cost to sell of 10%, you do the math return on investment.
Why do you accuse me of lying? The market is down and it is going down further over the near term.
Let’s talk again in 15 more years.
redmondjp » Jan 1, 2009 at 10:32 pm
So THAT’S why my grandparents (who all experienced the Great Depression) kept cash in their mattress!!! And, gosh darnit, some of it was real $20 gold pieces too (no such luck with today’s currency).
The Tim » Jan 1, 2009 at 10:34 pm
RE: #10,
Can someone explain to me how my current personal living situation has anything to do with the content of this post?
Agent » Jan 1, 2009 at 11:13 pm
The Tim,
How many pending sales failed to close in December? I believe it was 1 in 5 last month (or was it the month before?)
b » Jan 1, 2009 at 11:46 pm
waitingforseattletocool -
here is the math:
20k down + 96k (16 years of payments) and 84k left on your mortgage.
assume about $1k/year average maintenance, but it is likely more over a 16 year timespan due to big ticket items.
6% comission on that 425k sale =~ 400k
400k – 84k = cash after mortgage
132k (your cash in total) * x^16 = 316k
this works out to about 5.6% gain per year on average. not bad to bad for buying at a low and selling right after the high, but not great either. considering the average person moves every seven years and you will see why real estate is, generally, a break even “investment”. hopefully when this sinks in for most of the population, like it was before the bubble, price sanity from sellers will return.
waitingforseattletocool » Jan 1, 2009 at 11:55 pm
b
I would suggest the math be performed with the difference between mortgage payments and the equivalent rent.
waitingforseattletocool » Jan 2, 2009 at 12:06 am
By the way, I walked away from closing with $125K check (cash in hand) at closing in 2000 with a sale price of $300K so something is wrong with the math
Jonny » Jan 2, 2009 at 12:27 am
This all depends on who’s mattress we’re talking about.
offline » Jan 2, 2009 at 1:14 am
I don’t think even keeping cash in the mattress would help going forward with the way fed is printing money, for all these bailouts and debts, and its value depreciating big time coming years…we are screwed big time
Robert Wojciechowski » Jan 2, 2009 at 4:37 am
I think people trying to hoard money in a mattress can be dissappointed at some point. Unlike in the gold standard – The US govt and Fed can increase supply of money like crazy.
The American households cannot spend because they have debt burden. They just focus on repaying loans. This is crazy. Same thing is with housing. People feel burden of the payments especially after moving from ARM to full blown payments for a depreciating shack. So how to do this? You have to somehow reduce debt- and inflation is the way to go.
Offline – are we screwed big time. I would think that the following people will be screwed big time:
- People saving under mattress or in CDs. However for the moment you are dealing with deflation so for the very short term this may be the way to park your money.
- People who are buying long term US treasuries. Come on this is a classical bubble. Too many people panic.
- Govts who hoard US dollars
- In a way banks who were lending all the money. They will get it back but it will be worth less than they would think it should.
People on this forum were bashing me for saying that there will be bailout like crazy. But this happened. And then people did not like when I was talking about starting the printing presses and bringing in good HP machines – this is obviosly now how this happens but it makes the point.
The bailouts are great.
So if GM gets a bailout then unemployment will stay lower becauise of this. Barrack Obama will not want to preside over a nation with 20% unemployment rate. He will give GM even a sweeter package than current administration.
I would presume that Barrack might start giving sweeter deals for all distressed home owners. Everybody will just get a small piece of the pie.
And then checks, or less taxes or whatever to get you to keep more money in your pocket. People are obviously going this route!
I initailly thought that this will just cripple the $$. But no. I take that back. All other govts will do the same think like the US – so the $$ will be disfunctional but will have lots of disfunctional company. So it will be great for everybody.
People bashed me that the Chinese will be angry etc. No. The Chinese will be scared that their factories producing toys for American market will get shut down anytime. They will be even willing to be dilluted in terms on their USD holdings just to avoid social unrest. In 10-20 years time this may not fly and they might send in some helicopters – but for now – they will cooperate with a smile on the face.
I think the way to avoid long term for your wealth to diminish – you need to invest in sthg. Now maybe is not the time but soon it will be the case. Holding cash for say 20 years time means that the cash will be worthless.
Leo » Jan 2, 2009 at 8:01 am
Calculation is correct based on a fact you “buy home at 500k” and buy stocks at $100k. Stocks definitely lost more this year (38%stocks vs 9% RE). Anyways, I agree –money in matress was the best “investment” in 2008 :)
David Losh » Jan 2, 2009 at 8:24 am
In 2006 I thought the same way as comment #23. My opinion was that Hyper Inflation would wipe out debt. I think we are seeing something extremely unique in the fact governments around the world are throwing money at this global economic crisis. It was here on the SeattleBubble with the likes of the softwareengineer and sniglet that I was able to see that credit, and the financial markets are truly a global concern. I’m beginning to think governments benefit the most from the credit markets because they supply the money.
CitiGroup was the first indicator that a Financial Institution can create a global economic riipple. They, by the way, are a Consumer Credit lender. There was anothe Consumer credit lender at the same time that started the ball rolling, I forget if it was Chase or not.
To be short, because I need to go to work, manufacturing or jobs in manufacturing may the only way to help. Propping up financing will only prolong any recovery. The need for goods is immediate and extremely sustainable. The world population needs more than toys from China.
Sniglet » Jan 2, 2009 at 8:25 am
Sure, policy makers can increase the money supply but that has little or no impact on the value of the currency relative to assets. Japan has been massively pumping it’s money supply for 20 years yet deflation has run rampant nevertheless.
Moreover, all this stimulus from global goverments and central banks doesn’t come close to making up the difference in the loss of private credit markets (which have vanished in the last year). Anyone putting their money under the mattress will do VERY well over the next 3 to 5 years since most other assets (real-estate, stocks, commodities, gold) will keep crashing in value for YEARS.
In the LONG run fiat currency will inflate, but we are going to go through a prolonged bought of deflation before we get to that point.
I have laid out the case for deflation in my blog at http://www.surkan.com.
Herman » Jan 2, 2009 at 8:30 am
The return on a $500,000 personal home that you owned instead of renting, was:
100,000 Investment
(46,000) Capital Loss in 2008 (not recognized this way by tax code… but)
(22,000) Cost of financing remaining $400k @ 5.5%APY
(5,000) Annual maintenance and repairs @ 1%
(5,000) Insurance @ 1%
(4,350) Property tax @ 0.86%
(3,700) Cost to sell house at current value, divided over 10 years
+24,000 Rent payments avoided
+9,200 Tax benefit on mortgage interest and taxes @ 35% bracket
————
$47,150 = a return (loss) of almost (53%)
.
If you’d paid 100% cash for the home, of course, your loss would be much smaller, only about (8%) and much better than if you’d parked your half-mill’ in the S&P. But most people prefer to use their 4:1 leverage when they buy real estate.
Brian » Jan 2, 2009 at 10:22 am
The Tim’s living situation really isn’t relevant to the overall question of whether to rent or buy. It is only relevant to his individual situation.
I currently am living rent free myself, but that was always intended to be a temporary situation as I moved to a new area to start my practice. I was pretty close to pulling the trigger on buying a house about four months ago, but based in part on this site, decided to hold off, saving a ton of money in the process.
Now that business is humming along, it’s time for me to move out of my free rent situation (friends/family think it’s pathetic), but I’ve decided to just rent a house for the next six or twelve months, then reassess.
That being the case, any advice on negotiating rental prices on homes/townhomes in this market? I’m looking for a place in Everett/Mill Creek.
mukoh » Jan 2, 2009 at 10:50 am
My coin investments which are rarities of the pre 1800s era, are up 600%-700% over the last 5 years. Thats hard to beat.
deejayoh » Jan 2, 2009 at 11:09 am
Most people would have only put down max 10% on that house up through about mid-2007 – so the reality is they are out all their down payment
the scenario given of a 20% down payment has not really been very common for quite some time
The Tim » Jan 2, 2009 at 11:13 am
deejayoh @ 30,
Well now you’re just being silly. Everyone knows that the most fair way to compare things is to assume an all-cash purchase.
economist » Jan 2, 2009 at 12:24 pm
I look at buying a house solely as an investment, which is why I won’t buy at current prices.
Investing does not mean playing a Ponzi scheme. Looking at a house as an investment does not mean blindly assuming prices will go up. It means looking at P/E and comparing it to other assets, to see if it is a good place to put your money. If P/E is inferior compared to other assets of comparable risk, prices will go down. Like they are doing now and will continue to do.
Alan » Jan 2, 2009 at 12:35 pm
The 38% drop in the stock market is going to mean fewer people have the down payment needed to buy a house in today’s credit market. Fewer people mean less demand. Less demand means lower prices.
jon » Jan 2, 2009 at 1:12 pm
“The 38% drop in the stock market is going to mean fewer people have the down payment needed to buy a house in today’s credit market.”
Maybe, maybe not. Stocks are relatively concentrated in investors who already own houses. Part of the reason for the fall in the market is that there were $320 billion in mutual fund withdrawals. Money market funds tell a different story:
“Meanwhile, money market mutual fund assets rose by $​130.​2 billion, or 3.​6%, in November to $​3.​736 trillion, and these assets have risen by $​628.​4 billion, or 20.​2%, year-​to-​date in 2008.”
source: http://www.cranedata.com/archives/all-articles/2048/
Question is will that money stay there or go to an inflation hedge, like say, real estate ahead of the $1 trillion stimulus package that is burning a hole in the new Congress’ pocket.
Teck Kwan » Jan 4, 2009 at 3:14 am
waitingforseattletocool@18
Unrealized loss is not a loss … that is a good one. I hope the Japanese are still optimistic about their holding since the 90.