Housing cost calculator help?
I've been playing with the CEPR Housing Cost Calculator. It assumes that real house prices will fall so that price increases since 1997 only match inflation. For the Seattle-Bellevue-Everett metropolitan area, that would be a 49% drop in real prices. (Real = considering inflation, so list prices could remain flat or even rise while inflation drops the real price.)
Here's an example calculation: For a $500K house, 20% down, 6.25% interest, sold after 10 years, the calculator predicts that if you rented a $3K/month house instead you'd come out ahead by 85K in today's dollars. Since you can rent a $500K house for about $2K/month (on the Eastside at least), you might come out ahead by over $200K in today's dollars by renting, instead of buying, a typical $500K house.
Most of the calculator's many assumptions seem to be reasonable. But there are two main ones that I question:
The first assumption I question is that predicted 49% drop in real house prices. The help text (shown by clicking on the "House Appreciation" link) notes that "Some areas have simply become more desirable places to live during the last [ten] years, and therefore some of the increase in house prices in these areas will likely remain." I think Seattle is one of those areas, so as a proxy for Seattle I typically choose the next area on the list, Sheboygan, WI, where a 23% drop is predicted. Of course how far prices will drop is debatable. It's even possible that prices could overcorrect.
The second assumption I question is the interest rate on the money saved by renting instead of buying. The help text (shown by clicking on the "less than $x per month" link) says "any cost differences between renting and owning are assumed to be put into bonds which accumulate interest at the Congressional Budget Office's projected rate for that year". A rough calculation shows this interest rate to be over 6.7% annually over a 10 year period, after inflation. (The amounts are shown by clicking on the "See details" link.) I doubt that such a good low-risk return exists. I tried googling for that "projected rate", but don't find it. Can anyone explain this to me? It seems to me that on a low-risk investment you'd be lucky to beat inflation by more than 1 or 2%. If I calculated incorrectly, I don't see how.
Any other thoughts on this calculator appreciated. IMO it gets to the heart of the matter regarding the bubble: the question isn't so much whether real prices will drop, it's whether you're better off renting for now, all things considered, which for me includes many things the calculator doesn't consider.
Here's an example calculation: For a $500K house, 20% down, 6.25% interest, sold after 10 years, the calculator predicts that if you rented a $3K/month house instead you'd come out ahead by 85K in today's dollars. Since you can rent a $500K house for about $2K/month (on the Eastside at least), you might come out ahead by over $200K in today's dollars by renting, instead of buying, a typical $500K house.
Most of the calculator's many assumptions seem to be reasonable. But there are two main ones that I question:
The first assumption I question is that predicted 49% drop in real house prices. The help text (shown by clicking on the "House Appreciation" link) notes that "Some areas have simply become more desirable places to live during the last [ten] years, and therefore some of the increase in house prices in these areas will likely remain." I think Seattle is one of those areas, so as a proxy for Seattle I typically choose the next area on the list, Sheboygan, WI, where a 23% drop is predicted. Of course how far prices will drop is debatable. It's even possible that prices could overcorrect.
The second assumption I question is the interest rate on the money saved by renting instead of buying. The help text (shown by clicking on the "less than $x per month" link) says "any cost differences between renting and owning are assumed to be put into bonds which accumulate interest at the Congressional Budget Office's projected rate for that year". A rough calculation shows this interest rate to be over 6.7% annually over a 10 year period, after inflation. (The amounts are shown by clicking on the "See details" link.) I doubt that such a good low-risk return exists. I tried googling for that "projected rate", but don't find it. Can anyone explain this to me? It seems to me that on a low-risk investment you'd be lucky to beat inflation by more than 1 or 2%. If I calculated incorrectly, I don't see how.
Any other thoughts on this calculator appreciated. IMO it gets to the heart of the matter regarding the bubble: the question isn't so much whether real prices will drop, it's whether you're better off renting for now, all things considered, which for me includes many things the calculator doesn't consider.
Comments
However, factoring in 15% inflation and a GDP that is less than 1%, based on current M3 reporting numbers, that leaves you with a 7% loss each year.
With continuing war and more mortage bail-outs by the Fed, we can expect inflation to continue rising for at least the next several years. By the time this is over, we may be well above 20% annual inflation rates.
Now is the time to get out of the US dollar, if you haven't guessed yet. Anyone reading this who is frightened by these numbers should be. You should be voting for Ron Paul in 2008 because he's the only candidate who wants to end the war AND stop the senseless dilution of the US dollar.
If you are right that the rate of inflation will far exceed what can be earned on a low-risk investment, and house price increases continue to track inflation in the long run, then it seems that one should buy a house sooner. The calculator shows that buying beats renting in the long run. The breakeven point happens sooner the further the rate of return on savings from renting (vs. buying) is below the rate of inflation. I recall 19% CD rates in the 1980s due in large part to the high inflation then, but I'm not sure if that beat inflation.
The plummeting US dollar can overcorrect so if you get out of it at the wrong time you could take a big hit. One idea to hedge is to buy US companies that stand to gain the most from a falling dollar.
I've heard good things about Ron Paul, but unfortunately a good Republican is an unelectable one, simply because he or she would try to stem the dissolution of the country that the rich seek (the rich love Bush). The best we can hope for is Hillary, methinks, and even with her we can expect the wars to continue unabated.
Big advantages of buying for me are the ability to change the space and to have indefinite control. I've rented from the bank for years while making extra payments on the mortgage rather than remodel. If I wait too long to make my space my own I'll be dead. I think I'd rather take a 25% hit to my equity than not be able to remodel.
If everyone who says Ron Paul cannot win simply voted for Ron Paul, he will win. Believe, and act on that belief, and change will follow. It is really that simple.
Huh? I don't think that is the case.
To put it simply, can I vote for Ron Paul in the Republican primary, then vote for whomever I want in the general election regardless of party, without registering with a specific party? I don't think I can, but I could be wrong.
You can find more details here --
http://www.primarilypaul.com/ron-paul-in-the-primaries/
I don't know, man, I'm just going what I remember from when I was like 18 or something. It's never mattered because I despise political parties and their primaries, so I refuse to vote in them. Ron Paul is the first person since I've been old enough to vote that I have actually wanted to vote for (as opposed to voting against their opponent), and thus am actually considering voting in a primary.
Registering as a Republican is a dealbreaker, though. Shame he isn't running as an Independent.
You do not have to register as a republican in Washington to vote in the republican primary.
Glad to see I'm not the only one that's confused.
In Washington state, you do not have to register as a republican to vote for a republican in the primary election. You can be registered as a democrat or independent and still vote for Ron Paul (a republican) in the primary election. The primary election date for Washington state will be February 19, 2008.
You can verify it here --
http://www.primarilypaul.com/ron-paul-in-the-primaries/
My belief is that, in the absence of instant run-off voting (where you get to vote for multiple candidates for each position and prioritize them), a vote for a candidate who isn't a front runner is effectively a vote for whoever is most unlike that candidate. This is why I wouldn't vote for Ron Paul even if he was the best candidate.
For example, Gore would have won in 2000 if Nader hadn't siphoned off more liberal votes than conservative ones. So liberals who voted for Nader effectively voted for Bush, giving him the win. Many people including myself think that the lack of instant run-off voting is the biggest root cause of society's problems. If we had it, a third party could have a chance of winning, and the collusion between the two parties would no longer plague us.