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No Bottom in Sight for Housing Market - But an Error in Plain View

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Numbers may have changed, but conclusion sadly remains the same.

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No sooner I got off the plane, a couple of Minyans hammered me for the figures in my "Mr. Smith" example in Housing Market: No Bottom in Sight. A well-deserved hammering, I'm afraid - those figures were indeed wrong.

For what it's worth, I wrote the piece on my laptop while travelling, and had a bunch of financial calculators open. I used the compounding calculator for the "interest paid" figure, instead of the amortizing calculator. Mea culpa, mea culpa.

So now for the sad part: using the correct numbers and factoring in a real estate property tax burden of 1.25%, the total principal and interest payments over 30 years come to $527,776. Add the $60,000 down-payment and the total cash investment is $587,776. The ultimate $973,000 value of the house in the example is correct, therefore the net profit over 30 years is $445,224 or 75.75%. That's a return of 2.25% per year. Better than zero, I suppose, but hardly something to write home about as an investment.

And while I revisit my screw up, let me address some other comments from Minyans:

1. On the idea that there's more to a home than the investment aspect: I agree 100%. The idea of living in a good school district, of not spending money on rent, etc. etc. are all valid points, but have nothing to do with the investment angle of purchasing residential real estate, which was at the core of Minyan JT's mailbag question.

2. Another Minyan accurately pointed out that my example assumed a 0% rate of inflation and wondered why else would real estate increase in value but for inflation. I think there is merit to that question, even though some preferred neighborhoods may see value increases from simple supply/demand imbalances. Of course, that also means that other neighborhoods will increase in value less than the 4% average.

3. I agree with yet another Minyan who suggests that for some people a "forced savings" vehicle isn't a bad thing; but, again, it doesn't make it a good "investment."

4. Lastly, I will let each Minyan who owns a home figure out how much his/her home costs every year in major maintenance. I'll venture to guess that some – if not many years – that number is not a pretty sight.

So my sincerest apologies for screwing up the numbers in yesterday's piece. But I'm afraid that the ultimate conclusion remains the same.



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