Eugene White reminds us here that home ownership isn't the right option for everyone.
Of course not. Neither is owning a Mercedes or a fast bass boat. By the way, owning a home is no more an investment than owning a Mercedes or a fast boat, regardless of what you may have heard before. The long term rate of return for home ownership in the United States has been substantially lower than the return to owning an S&P 500 index fund.
A house is a consumer durable consumption good; it is not an investment. For decades, Congress has subsidized the housing industry and given consumers strong incentives to overspend on housing. Why? Not because consumers wrote their member of congress and asked for it. But there was lobbying for it. Where do you suppose the lobbying came from? If the banking industry comes to mind, good for you. Of course, home builders were not opposed, either.
Now we are suffering the harsh reality of Congress having helped direct way too many dollars of capital to flow to the housing market. That very same capital had alternative uses, don't forget. We are a long way from out of the woods on this. Just because the subprime mortgage debacle is out of the news doesn't mean the problems it caused have gone away; they are just out of sight, thanks to the Fed.
You and I have been compelled by our Congress and our Presidents (both Bush and Obama are guilty) to bail out the banks. Goldman Sachs has done particularly well as a result, which isn't surprising, considering Hank Paulson's former digs. Lehman Brothers didn't fare so well. Someone in the Bush administration evidently didn't think as highly of the owners of Lehman Brothers as they did of Goldman Sachs. They also didn't like Martha Stewart much, but that's anther story.
A $100,000 mortgage at just 5% annual percentage rate will end up costing the borrower $93,000 in interest. More than half of that interest will be paid during the first 15 years of a 30-year mortgage ($65,500). If the interest rate is just 1% higher at 6%, the interest bill would be $116,000! If you think renting is "throwing money down a rat hole," what would you call paying $93,000 (or $116,000) in interest to a bank?
But won't your $100,000 house be worth a lot more after 30 years? Yes; it will be worth $100,000 plus inflation minus depreciation for how ever much of your 30-year old house has now been used up. If inflation is just 3% per year, your 30-year old house will likely be worth $242,700 after 30 years. And by the way, with 30-years of inflation at 3% per year, that $242,700 asset, if sold, would buy just what $100,000 bought 30 years back.
And don't forget all the money a homeowner ends up putting into the house for routine maintenance and repair over a 30-year period. No, home ownership really isn't for everyone, regardless of what Barney Frank thinks.
By the way, banks don't' use some other household's hard earned savings to make mortgage loans. They use newly created money, made possible by our ridiculous banking laws and the Fed. That's right. Banks earn their money the old fashioned way; they create it out of thin air.
Of course not. Neither is owning a Mercedes or a fast bass boat. By the way, owning a home is no more an investment than owning a Mercedes or a fast boat, regardless of what you may have heard before. The long term rate of return for home ownership in the United States has been substantially lower than the return to owning an S&P 500 index fund.
A house is a consumer durable consumption good; it is not an investment. For decades, Congress has subsidized the housing industry and given consumers strong incentives to overspend on housing. Why? Not because consumers wrote their member of congress and asked for it. But there was lobbying for it. Where do you suppose the lobbying came from? If the banking industry comes to mind, good for you. Of course, home builders were not opposed, either.
Now we are suffering the harsh reality of Congress having helped direct way too many dollars of capital to flow to the housing market. That very same capital had alternative uses, don't forget. We are a long way from out of the woods on this. Just because the subprime mortgage debacle is out of the news doesn't mean the problems it caused have gone away; they are just out of sight, thanks to the Fed.
You and I have been compelled by our Congress and our Presidents (both Bush and Obama are guilty) to bail out the banks. Goldman Sachs has done particularly well as a result, which isn't surprising, considering Hank Paulson's former digs. Lehman Brothers didn't fare so well. Someone in the Bush administration evidently didn't think as highly of the owners of Lehman Brothers as they did of Goldman Sachs. They also didn't like Martha Stewart much, but that's anther story.
A $100,000 mortgage at just 5% annual percentage rate will end up costing the borrower $93,000 in interest. More than half of that interest will be paid during the first 15 years of a 30-year mortgage ($65,500). If the interest rate is just 1% higher at 6%, the interest bill would be $116,000! If you think renting is "throwing money down a rat hole," what would you call paying $93,000 (or $116,000) in interest to a bank?
But won't your $100,000 house be worth a lot more after 30 years? Yes; it will be worth $100,000 plus inflation minus depreciation for how ever much of your 30-year old house has now been used up. If inflation is just 3% per year, your 30-year old house will likely be worth $242,700 after 30 years. And by the way, with 30-years of inflation at 3% per year, that $242,700 asset, if sold, would buy just what $100,000 bought 30 years back.
And don't forget all the money a homeowner ends up putting into the house for routine maintenance and repair over a 30-year period. No, home ownership really isn't for everyone, regardless of what Barney Frank thinks.
By the way, banks don't' use some other household's hard earned savings to make mortgage loans. They use newly created money, made possible by our ridiculous banking laws and the Fed. That's right. Banks earn their money the old fashioned way; they create it out of thin air.
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