It’s time for me to get some sleep, but if you’re still awake and looking for some reading, here are some news and notes.
* Enron sold future revenues of one of their businesses, and it was like one more hit of crack cocaine. I can’t get enough of colorful similes.
* Money Magazine’s Best Cars of 2006. My Honda Civic doesn’t qualify, but the Honda Accord does (Best Mid-Size Sedan).
* David Bach: Why homeowners get rich and renters stay poor. I’m close to finishing his new book and I’ll have a review up shortly. It’s quite motivating.
* 7 top taxpayer mistakes from MSN Money. I’ll focus on this soon.
* Here are three questions MarketWatch says we should be asking Ben Bernanke, the new Fed chairman: Is the Fed done yet? What is your inflation target? What is full employment?
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{ 2 comments… read them below or add one }
While I completely agree that people should strive for home ownership, I think the VERY questionable math in Bach’s piece does the arguement a disservice. For example:
1. Landlords are raising rent at only 5% per year, but in his other example, property values are increasing at 10% year. With this much of a disparity (100%!) there would be huge incentives both to remain a renter or to buy as much property as you could. In otherwords, mortgage payments for new homeowners would be rising at a rate twice as fast as rents were.
2. His example of leverage is comical, too, because it completely ignores the transaction costs involved in real estate. Typically this is about 1% (closing costs) of the purchase price and 7% (closing costs, plus 6% comission) of the sales price. Using his figures, that is $2,000 on the way in, and another $15,400 on the way out, for a total of $17,400. Leaving you with a real gross gain of $2,600 on your $20,000 investment. Which is a 13% return, not the 50% return he claims. And oh yeah, we forgot to mention the capital gains tax you will owe on the sale because you haven’t lived in the house for 5 years. Let’s see, thats 15% of your $20,000 gain, which is $3,000. But wait, you say, that leaves me with a net LOSS of $400. Yes, and I am not even firguring in a mild 2% inflation each year, which would result in a reduction in the purchasing power of any gains anyway.
Ummm. Well, after getting out of my foaming rage, I re-read the article and saw that his holding period for the home purchase example was “a year or two.” Giving him the benefit of the doubt on this one — and assuming that he meant two years — housing values are really rising at about 4.5% per year, or less than rents are rising. But none of this changes my second critism, that his calcutations of the profits to be made are wildly overstated.