Comments on: Overnight Reading http://www.consumerismcommentary.com/2006/02/14/overnight-reading/ A premiere personal finance blog, established 2003. Within, Flexo discusses his own experiences with money, and he and other authors comment on a wide range of personal finance topics. Sat, 21 Nov 2009 16:42:00 -0500 http://wordpress.org/?v=2.8.5 hourly 1 By: Paul http://www.consumerismcommentary.com/2006/02/14/overnight-reading/#comment-1818 Paul Thu, 16 Feb 2006 16:42:51 +0000 http://wp.consumerismcommentary.com/?p=876#comment-1818 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. 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.

]]> By: Paul http://www.consumerismcommentary.com/2006/02/14/overnight-reading/#comment-1817 Paul Thu, 16 Feb 2006 00:33:36 +0000 http://wp.consumerismcommentary.com/?p=876#comment-1817 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. 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.

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