We have been doing a bit of home price monitoring around the old hood in Chicagoland and we can’t help but think, the two-tiered economy is evident even at this microlevel. Is a home a good investment? We say, define investment, writes Nell Sloane.
What is strange is that we still have multimillion dollar teardowns, but we also have homes that are barely above 2005 prices or are indeed still underwater.
For those who think homes are an investment, after reading the following we believe you will rethink that proposition.
So, we wrote a piece awhile back about this very subject, but we think revising this with a current exercise is well worth the time. So here we go.
There is a home for sale in the Chicago neighborhood for $1.45 million. It was purchased in 1999 for $1.1 million.
Many will say, wow, what a good investment right? Even if they sell it for $1.4 million they are going to make $300,000 on the home! This is how people think, but in reality, this thing is a huge loser and we will tell you why using real data:
Data we used
- Purchase price of $1,100,000
- 20% down payment of $220,000
- Average 30-year mortgage fixed interest rate in Nov 1999 is 7.5% (Generous for Jumbo)
- Taxes per year $13,000 ($500 increase per year)
- Sales price in 2018 $1,400,000
- Actual holding period 18 years or 216 months
So, let’s break this down via total actual outlay over 18 years by the owner:
- Total principal and interest payments = ($349,283 + $765,107) = $1,114,390
- Balance remaining $530,717
- Total taxes paid $310,500
- 5% brokers fee for sale $71,325
Here is the breakdown:
Gross Sales Price = $1,400,000
Minus:
20% Down Payment = $220,000
Balance owed = $530,717
Brokers fee = $71,325
Total taxes paid = $310,500
Total principal & interest paid = $1,114,390
Net return = -$846,932 (Yes negative $846k)
**
Now a few takeaways.
This doesn’t include any updates to the home, any yearly maintenance fees, which in total will most likely push this number well north of $900k in money spent, cash spent.
However, the big question is why do it? Is it all worth it?
Or the bigger question we get, what alternatives are there? You need the big home, the big expenses, the big car, we call BS, we say it’s a scam.
In fact, econometrics may likely deem it as a likely leading cause of divorce.
Look we aren’t advocating everyone should run out and rent, but when you buy a home and you don’t pay cash for it, I am sorry, you are renting.
In fact, it’s worse than renting, you’re overpaying in every single way. And for what?
The obvious arguments are extremely valid: great schools, a good neighborhood, safety, protection, accomplishment. We get it, but how much is this really worth?
What truly means the most to you? Money, wealth, family, happiness? It seems as if the strive for humbleness is overshadowed by the quest for power and wealth.
It’s not easy keeping a level head because conservatism isn’t short on certain stigmas to overcome, especially in the financial arenas. We get it, if you don’t drive that fancy hot car, if you don’t live in that mega mansion, if you don’t belong to the country club, people use these as benchmarks to success, why?
Because it’s been driven into the psyche that success is somehow measured strictly within monetary constructs. Your anathema, especially in the financial spheres if you exude conservatism, but we are hoping to change that thought process. This is really how some people think, not all people, but some, not that they will ever admit it though, but shallowness is perhaps in abundance.
Anyway, we tend to think America is finally realizing that this system of debt is not all it’s cracked up to be.
All this debt, taxes, etc. are hidden wealth thievery propositions which are being met with mass American anti-globalist mantras. People finally deciding, they have had enough. The prior example we just showed you is a symptom of decades of conditioning, which is now slowly being broken down.
If you ask anyone out there if a home is a good investment they will shout a resounding yes.
We say, define investment. How many people buy what they can afford, truly afford? It always seems to be a push to the absolute limit and even if the limit is set, the brokers and bankers are always there to sell you just a little bit more.
Please don’t be offended by this quant analysis of housing. It should enlighten you and make you think about value and exactly what investments are able to extract it and which ones ultimately end up consuming it.
If people would live with a little bit less, expect a little bit less and sacrifice just a little bit more, spotting value might just become a little bit easier.
Obviously, this doesn’t pertain to the 1%, but for everyone else, you really want the key to happiness, do the three things we just mentioned.
Hell, if you are damn lucky enough that you can afford the $1.4 million house, buy the $900k house instead and then toss the extra dollars into a rental property! This is the real secret of wealth accumulation, letting your money go to work as opposed to you working for your money!
Subscribe to Nell Sloane's free Unique Insights and Crypto Corner newsletters here
