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Current time:0:00Total duration:9:09

Video transcript

welcome back I now want to play a little bit of devil's advocate with myself you know I made this argument where I show that for the exact identical house if these are the numbers I mean you'd have to work it out based on your market and what the numbers are at the time but if this is the comparable rent for a million dollar house I showed you that for the million dollar house you're burning forty thousand dollars a year it's this is not money that is going to build equity this is not money that's going to the principal of your house this is money that just going out of your pocket and you'll never see again in a way and actually not in a way in reality you can view this forty thousand dollars as rent on the money that you borrowed interest is nothing but rent so when you have an asset if the asset is cash the rent on it is interest if the asset is a house the rent on it is your monthly rent payment so when you think of it this way when people say homeownership they really aren't home owners yet you're not a homeowner until you don't have debt you are a you are a money a money renter so your choice is either to be a money renter here or to be a house renter here and I show that you are burning almost double the money but then there's there's there's the argument of well well there there are advantages still to buying this house and what are they well one example is in this situation if I did get a fixed-rate mortgage and we learn you know when you look at all those adjustable rate mortgages we know that a lot of people didn't but if I have a fixed rate mortgage I know what my payment is for the foreseeable future for the next 30 years while my landlord in this case and the rental they could keep raising my rent so this this might look good right now but what if my landlord raised the rent to I don't know $3,500 a month well then out of your pocket point five times twelve you'd be spending 42,000 a year and then of course you get the interest from the money that you put in the bank plus ten Oh minus ten victory No - sorry so in that case if the rent goes up then out of your pocket is thirty two thousand every year right or what if the interest that you get on your cash in the bank goes down then this ten thousand will become lower but as we can see the rent would have to go up a lot to make up for forty one to make this a break-even situation let's figure out how much it would have to go up so in order for your net in this first scenario in order for your net outflow to be 41,500 you're assuming you're getting 10,000 from the money in the bank your rent would have to be fifty one thousand five hundred so it's fifty one five hundred right reading ten thousand from the bank and so divided by twelve your rent would have to be forty three hundred dollars your rent would have to be forty three hundred dollars in this situation to make this a break-even proposition and you could view it I mean this is another way to view it if I were to buy the house and if I were to move how much would I have to rent this house out for in order to not be losing money every month well I would have to rent it out for $4,300 a month even though maybe the market rents are only at three thousand and then well there's there's another devil's advocate argument and that's well housing has and this was something that you hear heard a lot about three years ago and a lot of these people aren't talking as much now but they would say housing has never housing has done nothing but gone up and I will build equity just from housing appreciation so how much does my house have to appreciate every year well to make up this difference forty one thousand forty one thousand five hundred minus twenty six so to make up that fifteen thousand five hundred difference every year every year this is fifteen thousand five hundred favorable my house would have to appreciate by a comparable amount right so how much appreciation is that on my house well that's a million dollar house right so fifteen thousand five hundred dollars appreciation on a million dollar house so I'm doing everything in thousand so a thousand thousands a million so that's only one point five percent appreciation so if my house appreciates by one point five percent that's it one point five percent if my house just appreciates by one point five percent I'm going to make up this fifteen thousand five hundred and so it is worth it for me it is worth it for me to blow this money by having kind of an increased by renting the money for more than I would have to pay to rent the house and that might sound like a very reasonable proposition that the house will appreciate by 1.5 percent from from 2001 to 2005 2006 houses were appreciating like 10-15 percent a year so it seemed and a real estate agent would often do this very math with you and say well you're definitely going to get 1.5 percent in fact you probably going to get 10 percent appreciation and you're going to make much more than this but think about what in in the presentation of the balance sheet and leverage what happens if housing prices go down by 1.5 percent what happens if it's minus 1.5 percent well then you're you're going to you're going to spend this much to rent the money right and you're not going to gain this much you're going to lose this much every year and so the proposition becomes even worse so this is a big deal now that you know I think on a nationwide basis a lot of the housing indices show that housing prices have gone down I think by 6 percent that's what the Case Shiller index says 6 percents a lot especially like a million dollar house that's $60,000 a year that's just evaporating that's wealth that someone thought they had that's just disappearing out of their equity so this this rationale of paying more to rent the money for house than to rent the house is justified if housing prices go up it becomes 10 times worse when housing prices are flat or god forbid if housing prices actually go down and now we see that housing prices actually go down in the last couple years especially in the areas where like the bay area or Florida or California especially you know Southern California where this is happening and you know went back even to three years ago when people used to make this argument people used to make the argument well you know my house just has to go up one or two percent and I'm going to make up the difference I'd say well why is your house going to go up 1 or 2% is it because I mean there has to be some reason why next year someone's willing to pay 2% more for that house is it because rents are going up 2% a year so the income stream is going to be 2 percent higher and actually in the Bay Area from 2001 to 2003 rents were going down and there were actually people moving out all the tech workers were getting laid off you had a lot of programming jobs being outsourced to India and wherever else so you had this whole situation where the population was actually decreasing demand for housing was going down but but for some reason housing prices going up so people said well they've been going up for the last five years so they'll continue and they've never gone down etc etc but it didn't make an economic argument and I'll show in a future video that the only reason why housing prices did go up is that it just became easier and easier and easier to buy a house financing got the standards that banks used the for giving out a loan became lower and lower and lower there are actually examples in in Southern California and in you know San Jose and some of the suburbs where you know people who had incomes of 30 or $40,000 a year the bank actually gave them a million dollar loan to buy a million-dollar house based on stated income these things called stated income loans where you just tell the bank what you earn you don't have to prove it to them and so every year that went by just became easier and easier and easier more and more people just thought that housing always appreciates so that's why they want to pay more and more to essentially rent the money for a house and just became a self-fulfilling prophecy but as we see on the way down it works completely against you so in a situation where we are now where nationwide housing prices are actually declining and actually they will decline until this rent versus buy equation starts to make a little bit more sense it really hurts the homebuyer and what's even worse and this is kind of adding insult to injury is that this this guy once you know if I bought this house and all of a sudden I lose my job and I can't pay the house back I might lose my entire $250,000 downpayment because maybe I can't sell the house or the house is selling for less or maybe I want to move and just there's no one out there who can buy a house because the the banks all of a sudden got smart again and realized that they should become more serious in terms of who they give money to and so I'm stuck holding this house and my flexibility in terms of where I can move is limited actually a friend of mine was telling it that they've actually done studies and there's a correlation between unemployment and homeownership because when you own a home you have less flexibility looking for a job if I have a house in San Jose but there's a job in LA I might not be able to take that job because I can't sell my house I might not even want to look for a job in LA while the renter of course I could just you know my lease ends and I leave so you know this is just a rough sense of the rent versus buy and I know I get very impassioned about this but that's just because I've explained this a lot and when I'm at parties you know and I start talking about the calculations people's eyes glow they over but I made this video now and I'll just tell tell people to watch it see you in the next video