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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Conan who wrote (5720)	10/1/2002 1:55:09 AM
From: Elroy Jetson	Respond to of 306849

you are assuming that each buyer pays 100% of the purchase price when they buy a home Some who have invested well, like myself, would pay cash for a home. Other people would have borrowed money to purchase the home. Sometimes the leveraged return is greater and sometimes its worse. In this particular case of the Southern California home, the leveraged return is a loss. The annual value increase was only 2.08% but the cost of borrowing money was 10.5%. In short, the leveraged return will never be higher than the unleveraged return unless the annual compounded appreciation rate is greater than mortgage rate. Assuming you actively refinanced over this 12 year period we'll split the difference between 10.5% in 1990 and 6% today. That's 8.25% plus your many refinancing costs. 2.08% minus 8.25% is a 6.17% loss per year - with refinancing costs this is likely a 6.5% loss per year. Property taxes at 1.5% per year and maintenance at 1.5% per year. This totals up to costs of 9.5% after leveraged appreciation. Add in the welfare benefits from the government and you get a total. Compare this total to rents received. If you are the renter, Imputed Rents never exceed 8% of the current property value. In reality comparable rents are far lower than 8% because of the over-investment in real estate caused by the welfare benefits. Compare this to an alternate investment and it doesn't look as favorable as you might fantasize.