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

To: Mike Johnston who wrote (32810)	6/6/2005 4:24:30 PM
From: a-hole	Read Replies (1) \| Respond to of 306849

Just curious, what corporate bonds with a decent rating are paying 6%?

To: Mike Johnston who wrote (32810)	6/6/2005 4:59:06 PM
From: Wyätt Gwyön	Respond to of 306849

If you cash out 500K of profits now and invest it in corporate bonds yielding 6%, here's how i see it: the problem with the 6% assumption is a shortage of quality bonds with anything like 6% yield, unless you are willing to take on major term risk (long duration bonds). seriously, if you know of a liquid supply of A+ or better 2-5yr corporates yielding 6%, let me know! i will buy a lot of them. more realistically, one could look at 5yr CD yielding an avg of 4% (and much more accessible to the average person in a bubblezone). that is $1666 a month, so quite a bit less. assuming 25% taxes, the net is $1250/month. OTOH, holding a house which costs, say, 750K (with 500K profits and 250K mortgage) has upkeep costs of 1% (7.5K/yr or 625/mo), taxes of say 1% (another 625), mortgage of $1200 (on 250K mortgage), so that is 625+625+1200 = 2550/month in savings. add 2550 to 1250 and the rental "breakeven" is $3800. even if you adjust some of these figures, that is still quite a bit of "leeway" which means renting is not such an absurd option from a cash flow perspective. the biggest difference, though, is not the cash flow of renting vs holding the house, but how much one can save by rebuying once/if the bubble pops. looking at a bubblezone like CA, if a two-income family owns a 750K home with 75K income (10x income), and if this ridiculous multiple falls to a less absurd 5x (even assuming that "it's different this time" and we will not see a fall to the 3x which was considered the historical upper end), then the price of the house will fall to 375K in constant dollars. the 375K saved by the 75K earners is a true windfall: assuming they are capable of saving 10% of their income (7.5K), that represents 50 years of savings!