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Leverage is the key. Someone could buy a $200k house for $20k of their own money in the form of a deposit for a mortgage. Now say house prices go up 4% a year (
by tomarr 10y ago
Leverage is the key. Someone could buy a $200k house for $20k of their own money in the form of a deposit for a mortgage. Now say house prices go up 4% a year (so probably less than S&P) for 5 years, while the mortgage interest is 1.5%. So they will have paid in approx $70k, and gained nearly $30k in asset appreciation. That's a 40% return on your cash, and you've not had to pay any rent!
- paulpauper 10y agoexactly, and this key point is ignored by Shiller Also, there are more options for homeowners who use leverage vs. stock traders who use leverage and are at the mercy of the awful brokers. For mortgages, payments can be deferred, etc.
- refurb 10y agoLeverage also has the downside of magnifying loses. Put 10% down on a $500k house. Market falls 10% and your return is -200%.
- toomuchtodo 10y agoWalking away from a mortgage is significantly less painful than walking away from a margin call (or, losing actual money versus borrowed money).