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People just don't understand inflation/math: "...$1.4 million; it’s a good time to sell, considering he bought the place for $627,000 in 2002." Wow! Sounds h

People just don't understand inflation/math: "...$1.4 million; it’s a good time to sell, considering he bought the place for $627,000 in 2002." Wow! Sounds huge right? Well, 12 years to double? That means it's a ~6% yearly increase. That's LOWER than medial bills, college education, & almost exactly what you'd get from any stock index (S&P 500) for that time period.

jonknee 13y ago
If you don't count the rent during that time... It housed her illegal apartment as well as two other families. Her $500 rent alone would be $72,000. I'm sure the other units (non rent-control) were fetching quite a bit more.
- johnvschmitt 13y ago
  Correct! But, more fun math: Stocks don't have maintenance costs like houses/rental units. The property tax alone per year on a ~$500k place is ~$8k. (You'd need to get $700/month in rent JUST to cover property tax.) (The next buyer, at 1.4M valuation, would need to charge ~$2k/month JUST to cover the prop tax, nothing else!) Add in ~$2k/year in regular maintenance, + ~$30k of maintenance every ~5-10 years (roofs, flooring, bathroom fixtures, appliances all die someday), and renting not so profitable. Reliable capital appreciation is the bigger, pure profit here.
rohin 13y ago
You made a mistake in your calculation because you ignored leverage. Most people buy a house using some combination of equity and debt (usually 20% / 80%). You need to calculate the return based on the equity invested. Assuming they paid 20% down that's $125K. The house appreciated $773K over the initial purchase price. That's a 6x return on equity, not a 2x. But thanks for the lecture about how other people don't understand inflation / math.
- johnvschmitt 13y ago
  You are correct, of course. My point was more about how journalists too often spout "PRICES DOUBLED!" to get attention like blood in the water, including here. And, in too many cases, it's over a time period that's 10+ years, so it's not really doubling, but 6%/year. And, yes, leverage can profit, but it can bite hard too. Plenty of people bought at $500k with $100k down, then saw the value drop to $300k, meaning they lost 200+100 = $300k if they had to sell. All fun math, with, yes, GROSS simplifications here.
  - rohin 13y ago
    Well, when debt is involved, prices doubling is a big deal! Prices going down 10% is a big deal too though.

jonknee 13y ago

If you don't count the rent during that time... It housed her illegal apartment as well as two other families. Her $500 rent alone would be $72,000. I'm sure the other units (non rent-control) were fetching quite a bit more.

johnvschmitt 13y ago
Correct! But, more fun math: Stocks don't have maintenance costs like houses/rental units. The property tax alone per year on a ~$500k place is ~$8k. (You'd need to get $700/month in rent JUST to cover property tax.) (The next buyer, at 1.4M valuation, would need to charge ~$2k/month JUST to cover the prop tax, nothing else!) Add in ~$2k/year in regular maintenance, + ~$30k of maintenance every ~5-10 years (roofs, flooring, bathroom fixtures, appliances all die someday), and renting not so profitable. Reliable capital appreciation is the bigger, pure profit here.

rohin 13y ago

You made a mistake in your calculation because you ignored leverage. Most people buy a house using some combination of equity and debt (usually 20% / 80%). You need to calculate the return based on the equity invested. Assuming they paid 20% down that's $125K. The house appreciated $773K over the initial purchase price. That's a 6x return on equity, not a 2x. But thanks for the lecture about how other people don't understand inflation / math.

johnvschmitt 13y ago
You are correct, of course. My point was more about how journalists too often spout "PRICES DOUBLED!" to get attention like blood in the water, including here. And, in too many cases, it's over a time period that's 10+ years, so it's not really doubling, but 6%/year. And, yes, leverage can profit, but it can bite hard too. Plenty of people bought at $500k with $100k down, then saw the value drop to $300k, meaning they lost 200+100 = $300k if they had to sell. All fun math, with, yes, GROSS simplifications here.
- rohin 13y ago
  Well, when debt is involved, prices doubling is a big deal! Prices going down 10% is a big deal too though.