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Inflation tsunami good reason to put as little down as possible?

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  • Inflation tsunami good reason to put as little down as possible?

    So seeing MMT 2.0 in action I am learning that printing money with reckless abandon is good for stocks. (Hooray!) Some are worried now about inflation. Jerome Powell doesn't seem to be worried about inflation and aims to keep it at a low target rate, but as we have seen, the traditional inflation tools like CPI don't do a great job showing true inflation (some would say by design) when factoring in the cost of real estate, and iphones, and kids college education among other real world costs of a true typical consumer basket. Some alternative real world inflation indicies show inflation closer to 10%. (See the Chapwood Index - https://chapwoodindex.com/)

    So with that being said...

    Should one aim to put down as little as possible towards a primary home purchase? Schiller et al says that real home prices over time only beat inflation by about 1%. Not a great return. But say your interest rate is 2.4% and true inflation is a conservative...say 3%. So let's say the difference between inflation and interest rate is 0.6%. Add in a mortgage interest deduction and Schiller's 1% and carry the 1 and the return on your home "investment" has a very small but theoretically positive return of at least 0.6%+ Schiller's 1% historical real return =1.6%

    So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return in year 1 of ownership.

    So by my math, mathematically the best return for a home purchase with an interest rate equal to or less than expected inflation will always be the longest term length with the lowest downpayment.

    Am I missing something?

  • #2
    i think you are missing quite a bit.

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    • #3
      Originally posted by tailwind225 View Post
      So seeing MMT 2.0 in action I am learning that printing money with reckless abandon is good for stocks. (Hooray!) Some are worried now about inflation. Jerome Powell doesn't seem to be worried about inflation and aims to keep it at a low target rate, but as we have seen, the traditional inflation tools like CPI don't do a great job showing true inflation (some would say by design) when factoring in the cost of real estate, and iphones, and kids college education among other real world costs of a true typical consumer basket. Some alternative real world inflation indicies show inflation closer to 10%. (See the Chapwood Index - https://chapwoodindex.com/)

      So with that being said...

      Should one aim to put down as little as possible towards a primary home purchase? Schiller et al says that real home prices over time only beat inflation by about 1%. Not a great return. But say your interest rate is 2.4% and true inflation is a conservative...say 3%. So let's say the difference between inflation and interest rate is 0.6%. Add in a mortgage interest deduction and Schiller's 1% and carry the 1 and the return on your home "investment" has a very small but theoretically positive return of at least 0.6%+ Schiller's 1% historical real return =1.6%

      So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return in year 1 of ownership.

      So by my math, mathematically the best return for a home purchase with an interest rate equal to or less than expected inflation will always be the longest term length with the lowest downpayment.

      Am I missing something?
      Yes, MPMD is correct (impo). This is not the math equation with static results that you seem to be assuming it is. Common sense, goals, and emotions play a big part (am sure there other other descriptors) and they c/n/b captured in a ROT formula that you invent. I think it’s important to understand that all ROTs have these same limitations.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Historically doesn't hyperinflation happen when there is excess money vs limited supply of goods?

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        • #5
          Real estate is regional. Not everyone has an iphone and not everyone is in college or paying for college. So I don't see how those factors are any more real then CPI.

          My most recent phone was the cheapest I ever bought. Same for tv. Same for computer.
          I can still buy a bottle of black velvet for $10 like I did in college. But I choose not to now.
          Beware of lifestyle inflation

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          • #6
            You logic only looks at the numbers on the inflation impact versus interest rate. Then you add in cost of living and even a tax adjustment.

            Need a lot more work on the depreciable asset side. Schiller is way insufficient. I certainly wouldn’t buy a house based upon average and assume that it will sit there and be average in future years.

            Even a below average house takes a lot of work and money to fall down or even survive.
            Schiller does not include any costs required to keep the house from going to zero. False conclusion using Schiller for the asset value. Doomed to failure.
            Gong!

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            • #7
              So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return in year 1 of ownership

              No of that really matters for a primary residence , which I would consider more of a consumption item. You could then just buy a smaller house and use the same amount of money to put 20% down.

              The two items I would try to justify on a home purchase is , do you like it, and can you afford it. A primary residence is a place to stay, it may turn to be a good investment or a poor investment, there are too many variables which are out of your control. If there is hyperinflation, you still need to be able to sell it to someone to make a profit, and if there is deflation , at least you have a place to sleep at night.

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              • #8
                Thanks for the responses. A couple things to clarify. I was trying to look at the impact of financing and future home price separated from the other expenses of home ownership for someone who has already decided to buy a certain house. For someone who has decided to purchase a soecific home, the upkeep costs will be a sunk cost unrelated to financing, and the overall return on the house inclusive on these could very well be negative. By separating out financing impact, Im just trying to determine if the overall return will be enhanced or diminished by financing. Forget Schiller for a moment. What is a reasonable minimum home future value? Lets assume home price will keep up with inflation. Yes there are areas that have had long term underperformance relative to inflation, but on average most home prices do not underperform inflation. So if mortgage interest rate is less than expected inflation, higher leverage will amplify this portion of the investment. If home price increases exceed inflation, this effect will be amplified.

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                • #9
                  My advice would be to stop thinking about your primary residence as an investment and start thinking about it as a cost. Keep costs low. Invest the rest according to a written investment plan, which may or may not include a hedge against inflation.

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                  • #10
                    Originally posted by hillaj1 View Post
                    My advice would be to stop thinking about your primary residence as an investment and start thinking about it as a cost. Keep costs low. Invest the rest according to a written investment plan, which may or may not include a hedge against inflation.
                    Bingo (was his name-o).

                    Comment


                    • #11
                      I’m probably going to be the only one to say this but why not keep the cost low but also think of it as an investment? Depending on the area you live in, the house could appreciate quite a bit (some places even 10%). With a big purchase like a house, I think it would be wise to always think about what your exit strategy is going to be (like just sell or turn into an AirBnB or more long-term rental, etc). If you are interested in rental income, I also don’t think it would be unreasonable to consider whether your house will be a good and easy rental property or not.

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                      • #12
                        I’m betting we see mega inflation so I took out a doctor loan and out 0% down instead of putting down 20%. Just my hedge of course kept the 20% in equities.

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                        • #13
                          Originally posted by tailwind225 View Post

                          So now add leverage into the mix. So at 10% down, you are 10x leveraged. So that 1.6% return results in a 16% return
                          Yes, that is how leverage works.

                          Your investment is your down payment and your return is the future value minus the purchase price divided by your initial investment. The smaller the denominator, the larger your return.

                          Of course there is the cost of interest.





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                          • #14
                            I’ve been expecting high inflation since we first used a doctor loan to buy a house for almost $0.5M with nothing down back in 2004. Interest at the time was 6% and we were sure it was going to skyrocket upwards.

                            Yeah, here we are with negative real rates in the U.S. and negative nominal rates in Switzerland and elsewhere.

                            Perhaps we really will see a giant run up in inflation. Ives been expecting it for a decade and a half and inflation has only slid lower over that time. (Cloudy crystal ball and all that.)

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                            • #15
                              Originally posted by Hank View Post
                              I’ve been expecting high inflation since we first used a doctor loan to buy a house for almost $0.5M with nothing down back in 2004. Interest at the time was 6% and we were sure it was going to skyrocket upwards.

                              Yeah, here we are with negative real rates in the U.S. and negative nominal rates in Switzerland and elsewhere.

                              Perhaps we really will see a giant run up in inflation. Ives been expecting it for a decade and a half and inflation has only slid lower over that time. (Cloudy crystal ball and all that.)
                              I'm usually a proponent of the cloudy crystal ball and the "it's never different this time" philosophy, but with regards to inflation, the data would suggest that things are different this time - at least compared to your 2004 reference point. The government has printed 40 cents for every dollar that existed in March and this data is before the most recent stimulus package. See the below charts:
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