Don’t buy a house:
Don’t buy a house.
The math makes no sense.
It’s not worth it now.
Housing has become unaffordable.
What was a path to wealth for our parent’s generation is gone for us.
Poof.
Disappeared.
Doesn’t work.
Let me explain.
For the last 40 years, house prices have gone up exponentially.
During that same time, interest rates fell.
What does that mean?
The cost of your mortgage payment kept going down.
So it was reasonable to afford a house.
Your monthly payments declined.
While house prices increased exponentially in value.
So what did smart people do?
Leverage the property.
Let’s do math.
Let’s say you bought a house for 100 grand in the 1980s.
For argument’s sake, let’s say you had to put 20% down.
So that’s 20 grand.
20 grand into your house and an 80 grand mortgage.
At the time, rates were 15% let’s say for argument's sake.
If you’re in the US and you can take it out over 30 years, you had to pay 1000/month.
Here’s a calculator to do your own math.
15% divided by 12 months is 0.0125 which gives you a monthly rate.
Multiply that by 80 thousand dollars and you get 1000 dollars.
So at that time you had to pay a thousand dollars a month.
Which is a lot.
But now over the next 30 years, what happened to the house?
That house went up 3x in value.
Some people it went up 10x.
20x.
Wherever you lived, it went up.
So now your mortgage of 80 grand, which you’ve been paying, is equity invested in the house.
That initial 20 grand down payment has turned into 220 grand of value if the house is worth 300k.
Because you only have an 80 grand mortgage, if you were to sell that house today for 300 grand, you would make a lot.
Now imagine being able to do this, but getting more money from the bank.
Imagine you went back to the bank and said I want to take a 150,000 grand mortgage.
But rates went down from 15% to 8%.
8% divided by 12 is 0.0067. Multiply that by the 150k mortgage.
And how much is your mortgage payment?
1,000 dollars.
THE SAME AMOUNT.
So over 20 or 30 years, your house increased and you asked for double the mortgage.
But rates got cut in half.
Your mortgage payment was the same!
The difference is you own way more equity now.
That 20 grand down payment has turned into 150 grand of equity (assuming you take out the 150 grand mortgage).
But YOUR PAYMENT IS THE SAME!
That’s how our parents generation got rich.
Exponentially increasing asset values with decreasing rates.
The interest rate, which is set by the Fed funds rate, went from a high of 22% in 1982 after the legend Paul Volcker put it there to kill inflation down to effectively 0% during Covid.
What is the Fed Funds rate?
The rate of interest set by the US central bank.
It went from a high of 22% down to 0% for the last decade.
But now it’s up?
From 0% to 5%.
Why?
Inflation.
Too much money created with rates super low.
When that happens, you don’t have to pay interest on your debt.
But all of a sudden when that rate goes to where it is today, you are screwed.
How do you have the money to pay it?
Let’s go back to the housing example.
Let’s say someone sold you the 300 grand house, which is more like 600 because housing prices have gone up significantly since 2010, especially in certain cities.
So let’s say that house is worth 600 grand today.
You want to buy it.
Let’s say it’s the same 20% down payment.
That’s 120k.
Who has 120k saved up in liquid cash?
No one.
So then you go to your parents.
Your parents have hopefully done well and can help you.
If you don’t have that, you are screwed.
You can’t afford it, and sadly likely never will.
At least in the cities.
But let’s say you can.
So your parents give you your 120 grand for the down payment.
Now you have a 480 grand mortgage.
The Fed funds rate is now at 5% so let’s say your mortgage rate is 7%.
7% divided by 12 is 0.00583 multiplied by 480 grand is 2800.
2800 monthly payment.
That’s 33,600 a year in post-tax dollars.
That excludes all your other costs like food, gas, kids, going out, etc.
Unless you’re earning a significant amount of money, that’s a lot.
Let’s say you have a partner and split it - still 1400 a month.
Now let’s add condo fees, property taxes and money allocated for any breaks/renovations.
That’s at least a few extra thousand dollars a year.
The issue today is you don’t earn that.
Your income can’t support that mortgage payment.
Wages have not kept up with asset appreciation.
But here’s where the big issue is with Covid.
Let’s say you bought that house in 2020 when your rate was 3%.
A lot of places around the world like Canada and Australia have variable mortgages.
What does that mean?
It means your mortgage payment changes every few years.
If your house doesn’t increase in value, your payment doubles.
People can’t afford a doubling of their mortgage payment.
Especially with everything else being so expensive right now like rising costs of food, gas and going out.
So you have people stuck in a debt trap.
Now, let’s say your house stays the same value or drops.
If you go to an appraiser and your asset value has fallen, you still owe the same mortgage.
Let’s say it falls 20%.
If it does, you’ve lost your entire down payment.
Gone.
Poof.
Disappeared.
Even if the property value stays the same, you still owe the same mortgage at a higher rate.
Let’s use that 600 grand example.
At 3%, your monthly mortgage payment is 1200 (0.03/12 * 480k which is the cost minus the down payment).
At 7%, your monthly mortgage payment is 2800.
In 3 years.
That’s what going to happen at least in Canada, but likely globally.
Many people can’t afford that.
What happens when that happens?
You have to sell.
What happens when you sell?
Everyone’s house goes down.
So you lose even more value.
Now instead of all of that, what if your monthly payment was less than your mortgage and fees?
Why would you tie yourself up in debt?
And spend tons of money on a down payment when you can use that money in other ways for yourself and your family?
Home buying is done for our generation.
Breaking points did a full piece on this that is 100% worth the watch.
The way to get extraordinarily wealthy for our parents' generation was real estate.
That is gone today.
It doesn’t exist.
We have to stop convincing the world that real estate is a safe path to financial freedom and wealth.
It’s not.
No way.
The only way it does is if house prices crash 50% so our generation can afford the mortgages.
If that happens, the global financial system blows up ten times over.
The world’s banks cannot let that happen.
They will not let that happen.
So what does that mean?
I don’t know.
All I know is the math doesn’t make sense.
No matter how much pressure you’re getting from your parents and people around you, it makes no sense to buy a house now.
None.
Don’t buy a house.
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