Animal Spirits Podcast - The Economics of Homeownership (EP.159)

Episode Date: August 7, 2020

On today's show we talk about one of the most important topics in personal finance, home ownership. Michael and Ben discuss renting versus buying, how to think about starter homes, where your house fits into your retirement plan, and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode of Animal Spirits is sponsored by NaviPlan by Advicent. Built on the most precise calculation engine in the financial planning market, Naviplan empowers advisors to cater their services to any client from simple goals-based assessments to advance cash flow planning analysis. To see how Naviplan helps model some of the concepts and strategies discussed on this episode, visit Advicent.com slash Animal Spirits. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching.

Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Rit Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. You often hear some version of the following comment. My parents bought their house for $100,000 35 years ago. Today it's worth $500,000. Real estate is the best investment you can make. Ben, have you ever heard this before? Of course, everyone hears this.

It's like that's the next step you always have to take. You graduate from school, you get married, and then you buy a home. Those are the steps that everyone needs to take. So one of the things about numbers like that, when you have such a long time period, is obviously the magic of compounding that anybody who knows anything about financial markets is familiar with. You can't do that in your head. You can't say, okay, 100 into 500, 35 years, do the simple division. No, it doesn't work like that. If you had a home that did that sort of appreciation, and I'm just making it up, but just for example, $100,000 into $500,000 over 35 years, That's 4.7% nominal home price appreciation, which is very good. However, that's gross.

What you don't see are the taxes that you never get back or the maintenance and the upkeep. And these can be massive costs. So let's say that that 4.7% goes down to, I don't know, 3%. Is that reasonable? Yeah. That's literally what one month T-bills did. Cash. That's what cash did over the last 35 years. So the first person to ever break this down, and he wrote about it in his book Irrational Exuberance, was Robert Schiller. And he said his book came out right as the real estate bubble was bursting. And he said, no one really ever looked at the numbers before going back. So he reconstructed this data going back to the late 1800s, early 1900s, and he created the Case Schiller Index. I looked at the numbers recently because he has them on his website. And from 1900 to 2019, the total gains in housing real.

He always uses inflation adjusted data for his numbers. 74% total. That's hard to believe. 120 years or whatever. So that's a 0.6% real return over that time period, over the rate of inflation, which has probably been 3% over that time. I had some fun of the numbers.

This is me cherry picking certain end dates, but... Well, I'm glad you're saying this, because obviously houses have changed dramatically, which we'll get into. Have you done post-World War II to today, 80 to today, stuff like that? Yeah, I looked at post-world two, but from 1900 to 1996, 97 years, the total return on a real basis after inflation for U.S. housing was 11%. 0.1% per year over the rate of inflation for 97 years. Since 1997,

it's up around close to 60% or roughly 2% a year. So all of the return appreciation, all the appreciation of the last 120 years has come since 1996, pretty much? 97 pretty much. But again, if you think about it, though, keeping up the rate of inflation. Is that that bad? No. This is all to say that when people talk about a primary home as an investment, that's probably missing the mark. Here's the thing, though. These numbers also don't take into account the fact that you have to live somewhere. You have to account for the cash flows and the implied rent. It's never an easy calculation. And you always have people who say, well, I've lived in San Francisco and my home is appreciated at 15% per year. The thing is, when you're

buying a home, everyone in real estate, unless you have a portfolio of REITs or something, is a stock picker. Because you could look at the outcomes of people in different areas, whether you had a place on the water or on the coast or in the Midwest or in a town that was ravaged by manufacturing leader or whatever it is. The experience is going to be totally different. So trying to look at it from the perspective of the Case Schiller Index and make it like the NSMP 500 index is really tough to do because in real estate, if you want a house, everyone is a stock picker. And there's so much more emotion that goes into it besides just what are the raw numbers. I know somebody who recently bought a house and unfortunately, it was a lemon. Yes, they did the inspection, but

there's some things that it just didn't pick up on. And it just seems like there's one problem after another. So you're right. Houses are probably more specific to your experience than anything. Yeah. So the biggest thing that most people deal with when you first come into buying a home is the buying versus renting thing. And there are certain people who'd think, well, owning a home is the American dream. Again, that's the next step. You have to buy a home. And there's certain people who say, that's ridiculous. You should never buy a home because if you look at the numbers, you could put your money in the stock market to do much better. And there's other people who say, no, you have to buy a home first thing. And obviously, it's not always so easy. So people who

are renting and want to buy, they'll say things like, I'm sick of paying someone else's mortgage, or I'll just trade up in a few years to buy a new place. And I don't necessarily think that those things make sense if you're not ready to buy a home. So the thing that I want to talk about next is what point do you get actually ready financially and emotionally to actually put down roots and buy a place and not just do it because people think that you should. Man, there are so many things to consider. So I did this analysis. I bought an apartment in Brooklyn. I lived there for four years, which is probably too short to buy a house or an apartment. 70% of the payments are all interest pretty much. So you got to have time to work that off. I didn't. I think

I got 2 or 3% price appreciation. So I did all the cost comparisons. What happened if I were to rent an equivalent place? And what I found was that buying cost me, I think 60% as much as it would have if I rented. In other words, there was 40% less. If I took that money and I invested it, again, I don't know anybody actually does that, but just to be fair, then it became 75% of the cost of renting. So I saved money by buying. It wasn't as if I was living for free, like far from it. It was still a pretty substantial cost. Right.

And that's also different in a place like Brooklyn probably where rents are really high versus somewhere else. I think especially when you're young, renting gives you way more flexibility and fewer headaches. You don't have to take care of stuff. You don't have to buy a bunch of stuff for landscaping and maintenance and upkeep. Do you think there's sort of two extremes is that renting gives you a ton of flexibility when you're younger and you don't know what your income is going to look like. Or what your career is going to look like.

Right. And it also gives you a ton of flexibility if you make so much money that you're like, I don't need a house as an asset because I have assets in my business, in my brokerage accounts. And I actually want, I will forego the asset because I love the flexibility of not being tied down to a home. It is, frankly, a lot of work sometimes. You can outsource a lot of it.

If you want outsource the landscaping and maybe the upper, keep in ongoing maintenance of a home, but there's still fees there. Obviously, yeah, you have property taxes, and then there's transaction costs involved, closing costs, and realtor fees and making renovations and all the stuff you need to buy. Like, when you first move into a house, especially when it's your first home, you end up buying so much stuff you didn't realize you needed. I thought we got a great deal in my house. It was a beautiful renovated home, but the backyard was completely not done. So it was just cruddy grass that needed work. There was no pavers or anything like that. My closets were all empty. There were no blinds anywhere in the house.

So I thought I was walking into like this ready made house and it pretty much was, but it still needed a substantial amount of work. And I had a leak in my roof that's still not done. And so there's all of these things that come up. And by the way, I think I made a great purchase. I'm incredibly happy here. But Morgan Hasel says it best that a house is a liability masquerading as an asset. Right. A house, even if it is an investment over the long term, let's say you do end up making some money over the rate of inflation from appreciation or whatever, there's still a lot of consumption involved. So it's got to be the most consumption heavy investment if it is one.

I look at it more of an asset than anything because it is, it's forced savings for a lot of people. We'll get into that later in the show. Well, it's both, but it's both an asset and a potentially huge liability. Yes, definitely. If things go south, three, too. So I, I think especially for young people, I always caution people on the starter home thing, because I feel like getting into a starter home and saying, kind of like you did, that's a tough thing to make it work all the time. It sounds like for you at work. I got an example here. So let's say the U.S. median home sales price for existing homes and the most recent date is like 295,000, $295,000. Let's say you put 10% down. That's roughly 265,000 in change. You're going to be

taking a loan out for. Your monthly payment, not including taxes and all that stuff, is a little over $1,100.60% of that roughly in the first three years goes to interest. 40% goes to paying down your principal. So as you said, a majority of the cost of the first few years of the loan go towards interest because you're not paying as much principal down. So let's say you live there for three years. At that point, you've only paid it down to about from 265 to 248. So you have like 17,000 in equity, which, you know, after three years doesn't sound great. But realize if you sell and go the normal route where you don't list it yourself or use something like Redfin with a lower rate, you're paying probably 5 or 6% in realtor fees

because when you're selling, you pay the buyer and the seller's costs, 6% of that 248 is 15,000. So there's your entire equity right there, not including any appreciation here, which is possible. And closing costs, Zillow says, average around $3,700, which sounds like for New York is pretty low. That seems pretty reasonable for me based on my experience. But when you realize the friction's involved,

that's not even including moving costs and all the stuff that comes from trying to make the house look nice, there's a lot that goes into selling a home. And it's also an emotional process too, right? So it's not easy. So that's the thing that people say, oh, did you make money in your house? Which is such a load of question. Okay. Well, yeah, I bought my house for $500,000 and I sold it for $5.25. So maybe there was price appreciation. But did I make money? What are you nuts? Between all the home improvements that I made, all the taxes that I paid, all of that sort of stuff.

So transfer taxes, for instance, I never heard of that. What's transfer taxes? It's just money that's gone. I think in New York, I think mine was half a percent. That's a lot of money. So closing costs, let's just say it's like, okay, you're putting down, whatever, making up a number, you're putting down 50 grand, but you need to come to closing with $76,000. Yeah, for all the ancillary stuff that you don't even realize. So again, getting back to what I said earlier, about 100 to 500, yeah, a nominal gross return, that sounds good. But when you start deducting everything, and again, it's just a matter of framing things.

A house is wonderful. It's where you raise your family. It's where you make memories. It is a huge asset if you live there forever, but just this idea that it's somehow an alternative, that it's going to beat the stock market. I mean, yeah, maybe depending on the house, if you live in, it depends on what the market does. But I think that viewing real estate through the lens of how much is my house going to appreciate is really missing the forest for the trees. So my brother actually gave me some of the device when we were buying our first home. I was looking on the lower end and he told me, even though this is your first home, I'd be stretching a little bit, get something you're going to stay in for 10 or 15 years at least. and maybe pay up a little bit because you can work into that mortgage. Now, some people would say that's financially irresponsible, but it's a problem for people when they buy a house and then have to move

and then they end up losing money on that too. So I think it's okay for people to wait and maybe save another three or four years before moving into their first home and they're ready. And maybe they can buy a little bit of a nicer house that will stay in longer than one that they're just going to move up from right away. What do you think when you hear it's a buyer's market or it's a seller's market? I've bought homes in both. So the first time, we bought our first home at the tail end of 2007, right as the 2008 crisis was heating up, but the real estate market had already dropped. And we bought a home that had seen the price drop like four times. And it sat on the market for like a year and a half. And it was a brand new construction. We were coming in from a rental and we had all the leverage in the world to buy. Now, when we sold our home, that same home, I guess it was 10 or 11 years later, it was not a buyer's market. It was a seller's market. And everyone wanted to buy and there was no houses on the market. So we sold our house in a weekend. But then it was hard.

for us to find one to buy on the other side. So you think great, I made some decent money on this home when I sold, but also the other houses are more expensive too. So you have to take that into account when you make some money that it depends what you're going to do when you roll that money over, right? So the housing market is red hot right now. People are leaving the city. This is true in my neighborhood. Just houses going up all over the place. Houses being listed, I should say. I was actually talking to a friend of mine yesterday who does some work in building and stuff. and he said that he was building a deck, and he couldn't finish because he can't find lumber. That's how crazy it is, that there's a shortage of lumber, which you see prices rising rapidly.

A friend of mine said, why don't you list your house? And since you got it a reasonable deal, and I was like, I've been in for 12 months. Where am I going? My house is appreciated, but so is every other house in my neighborhood. Where am I going? It's not like I'm selling my house and moving out of state. Right. Then there's also this idea that people say that you buy a home because you're get tax breaks on the deal. You can write off the interest expense, the property taxes. And so it's a better deal than people think. The way that I've always been taught to think about investing is you never buy an asset specifically for the tax breaks. It would have to be an amazing deal tax wise to make it happen. So that's not a reason necessarily to buy. It's certainly a benefit,

but not the sole reason why you'd ever buy an asset like this. Yeah. And obviously some of the benefits of that have gone away. So we were speaking to Bill Sweet this morning and he was filling us in that property taxes used to be fully deductible. But now the sum of property taxes and state income tax are capped at $10,000. So if you live in a high income state, Illinois, California, that hurts. It's not necessarily going to change the calculus of whether or not you can afford the house, but it definitely hurts. Right. Another thing is saving up for down payment, depending on where you're buying, could take a long time. So mortgage rates are ridiculously low right now. But if you've got to come up with 20%, I did a quick back of the envelope. If you're coming

up with, say, a $300,000 mortgage, if you're saving 10%, obviously that's $30,000, 20% would be $60,000. If you're saving for that for three years even, just to save 10%, that's over $800 a month you're saving. If you're trying to save for a 20% down payment, you're saving almost $1,700 a month for a $300,000 house. So I'm guessing a lot of people, especially younger people who are buying their first homes, are not putting very much down. I think I might have put 5% down for my first home because I didn't have a huge nest egg. I was maybe in the working world for two or three years at that point. So I did a 5% down payment. So I think the days of the 20% down payment are probably gone for most people. Isn't that fair, especially initial buyers, unless they have rich parents?

In this market with prices where they are largely as a function of interest rates being where they are, it's fantastic because you can get a bigger house for the same monthly mortgage payment, but you still have to come up with the down payment. So you can either put down less, which obviously in some cases means paying higher rates or there are companies like Unison that we spoke to last year that will help you with the down payment. Obviously, you have to give up some on the back end if and when you sell. but I think that's an option that's going to see big and bigger adoption. Yeah, and that's one where if you don't think that buying real estate is an investment and they take some risk off for you, that's the way to think about it. Talk about getting a cheaper home now. So if you look at just last year when rates were at 4% of a 30-year fixed rate mortgage,

$350,000 loan would have given you a monthly mortgage payment of $1670, basically a month. Now if we drop rates to 3% where they're at now, that same monthly payment could work for a $400,000 loan. So that's a way bigger increase probably than you're seeing on housing prices that rates can get you. So I think people are probably willing to expand their price range a little bit, even though that leads to more costs in terms of property taxes and upkeep and such probably. The fact that rates are so low now makes a big deal. And it is different depending on what your credit profile looks like. So the Federal Reserve actually just this week announced details where they broke out mortgage rates by different FICO scores.

And so the range looks like, so they went 680 or less and then 740 or higher and they went down the range. And it was basically 3.3% for a 30% or fixed. If you have a 680 or less, if you have 740 or higher, it goes all the way down to 2.8%. Hold on. Can we just pause here for a second? If you have 680 or less, meaning you are not a great borrower, 3.27% is insane. That is still not that bad. That is still lower than 99% of all rates that have ever existed for the housing market. So even though there's a spread there, what is it, 40 or 50 basis points. Yeah, definitely not bad, especially from what they were. If you're putting down anything less than 20%, I believe it's the number, then you're going to

have to purchase private mortgage insurance. Right, which I guess works out to roughly 0.5% to 1% of the loan until you get to 20% loan to value, or 80% loan to value, whatever, how you hit that 20% down payment, basically. We have 20% in $1.5%. equity. So that could be, I don't know, one or $200 a month, basically, depending on the size of your mortgage. So not astronomical, especially considering where rates are. I am more on the conservative side of my finances where I like the idea of a fixed rate mortgage because I feel like you can plan for the future. You could potentially grow your income to make it easier over time. You can refinance if rates fall. If rates ever rose, you're paying a better than market rate.

I just think it's easier to stomach. Obviously, there are people who don't mind taking the risk and taking a lower rate and maybe they don't plan and staying home longer. So they'll take an arm of the adjustable rate mortgage where anyone who's done that has probably taken advantage. You get a starting lower rate probably. You've seen this long term downward trend in rates, which has helped. You can have a lower payment potentially. And you can still make payments on principle. But what do you think about people who roll the dice with rates being so low now on an adjustable rate mortgage? I think it depends on what you're trying to do with the house. Right. And how long you're going to stay into it.

If you are in a career that you feel really confident your salary is going to grow, it seems unlikely. I guess it's foolish. Who knows what's going to happen in seven years or however long the length is? That rates are barring rates are 3% today. They're going to go up to 7% in seven years. Is that possible? Sure.

But if that's what it takes to get you into a house and you are confident that your income is going to grow such that if it does reset, you're not going to be absolutely screwed. But with rates so low, do you even? even need to do that? Right. There is a diminishing return on the scale of those rates when even going from three to two here wouldn't save you that much money. Don't you think there has to be a floor? At what point are banks going to say, sorry, we're not going below two and a half percent on a 30 year. We're just not. That's our floor. I don't care if rates go negative. Probably. It wouldn't surprise me if we got that. But yes, the fact that rates are so low probably leads to a better deal

from your personal finance life in terms of getting a lower payment than people even realize right now because all they look at is the sticker price of the house that have gone up lately. When you bought your house, how did you know which bank to use? What was that process like for you? I didn't really. We went with where our checking account was the first time. New Boyle move. Yes. And the second time we built our second house and they said we prefer to work with this credit union. So will you use them? And we had the right to use someone else, but we checked them out. We said, all right, the rates are good. We'll use them. I think if you go, the difference between a bank and a broker is that the broker will probably get a little more creative with you.

Maybe if you have a lower credit score or you want to try something different and the bank is probably a little more conservative with how they will do it. So I think that's probably the way to think about it. But we've gone through banks all the time and never just gone with a straight broker. Yeah. So the banks differ. I think I think I really, I really, read this, that J.P. Morgan won't lend to anybody below 740? No, that sounds way too high. Anyway, the point is the banks are more stringent in their London standards, for sure. And I think it pays to shop around a little, too. I've done that with refinancing as well. I've probably refinanced, I don't know, four times at this point. I think my first mortgage was

6.25 or 6.5, and I've refinanced a few times along the way in different houses. And I've shopped around for refinancing rates, too. What I did for this was, I think I just asked, some friends if they had anybody that they liked working with. I think that's probably a pretty good place to start. And then for my refi, which we'll get into, I went online to find out what relationships the New York City Department of Education has with some lenders. My wife is a guidance counselor. We have access to those sort of things. Yeah, definitely helps check around. And we just went with someone local who knew the market too and knew our realtor. So that helped as well. Speaking of realtors, we've spoken about us in the past.

Six percent sounds outrageous. So when I bought my apartment in Brooklyn, I remember, okay, the broker meets you at the apartment. Everything's on Zillow these days or Street Easy or wherever, Craigslist. So I found my apartment on Zillow. The broker met me there. She opened the door. And you walk into the apartment or house.

It's like, yeah, kitchen, bedroom, bathroom. It's different for everyone. But when I sold, even before I sold, I said to my wife, there's no way we're using a broker. We're just not. You did for sale by owner? Yes. I think you have to use like a lawyer in New York for the deals. Where I found realtors were the most helpful to me was on the negotiating side of things

and getting the contracts figured out and helping me through understanding some of those things. So I think from the buyer's point of view, why wouldn't you use a broker? Right, because you don't have to pay that. So the other thing is there's a few studies in like Freakonomics about this where they talk about how the owner has the endowment effect where they assume when they're selling a home that it's worth more. And the realtor just wants to get the sale because let's say they're getting their 3% as your realtor. And let's say half, I think the rule of thumb is half of that goes to their agency maybe. So they're getting 1.5%. So for every $10,000 bump in price, that realtor is going to only make 150 extra bucks. So to them, that doesn't matter that much. For you, that could be a huge deal. So that's kind of these two competing things when setting the price where the owner thinks it's worth way more and the realtor thinks let's just sell. And obviously not every realtor's out to just screw you and just get it done. But that's kind of a competing interest, I think. So Zillow is getting in the market. It's tough to eliminate fees. A lot that needs to go into this. Right. And I don't know,

do you think it's the case where if they eliminated some of those fees, it would get baked into the prices a little bit more? Are those fees already baked in? It's impossible to know, obviously. I also think there's a big difference between selling a house and selling an apartment. Like, I knew where I was in Brooklyn that there were buyers. You didn't need any skill to sell that apartment. Literally, I opened the door and I said, this is the apartment. Right. Probably a lot of it depends on your area and, yeah, what the supply of buyers is and who can reach

that price point. If you're in the suburbs and you're doing open houses and you want to set the house and all those sort of things, like I'm not saying that brokers don't earn any money, but just where I was in particular, it didn't make sense to give up 6%. And if it's your first time, you probably need a little education, unless you've really studied this stuff and understanding what you're getting and help. But obviously, the fact that everything's online these days, that you can just look at houses in pictures and take the virtual tour, that makes your life so much easier as a buyer these days, where you can have tons of people

look at it. The other thing that has changed, not only that rates gotten lower, just, so Jake at Economic wrote this a while ago. He said, housing affordability has basically been steady for 50 years, So he looked at the nominal sales price versus the payment. And it really hasn't changed on a real basis since the early 1970s. But the size of a home now is much larger. So the size of an average new home is 70% larger than it was in 1971, despite the fact that we have fewer people living there. So back then, there was an average of three people living in a house. Now it's two and a half because families are smaller.

So houses are getting nicer and better. Do you remember growing up, did anyone ever care about what their house really looked like like people do now because we have HGTV and such? When you're a child, you have little awareness of, I don't know, point taken. Yes, but people seem to care more now, I feel like, than they did in the past about nice appliances and open floor plans and all this stuff that just never was in the realm of conversation back in the day. So yeah, I think for a lot of reasons, there's never been a better time to be a home buyer

with rates where they are and the ease of access and obviously. in some places, it's ridiculous in San Francisco in those places. So square foot per person doubled since 1973. Right. There's way more room in your house now to get away from people if you want to. So what do you say to people who ask, does it make sense to pay down my mortgage faster? Well, how about I turn this one on you? And do you think that question has changed now that rates are lower? Yes. Here's what I do with my first home. Like I said, it was six and a half percent and we refinanced twice on it, I think. I think I went from six and a half to five to four.

And every time I just kept paying the same amount, I was paying my first time. So by the end of it, I was basically paying a double payment. And I did that for like five years. And then we went to sell our house, and I had some equity in there that I could roll into the down payment for the next one. But I thought, what was the point of me putting the money in there?

I could have been doing something different with it. I could have invested it. Yeah, I could. Yes, I could have bought Amazon. But it seemed useless to have that money sitting there without me being able to do anything with it. Now, I understand that there's peace of mind when you pay something down. And obviously, especially for people who are approaching retirement, they can maybe look at that mortgage as part of their fixed income where they're paying it off.

And they say, well, I'm paying 3 or 4% of my mortgage and 10-year treasuries yielding below 1%. If I pay this off, I'm kind of paying myself this rate. So I think I can see that, especially for people who are approaching retirement and want to be debt-free, for someone in my situation, initially in my younger years, I wanted to pay off the mortgage fast. Now I don't. I'm not in such a hurry. Is it because of rates? I think because of rates. What do you think? I'm saying that as someone who just refinance into a 15-year mortgage, so maybe I'm a hypocrite, but that's the way I'm thinking about it. Does it depend on what else you're doing with your money? Like if you're a younger person and you have a taxable account that's all in stocks, Does it make sense to take money out of the stock market to pay down your mortgage? Probably not given where interest rates are, given what your monthly payment is on your house. But let's say

that you are approaching retirement and your house isn't paid off and you're in a 60-40 portfolio. Does it make sense to potentially take some of the money that you have invested in bonds and pay down your mortgage? Maybe. You're not giving up much. You're kind of rebalancing your personal balance sheet there by paying down debt and giving yourself more of a margin of safety in terms of spending going forward. So I can see it both ways. I just think it's changed 6% mortgage rate world versus a 3%. I think that dynamic has changed somewhat for some people. It changes the equation for sure. You said that you refinance. I refinanced too. What were you told when you were poking around? What's a rule of thumb of? How do you

know when to refinance? I've always been told 1% is typical. If you can get 1% and you can calculate the break even. So for example, let's say you had a $300,000 mortgage. at 4%. Your monthly payment is a little over $1,400. If you go down to 3%, that brings your monthly payment to $1,200 in change. So you're saving like $170 a month. If you pay that $3,700 in closing costs, your break-even is 22 months when you make that back. And there's also, I've done this before, too, where you can roll those closing costs into your new mortgage and spread it out a little and now have to take that out of pocket. But that's the way to think about it. And again, I think as we get lower, those diminishing returns of, they're not going to have as big of a change

to your monthly payment anymore because rates are so low already. Let me ask you this. Do refinance rates get quoted in decimals or percentages? How about fractions? I thought you wanted to use fraction. I'm sorry. I'm sorry. That's what I meant. Yeah. You just ruined your own joke, your own punchline. I'm a fraction guy. The other thing is, I think in the coming years, we're going to have this huge deluge of retirees who are going to have to use their home as an asset. So here's some stats for you. So this professor, Census Bureau, data, I found this in a book recently. Home equity represents 68% of total household assets, not including Social Security benefits for married couples in the United States at age 65. So people who are retiring.

68%. Yeah. And right now, there's one estimate saying that U.S. homeowners are sitting on $6.2 trillion in untapped home equity. So if you look at the numbers, the top 1% have the majority of their assets, almost 80% in financial assets, and their primary residence is like 10%. If you go to the next 19% of people by wealth, they have 30% in their residence and 40% in financial assets. The other 80% of people, middle and lower class people, have more than 60% in their primary residence and 15% in financial assets. So that house, especially for the middle class, that's it in terms of financial assets for most people. That's the big thing. thing. And so they're going to have to figure out ways of tapping that, whether it's a

home equity line of credit or a reverse mortgage. That money is going to have to be used somehow. And people are going to have to get probably kind of intelligent with the way that they use it, correct? What we're told is that the reverse mortgage market used to be predatory, right? It used to not be a very great industry. Who did the commercials? Tommy Lee Jones? Does he reverse mortgages or did he do something else? I don't remember. Yes. It is one of those places, it has the stigma like annuities or insurance sales where it's easy to get taken advantage of. I think it might have been Tom Selleck. It was definitely a Tommy. We'll go with it as a Tom. All right. I think you're right that the reverse mortgage market

is going to be a real thing going forward when people just have Social Security. We obviously know the stat about what's a median retirement account for people between 65 and 70? It's not a lot of money. $21,000 or something. Yeah, it's not. So the home is going to have to be part of that. I recently read a book. It's called Reverse Mortgages, How to Use Reverest Mortgages to Secure Retirement by Wade Fow, who is a retirement researcher. I'm going to say you skimmed it. It was a pretty short book, so I actually did read it, recommended by Joey Fishing, who works for us, works with us than as advisor. It was more complicated than I would have imagined. It would not be an easy thing to understand. To me, my thinking was, why wouldn't

you just get a home equity line of credit? And he was saying payments typically come faster with those and you might not qualify because if you're retired and you have no income, the bank might not lend you a home equity line of credit. But it's worth understanding these things before you jump into it because I was relatively confused even after reading this book. It's not an easy thing to understand these things. So what is the difference between? So home equity lines of credit are typically used for what? Home repairments? Yeah, remodeling. So if you're going to redo your roof or put new windows on the house, taking out home equity, because you're improving the value of the home, that typically makes sense, and you can pay it off over time instead of taking out a big lump sum out of your

savings. So what do the rates look like on HELOCs compared to mortgages? Are they pretty close? So I just took one out two months ago, six weeks ago, just in case. I thought it would be a nice emergency backstop if I have something big to spend money on. In case the Fed stops manipulating the stock market, what are you saying? Whatever. If I have something wanted to do to her house, maybe, you know, I don't know. I figure why not have it, get it now before the banks start tidying things up, but it's 3% right now at my credit union. So it's similar to a mortgage. But the thing is, for 10 years, you can pay interest only. You don't have to pay the principal off for 15 years. Okay. Do you have to borrow money? No, it's a revolving line of credit. It's open for

15 years, I think. I have checks that I can write off of it, but I don't have to use it. If I don't use it, nothing happens. And the rate is locked at today's rates? No, it moves with line. Oh, it floats. Okay, got it. Yeah. So it floats. So it could go higher, but it's a pretty good deal in terms of just having that as an emergency backstop. But yeah, the reverse mortgage seemed fairly similar but a little more complicated. And you can use it almost as an annuity with a reverse mortgage where you can get it monthly. So again, I think it's something people have to understand, but I would make sure I'm leaning on an expert in understanding this stuff before dumping into it. Because it sounds like there are upfront costs involved and it's not

easy to understand. So earlier I said, talked about different lending standards. So J.P. Morgan requires a 700th credit score, which seems more reasonable than what I said. Wells will go down to 650. So if you're working with a mortgage banker, then again, it's more stringent of the requirements, less flexibility there. Let's talk about rental properties. Well, I put out the Schiller data this week on Twitter, and a lot of people who own rental properties laughed at me and said, these numbers aren't even close to being what my experience has been in it. So yeah, you have to think about cash flows. And even there, it's... What do you mean the S&P 500 is up? 14% of it?

for the last five years. I own General Electric. Exactly. But no, they're saying that the number is actually probably better. I think rental properties, it's hard to quantify what your actual performance is, probably. Why? I just think figuring out what you're all in costs are and everything, do you think anyone actually computes that? Yes. What your recoverable costs are versus your unrecoverables. Do you think people who own rental properties are really doing that assessment? I think some people are. I think that there's probably a decent percentage of the population who would feel safer owning a rental property than stocks because a rental property is something that you can wrap your hands around and you can see it. It's tangible. Whereas owning a stock in an ETF feels like

intangible, it feels like fake money. I think the way to think about rental properties, at least like around here, for example, you're not going to get a steal of a place where you can make cash flow above and beyond your all-in costs. So between, like we said, closing costs and taxes and flood insurance and homeowners insurance and everything else, you'll be lucky to find a rental property where the tenant can cover your all-in costs. So your break-even. Now, the good news is that that's a way to build equity in your house. So you look at it like you're putting a down payment down. So maybe that's where you raise the calculation off of.

Okay, I'm putting down, I'm making up a number. $40,000 is what I'm putting down. and every month I'm building $1,000 worth of equity in the house. And so after five years, I put down 40, I made 50, whatever it is, that's a, I guess, a decent way to think about it. But of course, whatever the spread is between, let's say that you're $1,000 a month in principle, that's your margin of safety, and it's not that big. So if there's a roof or damage or a missed payment, or you can't get the tenant out,

or, I mean, there's all sorts of idiosyncratic risk that you've got to think about. Right. side, your upside also has leverage involved. You're dealing with leverage. If you put a small down payment down, it's obviously harder to get diversified, but it's another form of forced saving. So it makes sense. It's certainly something you have to be willing to understand the risk involved and be, it's a, it is like another stock pick, though. But with a rental property, an investment property, it's not a consumption unlike your first home. So earlier in the show, we were saying, yeah, 100 to 500, but all the other costs.

involved. This is a little bit different because you ostensibly have a tenant eating a lot of those costs. Yeah. I think some people just would rather have real estate where they can see it and understand it better than the stock market. So I do get why certain people prefer that. Oh, totally. A, they see it. B, they don't see the prices fluctuate. So you don't feel the drawdown as bad unless, of course, you have tenants that can't pay, then you really feel it. But you know a lot of people, just anecdotally, there's people that build wealth and real estate. Oh, for sure. If you're doing it professionally and you've got 10 properties, 20 properties and you throw leverage on there, you can make a lot of money. You'd also get wiped out, but... And you can't

really become a Robin Hood speculator in houses. I mean, people have obviously speculated and gotten over their heels in terms of debt, but it's something that you can't day trade in and out of. You're forced to hold it. And the frictions make it so it should be more of a long-term asset. So let's say even if the long-term returns are worse than the stock market, but you're forced to hold it for a longer term, maybe behaviorally you're better off anyway because if it was a stock, you wouldn't have been able to hold it anyway. Because you see that Amazon can have a 30 or 40 percent drawdown. You don't really see that with your home that you own. All right. So we covered a lot in here. We're going to have tons of links of stuff that we've written and spoken about. Lots of charts. Thank you very much to advice him for sponsoring the show. Animal Spirits Pot. at gmail.com and we will see you on Wednesday.