- The Borrow Smart Chronicles
- Posts
- The Borrow Smart Chronicles - A Bigger or Smaller House
Everyone is jealous of what you've got,
no one is jealous of how you got it."
Is Buying a Smaller House a Good Idea?
Key consideration: Appreciation (offsets cost of ownership compared to renting), but all real estate is local...What if you are forced to buy a smaller house because of higher rates?
Between 1987 and 2007, the real estate values grew by 184% percent [9.2% percent a year].
2007 to 2012, real estate values dropped 27% from the peak [5.4% per year].
2013 – 2024, real estate values increased by over 109% [10.9% per year]
housing appreciation over time
a BORROW SMART CONCEPT
Appreciation Offsets The Cost of Living Indoors
Thus far only one period longer than 12 months where housing prices went down. We saw the peak in 2006-7 that bottomed in 2012 and was fully recovered by 2018, our most recent pullback lasted less than 12 months before largely recovering all losses.
Housing usually goes up, and when it goes down the big headwind is usually recession, (or higher interest rates)... so far we have had higher rates but no recession.
We know that interest rates are back to the historical average of around 7.25%... but using the chart below we can see how interest rates impact affordability.
this is a prevailing mindset in these current markets
Someone with a $2,000 budget for monthly mortgage payments could buy a $400,000 house at 3.5% (see the graph for assumptions), but if rates have moved up to 7% a buyer will have to:
- Buy a $300,000 house to keep that same payment, OR
- Spend $700 more per month - taking their budget to $2,700 for the $400,000 house.
A thought experiment may help:
Suppose you bought a smaller house for $300,000 instead of renting. You might consider a 4% annual appreciation rate. $300,000 X 4% = $12,000 per year + or $1,000 per month positive wealth impact versus renting if they choose the smaller house. How much higher payment are they making versus renting? Does the $1,000 offset that cost?
If you buy the $400,000 now and pay the extra $700 a month - consider at 4% annual appreciation rate. $400,000 X 4% = $16,000 per year + or $1,333 per month positive wealth impact, which more than offsets the $700 higher payment.
TIP: When comparing the house to house and payments consider the real impact of appreciation on your wealth. You should not buy a house you can’t afford, but there is also risk in waiting if house prices continue to go up. Renting can be a good choice, but you miss the appreciation that allows you to keep pace with real estate price growth, which impacts your broader wealth over time.
What Would I Tell a Family Member: I was talking to a relative about this issue or waiting, and I told them I would buy a smaller house now, build confidence, and get appreciation working for them to offset their wealth impact... if rates come down from 7% to 3.5% again, their house value will rocket higher because everyone can afford more house, AND they can use that to buy something bigger themselves OR refinance and drop their payment. If they buy the smaller house now, they’ll be in the real estate game + they’ll know they can easily afford their payments.
Just for fun, calculate your wealth creation over 10 years from the appreciation of your house so you have a real-world example to share with clients. Past performance is no guarantee of future results, but you got to live inside your investment either way!
LIABILITIES and DEBT
What’s Happening?
small target, but getting larger
and if rates move a little the target gets much larger
housing is a big part of spending and increasing
rate cuts will help but number is going down
the consumer still remains strong
and higher values mean higher equity to draw against in the future
record equity over $12T
“What is not started today is never finished tomorrow.”
REAL ESTATE
What’s Happening?
small drop from last week, still staying below 7%
rates moved up last week
homes aren’t selling
and lower prices haven’t helped a great deal
interesting that inventory coming online is growing in the rentals area
but again house prices go up like Gamestop!
“The utility of living consists not in the length of days, but in the use of time; a man may have lived long, and yet lived but a little.”
ASSETS and INCOME
What’s Happening?
a look at last week by sector
and at the stock level
you have to invest (own stocks) to participate in this wealth creation
consumers are spending like drunken sailors on holiday
and they are spending ore to get around
but in old cars, not new ones
the economy is slowing
but most states are growing
and wealth grew fastest for Millenials as they added $1Trillion in the last 3 years
this year looks to be positive
but I expect volatility as we get closer to the election
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
ON BEING HUMAN
What’s Worth Sharing?
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;
The Road Not Taken - Robert Frost
Jimmy Page explains how “Stairway To Heaven” was written! A must watch
— VINTAGE ROCK N’ ROLL 🎸 (@RockNRoLL_85)
1:21 PM • Jun 2, 2024
DOPAMEMES
And Other Happy Moments…
continue to be concerned that we are losing critical thinking abilities
Artificial Intelligence
And the Future of Work…
Don’t forget we have a Borrow Smart GPT trained on my book and our CLA Course: See if you’d give the same advice?
AI for Weather is a first step in controlling the weather: Microsoft/Nvidia
Create Free Images: But I love MidJourney at $10 a month it’s a steal for creators that want the ultimate image power! Video coming soon.
Shared this with my son - he’s in college! https://taste-bud.io/ and learning to cook…
Summarize your favorite TED Talk: https://tedsmrzr.vercel.app/
Was this email forwarded to you? Sign up here.