Looking Back 30 Years

Avoiding a $2.2 Million Mistake by Understanding LAG

Todd Ballenger
January 17, 2025

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"The magic you are looking for is found
in the work you are avoiding"

Robert Frost

This is from my book, Borrow Smart Repay Smart.

Key insights:

US Mortgages are running about 1% above their 30-year averages; if we revert to the mean, I’d like to see rates in 2025 get closer to 5.7%.

US Stock returns in the last few years are almost double their typical 30-year average return of 11.82%, so reversion there would mean lower returns this year and possibly over the next few years. Many expect net returns below 5% this year, depending on policy and interest rates/inflation.

US Bond returns are running below their average 30-year returns of 4.46%.

Housing Appreciation returns ran below the 30-year average for the last 12 months but have held up reasonably well.

a BORROW SMART CONCEPT
LAG - Liability Asset Gap?

It’s all about LAG™ - Liability Asset Gap™ is the gap between your cost of borrowing and your expected return from investments.

It is really easy to understand with a typical scenario. A client has $100,000 to put down toward buying a new house. The mortgage rate is 7% (new borrowing), but they have credit card debt of $20,000 at 24% (old borrowing).

The LAG says to pay down the credit card debt first of $20,000, and you’ll earn 24% on that debt as the LAG is 24% cost of credit card debt versus 7% cost of mortgage debt equals - 17% risk-free guaranteed return.

If you pay down debt, you earn that rate, just as paying down a mortgage means you EARN that rate of return as you are saving that amount of interest. You’d want them to put $80,000 down on the house.

Now - The Bigger Picture (last 30 years) Past performance yada yada…

Someone sells a house and has $1,000,000 net proceeds, and they want to buy a new $1,000,000 home. They can lock in a new mortgage today of 6.5% for say $800,000, that’s their cost of borrowing. We don’t know what the market will return, but we know it has averaged 11.82% over the past 30 years. If their investments return 10% over the next 30 years (instead of 11.82%), the $800,000 invested at 10% wins over paying cash for the house and saving 6.5% on the mortgage debt. 10% earned, minus 6.5% paid = 3.5% net…

Is that worth it? The answer is - would $800,000 invested at a net 3.5% over 30 years be worth it to the client or not? It Depends… but that’s about $2.25 Million net gain.

Advanced thought: Over time, the 6.5% is about a point higher than the average… I’d argue that they’ll have a chance to refinance to a lower rate to improve that LAG over time. If they can refinance to 5.5% after 3 years, their benefit grows to $2.9 Million.

This is how I feel when someone tells me they learned something from our course that is helping them transform the way they do their business:

I don’t know what bro is training for but he’s ready
— NO CONTEXT HUMANS (@HumansNoContext)
8:18 PM • Jan 16, 2025

LIABILITIES
What’s Happening?

watch 10 year, and premium volatility… for rates to start shifting down

“Average 30-Year Mortgage Rate in the US… per Charlie Bilello

1970s: 8.9%
1980s: 12.7%
1990s: 8.1%
2000s: 6.3%
2010s: 4.1%
2020s: 5.0% ---
All-Time Low (Jan 2021): 2.65%
2023 Peak (Oct 2023): 7.79%
Today's Rate: 6.91%”

longer-term view from re:venture consulting

house values going up, as is income relative to productivity - making it easier to pay debt while feeling wealthier from all that house equity growing

debt - give me more debt, still much of our growth based on new debt

lot of pent up demand growing

hitting lows in activity - use this time to build your base for the turn!

this time is different - investors are asking for higher returns on long-term bonds because the US is growing risk of not being able to service all that debt IMO