Tuesday, February 14, 2006

Homeownership Propaganda Machine Running Full Steam Ahead

Looking for contrarian indicators of the housing bubble collapsing? Well here you go:

Why Homeowners Get Rich and Renters Stay Poor

Seems Wells Fargo has schemed up a new idea to bring in the next round of greater fools, and they've done it in grand style with "The Great American Homeowner Challenge".

If that title alone doesn't make you want to show your patriotic pride and go buy a home, I don't know what else would..

From 2001 to 2005, the average homeowner saw the value of his or her house jump by more than 50%. Many homeowners doubled, tripled, and in some cases even quadrupled their wealth in just five years because of exploding real estate values.

Imagine that. Buy a home, live in it, build your wealth, get great tax deductions -- and then retire rich. It may sound too good to be true.

Indeed, plenty of experts will tell you that the housing boom never happened. According to them, what we've experienced over the last few years was just a "bubble" that's going to pop any minute now. Others insist that whether it was a boom or a bubble, it's over. According to them, it's now too late to get in on the party.

It's a bit early in the morning for me to pick apart this piece sentence by sentence, so I'll leave it up to all the readers to do it. Let the comments begin!


Blogger grim said...

Perhaps a little bias?

Wells Fargo is one of the biggest mortgage lenders in the U.S.

David Bach is doing a speaking tour as well as has a new book to accompany the program. He also has a series of books on becoming rich. Does anyone else see a pattern here?

Why now? It has nothing to do with the American Dream (tm) or homeownership, but it has everything to do with corporate profits, margins, and volume.

Unfortunately, I don't have much faith in the average American to realize that.


2/14/2006 08:59:00 AM  
Blogger Richie said...

Great, another skirt wearing pom-pom waving author who's selling a get-rich-quick scheme.

People who say it's cheaper to rent than to own are simply wrong. Under certain circumstances in certain markets (where real estate values are overheated and rents are low), there may be some short-term advantages to renting. But over the long haul, renting simply isn't a good deal. If you don't own your own home, you can easily wind up spending more than half a million dollars on rent during the course of a lifetime -- and probably a lot more.

I won't even bother with this comment. Most people who rent are renting, choose to rent low-maintenance properties (apartments, etc) where they don't need to incur costs of property & upkeep. It's a very easy assumption to say it's cheaper to buy, but most of these articles completely fail to bring in the cost of ownership (upkeep, repairs, property maintenance, utility bills, etc) when comparing rent-vs-buy. If you're a first time home owner, there's a HUGE amount of money to be spent on filling a house and upkeeping it. I can to attest to this as my wife and I just moved into a house.

Here's how it works. Let's say you buy a home for $200,000. With standard 80% financing, you make a cash down payment of $40,000 and cover the rest of the cost with a $160,000 mortgage from the bank.

Now let's say over the next year or two the value of your house rises by 10%. So now it's worth $20,000 more than you paid for it. If you were to sell the house at this point for $220,000, what kind of return would you have made?

If your answer is 10%, you're mistaken. You take the $220,000 you got for the house and repay the bank its $160,000. That leaves you with $60,000 -- or $20,000 more than the $40,000 original down payment. In other words, you made a $20,000 profit on a $40,000 investment -- which amounts to a 50% return.

That's a bit of funny math to come out with a 50% return. You're gain is $20,000 on an investment of $200,000. But if you really did sell the house, this section fails to mention any attorney fees, closing costs, and commission fees. Not to mention the cost of the upkeep of a home for 2 years. I guess that's the fine print. What about all the interest paid during the first 2 years of ownership? Just doing a quick calculation, on a 30 year loan at 160k @ 6% theres about $18,000 paid in interest the first 2 years. That pretty much wipes out the $20,000 you think you made and drops you into negative territory after closing costs.

Homeowners Get Tax Breaks, Renters Don't

The best way to stay poor is to pay more than you have to in taxes. When you rent, you get absolutely zero tax breaks on your housing costs. But as a homeowner, you get the mortgage-interest deduction, which can effectively reduce your monthly mortgage payment by 30% or more.

In NJ, If you're renting an apartment in a multi-unit facility, chances are you are saving in taxes. Let's take for example an apartment building that has 25 units and has a $50,000/year tax bill. That's $2000/taxes per unit. There's not many single family homes that have tax bills this low. Once again, no mention of upkeep for a home owner. Renters don't normally have to pay for any repairs for appliances or fixtures that break over time (water heaters, boilers, central air units).

And finally, the disclaimer at the end...

Obviously, no investment -- not stocks, bonds, or real estate -- goes up in a straight line forever. But over the long term in America (which is to say, 10 years or more), most experts believe that homeownership is an exceptionally smart way to invest your money.

That's right David, perhaps you should have read Grim's article on the 80's collapse.

2/14/2006 09:08:00 AM  
Blogger NJGal said...

5. Homeowners Become Savers

That might be my favorite. As a renter with an enormous savings account, my savings is frighteningly beyond the US rate - if all these homeowners were saving, why were we at -5%?

My other favorite is his rent/buy assumption - sure, it makes sense if you rent in $1500 and the house is $200K. And that happens where? Please, tell me where the miracle 200K home is where my rent would be 1500....

2/14/2006 09:12:00 AM  
Anonymous Anonymous said...


Here is a good article on the economic boom!! Now, how is this fueled? It is fueled by consumer spending. This will leave the Fed no option but to increase interest rates. Therefore, our friends at Wells Fargo are going to make more.

I do agree that if you keep a house in the long run, ie 20 years plus and are not in a ultra high tax area you will do well. But, with taxes going up and with the cost of owership increasing that could change.

In short, people are using the houses they live in not as homes but as cash machines. This will be the problem when the ARMs reset at a higher rate. Again, we will see increases in interest rates because if the inflation bias of the fed.

2/14/2006 09:15:00 AM  
Anonymous Anonymous said...

Manipulation and psychological warfare the weapons of the Real estate industry.
never before has an outlet like this one been able to expose such gross inaccuracies.
Blogs and the internet are fabulous free speech outlets.
If you are a buyer you are a clay duck in target practice for the realtors, builders, mtg brokers and appraisors. You are on your own.No one cares about your finanical well being but yourself. Good luck. many have taken the bait while a few have refused.

2/14/2006 09:19:00 AM  
Blogger Richie said...

The joy of PropertyShark.com. I guess if I owned a condo that I bought for $2,000,000 back in 2002 I would definitely tell people to keep buying today.


If that link doesn't work, just goto PropertyShark.com and search for last name "bach". There's one David L Bach there and that seems to be the guy...

Public records are a great thing.

2/14/2006 09:49:00 AM  
Blogger grim said...

"Our goal is to inspire 10 million Americans to buy a 1st home, 2nd home, or investment property."

Oh bother..

2/14/2006 10:03:00 AM  
Blogger grim said...

White House trying to quell the panic..

White House Sees Slow Drop for Home Sales

White House Predicts Safe Landing for High-Flying Housing Market, Growth for Economy

WASHINGTON (AP) -- The high-flying housing market should make a safe landing by gradually losing altitude, the White House suggested Monday.

Housing has been an important source of power for the economy as home sales hit record highs in the past five years running. Low mortgage rates were a factor behind brisk housing activity.

"A gradual slowing of homebuilding appears more likely than a sharp drop because the elevated level of house prices will sustain homebuilding as a profitable enterprise for some time," according to President Bush's annual economic report to Congress.

[Is anyone else having trouble comprehinding the logic behind that statement or is it just me?]

The decline in Americans' personal savings rate "may not be cause for much alarm for retirement preparedness." The personal savings rate last year dropped to its lowest point since the Great Depression. The savings-rate measure doesn't provide a complete picture of households' finances because it does not capture gains from such things as higher real-estate values or financial investments, the White House report and private analysts say.

[It's a good thing that indicator doesn't include high real estate values, as it's not intended to be a net worth calculation]


2/14/2006 10:26:00 AM  
Blogger chicagofinance said...

Why did they launch THIS garbage at THIS juncture?

Breathtaking hucksterism at the most base level.

If I understand correctly, this gentleman [I used the term loosely] is esteemed in the manner of Suze Orman [another self-promoting hot air balloon].

Bach has made his living preaching fiscal responsibility, and he repays his legions by sending them over the cliff during a thunderstorm.

He will rue the day he sold his soul to the devil right before doomsday. How's that for apocalyptic? :-)

This symphony hits the wrong chord [pun intended]!

2/14/2006 10:27:00 AM  
Anonymous Anonymous said...


For at least 6 months Suze Orman has been warning her audience that the housing market has peaked, and they should NOT consider interest only loans, or other crazy financial gimmicks, and to wait before buying if possible.

I find her TV show pretty good, though I'm far from being a financial whiz.

2/14/2006 11:46:00 AM  
Blogger NJGal said...

Did everyone notice Drudge reporting a "Boom" because of the rise in consumer spending? Wow, our economy is just jolly good now, isn't it?

2/14/2006 11:49:00 AM  
Anonymous Anonymous said...

"Did everyone notice Drudge reporting a "Boom" because of the rise in consumer spending? Wow, our economy is just jolly good now, isn't it?"

I wouldn't judge the US economy too harshly -- recall the economy in October, 2001.

During that time, the nation's financial district had just seen office space equal to the entire city of Cincinatti wiped out by terrorists, and the stock market was shut down for the first time in the nation's history (and people dumped everything when the market reopened 7 days later).

During that time, the economy we see today seemed a far away dream.

2/14/2006 12:29:00 PM  
Anonymous Anonymous said...

Suzy Orman's targeted audience are 20 to 30 and may be up to late 30's. She talks to them as children, "boyfriend, girlfriend "etc. I found her very practical and correct in her advices. I wish there is a show for the baby boomers. She will have call this generation "mother, father?"

2/14/2006 01:09:00 PM  
Anonymous Anonymous said...

I find Suzy Orman a little too bubbly for my taste, but my wife likes her show. I never see Suzy suggest get rich quick schemes. Most of her suggestions are fairly straightforward and simple. Not much for the sophisticated audience, but for the lay audience, its useful.

2/14/2006 01:52:00 PM  
Anonymous Anonymous said...

a ha, you imply that the people that frequent this blog are sophisticated!!

2/14/2006 02:56:00 PM  
Anonymous Anonymous said...

From the article:

"After 30 years, you will own a home that's worth just under $1.1 million."

Will $1.1 million be a lot of money in 30 years?

2/14/2006 03:53:00 PM  
Blogger lisoosh said...

Ditto on Suze Orman. Not that I pay her much attention but she promotes saving, thrift and using a downpayment when buying a house, as well as cautioning against buying too big a house or living a lavish lifestyle without the funds. Pretty common sense.

2/14/2006 04:18:00 PM  
Blogger chicagofinance said...

Re: the swipe I made at Orman

All of you have profiled my point. She really isn't presenting anything innovative.

She is merely someone willing to listen to stories and dispense the same information repeatedly. It's more "dime-store psycho-babble" than anything really usable for people in their lives. Finance for the "Dr. Phil-set"

2/14/2006 04:36:00 PM  
Anonymous Anonymous said...

This article is absolutely ridiculous for those of us that live in New Jersey. First of all, I pay $1000 per month for rent, which is $12,000 per year. While WASTING that $12,000 per year, I am also able to save between $70,000-$80,000. While prices continue to drop (as kindly pointed out on this site a couple of days ago), and I continue to save, I think the renter (I) will truly win in the end.

2/14/2006 04:40:00 PM  
Anonymous Anonymous said...

I saw this article earlier on yahoo finance and I couldn't help but wonder how much kool-aid this guy has been slurping.

Perhaps he can address another issue that will compound any recovery.


2/14/2006 06:56:00 PM  
Blogger landgrab said...

You guys would be AMAZED at home many people are clueless as to what is happening in the housing market.

In the last 24 hours, i told somebody that my girlfriend wants to buy a place. before I could finish the sentence and say - in 6 months, when the market hopefully bottoms out - they say, 'that's a great idea!'

I'd say that the general public is not totally clued on about the housing market situation, and won't be until later this year.

2/14/2006 09:34:00 PM  
Anonymous Anonymous said...

"This article is absolutely ridiculous for those of us that live in New Jersey. First of all, I pay $1000 per month for rent, which is $12,000 per year. While WASTING that $12,000 per year, I am also able to save between $70,000-$80,000. While prices continue to drop (as kindly pointed out on this site a couple of days ago), and I continue to save, I think the renter (I) will truly win in the end. "

4:40 PM

I want your job............

2/14/2006 11:20:00 PM  
Blogger Tru Efforte said...

The majority are still clueless.

I was just speaking to a handyman yesterday. He is trying to buy a third house, to flip. He says he's made more money with his last house than he made all last year, and it he keeps doing it, he is planning to quit next your to do it full time.

I wanted to tell him to keep his day job...but hey, he's the one right so far...

Tru Goodness

2/15/2006 12:25:00 AM  
Anonymous Anonymous said...

I love the pro-buy a home or commercial property asap stuff...the dumber others are in the market, more value for me at the right time. The after effects of this period will be felt by many and enjoyed by a few :) The assets I'm after are being held by over leveraged drunk monkeys at the moment. Greed is good. ps: they say a fool and his money will soon be parted...the question for the ages is...how did they get together in the first place? oh I forgot it's not his money.

2/15/2006 01:14:00 AM  
Anonymous Anonymous said...

Any of you folks see that show "Flip This House" which follows Richard Davis of Trademark Properties in South Carolina?

They're professional flippers, and finish a house in 10 days max.

It's a great show, one of my favorites.

The guy (Davis) is so loaded, he pissed away $100K 'donation' for a football stadium corporate box at his college alma mater, and another $75K 'donation' to the local symphony.

Wonder if he'll hit the wall soon.

2/15/2006 04:02:00 PM  
Anonymous Anonymous said...

Link to the A&E show "Flip This House"


I could watch this show all day.

2/15/2006 05:42:00 PM  

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