Week of June 25, 2018
Quote of the Week
“Happiness is a long walk with a putter.” — Greg Norman
The big news this week is that Lynne and I adopted a new dog. We were down to two dogs and we decided we should get another one. So, three weeks ago we went to the Humane Society of Southern Arizona and we adopted Mr. Buck, a one year old pooch. He was found as a stray at four months of age, fostered for a while, and then returned to the shelter where we adopted him.
We think he is a terrier mix, but our Vet would not make a guess. He is a happy boy and very smart. He loves to carry around socks and slippers so we have to keep the closet door closed at all times. He weighs 15 pounds and is very active. He gets along well with our other two dogs and is running our five year old Corgi to the point of exhaustion. We are blessed to have such a sweet new boy in the house.
Last week was not a good week for the markets. The Dow was down 2.0%, the S&P 500 was down 0.9%, and the Nasdaq was down 0.7 for the week. For the year the Dow is down 0.6%, the S&P 500 is up 3.0%, and the Nasdaq is up 11.4%. Oil took a big jump last week up 6.6%. The escalation in trade tensions with U.S. trade partners drove concerns about potentially higher inflation and slower global economic growth. Global economic growth is already starting to slow. Trade negotiations are likely to continue to make headlines and could result in market volatility. Worries that a trade spat between the U.S. and China could intensify into a global trade war are a legitimate source of anxiety for the markets. Just to add more fuel to the fire Mr. Trump announced his intention to add a 20% tariff to European made automobiles plus auto parts made in Europe and imported to the U.S. for assembly here. China and the European Union are already in negotiations to bypass the U.S. and increase their trade with each other.
We will see if the aggressive negotiating tactics Mr. Trump described and recommended in his book “The Art of the Deal” and that worked in the New York real estate market will work in international trade negotiations.
Homeownership Doesn’t Build Wealth
First, I want to say that I am not following the advice that I am about to give. Lynne and I like our home and we plan to keep it even though it is probably not a good financial investment.
Owning a home may help you save money, but it won’t help you make money.
Households are better off taking control of their finances rather than relying on fluctuating home values. This is the finding of a new study conducted by Florida Atlantic University, Florida International University and the University of Wyoming.
On average, renting and reinvesting the difference in costs wins in terms of wealth creation regardless of property appreciation, because property appreciation is highly correlated to the rate of inflation versus the gains in the traditional financial asset classes of stocks and bonds.
The question of rent versus buy has been wildly popular during the housing recovery. The historic housing crash during the economic crash of 2008 and 2009 came as a bitter shock to millions of Americans, many of whom never considered that home values could fall at all or that they could fall as far as they did.
The U.S. homeownership rate is still hovering near its record low, yet buyer demand has been steadily rising. Construction, however, has not been rising quickly enough to meet the demand, resulting in fast rising prices. In the last few years, prices have increased faster than income and inflation. In some markets, home values have hit record highs, again fueling the debate over whether it is more lucrative to buy or rent.
The cost of renting has also increased dramatically, as new households are formed and millennials, now the largest generation struggles to afford a down payment. While there has been a building boom in luxury rental housing, that has not been the case with affordable rental development.
Research shows that the old adage of “throwing your money away on rent” doesn’t hold up. That is because it assumes that the extra money a renter saves by not owning a home and not saving for the down payment is simply spent on goods or services and not invested. When you assume that those monies are reinvested at a reasonable rate of stock market returns, renting, on average, wins in terms of wealth creation. Of course, many renters will not reinvest those monies and will instead use them for consumer goods, which is the least desirable option in terms of building wealth. In other words, the rent argument only works if the renter invests the rental savings rather consuming it.
As long as home values don’t fall, which has historically been the case in most markets, with the glaring exception of the last recession, homeowners are building a nest egg. They had also been getting a tax advantage due to the mortgage interest deduction and the deduction for property taxes. For many that is now at risk in the Republican tax plan, which curbs the mortgage deduction and the tax write off for property taxes.
Let’s face it, if you add up the down payment, the cost of a mortgage, upkeep, major repairs, and property taxes it is expensive to own a home. I think you will be shocked if you put pencil to paper and add all the costs of homeownership. Plus, with the current higher home values and a looming recession, owning a home now might be a risky asset.
Just as a side note, we have recently been doing retirement projections for clients comparing owning the current home vs renting. Assuming that you take the tax-free sales proceeds (up to a $500,000 gain for married and $250,000 gain for singles) and invest it and achieve a return of 6%, the renting path far outperforms owning a home. Plus, when the air conditioning breaks you call the landlord.
By the Numbers
YIELD SPREAD – In the last 5 months, the 2-year Treasury note yield has increased 0.48 percentage points while the 10-year Treasury note yield has increased only 0.24 percentage points. Some, but not all financial strategists have concluded that the bond market believes near-term Fed action (impacting the 2-year note yield) will slow the economy longer-term (impacting the 10-year note yield) (source: Treasury Department).– Michael A. Higley, BTN 06-25-2018
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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