The Economics Of Cheating
On today's Planet Money:
-- South Carolina Governor Mark Sanford faced a decision last month — stay home and fulfill his public and family roles, or sneak off to Argentina for a visit with his mistress. Sanford chose the latter, of course, and economist Tim Harford argues it must make some kind of sense. Harford writes the Dear Economist column for the Financial Times and is the author of the Undercover Economist.
-- Listener Eric Laube says he and his wife paid off their mortgage in Houston this spring. They love the feeling of being debt free. But they like the tax breaks that come with a mortgage, and it's got them thinking of taking out another.
Bonus: After the jump, a listener argues that a house may be a home, but it's not an investment.
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Brian Spiker, a lifetime renter, writes from El Cerrito, Calif.:
I had a hard time listening to "Should We All Burn Our Mortgages?" because the term "investment" was being used for a home. If we classify your home as an investment, then it is the worst performing investment of all time. Like you mentioned in the podcast, homes used to be looked at like a car or a dress. They are still used today the same way but with the housing bubble in the past few years we have forgot that the point of a home is ... to live it. To have a stable place to raise our children.
A home which costs $350,000 with a 10% down payment creates a $315,000 loan. At an interest rate at 4.875% for a 30 year fixed loan the payment before taxes and insurance would be $1,667.01 a month. With taxes and insurance the payment would be around $2,232.00 (assuming 1.2% property taxes and $3,000 a year in insurance). Over the life of the loan (if you could last the 30 years) the cost of borrowing that money would be $285,122.13, the insurance would cost around $90,000 and the property insurance would cost around $113,400. For a grand total for 30 years of $803,522.13!
Assuming an average return on the value of homes of no more than 3% since 1929 that home would be "worth" $824,797. Selling it would give you a profit of $21,275.80. Throw in a kitchen remodel and that is gone (the tax benefits are easily taken out of the argument because spending $1 to save $.35 doesn't make sense).
Take the difference from what it is to rent and own and invest it into the S&P and on average the amount at the end of the 30 years will be between $250,000 and $500,00 ... in cash!
Buying a home is a home not an investment. I believe that the bubble has changed the minds of millions of people and it needs to get fixed.
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