Luminaireаt 385 First Avenue
Condo in Gramercy Park
No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning.
Let's make some financial assumptions that are borne out by decades of empirical evidence:
1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.
2) The S&P 500 increases at a real rate of 8.0% per annum.
These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:
Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).
An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.
Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.
A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.
If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.
If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of
$39,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11.
Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.
That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.
This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.
Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.
Do your own calcs, or criticize the model. I'm waiting....
Here is what I call BS on:
1) S&P 500 returns - it all depends on your time period. Last time I checked a few years back, market is up about 8% per year since they started tracking records, but in nominal, not real terms. It's up higher than that since early 80s, but was flat from 1968-1982. That's 16 years, no appreciation, during a time of huge inflation, so in real terms your money lost 3/4 of its purchasing power.
2) 0.7% real return on real estate. What is this from? I don't have the data, but seems like propoerty values are up a lot more than that over any time period. What would make sense is to pull actual nominal returns for both the S&P and Manhattan real estate for a comparable time period, then run your numbers.
3) 0.7% increase on rents. Again, I don't buy it. And again, use the same time period.
4) Historical averages do not equal future returns anyway. I find it funny that you think real estate is 50% overvalued, yet you blindly assume you will get 8-11% from the S&P 500. Good luck with that one pal.
5) Benefit of leverage. Sure, I know leverage cuts both ways and you can be underwater lose money more easily in the short term (although with real estate there are no margin calls), but if the stock market and real estate go up the same annualized % over the long term (which I think is much more reasonable, especially for manhattan where they are so highly correllated), you will do better with real estate because it is a leveraged investment. Oh, some other guys who learned how to make money with leverage: Stephen Schwarzman, Henry Kravis, Russ Carson.
I'm not going to waste my time to go find the numbers for a pointless "discussion" with you, but I think this post of yours once and for all proves that your opinion is basically worthless.
Buy low, sell high. You're guaranteed to make money!!
As my father taught me my entire life...The word "if" is the largest word in the english language. Lot's of if's in these calculations. I am not going to waste my with a long diatribe like stevejhx, sorry, I have higher priorities- and you won't likely see an additonal responses from me either. All I ask is that anyone reading these posts realize that his posts have a lot of assumptions, and while those assumptions work in many instances, the models don't always fit so neatly and cleanly. Therefore, it is reasonable to take the position that IT IS NOT ALWAYS MORE BENEFICIAL TO RENT (sometimes yes, sometimes no- I would be willing to give you that).
Let's do a study of net worth:
Take 100 people who have lived in NY City for the past 10 years and have been property owners.
Take another pople who have lived in NY City for the past 10 years and have been renters.
Same income, same martial status.
Steve, I am willing to bet you $10,000 that the hoome owners net worth is not only greater than the renters but significantly greater if not exponentially greater.
You willing to bet?
Global venture capitalist Parag Saxena paid $13.8 million for unit 29C at 15 Central Park West, twice what the seller paid for the apartment, according to city records posted today. Saxena, co-founder and CEO at Vedanta Capital, bought the unit on March 19 from an unidentified buyer, who paid only $6.9 million for it on Dec. 13. Other wealthy financiers in the building include former Citigroup CEO Sandy Weill and Goldman Sachs CEO Lloyd Blankfein. Saxena, a former CEO and fund manger with Invesco Private Capital, formed Vedanta Capital in 2006 with two partners. He ranked No. 31 in Forbes' 2008 Midas List of high-tech dealmakers. Last month, The Real Deal took a unit-by-unit look at the ultra-elite tower.
also if you believe that renting is your path to success, I really feel sorry for you. I bet that your landlord is estatic about your beliefs and is thankful everytime he cashes your rent check.
ok, A B is ALWAYS greater than C D
IF, A>D and B>C
So go and argue away all of your other "facts" and situations, real life "evidence," etc., you can't convince me no matter what... bunch of fools you guys like evillager, don't even bother trying you won't win.
he New York Sun April 18, 2008
Average Price For City Home Jumps by 28%
Fueled by a jump in Manhattan condominium prices, the average price of a New York City home climbed to $853,000 in the first quarter of 2008, 28% higher than the same period in 2007, according to a report released yesterday by the Real Estate Board of New York.
Average Manhattan home prices increased 41% from 2007 to $1.6 million, while prices in Brooklyn climbed 3%. The average cost of a home in the Bronx fell by 1% and dropped by 5% in Queens and Staten Island. The number of home sales throughout the city was down 22%.
The head of research at REBNY, Michael Slattery, said the citywide increase is due in part to a rise in condominium prices in Manhattan to $1.8 million, an average increase of 43% from 2007. "Manhattan, and particularly condos in Manhattan, have kept the New York City market very strong in terms of prices," he said.
Stevejhx is ALWAYS an idiot, every time.
Steve, I'm usually with you, but what's with the crusade here? You're also presenting a bit of an unrealistic scenario, no? Who is going to forego buying their own place and dump all that money into the S&P 500? Maybe I'm wrong here, but don't most people try to make lots of money so they can spend it, not hoard it away until they're 70? That's why you drop the cash on a place to call [your own] home. The word "always" is ahem, always a bit tough to swallow as well.
verain stevejhx = retard
Steve - haven't you bought a few properties in the past? and haven't you discussed wanting to buy properties in the future? What are you trying to accomplish here?
evillager, you fell into my trap!
1) From January 1, 1950 through December 31, 2007, the average capital gains from the S&P 500 was 8.66%.
That does not include reinvested dividends.
"If you were to go all the way back to 1928 and dissect the S&P 500 into rolling twenty-year periods, there would be fifty-nine of them (1928-1947, 1929-1948, etc.). The average annual rate of return over those periods was approximately 12 percent."
That's where the 8% real return on the S&P 500 comes from, on a rolling average basis, which corrects for specifically-targeted dates.
2)0.7% real gain on real estate is from Robert Shiller of Case-Shiller fame:
"Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed. Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004."
3) Market rents are constrained by market factors: 40x monthly rent in income. Therefore, if incomes go up 0.7%, rents can at most go up 0.7% because constraints.
"Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter)."
And that constraint on the demand side is 40x monthly rent in income, 28% total household income in housing expenses.
4) Historical averages do not equal future returns: that is true in the short-term. But it is also true that over long periods of time everything returns to its equilibrium. And the 12x annual rent = sale price is real, and constant over time specifically because of those market constraints:
The 12x ratio (if that's what you're talking about) exists because of the ratio of prices to income. If you make $100,000, you can you can rent a property that cost you $2,500 ($100,000 / 40). You can buy a property that will cost you $2,333.33 in total cost ($100,000 * 28%).
Let's just use rents vs. mortgages to make it easy. At 6% interest, you can afford a $400,000 mortgage, giving you payments of $2,389.20 You can afford annual rent of $30,000. $400,000 / $30,000 = 13.3.
Very close to the 12x, right? And 6% is a very low interest rate and I greatly simplified the math. If you - like ccdevi - claim that the rent to purchasing price ratio is 18x annual rent, then making $100,000, being able to afford $30,000 a year in rent, you could afford a $540,000 house, but that would give you monthly mortgage payments of $3,237.57. Your monthly pay is $8,333.33, giving you monthly housing costs of 39% of your monthly income.
OH WAIT! I FORGOT! NOBODY WILL LEND YOU THAT MUCH MONEY BECAUSE THE RATIO IS 28% TOTAL HOUSING COSTS TO INCOME!
You say: "If the stock market and real estate go up the same annualized % over the long term (which I think is much more reasonable, especially for manhattan where they are so highly correllated)"
If you the market prevents you from spending more than 40x annual rent / 28% percent of household income on housing expenses, HOW CAN RENTS / PRICES GROW AT 8% UNLESS INCOMES DO?
Well, sweetheart, THEY CAN'T!
"I'm not going to waste my time to go find the numbers for a pointless "discussion" with you, but I think this post of yours once and for all proves that your opinion is basically worthless."
Because you can't. You're in over your head. You're blind to the fact that the market is constrained by 40x/28%, and that real income rise only 0.7% per year on average, and therefore housing prices can rise only that much.
Your claim is so ridiculous that if you take the example of the $468,750 and increase it at a real rate of 8% per year, after 30 years it will be worth $4,716,870.42. But if your $100,000 income only rises a real 0.7% per year, it will be $123,277.58 after 30 years.
WHO MAKING $123,277.58 CAN AFFORD A HOUSE WORTH $4,716,870.42?
Them there's the numbers, baby, if you do what you are claiming.
That is, "$468,750 house."
Steve - I bought a property in 2003 for $420K. It is now valued at $1.4 million.
If I would have investedmy $82K downpayment how would that now be worth $1.4 million?
wyndcliff, ignoring the rest of them, I'm trying to show that the people who are so "into" real estate don't even know the fundamentals of the market. Yes I would like to buy, but for emotional reasons, not as an "investment," because it's a crappy one from a financial perspective. From having a secure place to live it's a marvelous thing to have.
My numbers are all proved over DECADES. I remember the dot.com bubble - the "New Economy" is special. Well that's what the real estate bubble is all about.
"Take 100 people who have lived in NY City for the past 10 years and have been property owners. Take another pople who have lived in NY City for the past 10 years and have been renters. Same income, same martial status. Steve, I am willing to bet you $10,000 that the hoome owners net worth is not only greater than the renters but significantly greater if not exponentially greater."
That's exactly the danger! Extrapolating from the most significant increase in property values in the history of the world - the last 10 years in Manhattan - onward toward the future. You need to take much longer periods, and moving averages, and look at the market constraints.
All my numbers are real and provable. Claims like property prices rise at a real rate of 8% per year - which is what evillager is betting his future on - are not only historically inaccurate, but theoretically impossible given the market constraints.
Steve - change last 10 years to last 20 years or 30 years. I will still bet you $10K.
petrfitz - I think you're missing steve's point. He's talking about historical values. If you would've bought that property in 1776 (when our dear country gained its independence) and today it is only valued at $1.4 million, you basically got a .7% real annualized interest rate. Sucker.
Hey, retard, you know even less about stocks than you do about real estate. Ask anyone who knows anything about the stock market what kind of a risk premium they can expect from equities over the risk free rate. Typical response will be 4% over treasuries (which is what we would use for fairness optinions when I was an investment banker, supplied by Ibbotson Associates, not "monkeychimp.com") 10 year treasury currently yields 3.7%, add 4% to that, you get 7.7% for a reasonable long term expectation.
Also, like I said, since you are such a data-whore, please go pull the data for the S&P 500 and Manhattan real estate prices. Use any time period you choose. Do the same for rents. Then, plug those numbers into your wittle formula, and tell me what you get. Idiot.
I meant to say if you bought it in 1776 for $50.
Oh, and that 7.7% is nominal, not real. Inflation is currently running at 3-4%.
which - according to steve - would've been overvalued by 50% back then.
people, don't even bother responding. He gets a kick out taking extreme stances and stirring everyone up. If steve gets his jolly’s off of writing pages of useless dribble, let him. Ignoring him is what frustrates him the most.
petrfitz, you're doing the very thing you can't do: extrapolate an impossibly large medium-term gain into the future, without even considering what the downside could be.
Ask this question: could you afford to buy your $1.4 million property on your income today, without using the capital gains from it as part of the down payment. That means you would need $280,000 in cash for the down payment / closing costs, and at 7% interest over 30 years afford a mortgage payment of $7,451.39, plus let's say $1,000 per month in (unabated) tax and $1,000 in maintenance. You would need a salary of almost $400,000 a year to afford that, versus what your salary was in 2003.
Therein lies the problem.
You could have purchased the S&P on April 17, 1998 through the depository receipts at a price of $112.28 and sold it today at $138.48, an increase of 23.3% over 10 years, or an annual rate of increase of 2.11%.
jeopa - if I bought in 1776 in New York, I could have bought the entire island of Manhattan for $60 dutch guilders.
The current vlaue of all RE in Manhattan has to be in the trillions of $$$$.
Steve, since the stock market did exist then, I would have to have put those guilders in my sock drawer then invested them 30 to 40 years later. If I placed those 60 guilders in a stock then what would the value be?
Would it be more than the value of the entire island of manhattan?
Or should I not have bought Manhattan and instead rented in Jersey City?
"betting my future"
that is laughable, I am only investing a couple hundred thousand. but yes, I am comfortable with my investment, and can very easily cover my mortgage payment many times over
you, however, are betting on rents increasing 0.7% per year. good luck with that one.
Stevejhx - herelin lies your problem. I did invest that money and also bought other properties. I am now sitting on approximately $7 million in equity. Just because you missed the opportunity does not mean you can create scenarios which didnt happen to wipe away other peoples gains.
Your argument is stupid and moronic.
I noticed that you are also not willing to take my bet. Name any time period and owners in NY will always have more net worth than renters.
It's no extreme position - do the math.
Rents and home prices CANNOT increase by more than incomes. How could they?
40x / 28%. Study it. If you take the example of the $468,750 house and increase it at a real rate of 8% per year - the S&P 500 real rate - after 30 years it will be worth $4,716,870.42. But if your $100,000 income only rises a real 0.7% per year - which is about average for incomes - it will be $123,277.58 after 30 years.
WHO MAKING $123,277.58 CAN AFFORD A HOUSE WORTH $4,716,870.42?
JuiceMan - you are right. I am a sucker for even getting into it. If someone listens to Steve, then that's their problem.
Also, it's worth noting that I'm not some huge bull on NYC real estate in general (though I don't think it will fall dramatically either). I just think steve is full of bs, and doesn't have nearly as much $ as he purports to. I think his backdown off the bet with malreaux exposed him for good.
Stevejhx says "Rents and home prices CANNOT increase by more than incomes. How could they?"
They can, they have, and they will continue to.
"Name any time period and owners in NY will always have more net worth than renters."
That is virtually assured because owners have to have a down payment, renters don't. So it's a stupid bet on the face of it.
"I am now sitting on approximately $7 million in equity."
So were a lot of dot.com gurus in 2000.
You assume that real estate never loses value. Sucker.
Steve - can a renter with no equity or credit history afford a home of $4,716,870.42?
oh, and steve, my income is up 10x in the last 8 years. how do I factor in to your 0.7% increases?
Steve, I also made several million from the dot com era.
no, petrfitz, they can't. THAT'S PRECISELY MY POINT. Neither can someone with a good salary and a good down payment and good credit, who 30 years earlier could have afforded that $468,750 house.
Real estate cannot increase at 8% per year because it quickly becomes unaffordable.
You seem to be catching on to what I'm saying. That's why we are today where we are.
how much has CEO pay gone up in the last 10 or 20 years vs. avg employee pay? you do realize that "average" professionals (bankers, lawyers, etc) in NYC get paid on par with CEOs in most parts of the country, right?
oh, wait. you're a tech guy. nevermind.
Stevejhx: What a blabbermouth (albeit smart) you are! Always repeating your anti-real estate bias, and roundly applauded by your like minded minions. You aptly stated your convictions ad naseum. Why must you monopolize this site? In fairness, one man, one vote/voice seems ever more fair and ethical an approach to participating in the dialogue here.
What about if I bought the entire island of manhattan in 1700's for 60 dutch guilders? Would it be better to rent for the last 300 years or would I be in a better position if I owned all of manhattan?
evillager, if you started making $1,000 a year, $10,000 isn't very much.
petrfitz, you did because you got out when the getting was good. Which is also my point.
I, too, made a lot of money in real estate and a lot of money in stocks.
steve pleaase answer my question about purchasing manhattan in the 1700's
that's hilarious. try $100K -> $1m, asshole. now fix my laptop already.
jrw293, I have no "anti-real estate bias." I am biased only against bubble pricing.
Real estate is wonderful.
petrfitz, again you make my point without knowing it. Incomes increase at the rate of productivity; housing increases at the rate of income. The net worth of corporations increases at a much higher rate because they are able to exploit efficiencies and add more value through product innovation.
That is what made NYC what it is today. It is also why the S&P 500 increases at a much higher rate than housing.
Steve that did not answer my scenario about would I have been better off buying ALL of manhattan in 1700 for 60 guilders or should I have rented?
petrfitz - it is ALWAYS better to rent your teepee than buy.
evillager, $100K -> $1m and you live in the East Village? you are "only investing a couple hundred thousand." Seems like you can afford more.
petrfitz, I did. And if the Indians weren't swindled, and knew exactly what property ownership could do, or really had a chance against guns and gunpowder, they might have wangled a better deal.
40x / 28%
Ignore it at your peril.
so Steve says owning some stock would be more valuable than owning all RE in Manhattan?
You are brilliant!
But Steve wouldnt all those corporations AND the entire NY Stock exchange be paying me rent to use Manhattan?
I think owning all of Manhattan is the better scenario.
Yes, steve, some millionaires do live in the east village. Welcome to NYC.
Also think of the mad chicks I could pull if I owned all of Manhattan.
Steve - I doubt a renter and owner of a site pad in LI would have millions. Keep dreaming up impossible scenarios and story lines.
eVillager - I am worth over $10 million and live in the LES just down the street from you.
petrfitz: Not that I agree with steve, but I think your experiment has a sophistication / risk-taker bias.
You'd be selecting for people intelligent and financially organized enough to buy real estate, whereas the pool of all renters includes the negative savings, paycheck-to-paycheck consumers making min-payments on 10.0 % APR credit cards (read CNN's Issue#1 Special feature 56 such people).
Take 100 real estate owners vs. 100 buy-and-hold stock investors with sensible asset allocation and leverage. I believe the real estate owners still win over most reasonable time periods, but it won't be a landslide.
Leelin - all things equal to start - behavoir patterns, credit history, cash in the bank, etc
Owners will still come out ahead of the renters 99% of the time.
"so Steve says owning some stock would be more valuable than owning all RE in Manhattan?"
No - I say owning all stock would be more valuable than owning all RE in Manhattan.
Hurl the insults and ridicule. Do the math.
I am not worth $10 million. Just a meager $2 million.
But good enough.
Lol, good for you...while I'm partial to the east village, the LES is a strong #2 in terms of my favorite hood in the city
Steve could I have bought ALL the stock ever created over the past 300 years with that 60 guilders? No
Your scenario is incorrect and you should admit it.
Oh, and I bet we're both half steve's age too!
You can not compare the purchase of equity of corporations with the purchase of a home. This thread is based on a complete misunderstanding of investing markets. (not to mention the stipulations rig the equation, as per my other post: A B > C D IF, A>D and B>C)
1 - Purchased equity of companies in the stock market is levered at the outset, because the corporations in which shares are purchased have a capital structure inclusive of debt.
2 - Real estate is not a levered asset. Only as a construct of the purchase will the majority of buyers will lever their asset with a mortgage. The leverage amortizes, so in the long-run, the leverage decreases and eventually goes to zero, unless the owner refinances.
Increases in real estate prices are therefore not equivalent to returns on real investing in real estate. Home ownership is different than investing in real estate. And therefore, you can not compare home ownership with investing in the stock market.
Nice try Steve. Redo the math and come back to us in a couple of days.
I have a potato, some thread, and a can opener. If you throw all eight of those items through an open door, you will have a card table and a cat. Therefore, real estate in Manhattan will go down.
example of simplified steve logic
Actually steve, quick question for you. You cite 0.7% annual real appreciation for real estate. Actually I want the nominal appreciation rate, because with a 80/20 mortage I'm leverage 5x. If inflation is 2.3%, say, then my nominal appreciation is 3.0%. With 5x leverage, that gives me 5*3.0% = 15.0% a year. Then take away inflation again to get my real rate of return, about 12%?
I won't defend the numbers and I know LTV doesn't stay 80% over time, I'm just saying you shouldn't use the real appreciation of the property values when you are calculation the IRR on a leveraged investment.
verain, you missed the point.
You need to take accounting.
2 - Real estate is not a levered asset.
3 - Take the same money and invest it in two competing asset classes. The results are set out above.
In fact, so accurate is my model that it's part of the definition of "imputed rent": opportunity cost.
Nice try Verain. Redo the math and come back to us in a couple of days.
leelin, real rates of return factor out inflation. You don't know what future inflation will be, or its correlation to past inflation. That is why they are used.
You couldn't compare one nominal rate with one real rate - they are incomparable. But if you want to choose inflation, you need to choose which index you want. And therein lies the problem....
Steve: You need to take accounting.
I need to take accounting? How about a degree in finance from the Wharton School? Does that count?
Steve: Your investment from your downpayment is increasing with leveraged-inflation.
$100K = $103K (with 0.7% real appreciation and 2.3% inflation)
You put down $20K. You get back $23K. You just got 15%. As usual, let's ignore all T-costs so you can see what I mean by leveraged inflation.
leelin, it's included in the calculation through the increase in the value of the house.
I excluded all inflation from the calculations. It makes no sense to include leveraging inflation since inflation doesn't affect the price of the asset or incomes, only the value of the currency.
Steve: Look at my example. Let's say real appreciation is 0.0%, but inflation is 5.0%
You buy a $100K house and wait a year. Your house iss worth $105K only because of inflation.
You put down $20K for the house. You sell and get $25K back. Inflation makes your $25K worth only $25K/(1.05). But you still made REAL money on your investment.
verain, they apparently didn't do a good job with you at Wharton, because stock prices are not based on the equity or liability or assets of a company - that's the book value, which is skewed by all sorts of things such as fully depreciated real estate with a real market value, securities mark-to-marketed because they have no counterparty price but which are actually worth something.
Stock prices are based on an estimate of forward earnings.
The stock certificate represents the value of a company as a producer of income, not as a holder of assets.
Which is why what you say is dumb.
And to say that real estate is not a leveraged investment is even dumber: people borrow up to 110% of its value. That is not leverage?
mark-to-marketed to 0, I meant
Stock price times number of shares = equity value.
Equity value plus debt = the value of the corporation.
Stock price based on forward earnings (I'll leave it that simple).
Earnings are after a company pays interest expense to its debt holders.
Therefore, earnings are levered returns to equity holders.
Steve, what is this "pulling mad chicks" that the straight boy is droning on about?
Steve: And to say that real estate is not a leveraged investment is even dumber: people borrow up to 110% of its value. That is not leverage?
Me: Increases in real estate prices are therefore not equivalent to returns on real investing in real estate.
Steve: Shiller shows that inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004."
Stock price times number of shares = market value, not equity value.
Equity value = Assets - Liabilities.
Equity plus debt = total assets. The value of a corporation depends on the definition of value.
Earnings are after a company pays interest expense AND PRINCIPAL to its debt holders.
The "therefore" is a non sequitur. There is no difference between an equity holder and a debtor, except who has priority over the company's assets. Equity and liabilities add to total assets.
A company borrows money from equity holders just as it does from debt holders.
You claim to have gone to Wharton, and you can't even read a balance sheet!
1 is a definitional misunderstanding on your part
2 is incorrect
Just to be clear, Steve, I thought maybe you may have had different views on the world, ok, put together poor argument, ok, been a bit flashy, ok, seeking attention and prone to combativeness, ok.
But as I just re-read your last post, including most amusing your criticism of my knowledge of corporate finance theory and practice and misstatement of same, I realize you really are just simply not knowlegeable. And ignorant of your lack of knowledge.
This will be the last time I engage you.
After all, never argue with a fool.
Ha ha ha!
"Market capitalization (aka market cap, mkt cap or capitalized value) is a measurement of corporate or economic size equal to the share price times the number of shares outstanding of a public company."
Assets - Liabilities = Shareholders Equity. Basic bookkeeping.
I see. So your earnings include the amount you've paid back in principal. Novel idea.
I make $100. I repay a loan, $9 in interest, $1 in principal. My net - OBVIOUSLY, according to you - $91 because I don't count the repaid principal. Somehow, I've managed to keep it.
Dumb. I make $100. I repay a loan, $9 in interest, $1 in principal. I have $90 left. Those are my earnings.
You are shown to be a charlatan.
Yes. "Never argue with a fool."
Wow, you guys use this forum like it's instant messenger, didn't expect so many messages in less than an hour.
Any update on whether you agree the leveraged-inflation affect derails assumption #2 from your original post?
Verain - i think Steve got you there. He is right about point 1 and 2.
leelin, this is the fastest thread I've ever seen. I'm avoiding work that's really boring - this is much more fun.
I said you can't include inflation because it doesn't measure the change in value of the asset - it measures the change in the value of the currency you're buying it with. Sure you'll make more percentage-wise if you count inflation, but it's not a change in what the thing is really worth.
manhattanguy, verain is a real estate agent. He has no degree from Wharton. With what he just wrote, he couldn't even pass high school accounting.
on wall street, equity value = market value of equity
"market cap" is a term used by individual investors
More crap from the multimillionaire evillager:
"Equity value is a market-based measure of the equity value of a firm; it is also called Diluted Earnings Per Share. It accounts for all the ownership interest in a firm including the value of unexercised stock options and securities convertible to equity. Equity value differs from market capitalization in that it incorporates all equity interests in a firm whereas market capitalization only reflects those common shares currently outstanding."
You might be right, but help me walk through this example.
You buy the hosue for $100K, $20K down and $80K on mortgage. Your house appreciates at 0.0% in real dollars a year. Inflation is 10% a year. In one year, that makes your house worth $110K, so you now have $30K of equity. Even adjusting for inflation, you have almost 27K of equity, a 33% return on your investment of $20K.
Though I admit that I did misunderstand what verain meant because I was talking about the value of shareholders' equity. We were using different definitions of equity.
He was still wrong, though.
You said: "Sure you'll make more percentage-wise if you count inflation, but it's not a change in what the thing is really worth."
That's why I'm taking inflation back out at the end, but you still come out ahead. You get 5x inflation 5x real appreciation, and then your money only suffers from 1x inflation when discounting back to today's value.
leelin, you may have the equity, and you will have to pay taxes on it, but in terms of purchasing power you have nothing new.
I make $10. An apple cost $1. I can buy 10 apples. Inflation is 10%. Now I make $11. The apple costs $1.10. I can still only buy 10 apples.
I make 10% more money but it's gained me nothing in real terms.
That's why the AMT affects so many people: $100,000 was a lot of money in 1969. It's not today, but the AMT was never indexed to inflation.
"That's why I'm taking inflation back out at the end, but you still come out ahead. You get 5x inflation 5x real appreciation, and then your money only suffers from 1x inflation when discounting back to today's value."
I make $10. I borrow $40. Now I have $50. Inflation is 10%. I now have $55. But my $10 is now worth $11, and my $40 is now worth $44, so the ratio remains the same.
You can't "take inflation back out at the end" without readjusting your principal and loan amounts in the same amount. Yes you make a gain - and yes you have to pay tax on it - but you're paying tax on inflation, not on real values.
Steve, actually it's more like this. You have $10, and someone lets you borrow $40 to buy 50 apples for $1 each. Now inflation is 10%. You sell the 50 apples for U, pay back the $40, and you have $15. Inflation sets you back to $13.50 dollars, but you still made $3.50.
"You can't "take inflation back out at the end" without readjusting your principal and loan amounts in the same amount."
Actually, you can take inflation back out at the end and come out ahead, because your loan notinal doesn't adjust with inflation. That's why bond holders hate inflation (when there is no inflation protection). Your mortgage loan principal stays the same regardless of inflation.
"I make $10. I borrow $40. Now I have $50. Inflation is 10%. I now have $55. But my $10 is now worth $11, and my $40 is now worth $44, so the ratio remains the same."
Sorry missed your double post. The key insight is that you still only pay back your original debt of $40 with $40. You pocket the gain as you pay back your debtor with less valuable dollars.
steve, I think now is a good time to buy. What do you think?
JuiceMan - you're turning into Spunky!
"More crap from the multimillionaire evillager"
Ha ha, steve, you are ridiculous. Ask anyone on wall street what "equity value" is. Oh, and by the way, I am a portfolio manager, and used to be an investment banker. Idiot.
PS - for the record, the wikipedia entry is wrong. Equity value does not equal "diluted earnings per share", that makes no sense whatsoever. The formula given, though, is basically an ass-backwards way of using the treasury stock method to calculate the fully diluted equity value, taking into account the dilution from issued but unexercised stock options.
Do you know what all this means steve?
Does anybody actualy believe anything steve says anymore?
Thank you steve. I would much rather be called spunky than stevejhx. spunky makes sense.
leelin, now I see what you mean - sorry I didn't understand the point you were trying to make. But the opposite is also true - you pay taxes - and a higher rate - on gains that are pure inflation. It's a double-edge sword.
oh, also steve? if you are worth $2m, how are you betting "millions" that real estate prices are going down (which you said on another thread)? so you are betting your entire net worth shorting those obscure derivatives linked to housing?
steve, you have been caught in too many lies to be believed by anyone anymore
evillager ... are you nuts? Wikipedia is always correct. It is a free resource that can be edited by anyone, let's say ... stevjhx.
evillager, you are partially correct. The wiki article is poorly written, but you are correct that it is discussing the FASB treasury stock method of calculating equity value.
I, however, was discussing stock prices as a function of expected forward earnings and said verain should take an accounting course. verain then introduced the completely unrelated concept of equity value. In accounting - which is what we were discussing - the value of equity is operating assets - debt. That is I was discussing and that is what I understood when he wrote it.
You changed the type of equity value - perhaps in line with what verain meant - to being the sum of common stock value and the value of total outstanding options. That is the definition of equity value you are speaking of; it is not what verain said equity value was - total outstanding shares x share price - and it is not what I was referring to when I said equity value.
The wiki article is unclear, but it relates to the FASB treasury stock method of calculating eps, which includes, by definition, option dilution.
I do hope that clears up the misunderstanding. I said accounting, using the definition of equity value in accounting. verain made an incorrect statement about the financial term equity value, which I corrected using the accounting definition that we were talking about. You added equity value as a financial term which is not what I was thinking of. When you did it dawned upon me what verain was referring to - which is still wrong - and I posted the poorly written wiki article.
So, you are right in what you said as a market term; I was right in what I said as an accounting term. verain was wrong in all terms.