My buy vs. rent model

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.

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 has some of the worst analytical application skills of anyone on this board. He is incapable of taking a concept and correctly applying it. Despite having it spelled out to him by multiple people, in the most elementary terms and with clear examples, he insists on his moronic ideas that: 1) you shouldn't consider the mortgage interest tax deduction when comparing rent costs to ownership costs, and 2) if you do consider the deduction, you should use your effective rate rather than your marginal rate, even though this is clearly incorrect and entirely stupid.
He babbles on and on with wrong ideas to either justify to himself that renting has been better than owning all these years, or to avoid having to admit that he just isn't that intelligent and is wrong. I feel bad for anyone here who reads his comments and uses what he says to make decisions.

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.

Lesson One:
Stock price times number of shares = equity value.
Equity value plus debt = the value of the corporation.

Equity value in finance is what I said - value of shares + options.
Equity value in accounting is somewhat what verain said: it is operating assets minus debt.

Now do you see the stupidity of verain's "Wharton Business School" post? His equity value (price x # of shares) could not in any way be related to debt. That's why I said what he said was nonsense, and why it caused confusion.

However, since you caught half of what he was trying to say, I give you credit because I would not have thought of that. I caught the other half. My experience is as an auditor with Price Waterhouse and Bank of America. Yours is as a portfolio manager. That's why we came to different answers.

I always apologize if I misunderstand something or make a mistake. I was not over-apologetic to evillager. I told the truth. The wiki article is poorly written, but I give him credit for identifying an equity value definition that I would not have thought of when I read what he wrote.

I will say it again: when verain made his first post "equity value" I thought he was discussing shareholders equity, since I was discussing accounting. He gave two definitions: the first was for market capitalization, which is what I said it was. It is NOT equity value. The second definition he gave was for the accounting concept known as value of equity, which is what I saw when I reread it, but he only kind of got it right: value of equity is operating assets minus debt.

Here's what verain said:

a) Stock price times number of shares = equity value.

That's not true; that's market capitalization. Equity value includes the value of options.

b) Equity value plus debt = the value of the corporation.

The way he wrote that technically means book value / shareholders equity: equity + debt = equity + liabilities = assets = book value. Though some people exclude goodwill and other intangibles from book value: see below.

That's what I thought he meant when I made my first post. evillager - to his credit - made me look again and I realized that verain meant value of equity, which is operating assets - debt. "Equity value plus debt" is essentially book value - intangibles, as above.

What is not possible is to confuse two different meanings of equity value:

Stock price times number of shares = equity value
Equity value plus debt = the value of the corporation.

Equity value as a market term is COMPLETELY unrelated to DEBT of any sort, yet that is what verain said. No Wharton graduate would ever say that (if he passed). Those are two different concepts entirely, even if they share the same name.

I don't take back what I said, but I do give evillager credit for looking at it in a different way.

dudes, enough! I stand by what I said. He did not say "enterprise value," and if he had, it's more complex than that: market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

evillager, you can't even say, "market cap and equity value are interchangable, because options have to be counted," because the options aren't in the market.

So stop - you're talking out your ass.

Market capitalization is not the same as equity value, it is not interchangeable. Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The value of options varies, and it can, in fact, have a huge effect on diluted earnings per share, especially in the case of ESOP's: they can HUGELY dilute the per-share value of of a company. That's why there's an FASB about it, and that's what the poorly written wiki article was about.

I actually wrote an ESOP accounting system back in the day, when I worked at Arthur Young.

So stop - you're talking out your ass.

"I think you should know that no one calls equity value based on accounting statement numbers."

That's dumb. You need to know the net value of your operating assets to see what return you're actually getting on them. If your return on your operating assets is less than the cost of owning them, then you're in dire trouble. And you can only know your cost of owning them by knowing your debt.

"He said that equity value plus debt is equal to the value of the company." No, I said the value of shareholders equity plus liabilities equals assets. evillager then tried to add in "enterprise value," earnings before interest, taxes, depreciation and amortiation (EBITDA), and all sorts of other completely unrelated nonsense.

I did not say that debt is intangible. I said that some people for some purposes do not include intangibles in book value.

"also, your analogy of value of a corporation to the total price paid for a house is 100% correct."

Wow! The total value of a corporation is the same as the total price paid for a house? You've got to be kidding. The total value of a corporation is calculated using the discounted cash-flow method. I defy you to apply a discounted cash-flow method to the price of owning a home, since there is no cash flow.

UNLESS - you use imputed rents for market rate rentals. Which is, in fact, the true value of a home: the price you would pay to rent it.

EnterHome, I was not way off base. What's happening here is obfuscation. I repeat - you are 100% exposed as someone who is talking out their ass, and anyone who listens to you is a fool.

So, let us stick to the premise, boys. Rather than (futilely) trying to prove me an idiot - deucescracked tried that with probability and failed - stick to the point. When you're heavily invested in real estate and prices are about to plummet - and are plummeting - you resort to the time-honored Karl Rove technique of smearing the messenger.

Won't work. Go back to the original post: since you're so smart, REFUTE THAT rather than trying to divert what the thread is about to things you claim I don't know about but do.

Real estate prices are constrained by incomes and leverage. 40x/28%. There is no way around it. Those ratios give you a p/e ratio on real estate of 12. There is no way around it.

But it's not going to work.

Dudes, you're WAY out of your leagues.

However, since you caught half of what he was trying to say, I give you credit because I would not have thought of that. I caught the other half. My experience is as an auditor with Price Waterhouse and Bank of America. Yours is as a portfolio manager. That's why we came to different answers.

If you buy you're limited to monthly housing expenses is 28%. If you rent you're constrained to 40x monthly rent. The 12x ratio of home prices to annual rents 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. But when you add in other costs - taxes, maintenance - you really can't afford that $400,000 mortgage, lowering that 13.3x ratio to around 12x.

malraux, you are correct for INVESTMENT PROPERTIES. The economics are entirely different, and I'm not discussing that. The $500,000 tax exemption saves you at most $75,000 (15% * $500,000) but it also could make you subject to AMT, which you can't control, and whose rate is 26%.

Unfortunately - and this is my entire point - if you buy right now and try to rent the place out, for the most part it your carrying costs will be twice your investment income. That is the problem. Historically, when you first buy a place, you start by breaking even on a cash-flow basis.

You've never seen a down market, that's your problem. You don't have enough experience in the real world. You try to obfuscate market realities by throwing in non sequiturs about terms whose value is debated.

I've seen 3 - yes three, not counting this one - severe corrections in the real estate market. In the late 80's in NY, in the early 90's in London, in recent years in Miami.

I remember Black Monday very clearly. I remember the evisceration of Bank of America when it was where Citigroup is today. I remember the dismantling of large parts of Price Waterhouse when the market collapsed in London and Madrid. I've seen it at my clients'.

You say bizarre things like "I think you should know that no one calls equity value based on accounting statement numbers." That's arrogant, and ignorant. You don't have enough experience in the world, haven't seen how these things operate in the real world.

There is no way to get around the 40x/28% income constraints on property prices, which leads to housing prices fluctuating around 12x annual rent. It is inexorable. You've yet to come up with anything to dispute that. You've yet to come up with anything that disproves that over long periods of time the S&P 500 ALWAYS outperforms housing as an "investment." No one anywhere debates that but you. You are even so bold as to spew that equity value is the same as market capitalization, and that stock options are immaterial to per-share price dilution.

It's nonsense.

I also have an Ivy League education, and I've also worked in some 25 countries. I've designed and written the very computer systems that you rely on to do your work. I've audited and consulted for most of the major investment and commercial banks around the world, and clearing and settlement systems. I'm involved on a daily basis in litigation on the very things you're talking about, as well as rights issues, takeovers, CDO's, you name it.

And I can probably fix your laptop. Get your thumb out of your mouth, study what is a down market. You're cocky, and you have a lot to learn.

Like 40x/28%.

the numbers come from the market. The usual rule for renting is that you must earn at least 40x the monthly rent, else they won't rent to you. The usual rule for mortgages is that no more than 28% of your total income can be allocated to housing expenses. As shown above, they're virtually the same number.

They can change, and if they do the structure of the market will change. But they've held pretty constant over time, because one default can wipe out the profit on many compliant transactions. If I have a $100,000 loan and default on it, and the bank loses, say, $10,000, it will never recover that amount, and it wipes out the profit on many other loans.

Ditto lending: if I default, it can take a year to kick me out during which the lessor makes no money, and he then has to pay to get me out. That is very expensive.

It takes a lot more than accounting or finance to know the value of a business. Ebbers did a really great job with that takeover, didn't he? Like capitalizing expenses so they could be amortized when they weren't capitalized expenses.

I (and others) were very concerned when we had MCI Internet service in the late 90's and they kept on sending us bills for services we didn't have, or had canceled. It smelled of fraud.

Ditto Enron. I was deeply involved with litigation surrounding that company, and I knew something was out of control, because they were paying me 40% more than market rates to do their work. It came as no surprise.

And elsewhere I have told the story of why I left Price Waterhouse - Banesto wouldn't give me data to check loan amortizations. I wouldn't certify their systems, I was overruled, I left and formed my own company. One month later, the entire Board of Directors was thrown in jail.

When I was at Price Waterhouse I also told Reuters that their Globex system (not today's Globex system) wouldn't work. I had the project halted once, but I was overruled the second time. Read this from 1992:

A pivotal test of the GLOBEX 24-hour trading system was postponed almost immediately after it began in early March due to what some sources call "a minor glitch." The failed test is not expected to cause further delays to the project's launch, currently planned for July. The 250 trading station (dubbed "keystation") test, conducted March 3 in New York, London, Chicago and Paris, ended abruptly "due to a software bug which Reuters believes can be quickly corrected," says Gary Ginter, the managing director of the GLOBEX project.

http://findarticles.com/p/articles/mi_hb3104/is_/ai_n7763436

I know a hell of a lot more than you idiots give me credit for.

8% S&P return is not nominal, it's real. The nominal rate on a rolling-average basis (eliminating the effect of choosing arbitrary start and stop dates) is 12%.

There have been "good reasons" for the increase in housing prices. In Manhattan the median property price is highly correlated to Wall Street bonuses: that's where the money went. Wall Street bonuses = income, and - as I've always said - property prices are tied to income, and leverage.

It remains a fact: if you are market-constrained at 40x/28% of income, BY DEFINITION housing prices are constrained by income, and it is those relative constraints that set the 12x "p/e"ratio.

Leverage is an issue, but only on the margin. The first person to use a lot of leverage gets a good deal. Every next person gets less and less, because property prices rise to offset the leverage.

In Manhattan we were in a long real decline in property prices until 1998. The population then started to rise, Wall Street bonuses rose, leverage rose through new mortgage products. My point is that though the population continues to rise, incomes are falling b/c of the Wall Street effect, leverage has been greatly reduced, and new construction more than offsets the growth in the population.

Robert Shiller proved that over 350 years, land constraints do not make property prices more expensive. Property prices increase along with incomes.

"If I were doing a contrast of stock returns to housing returns, I think you really need to compare housing prices to stock prices."

The problem with that is that housing prices are uncorrelated to stock prices. They are correlated to household income.

evillager, again: "the P/E ratio is also tied to interest rates - the higher the rate, the lower the P/E and vice versa."

That is true only because it affects your cost of capital. But there is no market constraint on corporate earnings - they can be whatever they are. For residential real estate that is not true; for residential real estate the constraint is an income-driven constraint. Therefore, if you have incomes fixed in the short-term and interest rates fixed in the short-term, the only thing that can change to get you to reach the 40x/28% constraint is the price of the property.

"Rates are way lower now than in the early 1980s, hence the P/E multiple expansion, since your hurdle rate is lower. In fact, you can think of the inverse of P/E as earnings yield. If it's true for stocks, it should be true for real estate."

That is true for investment real estate, not residential real estate. The value of residential real estate is its output value: market rents. The value of investment real estate is its discounted cash flow. And if you take the discounted cash flow of investment real estate right now, I believe you will find it negative in the long term, because market rents - what you could get for renting a property - are 50% below owners' carrying costs. If - as is happening - market rents decline, and incomes return to a normal level of growth, you'll never be able to make money.

MARat, I am weasel boy, and I wear the label proudly. Your last significant post is accurate. There is an income skew in Manhattan that affects the median price of property. I think the point I've been making is that incomes are falling, and we're not talking about the very high or very low ends: we're talking about well-off people who still have to work to make ends meet. For them - which includes me - the income ratio holds true.

Sometimes IT auditors limit themselves to looking at computer operations. Other times they help build sophisticated trading platforms, settlement systems (like Visa) and payment systems (like SWIFT). You just have to know whom you're talking to.

malraux, I never suggested that any particular property was under- or overpriced. I said the market was overpriced. You can make as much (or more) money in a falling stock market as a rising one, if you know how to do it. That's not what I'm talking about.

I'm not talking about investment properties; I'm talking about residential properties.

nlo, your post is accurate. Minor differences can have huge effects over time. Chaos theory, which please don't start to discuss b/c I know very little about it. K?

My original post was meant to get people to change the way they look at real estate. I'm glad you did.

Popomobile, mortgage rates don't matter but the type of mortgage does. The analysis works with a standard 80/20 30-year mortgage, because that's the depreciation schedule for real estate: 27 1/2 years less the land portion. Mortgage rates don't matter because prices rise and fall in value to compensate for interest rates.

ba294, you don't know what you're talking about. The 28% constraint does not include tax benefits: it is 28% out-of-pocket housing expenses of income. Moreover, the value of residential real estate is by definition its output value: not paying market rents. Market rents include the tax effect because landlords get that same deduction and more: they can defer capital gains tax indefinitely, which homeowners cannot.

Honestly, I looked at your model and without changing any of your default parameters it doesn't make any sense to me. I don't understand closing costs or any of the other costs of owning that should be amortized on a straight-line basis over the life not of the loan, but over how much time you plan to hold the apartment for. The US average is 7 years.

So why closing costs continue to increase, I don't know.

I don't understand how you can set your initial "appreciation" to -20%, yet your "home value" goes up from $600,00 to $618,000. It should go down $120,000. I don't understand how "equity" continues to increase even if "appreciation" is set to a negative value.

I don't understand why "opportunity cost" is negative. It should be positive.

I don't understand why "principal" is included as a carrying cost, when it's not a cost. It is the repayment of a loan.

I don't understand the "improvements" - they are not deductible unless they are capital improvements, and then they are only deductible by changing the cost basis of the property. Therefore, they affect capital gains tax and not income taxes for the federal government, but for NYC / NYS they are treated as capital gains.

I believe that PMI is not deductible unless paid up front and added to the mortgage.

Opportunity cost is calculated based on the full amount at risk - the price you paid - not on the down payment. From that full amount you pay interest to finance the investment. So in this case your opportunity cost is based on the $600,000 of the initial purchase, regardless of where you got the money from, since if you paid all cash your opportunity cost would be the same as if you finance it.

I suggest breaking this model down year by year rather than in 1 year increments, and allow for amortization over the time you will live in the apartment, rather than the life of the loan. Add in all the things that everyone has said you need to add in. You have a "net worth" without calculating taxes, and the primary-home tax exemption (single/married).

Besides the other things that I have pointed out, I believe your model is seriously flawed.

"they are treated as capital gains."

They are treated as "regular income."

sashamelia, I don't know why you went through all that effort to do that. I've reported the abuse, I hope others do, and I ignored you, as I hope others do.

But it seems that sashamelia is LICC, as only LICC could post one under his own name in the middle of sashamelia thread.

You're outed, LICC. I do hope they suspend your account.

"So why closing costs continue to increase, I don't know."

It's an opportunity cost. You spend $20k in closing costs. That 20k would gain interest in an investment.

"I don't understand how you can set your initial "appreciation" to -20%, yet your "home value" goes up from $600,00 to $618,000. It should go down $120,000. I don't understand how "equity" continues to increase even if "appreciation" is set to a negative value."

There are two models. There is a constant appreciation model and a variable appreciation model that is manually set. You can control which one is used through "Constant Inflation" parameter. Same for Tax Rate and Appreciation (mislabeled as just APR).

"I don't understand why "opportunity cost" is negative. It should be positive."

It's negative if the equity in your home is positive. Your change in net worth from a home = Equity - Opportunity Costs from not buying (Your monthly cash flow difference & the downpayment/closing costs) - Selling Costs.

"I don't understand why "principal" is included as a carrying cost, when it's not a cost. It is the repayment of a loan."

Principal is included to get a net cash flow from the difference between buying and renting. The net cash flow can be invested. I account for the equity in the net worth section. It's not that difficult.

"I don't understand the "improvements" - they are not deductible unless they are capital improvements, and then they are only deductible by changing the cost basis of the property. Therefore, they affect capital gains tax and not income taxes for the federal government, but for NYC / NYS they are treated as capital gains."

Theres no deduction with improvements. Not sure what you are talking about here.

"I believe that PMI is not deductible unless paid up front and added to the mortgage."

I'm not deducting for PMI. Trouble following excel references much? Not even going to bother with the rest.

"Besides the other things that I have pointed out, I believe your model is seriously flawed."

Your reading comprehension is seriously flawed. Anyways, I'm done arguing with your steve. Your nonsensical rantings are a waste of time.

Dude, I have no problem following references, but you provide no documentation. Is "APR" "annual percentage rate" or "Appreciation"? Because when I switched it from TRUE to FALSE, your model didn't change. In both cases it gives and "equity" figure of $60,000.

The same thing happened when I changed inflation from TRUE to FALSE and BACK - rent was still adjusted by the same amount.

"Principal" is not a "carrying cost." It decreases your liabilities. It's a cash-flow item but not an income statement item.

"Theres no deduction with improvements."

Then I don't know why they're there.

"Your change in net worth from a home = Equity - Opportunity Costs from not buying (Your monthly cash flow difference & the downpayment/closing costs) - Selling Costs."

Dude. Your net worth in a home has nothing to do with the opportunity costs for not buying it. Unless LICC wants to stand with you on that. Your equity is its present value less what you owe on it.

Here's the deal: you can't confuse balance sheet items (equity) with income statement items (interest expense) with cash-flow statement items (principal paid). It makes no sense. Not from an accounting point of view or from an economic point of view.

Then, your switches don't switch.

"It's negative if the equity in your home is positive."

Opportunity cost is always positive.

I still don't understand "closing costs": 7.45% + the future value of a stream of closing cost payments?

Closing costs are amortized on a straight-line basis over the term you hold the property for. There is no future value in that because you pay it in the present. That's just bizarre.

Sorry you think that my "reading comprehension is seriously flawed." It's not.

You need to restructure your model because it doesn't give you the information that you think it does. If you want to do it the way it's done in accounting, then you'll take your initial equity, and at the end of the year you will add your principal paid to the initial equity, then mark the property to market (plus or minus).

That's your equity. Tax benefits do not form part of equity, nor do they form part of your net worth. If what you seek to do is to see how much money you will wind up with after the transaction, then you start with that. Then you add up a stream of rental payments for the period that you will hold the property for, and all related rental expenses. Add to that the risk-adjusted opportunity cost of not investing elsewhere (which is based on the full amount at risk, not the principal). The result is your net cost to rent.

Then you compare that the same or similar items owning, including property taxes but not principal. If you want to put in a fake number for taxes, feel free, but remember that capital gains and dividends are also taxed at a lower rate, and if you buy rental property instead of securities then you can defer property taxes indefinitely as long as you reinvest the principal. It's a very complicated matter to do, but feel free to try.

And amortize it over the time you hold the property for.

Dude!

Yes, ranter?

Sorry, the model is horrifically flawed. If jgr adjusts it in accordance with accounting principles fine, but taking the future value of an imaginary stream of closing cost payments makes ZERO sense.

"George Washington University, and my advisor was a Nobel-prize winner for national income accounting."

Again with the accounting.... that is your problem. You are talking about accounting standards, not how one runs a business. This is why we keep the accountants in the basement.

I also trained under a few guys you might have heard one. A few one nobels. One was Robert Shiller. And Swensen was my primary advisor.

And, again, doesn't change that you've made some major mistakes here.

> "Tax benefits can be calculated as a function of a DECISION."
> What? No. It is a function of ALL decisions.

Incorrect... your TAX is a function of all decision.

The tax benefit of a specific decision is the difference in taxes paid with that decision and without that decision. If I can choose A or B - which is what we are talking about in this case, all other variables are obviously held constant, my salary is not affected, etc - then I simply have to compare the taxes paid in A versus the taxes paid in B.

Stop playng semantics, Steve, you aren't very good at them.

"Absolutely not, and that's my point: all of your decisions weigh on how much tax you pay. You must, then, take them as a whole, not individually, because taxes aren't applied individually - each individual item added to the next gives you your tax rate."

Again, you are making the same mistaken. Yes, all decisions factor in your tax, but if you can't calculate the tax benefit of a specific rent/buy decision, you are both a horrible accountant and a horrible economist.

That my 401k contributions affect my overall tax burden doesn't stop me from being able to calculate the net change in my taxes off a rent/buy decision. Yes, I have to add up multiple tax consequences, but that fairly easy... because I learned addition, subtraction, and multiplication, too.

Try them sometime...

jgr, if you're still there, I still disagree with your condo buyer closing costs. I estimate them at 5%. I tired changing the annual house price appreciation on the Parameters tab but it didn't change the Net Worth Difference.

If a real estate purchase is financial decision then all you care about is terminal wealth. If a real estate purchase is a personal decision you need an indifference curve.

Among the multitude of things that steve is wrong about, he constantly tries to accuse me of posting with other names. Sorry steve, I have only posted on this site using LICComment as my name. I am not sasahmelia, techguy, or anyone else your paranoia thinks I am. Wrong again.
By the way, your analysis of the model is full of mistakes. Opportunity costs aren't positive if what you otherwise would have invested in provides a negative return. Opportunity costs aren't measured by the full amount, because you wouldn't have borrowed the money to invest the full amount. How can you be so dense? I'm starting to question your sanity.

"A few one nobels," nyc10022?

Ah, Yalies...

;-)

I actually agree with stevejhx on a key point: You can drive yourself crazy making this model ever-more precise, adding more and more variables, sensitivities and nuances. More likely than not, you'll lose the forest for the trees. I think a simplified version focused on the key metrics (or an alternative approach , such as the one Steve advocated or the one I suggested earlier in the thread) would be more useful in the practical sense, even if it's less precise.

"I am not sasahmelia"

Amazing, then, in sasahmelia's thread of spam, it said

sasahmelia
sasahmelia
sasahmelia
sasahmelia
LICComment
sasahmelia
sasahmelia
sasahmelia

All copying and pasting the same thing. Dead give-away, LICC.

"The tax benefit of a specific decision is the difference in taxes paid with that decision and without that decision."

It doesn't change the fact that you can't choose the order in which you take the decisions, as taxes don't work that way.

"my 401k contributions affect my overall tax burden"

First, 401k contributions are not deductions. Beyond that, your overall tax burden is calculated at your effective tax rate, not your marginal tax rate.

more ignorance: "Opportunity costs aren't measured by the full amount, because you wouldn't have borrowed the money to invest the full amount."

The opportunity cost must be calculated on the full amount because that's the amount you've invested, and the amount you have at risk. If you calculate it on just the down payment, and you make a $100,000 down payment, but your house declines in value by $200,000, you have lost more than your down payment. Opportunity cost is calculated based on the amount at risk or the amount spent, regardless of where you get the funds from. The difference is the profit or loss made must include the financing cost.

If you get a loan for 100% of the value, is your claim you have nothing at risk?

One more flaw in the model - there is an underlying assumption that any tax savings will be invested or saved, not spent on something else. In reality, given the negative savings of Americans, that assumption is untrue, and thus it is incorrect to add "tax savings" to "net worth." (For this reason as well as the fact that it's just plain dumb.)

"I think a simplified version focused on the key metrics (or an alternative approach , such as the one Steve advocated or the one I suggested earlier in the thread) would be more useful in the practical sense, even if it's less precise."

newbuyer99, whether the model is incredibly detailed or at a high level, steve will continue to poke holes in it. steve has posted his own models which have serious flaws. All models are flawed. Fact is, jgr attempted to put a model together to help people with the decision process, which we should all applaud. It is a good foundational model and once you have it, you can change it however you like. Kicking jgr in the balls (or ovaries) because he/she posted a model to help people is silly. If you don’t like it, don’t use it.

steve, your insistence that I am some other person posting at the same time just adds to your list of lunacy. I'm starting to pity you.
Your amount at risk is not the same as your opportunity cost. This is a very basic concept, so again I am not surprised that you lack the capacity to understand it.

"All models are flawed."

Didn't you laugh at me when I originally posted that, JuiceMan?

Unfortunately, this model is more than seriously flawed, as I indicate above. That being said, I prefer the simple measures that I've posted, which have held up over time.

LICC - please! You borrow $100,000 to buy a house versus borrowing $100,000 to buy stock; you pay $100,000 in cash to buy a house, you pay $100,000 in cash to buy stock.

There is your opportunity cost - it's the amount you have at risk, the amount you invest, whether you borrow it or not. Sorry it doesn't give you the answer you want, but it is true.

It can't be otherwise.

I wasn't at all trying to kick jgr in the balls. I also applaud his efforts to quantify a pretty important decision. I was more commenting on the direction of the thread, which is to suggest making more and more modifications and making the model more and more complex/unwieldy.

"Didn't you laugh at me when I originally posted that, JuiceMan?"

Probably, but I think it was because you were using it to deflect one of my questions.

"which have held up over time."

In your opinion.

Steve,

Going back to the tax argument.

I wanted to construct a very simplistic argument so bear with me. All other things being equal, and for the sake of argument, I put $0 down and there are no closing costs and no monthlies on a property. The only ongoing costs I have is the interest on the mortgage and there are no friction costs associated with buying and selling. I'm also assuming no capital appreciation/depreciation for the sake of the model model. I'll also assume that you can purchase a perpetual rental at a fixed cost in the market.

In this sceanario, if I paid $1mm for a property at an interest only rate of 5% then I pay $50k interest per annum.

For the sake of the argument, I save $15k in tax under the current tax set-up. It doesn't really matter for the sake of the argument whether this is the net effective rate or marginal rate. It's the actual tax saving I make if I do my return either claiming or not claiming the deduction.

If the equivalent rental is $50k per annum then I have the choice of either renting for $50k or paying $50k mortgage and additionally receiving a very real check for $15k each year.

I understand that at the margin the property may only be worth $700k if the tax advantage were removed.

I still, however, remain confused as to why you would ignore the tax benefit in your model.

Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision.
This is not your amount at risk. Eco 101. steve sinks more and more. If a person doesn't buy a house, that doesn't mean they would borrow the same amount of money to make an alternative investment. You are wrong again, as usual.
Hey steve, Juiceman and I posted in the middle of your posts - maybe we are all the same person!

smallmj - there have been numerous threads were many people have run several examples and clearly explained to steve why he is absolutely wrong with his argument on measuring the tax benefit. His insistence on his position is one of the more embarrassingly foolish arguments, of several foolish arguments, that he makes on this blog. You are trying to present him with logic, common sense and practical application, and he will understand none of it. Don't get frustrated, he just can't admit he is wrong.

smallmj - well said.

jgr - thanks for the model and for putting yourself out there with it. It is quite helpful and has also stirred debate, which is always nice.

And of course, a Happy New Year to all...let's hope '09 is a good year for all!

"In your opinion."

No. They are the long-term mean.

smallmj, it depends on what model you're using. If you're using a model that explicitly takes tax benefits into account, then you need to take the tax benefit into account. Imputed rent, for example, and owners' equivalent rent. But if you are taking the historic ratio between housing costs and rental costs, and that ratio does not explicitly take the tax benefit into account, then you can't add it back in.

Which is what LICC and others attempt to do.

That said, my other point is and will remain that the tax benefit is actually illusory, because you pay for it when you buy the house through an inflated price. Were you to eliminate that benefit, housing prices would fall to compensate for it, precisely to the level of rents.

LICC, thank you for copying directly from wikipedia: "Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision."

http://en.wikipedia.org/wiki/Opportunity_cost

And since you seem to understand wiki, read a little further:

"A person who invests $10,000 in a stock denies themselves the interest they could have earned by leaving the $10,000 in a bank account instead."

No mention of where the money comes from. You could take a 0% credit card advance and put it in a bank account or in stock or to transfer the balance from another card. It's still borrowed money, and the amount you invest is the amount at risk, which is the full amount you invest, not just the principal part.

Sorry.

If you want a discussion of opportunity cost with borrowing, go here:

http://cathypareto.blogspot.com/2008/07/thinking-about-borrowing-from-your-41k.html

MBA, CFP.

The case is now closed. You are really....

> he just can't admit he is wrong.

Yeah, that ship sailed for me when I saw the Dow 6500 thread.

He pulled a clinton and disputed the meaning of the term "is".

steve, that was one of the worst tries at backpedaling that I've seen.
I used to think that steve had an average level of intelligence and just had trouble applying concepts, but now I see that he is just slow. Even basic concepts are beyond his grasp.

LICC, that's just lame. You're back on ignore.

nyc - that's exactly where we were headed, had it not been for all the things the Fed and Treasury did to right the situation. We may still get there, though now I think we've seen a bottom put in. Of course, as with all stock market predictions, I may be wrong.

"nyc - that's exactly where we were headed, had it not been for all the things the Fed and Treasury did to right the situation."

No, we were headed to 20,000, had it not been for all the economic troubles.

See what I mean?

This is just too funny...

then, nyc, you know nothing about trading stocks, or how to read the charts.

We've been through this, which is how you first got on my ignore list. The stock market is very volatile, can react on a dime. It reacts to news. Did you know that?

steve, why do you put people who disagree with you on ignore? I can understand if someone is being offensive, but LICC and nyc10022 are just countering your absurd claims. You want to be disruptive and opinionated but don't expect pushback? Stop with the hissy fit.

> then, nyc, you know nothing about trading stocks, or how to read the charts.

You lost your shirt in the market, and you're telling other people they don't know how to trade stocks?

> The stock market is very volatile, can react on a dime. It reacts to news. Did you know that?

Yes. The difference is, you don't understand that if you wait until after the news has been confirmed to make your move, you have lost. You shouldn't be trading, Steve.

You should buy index funds. You are a *horrible* active trader.

No hissy fit, JM. I ignore LICC for statements like this: "I used to think that steve had an average level of intelligence and just had trouble applying concepts, but now I see that he is just slow. Even basic concepts are beyond his grasp."

I don't mind a good argument and in fact I like them, but I don't read anyone who publishes anything like that.

Besides, on opportunity cost I'm right.

nyc was ignored for a similar reason - I say something and he twists it to mean what he thinks it means, rather than what it says. If he has an argument I'll listen to it, but not distortions. If I say "headed toward 6500" I mean precisely that. I don't mean "will reach 6500." It's a trend.

Ditto "riddance" - it does not mean "good riddance."

Just like someone who claimed that when I said "suicide alley" for Wall Street I was inciting suicide rather than what it clearly said - a bad place for real estate - and then acted as if I had actually said that.

It's called projective identification. I ignore people who engage in it. It is indicative of severe emotional problems.

"I say something and he twists it to mean what he thinks it means, rather than what it says."

seriously steve, everyone would have YOU on ignore if this was justification for doing so.

JuiceMan, where did I twist what anyone said?

Usually I copy it verbatim.

And I have yet to write anything like what LICC writes.

If everyone had him in ignore (like I do), this site would be a much better place. I am thinking of putting his frequent responders on ignore too. Collateral damage from his posts but it would clean up reading this site.

steve can ignore me all he wants, it doesn't change the facts. His analyses and claims are consistently wrong, he misapplies concepts and cherry-picks facts, he argues just to argue, he is obnoxious and rudely responds to anyone who disagrees with him, and his commentary, while often convoluted, displays very low levels of thoughtful application. I wonder sometimes about his psychological issues, because I can't see how anyone in their right mind can say and think the things that he posts here.

Fair enough on the LICC comments, I guess they don't seem that bad compared with what is usually posted on this board. As far as twisting what anyone said, I leave that for you to ponder steve. To ignore someone for "twists it to mean what he thinks it means, rather than what it says." is really funny to me. This is, and has always been, your M.O.

"twists it to mean what he thinks it means, rather than what it says."

To misunderstand is one thing, JuiceMan. But one is corrected even with dictionary quotations and one insists that someone means something that he plainly does not mean and clarifies the misunderstanding, is projective identification.

It's just annoying.

"This is, and has always been, your M.O."

Show me where.

"Ignoring comment by LICComment."

Let me repost this from another thread regarding certain people's identities:

Let's compare how these people write and come to a conclusion:

LICComment - "I used to think that steve had an average level of intelligence and just had trouble applying concepts, but now I see that he is just slow. Even basic concepts are beyond his grasp."

oldbuyers - "I have seen your 'stand up' routine and it is appropriate to call you a loser. keep pontificating about 50% reductions that will never happen. Nice try, comic boy."

Hmmm.

There's a way to tell that these two snide tidbits were written by the same person, but I won't say how.

Except the clue's in what I'm writing.

steve, I have no motivation to create another identity and post about you with a different name. You have serious paranoia issues.
To weigh in on the other point, when you say you think the market is headed toward 6500, that means you think the market will drop to 6500 or close to it. It doesn't mean that you only think the market will go down to some unspecified level. If that were the case, you can just say you think the market is headed to 1000, and if it goes down at all then you say you were correct. Giving a number is then absolutely meaningless.
I really can't tell if you are unstable, just immature, dim, just trying to be an instigator, or a combination of them all.

You guys are missing the best part of the 6500 argument. Its not that he was wrong about the call (lets face it, none of us can accurately predict the stock market). Its that he claimed he was *correct* about the 6500 call after the market bounced up.

Did you know the opportunity cost of buying a $2000 used car is at least $100k? If I hit a real car, that's how much I could be responsible for, and we all know the amount of money at risk equals opportunity cost.

Just yesterday, I bought $5 in over the counter meds, and my accountant (named Steve of course) ran up to me telling me I was holding millions in opportunity cost. If I drop the bottle, some little kid ODs on the drugs, has developmental disorders, and the family sues, I could be out millions! Man, if only I invested those millions in the stock market instead!

Ignoring comment by LICComment.

Ignoring comment by tech_guy

JuiceMan - you well know that steve likes to hijack every good discussion on this board and kill it with annoying comments, incorrect analysis, illogical conclusions and misapplied theories. And he does it in an entirely obnoxious way. His playing the victim routine is quite pitiful in context.

"nyc was ignored for a similar reason - I say something and he twists it to mean what he thinks it means, rather than what it says. If he has an argument I'll listen to it, but not distortions. If I say "headed toward 6500" I mean precisely that. I don't mean "will reach 6500." It's a trend."

I'm still laughing about this one.

Steve is the Bolt of backtracking...

"No, very flexible, and one of the few people who has ever admitted he's wrong."

Steve, can you show us even one post when you were ever very flexible and also one post when you ever admitted you were wrong?

so, because the dow went up 5 points on friday, I can say for certain that it is "definitely headed to 20k"?

jeez, still laughing.

Steve started ignoring me as soon as I called him on his calls.... this is what he ignored me for posting...

"dow 6500.... There is very little doubt now that that's where we're headed."
- Steve 4 weeks ago.

"Nor did I say that we would go to 6,500 on the Dow."
- Steve 3 days later

"dow 6500.... There is very little doubt now that that's where we're headed."
- Steve 4 weeks ago.

"Nor did I say that we would go to 6,500 on the Dow."
- Steve 3 days later

I stand by the meaning of that, and we did get perilously close to it. And right after I said that the Treasury and the Fed took bold moves to shore up the market, and they subsequently lowered interest rates far below what anyone expected.

You know very little about the way the stock market works, or the meaning of "headed."

You're like malraux's "idiot's thread" - just because it doesn't come true at precisely the moment I say something, I'm wrong.

Well, Cramer said, "They know nothing!" fully a year before this current mess. Was he wrong?

Seemed so at the time (to some) as the market continued to go up, but in the end, he was proved right.

waverly - I say I'm wrong all the time, when I am. You can look it up for yourself.

"His playing the victim routine is quite pitiful in context."

I agree LICC. I've been reading your stuff long enough to know you aren't offensive, especially after some of the things steve has said about you. Don’t take my comment out of context, I don’t find you offensive at all. You are actually one of the folks on this board that make a hell of a lot of sense.

As usual, steve is being extremely hypocritical and will probably try to have this thread deleted anyway.

steve, time to take your ball and go home?

Steve, I cannot find you admitting you are wrong anywhere.

Since it appears that you say you admit you are wrong all the time, but everyone else believes that you never admit that you are wrong, can you provide us with several examples of you admitting you were wrong?

It shouldn't be that hard, since you say you do it all the time. If you cannot provide these examples, it will prove that you never admit you are wrong, no matter how much you profess otherwise.

> I stand by the meaning of that, and we did get perilously close to it.

Yes, perilously close the day you called it... right before it went the other direction in a big way.

It would be impossible to call something more wrong if you tried.

> You know very little about the way the stock market works, or the meaning of "headed."

If losing your shirt in it means knowing how it works, then, yes, I know nothing. Thank god.

I learned from Swensen and Shiller, you learned stocks from an accounting professor apparently.

Sorry, you know *much* less than me on this topic, and you have proven that pretty clearly.

> You're like malraux's "idiot's thread" - just because it doesn't come true at precisely the moment I
> say something, I'm wrong.

Now you are just playing stupid. Yes, if your call is about marketing timing, and your timing is off, you are wrong. If you change your story AFTER you are proven wrong, yes, you are wrong. Timing is everything.

> Steve, I cannot find you admitting you are wrong anywhere.

Yes, if Steve can't admit he was wrong on this one, then he can't admit he's wrong on anything.

He'll probably just ignore me again.

He'll ignore the thread entirely now or change the subject. That's his MO when he is boxed-in by bad logic and/or fuzzy numbers. He is not wired to admit he is wrong.

I'll also add in... Steve said sell right before the bailout announcement, which actually gave a bump. When the bailout was announced, Steve said he was buying back in... which is right around when we started tanking again.

You can't make this stuff up...

"can you provide us with several examples of you admitting you were wrong?"

Yes but I'm not going to. Happens all the time, though.

"That's his MO when he is boxed-in by bad logic and/or fuzzy numbers."

No. When I'm wrong, I'm wrong. The only bad logic and/or fuzzy numbers are posted by people who think that real estate is Manhattan is currently a good investment. It is not.

> Yes but I'm not going to. Happens all the time, though.

ok, I'm laughing again.

Happens so much no one has actually seen it... and Steve won't give an example.

"Yes but I'm not going to. Happens all the time, though."

Hahahaha!!!

Wow....the lengths that someone will go to just so they don't admit they were wrong about something! I hope you made a lot of money on your condo in Fire Island because you are going to need to increase your therapy visits to deal with this complex that won't allow you to admit you are wrong and also causes you to constantly tell other people how much smarter you are then they are and how you are Ivy Leagur educated.

"Yes but I'm not going to."

That is so funny!

If you must know I recently posted that I was wrong about Lehman - I thought the government would have taken it over - and the downturn in the stock market after its collapse: I anticipated some downturn, but not like what we saw.

Those are just two recent examples. There are many, many more, but I'm not going to look up the links for you.

"constantly tell other people how much smarter you are then they are"

Where did I say that? Nowhere. But it is "than they are."

I publish my numbers, my sources.

> Where did I say that? Nowhere.

uh, about 12 inches north, sir...

Just a few of Steve's comments from this thread:

"George Washington University, and my advisor was a Nobel-prize winner for national income accounting. I also have an honors degree, my thesis was on the relative weight of inflation and increases in wages in the food-services sector from 1970 - 1980, a period of both high inflation and large increases in the minimum wage, on a sector with wages closely tied to the minimum wage."

"You know very little about the way the stock market works, or the meaning of "headed."

"You know nothing about trading stocks, or how to read the charts."

"Besides the other things that I have pointed out, I believe your model is seriously flawed.
I proposed an alternative, far simpler model that gives the same result."

"and you will know why I resigned from Price Waterhouse. I told them there was a fraud at Banesto (it was my client) and they wouldn't listen to me. I know more about the subject than you know."

"I am not mistaken in any regard."

"Worked at a bank in high school? Very impressive. I audited and advised banks all over the world, and gave presentations to chairmen of the board. I spent years working in and around banks."

And of course we have all heard him tell us about his Ivy League education and had to deal with all the snarky condescending statements.

stevejhx
1 day ago
ignore this person
report abuse But it seems that sashamelia is LICC, as only LICC could post one under his own name in the middle of sashamelia thread.
You're outed, LICC. I do hope they suspend your account.

The above is a pretty poor forensic analysis. In fact, anyone could have been in the midst of a post while sashamelia was posting non-stop. And it seems more likely that if someone was able to post in the midst of all that, that that person has to NOT be the same period, otherwise the repeat poster (sashamelia) would have had to do a quick change of names (to LICC as is being accused here) to post under that name, and then back all very very quickly to start reposting under sashamelia.
Also, since it appears that sashamelia was doing a cut and past job from a prior discussion, and LICC's post was new text, it seems that the theory of a quick chango (that's Spanish for you Steve) and reverso back is even more of a stretch.

What seems most disturbing is that when the arguments get excited, the personal accusations come out. If the argument has merit, it should stand on its own.

mandalay, thanks for another example of steve being laughably wrong but still obnoxious about it.

And will Steve admit he was wrong about anything in these posts? Of course not. He runs away to another one, kind of like Rufus.

waverly, I did.