Why buying at the peak was a brilliant move Posted on August 17th
If you bought a house in L.A. in the summer of 2007, paid peak prices and have watched your home’s value drop by 33%, you have to admit: You made a really bad financial move, right?
Er, wrong, according to a contrarian opinion piece in today’s L.A. Times that argues that buying L.A. real estate in 2007 — even at peak prices — was “a smart investment.”
The author, and proud peak buyer, is Chris Ayres, who lives in L.A. and writes for the Times of London. He argues, “Those of us who purchased nonspeculative property from 2004 to 2007 for the gratuitously self-indulgent purposes of raising a family and investing in our neighborhoods will ultimately have the last laugh.” The words “cheeky Brit” do come to mind.
Ayres’ logic: Peak buyers got easy financing on good terms. Interest rates were low. Inflation — possibly a bigger factor in coming years than in the recent past — means the value of of his home in dollars will someday rise, while his loan payments will become relatively cheaper. Perhaps the biggest advantage, he argues, is “the glorious all-American instutition that is the home mortgage interest tax deduction.”
His back-of-the-envelope math on savings from the peak purchase of a $1.2 million home:
–$20,000 per year in income tax savings, for $200,000 over the next 10 years.
–Another $200,000 over 10 years by getting a lower interest rate on his bubble-era loan.
–Another $700,000 in savings and equity that 5% annual inflation will ultimately add to the value of his home and increasing affordability of his mortgage.
He concludes: “The penalty for having bought at the height of the worst real estate bubble in history adds up to a potential $1.1 million gain.”
My two cents: He’s trying to have it both ways on rising interest rates and future appreciation. If interest rates do settle two points higher than they were last summer, as Ayres argues, home prices will take an even bigger hit, and his home will not increase as much in value — regardless of what inflation does.
Off topic but tangentially related: Ayres is a journalist, a trade with a glorious history and a questionable future income stream. Salaries for journalists are not likely to keep pace with inflation over the next 10 years. If you haven’t noticed, free content is putting downward pressure on the cost of paid content. An era of 5% inflation will not be kind to journalists.
–Peter Viles
Your thoughts? Comments?
Photo Credit: Home of the Week from this week’s L.A. Times, by Charmaine David.