bump
Dude! So was I! That exact same combination. In grad school now.
I just wanted to pop in to say welcome.
(Also, you’ll probably have to have a lot of patience to get through the dogmatic to the theory.)
Are you in grad school for economics?
No if you lookup “fiat” you’ll see it’s just an authoritative decree. So a “fiat currency” is just that…a currency that is a currency because the government says it’s a currency. It has no real baring on taxes (although that is generally how it works..you don’t declare something is a currency and then not accept it for payment…but it’s the declaration that allows for the tax payments, not the other way around.)
You finish the other 2 vids?
I think some schools and some professors are more open towards Austrian perspectives - however you will find that this is less the case in high-ranked universities where faculty and students have “put all their eggs into one basket” so to speak and specialized very heavily in certain mainstream models like RBC (Real business cycle) and Neo-Keynesian models. You will find that a someone who is mainstream but pro-free market generally follows RBC theory.
Those models are, of course, extremely math-intensive and complicated. I’m currently doing a Master’s in Economics at a business school in Canada and will probably barely look at them, mainly because I am more focused on microeconomics than macro/financial stuff. So I’m not much of an authority, but it seems like this is the situation: the Austrian view is actually somewhat more intuitive and simpler to understand than mainstream models, so it gains some traction in media/lower-ranked academia, but is disregarded in more complex/advanced academic work. I couldn’t tell you whether this is because mainstream academics don’t want to throw away all their hard work or because the mainstream models are actually more accurate or have better theoretical foundations.
Um…Kay.
Well, I know the definition of fiat. It’s basically an arbitrary decree of the currency. There’s no basis other than, “if it’s good enough for us, it’s good enough for you!”
Yes, I watched the other two videos. I thought they were pretty good. I’m convinced. However, I wasn’t following Peter Schiff’s response to someone telling him he loses money renting because he cannot sell the property. I understand the monthly obligations will be less for him since he doesn’t have to worry about maintenance, taxes, and so forth, but he doesn’t get to recover any of the rent.
Peter’s argument is
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You need a place to live, just like you need food and clothing. Thus it has to be paid for one way or another. And you are getting something for your rent money, a place to live.
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If you buy a house, you also get a place to live, but with added expenses, such as maintenance, taxes and so forth.
In addition, you are buying a lottery ticket. On the one hand, you don’t have to pay the actual rent to anyone. In that sense, you have an immediate payoff from your lottery ticket.
On the other hand, when you decide to sell, the price of your house may go down and be less than what you paid for [and spent on upkeep].
A crude numerical example:
Say you paid $200,000. Rent in a similar place would be $10,000 a year, and you lived there for five years. Maintenance and taxes etc. was $10,000 in all. So if you sell it for $200,000 your lottery ticket got you $40,000.
But if you cannot sell it for more than $150,000 then you bought it for $200K, and got back $150K plus $40K, for a loss of $10K.
So if you have reason to suspect that the houses are overpriced when you buy it, thou art in trouble.
But if you rent, you lose all of the money you spent on rent. You also don’t have to sell if you’re going to lose money.
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You don’t lose the money. Would you say that if you buy food in a supermarket, you are losing money because you could have bought a farm and gotten the food for free? Same here, you got your money’s worth, a place to live.
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You might argue that you may have done better, cleverly spending $200K and paying rent to yourself. And if you guessed right, you indeed do better, as in the example in previous post.
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If you see prices going down and decide not to sell because you are going to lose money, what does that help you? What if prices will be down forever? This is a distinct possibility if you bought in the midst of a housing bubble that has a ways to go before hitting bottom [and staying there].
Well, in essence, you are losing money, because with a house, you are merely transferring your wealth and using that to live at the same time. It seems to me to be the better choice. Most of the time, you can simply transform that back into a more useful exchange medium, i.e. cash. Of course, a housing bubble burst can reduce the value of your wealth that’s in the housing form. Still, you do not recover any of that money when you rent.
Nope, mathematics.
So, economics is a hobby for you? I’m strongly considering the M.A. in Mathematics at my university. This particular program is designed for those who want to teach at the junior college level, but there’s nothing stopping me from taking the more advanced classes instead, i.e. the applied or pure math classes.
I’m taking Advanced Linear Algebra and Abstract Algebra this summer.
You are not transferring anything. If it costs you $10,000/yr in mortgage interest (ex principal payoff), insurance, maintenance, and taxes to “own” a certain $200k home, while you could rent the same one for $8,000/yr you are, in fact, losing $2,000/yr. That’s what Schiff was talking about. Now, of course, the “own” scenario also exposes you to a leveraged $200k bet on the direction of the housing market, but that’s not necessarily a good thing in itself, as the bet could go either way, as many people discovered over the last few years.
Moreover, in the rent scenario you’d still have access to the downpayment ($20-40k cash) which you could invest elsewhere for extra dividends.
The analysis gets a bit more complex when you include inflation projections and whether the mortgage is a fixed rate or not. Conceivably, one could come out well ahead over the long run by buying something now with a 5% 30yr fixed rate mortgage vs. renting. Even if the expenses vs. rent math may not be in favor of owning today, the benefits of borrowing for 30yrs at 5% may change that math significantly in favor of owning if inflation increases. But that’s yet another bet you’d be making. Most people are unaware that they’re making these levereaged bets because they could not fathom a world in which long-term “rule of thumb” trends experience violent reversals.
Of course you are transferring something. That’s what happens in the market when you purchase something. I exchange my money for a house of, hopefully, equal monetary value.
However, I see your point. In this case, you have to assume you get back all of the price of the house. Then, he’s comparing the cost of renting versus the cost of the purchasing (interest, insurance, etc.) and owning (taxes, maintenance, etc.) the house.
Is a situation like this the exception in the housing market? I mean, would you expect this in California or NYC but not, say, in Texas or the heartland?
Every location (including CA or NYC) is “special” and has its own supply/demand dynamics affecting price and rent projections. If I anticipate that a certain real estate market (NYC) would be demanded by foreign USD holders then I may include that into my math today and put in a higher bid than I would if I didn’t anticipate such an effect. If my conviction about higher inflation (and future rates) was strong enough, I may find it worthwhile to pay $10k/yr now in expenses (under a fixed rate mortgage) even though I could rent the same place for $8k/yr. As I said, every market and every situation is an “exception”. One just needs to be aware of all the moving parts and all the leveraged bets one is making, and how all that fits into their overall asset alocation, of which I believe 90%+ of real estate buyers are unaware.
I think your 90% is generous. It’s probably 95%+.
So, basically, the ideal situation is one in which there is an increase in housing prices that exceeds the costs of purchasing and owning the house.
But, for people who simply want to buy a house and “settle down,” and this includes other personal goals and aspirations they have, it’s worth it to spend the extra money over merely renting.
I think the operative word is “for people who…” That’s the overall point. Notice Schiff also mentioned he did end up actually buying the house he was renting, because the situation arose that it made sense for him in his situation. The point that he was trying to make was the fallacy of home buyers and people like that real estate agent who automatically claim “borrowing and ‘owning’ = good, saving money…renting = bad, losing money”.
I realize everyone has mentioned maintenence, but I’m not positive everyone really appreciates the impact of that. As much as people seem to forget about the hassles and costs of simply owning the house and paying the monthly expenses in conversations like this, they also seem to forget the possiblitiy of large one time expenses. Suppose an underground pipe gets clogged or forms a leak. That can easily work its way up to $10k, $15k, even $30,000. Things like that aren’t covered under normal insurance.
I believe Schiff actually did bring this up, saying something about “…and that’s supposing nothing ever goes wrong with the house”.
And getting back to the whole “buying house = good, saving/making money” thing…
Don’t forget about depreciation of the currency. You have to make up for that too.
So not only do you have to make more money than what it cost you to purchase, own, and maintain it, in real (i.e. inflation adjusted) terms, but you also have to make enough to make up for your time preference and opportunity cost. You were spending all that extra money that you could have been saving (and spending on other stuff) if you were renting. I suppose the argument could be made that you preferred the house to the other things you would have been buying, so you were actually satisfying current wants and therefore aren’t foregoing anything, but if you’re trying to talk about not spending/“losing” any money, you have to account for that too.
So when all of that is said and done…exactly how many people actually don’t “lose money” in the exact same way as the “idiots” who rent? That’s Schiff’s point. There is almost no scenario in which you are not going to spend money to live somewhere. But people talk about buying a house versus renting as if you were living for free in the first scenario, and throwing your money down a toilet in the second. It’s a lot like the people who claim our national debt isn’t a problem because “we owe it to ourselves.”
And don’t forget, this all assumes one thing…that you actually sell the house. So…what if you don’t sell your house? You’re not getting that money back. Where’s your profit? You’re “losing money”.
And how many people leverage the equity in their house and invest that money in something that earns a return? Almost no one. There are generally two types of homeowners…the ones who strip out their equity and buy toys and consumer goods or vacations, and the ones who feel like their house being “bought and paid for” is a point of pride, and that they are to be commended. They’ve got a few hundred thousand dollars sitting right beneath them and they more than likely spent even more than that…and what is it doing for them? Nothing. That money is just sitting there.
…Whereas if you were investing the money that you were saving by renting, you could be earning a compound return all the while. So…who’s losing money again? It’s not so cut and dry the way ignorant real estate agents and wannabe house-flippers make it out to be.