# Why are so many people woefully ignorant of financial matters? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [February 16, 2007, 11:21pm UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567 "2007-02-16T23:21:25Z")\ **Posts on this page:** 7\ **Page:** 7
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 20, 2007, 10:57pm UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/121 "2007-02-20T22:57:36Z")
[QUOTE=hajario] Maybe but you buy a house on margin. [/QUOTE] That doesn’t make up for the differences in return rate in a housing market as inflated as it is right now. I was playing around with a spreadsheet using the following assumptions Rent: $1000/mo, increasing at 3% inflation per year House: $400,000, 10% down, 6% 30-year fixed loan, home value increasing at 5% a year. Property taxes 1% of purchase price, increasing at 2% a year (CA law, as far as I could tell), Maintenance at 0.5% of home value, annually, tax break for mortgage interest in the 33% bracket. Alternate investments increasing at 8% a year. Want to guess when the home-owner gets the advantage? \ Never. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [February 20, 2007, 11:03pm UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/122 "2007-02-20T23:03:27Z")
[QUOTE=iamthewalrus(:3=] That doesn’t make up for the differences in return rate in a housing market as inflated as it is right now. I was playing around with a spreadsheet using the following assumptions Rent: $1000/mo, increasing at 3% inflation per year House: $400,000, 10% down, 6% 30-year fixed loan, home value increasing at 5% a year. [/QUOTE] And are these equivalent? When we bought our house for a bit under $400K 10 years ago we could never get as big a place for $1,000 a month. ---
**Author:** ![amarinth](https://avatars.discourse-cdn.com/v4/letter/a/3be4f8/32.png) [@amarinth](https://boards.straightdope.com/u/amarinth)\ **Post date:** [February 20, 2007, 11:16pm UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/123 "2007-02-20T23:16:10Z")
[QUOTE=Voyager] And are these equivalent? When we bought our house for a bit under $400K 10 years ago we could never get as big a place for $1,000 a month. [/QUOTE] Actually - in my market, the $1000/month apartment is nicer. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 21, 2007, 12:58am UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/124 "2007-02-21T00:58:31Z")
[QUOTE=Voyager] And are these equivalent? When we bought our house for a bit under $400K 10 years ago we could never get as big a place for $1,000 a month. [/QUOTE] In Santa Barbara, those are reasonable estimates for, say, a 1 br condo and a 1 br. apartment. I also tried it with a $200K house and $700 rent. Renter still wins. Also note that many of my assumptions: 5% housing increase, 6% loan, 8% other investments (stock market), 33% tax bracket (with no standard deduction adjustment), are somewhat biased in favor of the homeowner. But we should probably start a new thread about the merits of owning or renting, rather than further hijack this one with my railing against the absurd housing market in parts of CA. ---
**Author:** ![crazyjoe](https://avatars.discourse-cdn.com/v4/letter/c/f14d63/32.png) [@crazyjoe](https://boards.straightdope.com/u/crazyjoe)\ **Post date:** [February 21, 2007, 1:06am UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/125 "2007-02-21T01:06:53Z")
I think your mistaken assumption is the 5% per year. On average, housing prices increase more than that…or they were. Also, you need to make sure you also figure in the tax deduction for property tax as well as mortgage interest. In certain markets, you buy a house because you want to own some property and you don’t want to deal with landlords, etc, regardless of whether it’s a net win for you in terms of income. Just having something to call “yours” adds the extra value. In other markets, you can easily make anywhere etween 10 - 20% per year return on your house. ---
**Author:** ![Throatwarbler\_Mangrove](https://avatars.discourse-cdn.com/v4/letter/t/8c91f0/32.png) [@Throatwarbler\_Mangrove](https://boards.straightdope.com/u/Throatwarbler_Mangrove)\ **Post date:** [February 21, 2007, 1:14am UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/126 "2007-02-21T01:14:35Z")
> [@](#): > > I think your mistaken assumption is the 5% per year. On average, housing prices increase more than that…or they were. Never heard of it. Any cites? > [@](#): > > In certain markets, you buy a house because you want to own some property and you don’t want to deal with landlords, etc, regardless of whether it’s a net win for you in terms of income. Just having something to call “yours” adds the extra value. Now you’re dealing with intangibles rather than pure cashflow/NPVs. People don’t “need” a house any more than they “need” a Ferrari. If someone is perfectly happy with rental accomodations, then granite countertops and stainless steel appliances have a marginal value of 0 - they don’t generate any income. If you can’t live without that stuff, then that’s consumption, not investing. > [@](#): > > In other markets, you can easily make anywhere etween 10 - 20% per year return on your house. You can do the same if you pick the right stocks, but picking the right market is the rub, isn’t it? We’re talking about average returns over the long run, and housing even in stable markets rarely beats inflation. For pure price appreciation housing is one of the worst investment you can make. That’s why goverments subsidize it. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 21, 2007, 1:33am UTC](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567/127 "2007-02-21T01:33:56Z")
[QUOTE=crazyjoe] I think your mistaken assumption is the 5% per year. On average, housing prices increase more than that…or they were. [/QUOTE] It may well be. It was based on the historic national average of about 1% over inflation, plus a bit. I know that CA since the 60s has had an average of about 9% growth, but that includes the recent spike, and has an actual inflation rate of 4.5+% Without that spike (which I don’t believe is sustainable), and using my 3% inflation term, housing increases about… 4% But I could be wrong. And I’ll add the property tax deduction in. I did not realize that it was deductible. [Previous page](https://boards.straightdope.com/t/why-are-so-many-people-woefully-ignorant-of-financial-matters/392567.md?page=6)