Asking $3,890,000 two years ago, available for rent at $10,000 per month last August, and then back on the market for $2,199,000 this past January, the sale of the Bernard Maybeck designed 270 Castenada closed escrow on 3/5/10 with a reported contract price of $2,075,000 ($573 per square foot) and an official 53 days on the market.
That’s appreciation of 4% per year over a nearly 14 year hold. You’d think it would be higher on such a beautiful place, purchased just before the dot com boom really gained steam (i.e. they purchased at a very favorable time).
Four percent per year over 14 years and you fault it. Typical.
In 14 years the previous owner paid nearly a million dollars in interest. Not super relevant to the above P&L discussion, but the bank did much better than the owner on this one.
When it was all said and done, the owner actually spent about $1k/month to live there, which, obviously, is much cheaper than it would have cost to rent it. So the owner won in absolute terms, if not relative.
How much would it have cost to rent this property for 14 years? 500K?
“Beautiful place and it even looks cheap, but only in comparison to bubble prices that are gone for good. If I didn’t think it would be 10% less next year, I’d buy it myself. I’m sure someone will.
Posted by: tipster at January 12, 2010 9:42 AM”
Little did I know it would be worth 5.5% less only a few weeks later, more than halfway to the 10% down I predicted.
Getting 4% over the long haul is basically having the house rise with inflation, which in the end is what makes sense.
If you’re betting that you’re going to do better than this, then you’re betting that you have market timing skills or that some demographic trend will be ‘wind at your back’.
for the record, the DJIA rose 4.7% over the same period, but I am sure tipster and Jeff already knew this.
I believe the adjoining buildable lot next door was not included in the sale, as it had been originally at $3.89M
Property shark has it as one large lot extending to the corner. There is a vacant lot behind it that has a different owner. You’re probably thinking of a different property.
“When it was all said and done, the owner actually spent about $1k/month to live there”
How did you come up with this figure???
No property taxes/maintenance/2% interest?
You’re right and this is why prices will fall further. Over a 10 – 15 year period prices should rise about 3 percent per year. So while I’m guessing the owners are kicking themselves that they didn’t sell in ’07, at least they didn’t sell in ’11.
Another way to calculate it:
$1.35M in 1996 (that was I believe the claim on the other thread) is $1.86M in 2010.
(as usual, usinflationcalculator.com, using CPI and all its quirks)
That’d be 0.8% per year real annual gain when adjusted for inflation vs. 3.1% nominal annual gain (bad calculation, tipster). Note that 1996 is approximately the trough for the early 90s housing bust. I suspect if you included all applicable housing costs (e.g. insurance, property tax, maintenance, etc.), they probably wouldn’t have had much of an annual gain.
The home is gorgeous. The problem is that comps are comps right now (bank loans) and, the Maybeck name doesn’t have much pull with the banks these days…
When I think about what $2MM might buy in other upscale neighborhoods in the city (say, I dunno, a condo interest in a multi-unit building), this seems like quite a buy.
“When I think about what $2MM might buy in other upscale neighborhoods in the city (say, I dunno, a condo interest in a multi-unit building), this seems like quite a buy.”
Either that, or this is the new normal and those other neighborhoods prices will fall too.
“When it was all said and done, the owner actually spent about $1k/month to live there”
I’ll echo “J” and also ask how did “missionite” come up with this figure?
Missionite has an interactive rent versus buy spreadsheet, I believe. I don’t always agree but you can’t fault his effort unlike a lot of posters on here.
But a few points on this house. First off, who viewed it? I did. Like others who have seen it I thought the greatroom was incredible. Much of the rest of the house is nothing special, particularly the bedrooms. Secondly, this neighborhood, but moreso this street, never captured the sort of dollar figures most people assume that it would have. That’s especially when considering how large some of the lots are. This is the third highest sale ever on the street, and the second most per foot for a house in the price range. Only one house beat it, handily, 127 Castenada, it was larger with a larger lot, and the most ever in 4-C.
In fact, this is the eighth highest sale ever in the area. And discounting the only two 3M sales ever in the area, both larger with larger lots, it’s within the very range the top houses in the neighborhood have always fetched. People who know SF r.e. know that Forest Hill has lovely homes on large lots that don’t sell for as much as St. Francis Wood, let alone Pacific Heights. They never have. This is nothing new.
Anonn – I completely agree. I’ve seen this house and know the neighborhood well. I was at the original open ($3.89) and it was crawling with neighbors taking a look. Everyone was shaking their heads at the asking price. (At the time my friends and I thought seemed $2.5 seemed like a good guestimate.)
For some reason some owners love the neighborhood “discount” on the buy, but then when it comes time to sell do the “but it would be “x” in Pac Heights” mental math on figuring the selling price (101 Lansdale did the same thing). But you don’t get it both ways….
Tripp Knightly – You’re right. I think FH is a hidden gem of a neighborhood and I’ve never quite been able to figure out why it still remains so much off the radar.
PS – Anonn – this is exactly the type of post that adds value and keeps the tone of the conversation engaging. More of the same please!
J, nnona et al.
As annonn has aluded to, I have spent a considerable amount of time creating a rather detailed spreadsheet (and an iPhone app as well, although I haven’t gotten around to releasing it on iTunes) which analyzes the true cost of ownership.
The true cost of ownership is, essentially:
Sale price of home
– Loan Balance
– Total interest paid over the period of ownership
– Expenses (maintenance, insurance, etc.)
– Taxes and fees (Property tax, SF transfer fee, capital gains, etc.)
+ Equity
+ value of tax deductions
/ number of months of ownership
= monthly cost of ownership
If you want to get fancy you can also factor in the opportunity cost of having your down payment tied up in the home as opposed to earning investment income.
The number I am quoting (roughly $1k a month) is a best guess analysis not including the aforementioned opportunity cost. It’s based on some assumptions: that they paid 20% down, that their mortgage was roughly 7% on average throughout the duration (interest rates were closer to 8.5% at the time of purchase but I’m also assuming they refinanced along the way), that there maintenance expenses were roughly 1% a year, etc.
The out of pocket monthly costs were probably closer to $7,000/month and I suspect that is the source of some of the confusion. My $1k/month number is factoring in the appreciation and tax benefits.
In other words the owner didn’t “make” money per se, unless you compare it to the cost of renting a similar unit. Given that the house is truly one of a kind, and that the ending cost was truly nominal compared to what the cost of renting it would be, this is a “win” from the perspective of somebody enjoying a very nice house very inexpensively, but it’s a “loss” from the perspective of someone hoping to make money on an investment.
Please note that none of these numbers are factoring in inflation as Anon. E Mouse refers to above. With inflation in play there is some narrowing in benefit, but it was still cheaper to own than to rent.
Finally I wanted to point out to Steve that while the DJIA had annual average growth of 4.7% which is obviously an improvement over the 3.1% in annualized growth experienced by this property , there is an important distinction here and that’s that few people purchase stock with 500% leverage (i.e. get $100 of stock for every $20 they put down in cash) and the ones that do seem like they live to regret it more often than not. So in this case a hypothetical $270k down payment would have only delivered returns of $243k if invested in DJIA. But that same $270k delivered somewhere around $1M in value when put towards the purchase of the house if you compare the total expense to what it would have cost to rent something similar. “Value” is relative and subjective of course. But the larger point is you can’t do a flat comparison of stock market rates of return to housing rates of return because one is almost always heavily leveraged and the other is not.
“If you want to get fancy you can also factor in the opportunity cost of having your down payment tied up in the home as opposed to earning investment income.”
That is not just getting fancy. That is a fundamental issue. That 20% down payment money would have covered rent for many years. Would you then say they are living rent free?
Still not buying $1k/month. Additionally, over a 14 year period, inflation plays more than a minor role.
Why not also include the commission to the used house salesmen in the total cost of ownership?
J,
I think you are relatively new around here, and so might not be familiar with how much work I have put into understanding the true cost of ownership.
My spreadsheet does factor in the opportunity cost, agent commissions, and many other things not mentioned (perhaps you should investigate what I have done before criticizing?). The reason I refer to opportunity cost as “getting fancy” with regards to this transaction is that investment opportunities can result in losses too. So it’s highly speculative, well above and beyond the speculation I have already engaged in, to suggest what the owner of 270 Castaneda could have potentially made had they invested their $270k down payment in 1996 (which, I have to add, we don’t even know for a fact that is what their down payment was). There are people who made millions and lost it all in the crash of 2001 for example. So the correct answer is going to be a range from total loss of principal (if they sunk everything into Webvan or Iridium) to potentially a 24,000% return (if they had put everything in Hansen’s). Or they could have put it all in an index fund tracking the DJIA and seen annualized returns of 4.7%. There’s quite a spread there, and trying to suggest what they could have done involves a more than fair amount of hindsight and speculation, and any number I gave as a result would be correspondingly highly suspect.
The ranges I am talking about with regards to housing expenses (taxes, interest, expenses, etc.) are much smaller, and while there is still a range, they are more predictable and universal and we can have a higher degree of certainty when we are talking about them.
With regards to inflation I did not say that it plays a “minor” role. I said it narrows the benefit of owning. It does not obliterate it. It appears that you might be losing sight of the fact that a rising tide lifts all boats. So while inflation would affect the relative value of the initial purchase price, it would also affect the relative initial value of any other investments, as well as any rent that was paid in lieu of purchasing the house. So while inflation would have a real impact on real gain, the relative impact when compared to investment alternatives would be much smaller, because they are all impacted by inflation. By my estimation, the relative difference of that impact is not sizable enough to make up the difference between what it would have cost to rent this place (or something similar) and what it cost to own it.
Finally, for your benefit I will walk you through the numbers. This is assuming a 30 year fixed at 7% with 20% down payment, and an owner who is in the 33% tax bracket.
$2,075,000 (sale price)
– $693,551 (loan balance at time of sale)
– $1,207,124 (mortgage paid over 14 years)
– $103,777 (5% agent commission)
– $15,566 (SF Transfer Tax)
– $16,875 (closing cost on purchase)
– $86,940 (total homeowners insurance, note I’m guessing slightly high due to the unique aspects of this home)
– $189,000 (total maintenance costs during ownership, estimated at 1% per annum)
– $215,649 (total property taxes paid – note, this number is just a rough estimate)
– $270,000 (down payment)
+ $495,470 (rough estimated value of tax deductions on mortgage interest and property taxes over 14 years)
/168 months of ownership
= $1357/month
Now i’m guessing that some things are probably estimated a little high (maintenance and housing insurance), and other numbers are difficult to analyze in hindsight (sorry but I’m not going to research the exact local property tax rate for each of those 14 years for example). My spreadsheet is designed to help potential home buyers analyze the future, not armchair quarterbacks second guess the past, but I’m not above making a reasonable guesstimate so I’m going with roughly $1k/month. Your mileage may vary, but probably not by much, unless a factual understanding is less important to you than slanted opining.
missionite — I’m familiar with your calculator, but I had a question regarding your numbers above.
If I understand correctly, you’re assuming their original mortgage was $1,080,000 ($1.35M – $270K down). According to your figures above, that means they paid $1.08M – $693,551 = $386,449 in principal. Which means they paid $1,207,124 – $386,449 = $820,675 in mortgage interest.
Then, you’re saying that they got a $495,470 benefit from tax deductions on mortgage interest and property taxes, so that would be a $495,470 on $820,675 + $215,649 = $1,036,324, for an effective tax rate (per the deduction) of 47.8%? How did you get that from a 33% federal tax rate? Just from your figures above, I’m getting more like $438,365 at 42.3% (33% + 9.3%), which would raise the monthly costs you quoted by ~$340/mo, making it about $1700/month.
[In the Clinton years, the top rate was 39.6%, and California might have still been 9.3% then, for a total of 48.9% in the top federal bracket. Currently, it’d be 35% for federal, so 44.3% is the top.]
In any case, part of the reason these guys did as well as they did compared to many properties featured on SocketSite was that they bought at a trough, sold relatively close to a peak, and apparently didn’t spend massive amounts of money doing renovations (unless they were unpermitted).
(Btw, note that itemized deductions do phase out in most years, so they wouldn’t necessarily get the whole 42.3% deducted. That 42.3% should be seen as a ceiling and not the actual number.)
missionite’s calculator is a good one. But it does understate the ownership cost by overstating the tax deduction (particularly over a long hold, where the deduction declines considerably after the first few years) and by completely ignoring the opportunity cost of the sizable down payment. You can’t just say “may have hit the jackpot or may have lost it all so I’ll ignore it.” It is certainly a bit of art, but you could get about 7% on a 30-year treasury at the time of purchase; with a 30-year mortgage, that is a pretty fair standard to use as the opportunity cost. Fix these two flaws and you end up with a monthly nut of closer to $3000. Still quite good, but not the result it appears to be at first blush.
Well, note that $270K at 5% would be around $535K when compounded over 14 years. Opportunity cost per month is almost $1600 under this measure. I agree with missionite that it’s hard to evaluate opportunity cost, but I don’t think that means ignore it. If we’re truly talking about downpayment money, it should be in something safe, so I typically like savings/treasury rates as the opportunity cost.
(Btw, note that itemized deductions do phase out in most years, so they wouldn’t necessarily get the whole 42.3% deducted. That 42.3% should be seen as a ceiling and not the actual number.)
E.g., no property tax deduction at all because you lose it in the AMT.
As has been stated, there are plenty of ways to earn a yield on $270k that involve little to no risk, and are considerably more liquid than a house.
Is there ANY official source for the purchase price in 1996? I guess you could calculate based on property taxes…
First of all, thank you all for the comments. I always appreciate feedback. And I will point out, as I have many times, that I am not a professional, just an amateur who is self taught and doing his best to make sense of a complicated subject.
Over 14 years the interest paid on 1.08M at 7% will be $955,676. You can verify this using any online mortgage calculator. It is all deductible, assuming the owners were married (which I did). If the owner was single however, the deductible portion of the interest is MUCH smaller, $539,792 to be exact.
“If I understand correctly, you’re assuming their original mortgage was $1,080,000 ($1.35M – $270K down). According to your figures above, that means they paid $1.08M – $693,551 = $386,449 in principal. Which means they paid $1,207,124 – $386,449 = $820,675 in mortgage interest.”
Oops. I was posting at work, wasn’t paying attention, and grabbed a number from the wrong cell. The correct loan balance at the end of 14 years is $828,551.72. I stand corrected and my apologies for the error.
The tax benefit is still correct (or roughly correct since I don’t retroactively compute property taxes at the rate that was set for that given year – I just roll with 1.141% for all of them, likewise I don’t try to reverse engineer Federal tax laws and rates over the past 14 years).
So $955,676 (total interest) + $215,649 (total property taxes) = $1,171,325 * 42.3% = $495,470 in tax benefits.
I am agnostic on AMT phase-outs, and other tax law quirks. My goal wasn’t to re-write turbo tax, and my spreadsheet is admittedly not a great fit for higher income properties where AMT might come into play. It’s also not designed to do historical analysis like what we are doing here. But it’s fun so I’m doing it anyways.
Which brings me to opportunity cost. Even an annualized return of 9% (double the DJIA) will not make up the difference in value acquired by this purchase. This was not a great investment in the sense of “making” money, because it did cost money to live here, but it was a great bargain in that it cost considerably less to own than it would have to rent something similar. The value of that bargain was much greater than what they could have realistically expected to have made with any “safe” investment. Getting nit-picky about the exact numbers is failing to see the forest through the trees: in this case the owner won handily.
Just to add to this (I meant to add this at 1am last night, but forgot somehow), the change in loan balance did change the post-sale post-tax monthly expense to roughly $2k a month. Still quite a bargain over what this place would rent for.
And to directly respond:
A.T.: It is entirely possible I am actually understating the tax deduction benefit. If, for example, they were in a higher tax bracket they got even more benefit. We’re guessing is what it comes down to. My numbers are reasonably close for the scenario I am describing. If they are in a different tax bracket, or qualify for the AMT then that is a different scenario and my estimation of the tax deduction will be either low or high respectively.
Your treasury example is not quite as rosy as you think. First of all to make it apples to apples (you can’t fairly compare a 30 year investment to a 14 year investment) they will have to sell the bond before maturity. I believe that usually results in a discount. I am not knowledgeable about bonds, but presumably if rates were near 7% on 30 year bonds then there must have been some risk concerns which would have given someone pause before sinking $270k intro a treasury bill back in 1996. If interest rates rose, and you had to sell the bond before maturity you could lose money. This is the problem with calculating opportunity cost in hindsight: risk never looks risky in hindsight, because you already know what happened.
J,
While there are low risk investments, there is no such thing as a “no risk” investment. But if I’m wrong, and you know of a “no-risk” investment, please let me know. And low risk investments pay low returns. As I said before, it would take an unusually successful investment strategy to match the value obtained by this seller over the course of their ownership of this home.
“While there are low risk investments, there is no such thing as a “no risk” investment. But if I’m wrong, and you know of a “no-risk” investment, please let me know.”
US Treasuries are considered no risk by most investors. When you compare something to a risk-free rate, Treasuries are your benchmark.
I would also say that an FDIC- or NCUA-insured savings account is risk-free.
Money market accounts are NOT risk-free, but were commonly thought of as such, and the feds even made them risk-free for a while.
270 Castenada got into contract two years ago when it was listed at $3.9mil, but it fell out. Isn’t the real story here that by waiting two years they had to cut the price 47% to get it sold?? The real stats should be “sold after 700+ days and 47% off list”.
But that’s not a complete story. Here’s how that story might have gone. They were about to move here. They offered 3.1M after a frenzied weekend open house, and were somewhat surprised that they got into contract, because its beauty had put them under the ether and their offer was a lowball one. Then they took a step back, looked at the comps in the neighborhood, had a look around town on their next visit, and thought better of it. Sounds plausible to me. Who knows? What we do know that this 2.075M sale is compatible with what the neighborhood has ever done.
“While there are low risk investments, there is no such thing as a “no risk” investment. But if I’m wrong, and you know of a “no-risk” investment, please let me know.”
US Treasuries are considered no risk by most investors. When you compare something to a risk-free rate, Treasuries are your benchmark.
I would also say that an FDIC- or NCUA-insured savings account is risk-free.
Money market accounts are NOT risk-free, but were commonly thought of as such, and the feds even made them risk-free for a while.
“US Treasuries are considered no risk by most investors. When you compare something to a risk-free rate, Treasuries are your benchmark.”
http://www.marketwatch.com/story/yes-theres-even-a-risk-in-treasury-bond-funds-2009-08-31
“I would also say that an FDIC- or NCUA-insured savings account is risk-free.”
The interest rates I see currently at FDIC insured savings account don’t come close to keeping pace with inflation. I’m not sure that can fairly be called an investment.
“there is no such thing as a “no risk” investment.”
nonsense.
“But if I’m wrong, and you know of a “no-risk” investment, please let me know.”
C.D.s
“The interest rates I see currently at FDIC insured savings account don’t come close to keeping pace with inflation”
How do YOU measure inflation??? By my account, I have had no problem beating it with CDs or other types of FDIC insured accounts. Shopping around yields better yields…
If I didn’t think I could, I would buy TIPS.
“The interest rates I see currently at FDIC insured savings account don’t come close to keeping pace with inflation.”
I believe people have mentioned no-strings attached 2% savings accounts, which if you believe that we’re in deflationary times certainly beat inflation. And those same accounts were at 5+% rates not that long ago.
Anyway, you could invest in TIPs if you really had a big concern about this. Or I-Bonds or something else that’s inflation-protected.
Anyway, if you really think US Treasuries are not risk-free, you REALLY shouldn’t be buying property in the U.S. as a purported investment.
If they are in a different tax bracket, or qualify for the AMT then that is a different scenario and my estimation of the tax deduction will be either low or high respectively.
I don’t understand how this is even a question.
If they are paying for a place this expensive because of income, they will absolutely be caught by the AMT, which kicks in at income levels WELL below what you’d need to afford this place. And, as I mentioned, you do not get any property tax deduction in AMT.
If they’re not W-2 wage earners and are paying for this place some other way (dividend income, stock sales, etc.), then they won’t be in the high tax bracket you’re positing.
Either way, there’s no way they’re getting the tax benefit you’re assuming.
FWIW, AGI for us (DINK wage earners) has been in the 280K range the last two years, and we’ve paid the AMT the last two years. It’s possible that if we owned a sufficiently large house, we wouldn’t face AMT liability, on a back of the envelope basis, but having kids might push one back into the AMT again. I would agree with Shza, that, in these groups, we are likely to be talking about AMT liability, again on the back of the envelope basis.
Shza,
First of all mortgage interest is deductible even under the AMT, so this isn’t going to have some catastrophic effect on the tax benefits. The issue here is the deductibility of property taxes. If we completely remove property taxes from the deduction, the tax benefit drops from $495k to $404k. It’s not good, but it’s hardly catastrophic, and raises the monthly expense by $535 which is not enough to change the advantage of owning vs. renting in this case.
Second of all your confidence that they will “absolutely” be caught by the AMT is misplaced. The issue with AMT is that the exemption amounts aren’t indexed to inflation, so it “catches” more and more people as time goes by.
But precious few qualified for it during most of the period of ownership we are discussing. For example in 2000 only 5% of those making between $100k and $200k a year qualified for the AMT. And only 18% of those making between $200k and $500k a year qualified.
Even in 2010 only 35% of the people making $100-$200k a year will pay the AMT. And in the $200k-$500k it catches 64% which still leaves over a third not paying the AMT.
I don’t know what the income level of the owner was, but I think that it’s not only possible, but it’s actually likely that they did not qualify for AMT for most of the period of ownership. Unless they are super rich and slumming it.
J,
“”But if I’m wrong, and you know of a “no-risk” investment, please let me know.”
C.D.s”
CD’s carry risk. If you take the money out too soon, you pay early withdrawal penalties and interest. You can buy so called “no-risk” CD’s which don’t have these penalties, but they pay rates similar to a savings account (i.e. currently well under 2%).
“How do YOU measure inflation???”
http://www.inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp
“By my account, I have had no problem beating it with CDs or other types of FDIC insured accounts. ”
Inflation last month was 2.63%. Most of the rates I’m seeing at FDIC insured institutions right now are in the neighborhood of 1.5% even for large deposits held for lengthy periods. Will these trends continue? Maybe, maybe not. I think, but I’m not sure, that’s called risk.
“Anyway, if you really think US Treasuries are not risk-free, you REALLY shouldn’t be buying property in the U.S. as a purported investment.”
I bought property, but as a place to live, not as an investment. I fully expect to lose real money in the process. I’m not much of an expert on US Treasuries, I know very little actually, but I do know there are people and governments who have been burned on them. Like China for example.
Missionite, good point on the history of the AMT. I never suggested it affected anything but the property tax though.
And if we assume these people were W-2 earners (wasn’t it that conductor though?), they’d definitely be in at least the $200-500k bracket to afford this place (and I’d hardly call this “slumming it” even if they made a notch over $500k).
“Inflation last month was 2.63%.”
Sure, monthly figures fluctuate quite a bit under CPI. But the trailing year (based on data you gave above) averages to -0.15%. There are savings accounts where one can get 2%. And you can certainly do better with various risk-free instruments depending on liquidity requirements. Certainly if you are planning to buy a house in 2 years, you wouldn’t put your down payment money in a 5 year CD.
Re: the AMT, the higher the income, the more likely someone hits it. I would guess that a disproportionate number of the 36% not facing the AMT in 2010 who earn between 200K and 500K are in the 200K-300K range. And this house would require at minimum around 308K in yearly income based on the $7185/mo mortgage payment you quoted above at traditional 28/36 ratios.
Note that AMT tax rates are nominally 26% and 28%, but there is a 32.5% bracket and a 35% bracket because of the phaseouts (see http://thefinancebuff.com/2009/03/2009-amt-tax-brackets.html).
Anyway, thanks for the additional insight on your calculator — as I mentioned, I’m generally a fan. I’m not sure we completely disagree on much of anything here, and I’m glad you don’t see housing as an investment, but rather as just housing, unlike so many people. And I agree with you that these people did surprisingly well, at least partly I suspect due to good timing as I mentioned above.
Still can’t believe they actually went into escrow with a $3.89M listing price though. Someone was smoking something.
Shza,
You are right, it is conductor Kent Nagano, and according to Google he makes an astounding amount of money (well in excess of a million a year apparently). He very well may have been paying AMT since it was introduced. I take back my comments regarding the likelihood of the owner paying AMT, and accordingly revise my monthly expense up another $500/month.
Anon E. Mouse,
Not to quibble (actually I must admit I love quibbling), but the statement I made was that savings rates do not keep up with inflation currently, which as far as I can tell is true.
You can extrapolate data from the past to suit either side of this disagreement. For example you point to the last year as averaging -0.15%. However I could point to the past five years that average 2.59% or the last ten years that averaged 2.57%, or the median of the last four years which is 3.35%. Finally from a statistical point of view, last year was an outlier, and the short term trend doesn’t suggest a continuation of deflation which peaked last July.
With all that being said, I am not making any of the aforementioned arguments, as strong as they may be. I am not making them because past performance is not a predictor of future results. Deflation may return worse than ever, or we may run into runaway inflation, or perhaps we return to the mean and average roughly 2.5% inflation annually. The truth is, we just don’t know what is going to happen because it is in the future, affected by more variables than we can track, and inherently unpredictable. All we know for sure is what is happening right now, and right now, as far as I can tell, there is no commercially available savings, checkings, or CD account that will offer a fixed interest rate that is equal to or higher than last month’s reported inflation amount. (note: there are some “teaser” rates out there that offer above average rates for the first three months and so on – but even these don’t match the current inflation rate)
Furthermore, I still am not persuaded that any of the “no-risk” investments you or J have suggested are truly “no-risk”. They all carry some degree of risk (albeit low – but present nonetheless), and the ones with the lowest amount of risk cannot fairly be called investments, in that they fail to promise returns in excess of current inflation rates.
CD’s have penalties associated with early withdrawal, and from what I can see don’t offer rates ahead of current inflation rates.
Bonds are discounted if sold before maturity, and may even suffer real losses under certain conditions which are entirely possible.
Savings Accounts don’t keep up with inflation.
What else you got?
“CD’s have penalties associated with early withdrawal”
This is just dumb. The fee is no more than the interest you would have earned for 3 months on a 12 month CD. You don’t lose any of your investment with an early withdrawal after 3 months. A 1 year CD is also far more liquid than a house and ISN’T the only type of FDIC insured account that can beat inflation.
But if you really cared about being accurate, you would have already known that. And also not spouted off 1 month of non-seasonally adjusted CPI data.
I think your arguments on CDs, bonds, and savings accounts are pretty weak. All of them, properly used, could serve as useful holding places for down payment money. Many of the online savings accounts do surpass inflation on a regular basis. After all, fed rates are often set to deal with inflation.
CDs can be short-term or long-term and you can lock-in rates when they are high or stay short when they’re low.
Bonds is a broad category — again, there are things like TIPs and I-bonds as well as other bonds to consider. You can buy STRIPs as well.
I really don’t think this is as hard as you’re making it out to be.
J,
Before you label something as “dumb” you should first check to make sure it is actually dumb. You should also make sure that any statement you make after that is universally true.
Apparently you agree that there are early withdrawal penalties, but you think my comment is “dumb” because the penalties only affect the principal in the first three months on a 1 year CD. So if you withdraw it at any point in the entire first quarter of the investment period you will suffer a loss of principal, but it’s dumb to point this out? ….uh, ok.
Setting aside the rather relevant fact that the risk of loss of principal is in fact a “risk”, and is not, as you claimed earlier “no-risk”, let’s take a closer look at this.
According to a Bankrate.com survey (link below because it’s a long one), it is typical for 1 year CD’s to have a withdrawal penalty of 90 days of interest. If the CD is held for a longer period that withdrawal penalty is typically 180 days. Regardless in many cases the penalties can be substantially higher (they point out a bank that has an early withdrawal penalty of a whopping 24 months of interest) and the “3 month rule” is not as universal as you imply.
http://www.bankrate.com/finance/exclusives/cd/early-withdrawal-penalty-study/survey-CD-early-withdrawal-is-costly-1.aspx
I’m not sure why you keep harping on CD’s being more liquid than houses. Are you going to tell me the sky is blue too? Perhaps you think I am arguing that houses are a better investment than CD’s. If that’s the case you should go back and reread what I have written, because you will see that I don’t think houses are an investment at all. They can however be a better value than renting in some cases. Our discussion about Bonds, CD’s, and savings accounts has been, first of all, related to how does one fairly determine opportunity cost, and secondly, as to whether they are “low-risk” or “no-risk”. You rather firmly stated the latter, and then proceeded to provide evidence of the former. I can’t directly help you with your cognitive dissonance, I can only point it out.
I do care about being accurate, and have willingly conceded errors when they are pointed out, even within this thread. Your accusation is itself erroneous. Furthermore it appears you are not willing to discuss disagreements without resorting to snide comments. That’s too bad for you I guess.
Addressing the substance of your comment:
The Bureau of Labor Board and Statistics says that seasonally adjusted figures are to help “some users” identify underlying trends, are subject to revision for five years after they are issued, and should not be used in matters such as contracts which have escalation rates tied to the CPI.
http://www.bls.gov/cpi/cpifaq.htm#Question_16
So if seasonally adjusted is not a reliable way to perform these calculations, so what is? Well according to the BLS there are a number of ways:
http://www.bls.gov/cpi/cpimathfs.pdf, but the most commonly used are trailing 12 month averages, and annual averages.
Given that the last reported month is January, there isn’t a whole lot of difference between the trailing 12 month and the annual. So probably the fairest and most accurate way to look at inflation is to see what was the average inflation rate for San Francisco for the year ending 2009. http://www.bls.gov/ro9/cpisanf.htm
According to BLS it was 2.6 percent. the average for the past five years is closer to 2.8%. Unfortunately there aren’t any CD’s or savings accounts offering a rate that high (unless it’s a teaser introductory rate, and I don’t think there are any examples even of that). So, as far as I can tell, and using the most accurate data I could find, and in the manner that the producer of the data recommends using it, my statement that there are no CD’s or savings accounts currently beating the most recent data we have for inflation appears to be accurate.
Anon E. Mouse,
Simply put, returns above the rate of inflation are not guaranteed with even the lowest risk investments. And the rate of return of even these safest investments has varied well over 500% in the 14 years this property was owned. Going back to the root of this discussion, you could pick a range of numbers to calculate opportunity cost, and any one of them would be just as likely to be as right as the other. That’s the heart of my argument, and I don’t see what’s so controversial about it.
Anyone remember when people bought houses as a place to live not as a speculative investment? I suspect this is the case with Kent Nagano and Mari Kodama who sold this and bought the place at the SW corner of Divisadero and Vallejo for around $8 m according to the Biz Times. They appear to be a couple who earn their living by actually doing something and creating value, not simply playing the numbers game with one or the other kind of speculative investment.
They appear to be a couple who earn their living by actually doing something and creating value…
I could be wrong, but I’ve always believed that this downturn won’t be over until the EIC (entertainment industrial complex) takes a significant hit as their ‘services’ were artificially inflated during the bubble. This includes movie stars, TV personalities, athletes, and yes, even conductors (fund raising for the arts is hurting these days…)