David Bach has one of those should've-known-it-at-the-time
articles (like that
Dow 26 Gazillion book of late '99) on Yahoo Finance today.
"The Automatic Millionaire Homeowner", as he describes it, is a can't-lose situation. With the historical price increases, general inflation, taxes, multiplied by mortgage leverage you'll be a millionaire! It is automatic!
The aspect that makes me feel just a bit queasy is that the article is clearly targeted at current renters with the strong sell on get in now! It feels inappropriately pollyannish just to sell books. I suppose a book titled, "The Probably Good Investment Homeowner" doesn't motivate the market.
Here's the rub: The fundamental premise is actually sound. In the long run it is generally better to own assets than borrow them. And if your asset is increasing in value, then it makes sense to leverage. Unfortunately the automaticness falls apart when you look at Bach's assumptions...
One can debate the likelihood of 6% annual gains or the tax structure or saving-vs-mortgage paying. But the topic I want to focus on is inflation.
Much of the past 50-year gains in home ownership wealth has been driven by inflation. Pay back today's loan in tomorrow's inflated dollars. That's why governments are always tempted to print more money and inflate away their debts. But recently we're facing fundamentally different inflationary pressures than we've seen in the past.
First, in the post-Milton Friedman world, the Fed recognizes that it's control over the supply of money is the single biggest lever in controlling inflation. And with their success of the past twenty years or so, they're likely to keep the hair-trigger on the inflation target. Partly because of this attention, we've may have seen the last of massive inflationary periods like the we saw in the 70s (a so-called "inflationary-bust" period).
This is good news folks. Relative price stability (or "inflationary boom period") goes a long way to ensuring prosperity in general. It simply erodes the argument that Bach uses that rents will go up by 5% per year and homes by 6%. What if they're both 1% on average for the next 15 years?
To extend the argument, we've already seen the long, steady decline of inflation over the past twenty years. In fact, due partly to globalization and technology advances, we may be more likely (that ever before) to face deflationary pressures. (in 2003, deflation was indeed Greenspan's worry). While cheaper electronics and software and toasters is a good thing, deflation across goods, services, assets prices, wages, etc., in general (ie. a "deflationary bust" period) reverses the assumption that leverage is a good thing. And therefore would wreak havoc on many aspects of our economy. Deflationary bust is not a high probability scenario, but the prospect of deflation are sure strong enough to undermine Mr. Automatic.
In retrospect, I count that Dow book (along with those TXN call options I held November 1999-Feb 2000) among the sell everything signs that went unheeded. In that context, The Automatic Millionaire Homeowner seems like a big slap on the back of the head.
via The Stalwart
