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InvestWELL Report |
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Question: Assume a person pays $1000 per month for rent. If a mortgage payment is also $1000 per month, does it make sense to buy a house?
Answer: We need to look at the situation in a broader context and we will keep the situation at the simplest level.
From an income statement point of view, the above logic is correct. A person simply substitutes paying rent with mortgage payments.
From a balance sheet perspective we need to consider the future value of the house. Let us assume hypothetically that a year after the purchase the house goes down in value by $30,000 (or 10%). Here is a situation from a balance sheet perspective:
Assets = 300,000 – 30,000 = 270,000
Liabilities = 300,000 – 2,000 (the mortgage portion paid off during a year) = 298,000
Hence,
Total Equity = Assets – Liabilities = 270,000 – 298,000 = -28,000
The house buyer lost $28,000 during one year.
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Assume your monthly rent and your mortgage payments are the same. Last year, you bought a house for $400,000. This year, your house has appreciated in value by $8,000. What is your total one year return?
A) More than 2%
B) 2%
C) 1%
D)
Less than 1%
Answer to the Quiz
at the bottom of the newsletter
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(Cumulative %)
Investment Strategy – MEMBER SECTION
InvestWELL Picks has outperformed the S&P 500 index by a nice margin (Chart 1). Recently, the difference between the two has narrowed somewhat due to a very strong performance of the S&P 500.
Chart 1.
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- During the last month, the US equity staged a remarkable rally (Chart 2 & 3). We do not believe the equity market will carry on the recent amazing performance in the next couple of months. Currently, the interest rates and the housing market still dominate as the most important issues. We think that the weakness in the housing market will continue to hold interest rates at bay.
Charts courtesy of StockCharts.com
- During the last month, the Canadian equities declined significantly, despite the strength of the US market (Chart 4 & 5). This divergence does not augur well for the Canadian equities. Here is a direct quote from our September newsletter “We believe that the upcoming decline in commodities (as evidenced by the downward sloping cumulative advancing-declining ratio) will likely have a negative impact on the Canadian general market”. We think this quote will continue to be valid in the next couple of months.
Charts courtesy of StockCharts.com
- In September, the job growth in the US was lower than anticipated, but the upward revision of the August numbers pointed to the continuation of the strength in the labor market.
- In September, the overall Employment in Canada edged up slightly (+16,000). This year, the strongest growth continues to come from natural resources, business, real estate and health care.
- Last month, a US-based hedge fund Amaranth managed to lose US$1.5B in natural gas trading. This is yet another reminder that a hedge fund could actually be a misleading term. We believe the idea of a financial hedge (or absolute return) is a very sound idea. Of course, the problem lies in its implementation.
- Moody’s, a reputable credit rating agency, projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first nationwide decline for an entire year in home prices since the Great Depression of the 1930s.
- Last month, the IMF said the strongest economic expansion in three decades will cool next year, warning about inflation, oil prices and the U.S. housing slowdown.
- Please note that the S&P 500 index has been trading in a narrowing channel since the summer of 2003 (Chart 6). It is quite likely that the market will make a sizeable move once it the channel is broken.
Chart courtesy of StockCharts.com
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(see
explanation)
Charts 7 - 9: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
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A is correct.
Your house has appreciated in value by 2%. At the same time, during the last year, you paid off a portion of the mortgage (e.g. 1/25, 1/30). Hence, your total return is more than 2%.
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Thank you for reading InvestWELL Report.
InvestWELLFinancial.com
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The contents of this publication are the property of InvestWELL Financial and may not be summarized, reproduced, or rebroadcast in any fashion without our written permission.
InvestWELL Financial’s first priority, as a provider of independent and unbiased financial information, is to educate our clients. Not only do we provide practical information about securities, but we also coach our clients to become successful independent investors. As such, InvestWELL Financial does not assume any responsibility whatsoever for the use of any information from the website or related publications. Although all sources of information are vetted and the information is believed to be reliable, it is not provided as investment advice. Past performance is not an indicator of future performance in securities. Each portfolio must be balanced and based on personal circumstances. High-risk investment decisions should be made in consultation with an investment professional.
InvestWELL receives no commission or benefit of any kind from the companies whose securities InvestWELL Financial showcases. We do not necessarily own shares in the showcased securities, but if we do, these shares would only form a very small part of widely-held and publicly distributed companies. There is no intention whatsoever of profiting in a manner where the price-impact of trading or holding of a security might arise. The website and related publications of InvestWELL Financial are intended to only be used for educational purposes.
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