Houses and Spouses

Houses and spouses are not so different from one another…

Both possess intangible attributes that do not lend
themselves to a clinical economic analysis. Therefore,
neither tends to produce optimal results when selected
solely for their investment potential. But this truth has
not prevented millions of Americans from speculating on
real estate, or prevented a few other Americans from
speculating on matrimony.

A big problem with both houses and spouses as investments
is that neither can be counted on to deliver a reliable
short-term profit. Indeed, a short-term commitment to
either a house or a spouse can result in a significant loss
of capital. On the other hand, when viewed strictly as
investments, houses and spouses often produce worthwhile
returns over the long run.

To summarize, there is a danger in treating ANY long-term
investment as a short-term speculation. The nation’s
bankruptcy and divorce courts are cluttered with folks who
have attempted such foolishness. A short-term perspective
is the domain of renting and dating, not home-buying and

But we here at the Rude Awakening do not judge; it is not
our concern whether an individual rents and dates or buys
and marries or rents and rents. Our beat is financial, not

Even so, we have a suspicion that certain aspects of life
should not be subjected to the harsh light of dispassionate
financial examination. (Very few spouses, for example,
would appreciate receiving a monthly cost-benefits analysis
of their familial participation). Nevertheless, for those
Rude Awakening readers who view life with the exacting
precision of an accountant and for whom life’s many
components are but a collection of assets and liabilities,
we present the following examination of home-buying versus

Home prices are rising, and rising quickly. So much so that
a stockbroker friend relates, "I’ve had about six
conversations over the last couple weeks in which one of my
clients informed me that Florida real estate is a ‘sure

"These clients are sick of the stock market and are
observing with the flawless vision of hindsight that
Florida real estate has been a great investment."

"So what do you tell them?" your editor asked.

"What can I tell them? They already know the answers:
Stocks are unreliable. Real estate always goes up…These
opinions remind me of the moronic comments I used to hear
in 1999, when a number of clients scolded me for being too
cautious because ‘Nasdaq stocks always go up.’"

"So does that mean you’d be a seller of Florida real
estate?" we inquired.

"Not necessarily, but I don’t think I’d be a buyer at this
very moment…Maybe I’d be a renter."

Our stockbroker friend presents a surprisingly attractive
alternative. In many of the nation’s hottest property
markets, the cost gap between being renting and buying has
reached the widest spread in more than a decade. In other
words, renting has rarely offered such a financially
attractive alternative to buying.

"In the past, home prices and rents tended to move in
alignment," the Wall Street Journal recently reported. "But
the relationship between the cost of renting and owning has
broken down as low interest rates and an array of new
mortgage products have helped turn many renters into
homeowners. That has helped propel home prices upward –
and, in turn, has weakened the rental market, prompting
landlords to cut rents or at least raise them less

"The result," the Journal continues, "is a widening of the
gap between the cost of renting and the cost of buying in
some of the nation’s hottest housing markets – a gap now at
its biggest since at least 1994, according to Torto Wheaton
Research in Boston, and by some accounts at its biggest
since the 1970s. The data suggest the economic case for
renting, at least in the short term, has grown
significantly in these markets."

To calculate its rent-versus-ownership comparison, Torto
Wheaton examines the housing and rental trends in twenty-
one U.S. cities. The research firm compares the cost of
renting the average-price apartments to the cost of buying
the median-price homes, financed with a 30-year, fixed-rate
mortgage. Even though the average apartments and the median
houses are not directly comparable, the analysis does
illustrate how the relationship between renting and owning
changes over time.

In San Francisco, for example, the monthly cost of renting
an apartment is just 45% of the monthly cost of buying a
home, down from 67% in 2001. And in Miami, rental costs are
63% of the cost of homeownership, down from 89% in 2001.

The chart below presents a sampling of other U.S. cities.
Of those presented, Dallas offers the smallest relative
benefit to renters, while San Diego offers the biggest

"The potential cost savings for renters could well be even
larger," the Journal continues, "given that the analysis
doesn’t factor in property taxes and other expenses
associated with homeownership. Mitigating that is the fact
that mortgage interest and property taxes typically are
deductible from federal income taxes."

But many homebuyers, like eloping couples, turn a blind eye
to inconvenient realities, while seeking to consummate
their imprudence. The fear of missing out on further price
appreciation, or of being shut out of the market for good,
far outweighs the risk of "top-ticking" a housing bubble.
Thus, the rate of homeownership in the U.S. reached a
record-high 69.2% in the fourth quarter of 2004, compared
with 67.5% in 2000.

"Many buyers who have done the math are betting that rents
eventually will rise," the Journal asserts, "and that any
savings from renting will be more than offset by rapid
gains in home prices."

We not as certain as the Wall Street Journal that home
buyers have "done the math." We suspect most homebuyers
rely on a very simple calculation: Because home prices have
been going up, they will continue to go up. Therefore,
buying is smart and renting is stupid.

And so far, this unassailable logic has produced brilliant
results. Who are we to argue against it? But for those
folks who wish to conduct slightly more elegant
mathematical calculations, we provide the following link.

Your editor used the attached calculator to evaluate the
merits of buying his current home at its prevailing market
value versus renting his house at the prevailing rental
rates. Based upon his (bearish) assumptions, renting for
the next ten years would have produced a greater financial
benefit than buying. The pivotal assumption, of course, is
the future direction of house prices.

If prices merely tread water for the next five years or ten
years, as we assumed in our calculations, renting easily
wins out over buying. But clearly, owning an appreciating
house is better than renting one.

Try it yourself. Just for kicks, compare the economics of
buying your current home at its current market value versus
renting the home at prevailing rental rates. In particular,
take a look at the effect of 0% home-price-appreciation.

Do the math, but don’t overreact if the results don’t
please you. Many houses, like many spouses, are well worth
keeping around, even when they are more likely to be
financial liabilities than assets.

Did You Notice…?
By Jay Shartsis

Utility stocks may be ripe for a fall. The first warning
sign is that assets in the Rydex Utility fund have swelled
to more than $56 million. Over the past four years whenever
assets in this fund have exceeded $50 million, its price
was never higher after 30 days. After the 23 times when
this tripwire was hit the average loss for the fund was
6.6%, according to

It is also notable that utility stocks have experienced the
most insider selling in five years. The stocks are up 12
months in a row, and the group is nearly 37% above its 200-
day moving average, which is very overbought.

Long story short, the utility stock rally looks very long
in the tooth.

And the Markets…



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