Chuck Ponzi January 8th, 2008

Just how smart is Chuck Ponzi?

I might rather ask, how lucky is Chuck Ponzi?  It doesn’t matter to me what you think is more important, luck or brains; either one can fail you at an in opportune time, and frankly, luck will almost always beat brains.

Late last month, a poster commented on my “Who is Chuck Ponzi?” post with the following:

Wow you must be a genius. That’s like saying - “I feel it coming, its going to rain!” Well, yes if you say it long enough you will eventually be right. In truth you thought home prices were overvalued late 2002 early 2003. In 2004 you say honey housing is overvalued lets sell (this sounds more like an investor). You sell it for twice as much as you paid for it a few years earlier. So lets say you sold it for 450,000 (meaning you paid 225,000). You move out and most likely had to pay rent right? $1000/mo - Approx. the same as what the mortgage on a $225,000 house was at that time. Hmmm….Seems to me that that house is now worth about $500,000 - down from the $600,000 at its peak but still that’s a lot of equity on your $225,000 house! Me thinks you made the wrong move. Granted, this story would be different if you thought it was over valued when it was at 575,000 and sold at that time. Then you’d be my hero - of course I would argue that maybe you just got lucky. - You are entertaining reading though

This dripping with sarcasm comment nevertheless displays just how ignorant of opportunity cost some are.  There are so many variables to determine whether it has been a better play to sell and rent or to buy since mid-2004, but I will outline a few here for you:

1.  I enjoyed a great low rate on my ARM financing of 5.5%.  Monthly payments after taxes were about $1600 with HOA and not including maintenance.  I generally spent another 300 per month on general maintenance that I would not spend on a rental.

2.  I enjoyed some tax benefit of my payments,  I could deduct about $14000 per year on payments, and my combined marginal rates were about 27%, for a tax benefit of about $3,500, although some of my standard deduction would have eaten it up some. (nevertheless, I used the most conservative approach when calculating opportunity cost)

3.  Total after-tax cost of owning was about $19,000 per year for our very small 3 bedroom detached condo (1380 ft2) in Santa Clarita.  Similar houses were renting for about $1900 per month for a total after-tax cost of about $23000 per year.  That additional 4K per year represented my lower-cost of owning.

4.  After selling our house and paying expenses and buying a new car (cash), we cleared less than the person above stated.  It was less than half since realtors fees, escrow fees, and a million other expenses pop up when you sell.  That was to be expected and was calculated as part of our opportunity cost.

5.  We have actually lived in larger places since we sold, renting for $1900 (Hollywood 1900 ft2), $1895 (San Diego 1450 ft2), and $2500 (OC 2000 ft2).  In the last one, we are renting for an after-tax cost of $30,000/yr.  This means we are paying an annual amount $11,000 greater than our original.

6.  My income has increased substantially since we sold (67%), and we needed to be mobile since I have had 2 new jobs in the last 3.25 years.  Renting was pretty much a given, and my increase in income could not have come without that mobility.  For us, it is clear that renting has payed off just because of that.  I suspect that my income otherwise would have increased about 15%.

7.  In addition to the increase in income, our investments have done quite well.  I’ll let our ‘07 returns speak for themselves:  the green line is ours, the blue line is the S&P500.  Each of the last 3 years has been about the same in terms of returns for our portfolio.

As you can see, we are doing just fine.  In fact, we have done so well, I am considering starting a vulture fund if I can find enough outside capital to do it with.

All told, selling (even early in ‘04) has been extremely lucrative for me and my family.  I stress this because we are going to see substantially lower prices in the future.  We’re just getting started in the residential housing sector of SoCal, and we’re already seeing prices equivalent to Mid-’04 (and lower in many places including the one where we sold).

8.  We have really enjoyed living closer to the ocean in San Diego and Orange County.  That it has been cheaper than living in the desert in addition to the great weather has been an added bonus.  Because we have not spent a dime of our housing windfall shows 2 things about me and my family:

a.  We are extremely prudent people.  Unlike those who immediately spent their housing windfall via equity extraction and will need to repay it in the future, we have only “borrowed” from ourselves to purchase large items with cash.  Even that has an opportunity cost through rate arbitrage, though I have been unwilling at this time to take.

b.  We have remained impervious to the temptings of wealth and consumption so prevalent in our society today.  Not that we won’t wisely spend our money in the future, but that now in our lives is a time to build, not to spend wealth.  Too many of our age cohorts have not followed that and appear to spend like they will will be dying tomorrow.  There is no substitute for savings.  It is laying up in storage that which you do not need today in preparation for the day that the need does arise.

The opportunity cost of keeping the home meant that job opportunities, and the investments could not have happened.  Indeed, we have lived a better lifestyle by renting than by owning, not to mention the long-term benefits provided by substantial returns on investments.

Someday, I hope to say that the housing bubble made us rich.  In the meantime, we’ll still be wisely investing our money.  For many who already say that the housing bubble made them rich, it won’t count until the money becomes liquid.

I still stand by my assertion that home prices were overvalued in 2002 and 2003.  The difference is that over time, increased income eats away at that imbalance so that home prices in some areas may not dip below 2002 prices, but many places in SoCal are already experiencing 2003 prices, and will erode further in 2008.

• Lizard Brain