I now want to play a little bit of devil's

advocate with myself.

I made this argument where I show that for the exact

identical house, if these are the numbers -- I mean you'd

have to work it out based on your market, and what the

numbers are at the time.

But if this is the comparable rent for a $1 million house, I

showed you that for the $1 million house you're burning

$40,000 a year.

This is not money that is going to build equity.

This not money that's going to the principal of your house.

This is money that just going out of your pocket, you'll

never see again.

In a way, and actually not in a way, in reality, you can

view this $40,000 as rent on the money that you borrowed.

Interest is nothing but rent.

So when you have an asset, if the asset is cash, the rent on

it is interest. If the asset is a house, the rent on it is

your monthly rent payment.

So when you think of it this way, when people say home

ownership, they really aren't homeowners yet.

You're not a homeowner until you don't have debt.

You are a money renter.

So your choice is either to be a money renter here, or to be

a house renter here.

And I show that you are burning

almost double the money.

But then there's the argument of well, there are advantages,

still, to buying this house.

And what are they?

Well one example is, in this situation, if I did get a

fixed-rate mortgage -- and we learned, when you look at all

those adjustable-rate mortgages, we know that a lot

of people didn't.

But if I have a fixed-rate mortgage, I know what my

payment is for the foreseeable future, for the next 30 years.

While my landlord, in this case, they could

keep raising my rent.

So this might look good right now, but what if my landlord

raised the rent to, I don't know, $3,500 a month.

Well then, out of your pocket, 0.5 times 12, you'd be

spending $42,000 a year.

And then of course you get the interest from the money that

you put in the bank.

Plus 10.

Oh, minus 10 actually, sorry.

So in that case, if the rent goes up, then out of your

pocket is $32,000 every year.

Right?

Or what if the interest that you get on your cash in the

bank goes down?

Then this $10,000 thousand will become lower.

But as we can see, the rent would have to go up a lot to

make up for $41,000, to make this a break-even situation.

Let's figure out how much it would have to go up.

So in this first scenario, in order for your net outflow to

be $41,500, assuming you're getting $10,000 from the money

in the bank, your rent would have to be $51,500.

Right?

Because you're getting $10,000 from the bank.

And so divided by 12, your rent would have to be $4,300

in this situation to make this a break-even proposition.

This is another way to view it.

If I were to buy the house, and if I were to move, how

much would I have to rent this house out for, in order to not

be losing money every month?

Well I would have to rent it out for $4,300 a month, even

though maybe the market rents are only at $3,000.

And there is another devil's advocate argument.

And that's, well, housing -- and this is something that you

heard a lot about three years ago.

And a lot of these people aren't talking as much now.

But they would say, housing has never -- housing has done

nothing but gone up, and I will build equity just from

housing appreciation.

So how much does my house have to appreciate every year?

Well, to make up this difference-- $41,500 minus

26-- so to make up that $15,500 difference every year,

this is $15,500 favorable.

My house would have to appreciate by a comparable

amount, right?

So how much appreciation is that on my house?

Well that's a $1 million house, right?

So $15,500 appreciation on a $1 million house.

I'm doing everything in thousands, so 1,000 thousands

is a million.

So that's only 1.5% appreciation.

So if my house appreciates by 1.5%, that's it-- 1.5%.

If my house just appreciates by 1.5%, I'm going to make up

this $15,500.

And so it is worth it for me.

It is worth it for me to blow this money by having kind of

an increased -- by renting the money for more than I would

have to pay to rent the house.

And that might sound like a very reasonable proposition,

that the house will appreciate by 1.5%.

From 2001 to 2005, 2006, houses were appreciating like

10%, 15% a year.

So it seemed -- and a real estate agent would often do

this very math with you, and say, well, you're definitely

going to get 1.5%.

In fact, you're probably going to get 10% appreciation.

And you're going to make much more than this.

But think about, in the presentation of the balance

sheet and leverage, what happens if housing prices go

down by 1.5%?

What happens if it's minus 1.5%?

Well, then you're going to spend this much to rent the

money, right?

And you're not going to gain this much.

You're going to lose this much every year.

And so the proposition becomes even worse.

So this is a big deal.

Now that, I think, on a nationwide basis, a lot of the

housing indices show that housing prices have gone down,

I think by 6%.

That's what the Case-Shiller index says.

6% is a lot.

Especially on a $1 million house, that's $60,000 a year

that's just evaporating.

That's wealth that someone thought they had, that's just

disappearing out of their equity.

So this is rationale of pay more to rent the money for a

house than to rent the house is justified if

housing prices go up.

It becomes 10 times worse when housing prices are flat.

Or, God forbid, if housing prices actually go down.

And now we see that housing prices actually go down.

In the last couple of years especially, in the areas

where, like the Bay Area, or Florida, or California,

especially Southern California,

where this is happening.

And back even two or three years ago, when people used to

make this argument.

People used to make the argument, well you know, my

house just has to go up 1% or 2% percent, and I'm going to

make up the difference.

I'd say well, why is your house going to

go up 1% or 2% percent?

I mean, there has to be some reason why next year someone's

willing to pay 2% more for that house.

Is it because rents are going up 2% a year, so the income

stream is going to be 2% higher?

And actually in the Bay Area, from 2001 to roughly 2003,

rents were going down.

And there were actually people moving out.

All the tech workers were getting laid off.

You had a lot of programming jobs being outsourced to India

and wherever else.

So you had this whole situation where the population

was actually decreasing.

Demand for housing was going down.

But for some reason housing prices were going up.

So people said well, they've been going up for the last

five years, so they'll continue.

And they've never gone down, et cetera, et cetera.

But it didn't make an economic argument.

And I'll show in a future video that the only reason why

housing prices did go up is that it just became easier and

easier and easier to buy a house.

The standards that banks used for giving out a loan became

lower and lower and lower.

There are actually examples in Southern California, and in

San Jose and some of the suburbs, where people who had

incomes of $30,000 or $40,000 a year.

The bank actually gave them a $1 million loan to buy a $1

million house, based on stated income.

There's things called stated income loans, where you just

tell the bank what you earn.

You don't have to prove it to them.

And so every year that went by, it just became easier and

easier and easier.

More and more people just thought that housing always

appreciates.

So that's why they want to pay more and more to essentially

rent the money for a house.

And this became a self-fulfilling prophecy.

But as we see on the way down, it works

completely against you.

So in the situation where we are now, where nationwide

housing prices are actually declining-- and actually they

will decline until this rent-versus-buy equation

starts to make a little bit more sense-- it really hurts

the home buyer.

And what's even worse, and this is kind of adding insult

to injury, is that this guy, if I bought this house, and

all of a sudden I lose my job, and I can't pay the house

back, I might lose my entire $250,000 down payment because

maybe I can't sell the house, or the house

is selling for less.

Or maybe I want to move, and there's no one out there who

can buy a house because the banks all of a sudden got

smart again, and realized that they should become more

serious in terms of who they give money to.

And so I'm stuck holding this house, and my flexibility in

terms of where I can move is limited.

Actually a friend of mine was telling me that they've

actually done studies.

And there's a correlation between

unemployment and home ownership.

Because when you own a home, you have less flexibility in

looking for a job.

If I have a house in San Jose but there's a job in LA, I

might not be able to take that job because I

can't sell my house.

Or I might not even want to look for a job in LA.

While the renter, of course, my lease ends and I leave.

So this is just a rough sense of the rent versus buy.

And I know I get very impassioned about this.

But that's just because I explain this a lot.

And when I'm at parties and I start talking about the

calculations, people's eyes glaze over.

But I made this video now and I'll just tell

people to watch it.

See you in the next video.