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Thread: Is this a common fallacy in real estate?

  1. #1

    Default Is this a common fallacy in real estate?

    I noticed the same hook for selling houses as I hear in selling timeshares.

    The sales pitch goes like this.

    1. How much do you travel/pay rent?
    (Standard answer : every year, every month)

    2. How much are you currently spending?
    (Standard answer : At least $1 a trip, at least $500 in rent)

    3. How much longer will you be doing this?
    (Standard answers: as long as I can, at least 10 years/ as long as I live or until I own a house)

    4. OK, so for the next 10 years, let's see how much you'll be spending!
    (They take answers from 1. & 2. and multiply it for the appropriate amount)

    Up to now, they're already assuming you will always do what you do, no change.

    Here's the BIG FALLACY.
    5. Ok, don't you think in 5 years and longer, inflation will increase?
    Answer is usually : YES

    6. Ok, so isn't it reasonable to buy your house today or timeshare today, so you'll own it later and save money?

    The fallacy is here : the fear of inflation (not hyperinflation, just steady natural inflation)
    (please correct me if you can)

    My answer:
    a) IF inflation goes up and makes prices of housing, rent, travel go up with it, I DON'T CARE.

    b) Because either my wages go up with it (and it won't matter) or my wages don't keep up (and if my wages DON'T keep up with inflation, demand for housing & travel will DROP as it is happening today)

    c) Why should I pay up front or loan upfront at a ridiculous price I can't promise myself to pay back? (Forget interest!)

    d) Why should I buy today just because I don't think I can afford it later?

    e) Not traveling and not living in a nice house is not the end of the world, nice try on scaring and threatening me.

    f) Seriously though, how much money am I paying today, and in the next 5 years to travel and live in the same place, and to save HOW MUCH?

    Does my analysis make sense?

    Does the sales pitch "But if you don't own a timeshare or house you'll just keep paying and own nothing!" sound a bit funny?



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  3. #2

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    Time shares are rarely a good deal.
    Owning a home (in my opinion) can be a good thing. I intend to have mine paid for well before I retire which will effectively increase my income because then I will not have to worry about rent/ mortgage payments anymore. I will still have the asset if I decide to sell it. Renting all you get is a place to live and you help pay someone else's mortgage and taxes. Similar to renting (leasing) a car your whole life. If you move often or always want a new car, maybe an OK deal but costs you more in the long run. I am already paying less than I would be if I was renting even today. A person does have to decide what is best in their situation.
    Quote Originally Posted by NorthCarolinaLiberty View Post

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  4. #3

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    Quote Originally Posted by Zippyjuan View Post
    Time shares are rarely a good deal.
    Owning a home (in my opinion) can be a good thing. I intend to have mine paid for well before I retire which will effectively increase my income because then I will not have to worry about rent/ mortgage payments anymore.
    That would be the only mentality that makes buying a house right.

    I will still have the asset if I decide to sell it. Renting all you get is a place to live and you help pay someone else's mortgage and taxes.
    Yes, and happily so since they overpaid , and now they're begging to rent it out by lowering prices

    I think another common scare is "you'll be paying somebody else's mortgage"

    That won't hold true if your wages can't afford it, and rent would be forced to come down (or if there's enough people who already own houses, renting supply would increase as well), in which case the landlord can either collect less rent or no rent at all. All of which are good times for me to save up the difference.

    Sometimes I wonder, when people build houses, do they have statistics to decide whether there's enough people to fill them up?


    Similar to renting (leasing) a car your whole life. If you move often or always want a new car, maybe an OK deal but costs you more in the long run. I am already paying less than I would be if I was renting even today. A person does have to decide what is best in their situation.
    agreed.

    but leasing your car is no different than owning it for people not smart enough to keep their car longer than the loan term.

    I myself drive a car that cost less than $2000, you can laugh at me all you want, I'm laughing at the fact you pay $300+ a month.
    Last edited by Josh_LA; 04-06-2009 at 05:45 PM.

  5. #4

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    You always hear the line " you are throwing your money away on rent". It always makes me lol

  6. #5

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    Quote Originally Posted by Mitt Romneys sideburns View Post
    You always hear the line " you are throwing your money away on rent". It always makes me lol
    so do you agree with what I wrote above?

  7. #6

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    Josh, not trying to be an a$$, but it sure is going to sound like it. I dont think you are necessarily the most qualified person to be determining whether owning a house or renting a house makes the most sense - considering you were here on this forum asking about how a standard 30 year fixed loan works just a few days ago.

    I think you are correct in some of your points, but there are just so many different factors to consider. It definitely isnt a clear cut answer, but in my opinion the vast majority of circumstances would favor buying to renting. I am sure there are exceptions (due to a person's individual financial situation and micro market conditions with respect to rent vs. the price of homes).

    To go on here though and pretty much bash purchasing a home, I think it is going a bit far. Although, I do applaud you for learning more and making some good points.
    "You can easily judge the character of a man by how he treats those who can do nothing for him." - James D. Miles"


  8. #7

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    Quote Originally Posted by ord33 View Post
    Josh, not trying to be an a$$, but it sure is going to sound like it. I dont think you are necessarily the most qualified person to be determining whether owning a house or renting a house makes the most sense - considering you were here on this forum asking about how a standard 30 year fixed loan works just a few days ago.
    I don't mind asses, I like criticism.

    Now I know how a 30 year fixed rate loan works and it makes zero sense to me

    I think you are correct in some of your points, but there are just so many different factors to consider. It definitely isnt a clear cut answer, but in my opinion the vast majority of circumstances would favor buying to renting. I am sure there are exceptions (due to a person's individual financial situation and micro market conditions with respect to rent vs. the price of homes).
    Fair enough.

    But is it fair to say inflation shouldn't be sufficient to scare a person into buying because supply and demand plays in too, as well as wages keeping up.

    To go on here though and pretty much bash purchasing a home, I think it is going a bit far. Although, I do applaud you for learning more and making some good points.
    I'm not bashing buying a home, you can read me telling Met Income it may make sense to buy a home if he an be out of it in 10 years (other factors considered).

    Can you tell me what are good points, what are bad points?

    thanks!

  9. #8

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    Quote Originally Posted by Josh_LA View Post
    so do you agree with what I wrote above?
    I think I do generally. I dont get all caught up in the hype over the virtue of home ownership.

  10. #9

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    Quote Originally Posted by Mitt Romneys sideburns View Post
    I think I do generally. I dont get all caught up in the hype over the virtue of home ownership.
    But I am still open minded to it.

    I just think it's irresponsible and immoral to let inflation be the sole fear.

  11. #10

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    While I do think that, due to economic hardships, demand will fall for buying houses in general, and so prices will be falling. But that's not universally true.

    Interest rates will follow inflation and financing will become more expensive, even as prices on housing falls. No matter how little the demand is, banks will not lower the interest rate below the inflation rate. They would be better off not loaning money than to offer a 10% rate when inflation is 11%. On top of that they have to add a little for risk. They probably wouldn't even offer a 12% rate when inflation is 11%.

    Generally, wages won't keep up with inflation. So most wage earners won't be able to afford financing.

    Then, on the other hand, I expect rural housing to go up in demand. The people who will be able to afford to buy during the coming years will likely prefer land that can help support them.

    City house prices will fall with demand, but rural house prices will rise with demand. Now is the best time to buy rural housing.

  12. #11

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    Quote Originally Posted by enjerth View Post
    While I do think that, due to economic hardships, demand will fall for buying houses in general, and so prices will be falling. But that's not universally true.
    Yes, just like its universally true about health care and wages, so why do you care about anything other than your business?


    Interest rates will follow inflation and financing will become more expensive, even as prices on housing falls. No matter how little the demand is, banks will not lower the interest rate below the inflation rate.
    I agree, they wont, and as I just pointed out, if the principle is low, interest rate won't matter.

    If a house costs $10K, will it matter if interest rates are 20% a year?
    If your cash call was $400, will it matter if the interest rates are 100%?

    They would be better off not loaning money than to offer a 10% rate when inflation is 11%. On top of that they have to add a little for risk. They probably wouldn't even offer a 12% rate when inflation is 11%.
    You're missing the point, I think.

    If banks stop putting out money to the market, it WILL DECREASE INFLATION.

    The Fed Res and Treas can print all they want, but if we never use their money it won't matter (or if we invest our money in better places, we don't care either).


    Generally, wages won't keep up with inflation. So most wage earners won't be able to afford financing.
    But that didn't stop houses from foreclosing, did it?

    Then, on the other hand, I expect rural housing to go up in demand. The people who will be able to afford to buy during the coming years will likely prefer land that can help support them.
    Hopefully people use their head and that becomes true.

    City house prices will fall with demand, but rural house prices will rise with demand. Now is the best time to buy rural housing.
    Come visit Los Angeles, you literally see 3 storefronts for rent or lease on every street, blvd, rd, ave. Why owners aren't using their heads? Beats me!

  13. #12

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    Real estate is probably the worst hedge against inflation in this environment. You cannot hedge against inflation by buying something overpriced and real estate is still way overvalued. The only way someone will come out ahead in real estate is if they literally get to buy with 3% down through FHA and get bailed out through hyper-inflation in the next 5 years. But, it's not really the asset that made you money, it's the fact that you used someone elses money to buy it. If you have a down payment saved up, it would probably be better to invest it in some real inflation hedges like Gold, Silver, Oil, and what not. On the flip side, if you are able to buy with virtually no money down, I don't see the harm in trying to do so (provided you don't ridiculously overpay for the home) while investing what would have been your down payment into some real inflation hedges.
    Last edited by theoakman; 04-07-2009 at 11:20 AM.
    you can buy now using an elevated dollar to get in on things that are poised to go way up when the dollar collapses. If he's right, and I think he is, his profits are going to be ridiculous. I've already showed by referencing some mining stocks that you can make a killing in this market playing Schiff's investment strategy.

    -theoakman, RPF 1/26/09.

    Oh what a difference 10 months makes. Deflationists, where are thou?

  14. #13

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    The fallacy is here : the fear of inflation (not hyperinflation, just steady natural inflation)
    (please correct me if you can)
    Inflation isn't fiction. In the Keynes model, it is not only a reality but a necessity.

    30 year mortgages are for suckers, but you can reduce the interest you pay by paying extra principal every month. Or you can do what we did, and get a 15 year mortgage. The rates are generally lower on those, too.

    Using the model of the past 3 years is misleading. I purchased a house 15 years ago, for 45,900. The woman who bought it from me sold it 3 years ago for 154,000.00. Zillow indicates that it's now only worth $90,000. Which means I would have essentially doubled my money, less the interest, if I had stayed there and sold today.

    Life's a gamble, and real estate is no different.

  15. #14

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    Quote Originally Posted by angelatc View Post
    Inflation isn't fiction. In the Keynes model, it is not only a reality but a necessity.
    I never said inflation is false, I said it's not relevant if we consider wages will or will not increase along with it.

    30 year mortgages are for suckers, but you can reduce the interest you pay by paying extra principal every month. Or you can do what we did, and get a 15 year mortgage. The rates are generally lower on those, too.
    Fair enough, so you'd agree with me longer loans are for suckers.

    Using the model of the past 3 years is misleading. I purchased a house 15 years ago, for 45,900. The woman who bought it from me sold it 3 years ago for 154,000.00. Zillow indicates that it's now only worth $90,000. Which means I would have essentially doubled my money, less the interest, if I had stayed there and sold today.

    Life's a gamble, and real estate is no different.
    I agree, but some people can't (and shouldn't) take certain bets.

  16. #15

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    Quote Originally Posted by Josh_LA View Post
    I never said inflation is false, I said it's not relevant if we consider wages will or will not increase along with it.



    Fair enough, so you'd agree with me longer loans are for suckers.



    I agree, but some people can't (and shouldn't) take certain bets.
    In general, borrowing money is for suckers unless you are borrowing to produce something. Unfortunately, the US government's policies are entirely skewed in favor of those who borrow simply because the US government is the biggest offender of us all. They are now borrowing trillions of dollars. They are creating an environment where those who borrow will be rewarded the most while those who save will be punished the most. In Weimar Germany, people found that the most effective way to evade taxes was to defer payment for a few months and let inflation eat away your debt to the government.
    you can buy now using an elevated dollar to get in on things that are poised to go way up when the dollar collapses. If he's right, and I think he is, his profits are going to be ridiculous. I've already showed by referencing some mining stocks that you can make a killing in this market playing Schiff's investment strategy.

    -theoakman, RPF 1/26/09.

    Oh what a difference 10 months makes. Deflationists, where are thou?

  17. #16

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    Quote Originally Posted by theoakman View Post
    In general, borrowing money is for suckers unless you are borrowing to produce something.
    Agreed.

    So a person who doesn't know how to predict inflation and economy beyond 10 years would be an absolute sucker for being scared into buying a home for just that reason.

  18. #17

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    Quote Originally Posted by Josh_LA View Post


    Fair enough, so you'd agree with me longer loans are for suckers.


    Not necessarily. Taking 30 years to pay off a mortgage is foolish, but taking out a 30 year mortgage isn't necessarily foolish.

    There are so many variables that stereotyping and generalizing is misleading.

  19. #18

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    I never said inflation is false, I said it's not relevant if we consider wages will or will not increase along with it.
    That's a false paradigm though. Wages do increase. Maybe not at the same rate of inflation, but most of us make more money now than we did 10 years ago. In the '80's, heart surgeons made $150,000 per year.

    Do you think that heart surgeons make more now? DO you think that the home he bought then is worth more now?

  20. #19

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    Quote Originally Posted by Josh_LA View Post
    Agreed.

    So a person who doesn't know how to predict inflation and economy beyond 10 years would be an absolute sucker for being scared into buying a home for just that reason.
    The real estate industry has consistently relied on trying to scare people into buying for the past 12 years. If you plan on staying in a particular area and raising a family there for over 15 years, buying a house probably makes sense. Along those lines, you'll probably end up saving money compared to renting the same place in the same area for 15 years. This was the case for a good 60 years in this country. The past 10 years were a complete anomaly and it will make sense to buy a home as soon as prices come back to reality. You don't really need to know how to predict inflation. In the past 40 years, there has only been about a 2 or 3 years where we weren't actively debasing our currency. You only really need to know if a house is overpriced or not. It's not that hard to figure out. Yet somehow, the entire country wasn't able to do so.

    I remember looking at homes in 2006. I really wasn't in tune with the economy at the time at all. I was familiar with basic economics. I read Adam Smith. I read Milton Friedman. But I wasn't actively following any markets. My girlfriend and I walked into about 5 open houses in a day and walked out asking each other if they were on crack asking for those prices. Common sense basically told us that something was wrong. The real estate bubble was a historical anomaly.

    The best way to determine if things are normal is to look at the down payments required. During the 90s real estate boom, down payments were down to 10% before it went bust. During this boom, they were at 0% and actually negative if you looked at the way some of these mortgages were structured. If minimum down payments are at 20-30% for a good 3 years, you can probably safely assume it's a safe environment.
    you can buy now using an elevated dollar to get in on things that are poised to go way up when the dollar collapses. If he's right, and I think he is, his profits are going to be ridiculous. I've already showed by referencing some mining stocks that you can make a killing in this market playing Schiff's investment strategy.

    -theoakman, RPF 1/26/09.

    Oh what a difference 10 months makes. Deflationists, where are thou?

  21. #20

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    Quote Originally Posted by theoakman View Post
    The real estate industry has consistently relied on trying to scare people into buying for the past 12 years. If you plan on staying in a particular area and raising a family there for over 15 years, buying a house probably makes sense. Along those lines, you'll probably end up saving money compared to renting the same place in the same area for 15 years. This was the case for a good 60 years in this country. The past 10 years were a complete anomaly and it will make sense to buy a home as soon as prices come back to reality. You don't really need to know how to predict inflation. In the past 40 years, there has only been about a 2 or 3 years where we weren't actively debasing our currency. You only really need to know if a house is overpriced or not. It's not that hard to figure out. Yet somehow, the entire country wasn't able to do so.

    I remember looking at homes in 2006. I really wasn't in tune with the economy at the time at all. I was familiar with basic economics. I read Adam Smith. I read Milton Friedman. But I wasn't actively following any markets. My girlfriend and I walked into about 5 open houses in a day and walked out asking each other if they were on crack asking for those prices. Common sense basically told us that something was wrong. The real estate bubble was a historical anomaly.

    The best way to determine if things are normal is to look at the down payments required. During the 90s real estate boom, down payments were down to 10% before it went bust. During this boom, they were at 0% and actually negative if you looked at the way some of these mortgages were structured. If minimum down payments are at 20-30% for a good 3 years, you can probably safely assume it's a safe environment.

    thanks, even though it sounds like you just told me what I wanted to hear, much apprecaited, I will read this carefully again!

  22. #21

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    Quote Originally Posted by angelatc View Post
    That's a false paradigm though. Wages do increase. Maybe not at the same rate of inflation, but most of us make more money now than we did 10 years ago. In the '80's, heart surgeons made $150,000 per year.

    Do you think that heart surgeons make more now? DO you think that the home he bought then is worth more now?
    Well, wages don't really outpace inflation when inflation is significant. The point of inflation is precisely to rob wages and savings. So it's natural that they don't follow inflation. If you look at nearly every industry, you'll find that in the past 10 years, the average wage has increased nominally by about 20-25% since 1999. On the flip side, you'll find that the price of food and gas has doubled. The price of housing doubled (but it's coming back down). The price of health care, the cost of electricity, the cost of dirt, car insurance, everything....it's all up more than 25% the past 5 years. It's probably up more than 100%. The federal government spending was up 40% in the past 10 years prior to October. There's no question it's past 100% now and it's probably going to 500% by the time Obama is finished.

    Wages have not kept up with inflation. They haven't even come close. Now, because it's all relative, you will see housing fall back in line with wages. This is unavoidable and it's also a good thing for Americans. The real danger is that things such as oil and commodities are traded and bought on the global markets. These things will end up costing Americans more and result in a decrease in our standard of living.

    The point is, inflation has literally destroyed our real wages the past 10 years at a much faster rate than it ever has in American history. The real danger is, we haven't even seen the big inflation that is likely to come from our government's reckless policies in the next 5 years. It's not going to be pretty. At this point, the best thing we can hope for is the bankruptcy of our governments (similar to the bankruptcy of the USSR) and a nice structure reorganization of all governments (federal, state, county, and municipal) into much smaller governments.

    We truly live in Bizarro world right now when Europe, Russia, and China are telling us that government spending and socialism are the fast track to poverty and economic malaise. We used to fight wars to stop the spread of communism yet we somehow peacefully embraced it here.
    you can buy now using an elevated dollar to get in on things that are poised to go way up when the dollar collapses. If he's right, and I think he is, his profits are going to be ridiculous. I've already showed by referencing some mining stocks that you can make a killing in this market playing Schiff's investment strategy.

    -theoakman, RPF 1/26/09.

    Oh what a difference 10 months makes. Deflationists, where are thou?

  23. #22

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    Quote Originally Posted by Josh_LA View Post
    thanks, even though it sounds like you just told me what I wanted to hear, much apprecaited, I will read this carefully again!
    There are plenty of benefits to home ownership. Making money is not one of them.

    There are also plenty of drawbacks. Maintenance and upkeep are pains in the asses. Oh yeah, and bad neighbors are a nightmare. The biggest drawback however, is the fact that states are realizing that they can turn every homeowner into a renter through property taxes. There's no easy solution to protecting yourself in this crisis when the government changes the rules every other month.
    you can buy now using an elevated dollar to get in on things that are poised to go way up when the dollar collapses. If he's right, and I think he is, his profits are going to be ridiculous. I've already showed by referencing some mining stocks that you can make a killing in this market playing Schiff's investment strategy.

    -theoakman, RPF 1/26/09.

    Oh what a difference 10 months makes. Deflationists, where are thou?

  24. #23

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    Quote Originally Posted by Josh_LA View Post
    I agree, they wont, and as I just pointed out, if the principle is low, interest rate won't matter.

    If a house costs $10K, will it matter if interest rates are 20% a year?
    If your cash call was $400, will it matter if the interest rates are 100%?
    The rate always matters, much more than you're implying.

    If housing falls by 40%, but the interest rate shoots up to 10%, that's effectively a trade-off.

    If a house costs $10,000 @ 20% and your wages are so low that you need a mortgage (the only reason to get a loan), it's going to cost you $60,120 to pay off your $10,000 house in 30 years. A 15-year mortgage will cost you a total $31,680.

    The interest rate has as much to do with determining the affordability of the house as the price does, and inflation is a real hazard that will drive up the cost (rate) of financing.

  25. #24

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    Quote Originally Posted by Josh_LA View Post
    But I am still open minded to it.

    I just think it's irresponsible and immoral to let inflation be the sole fear.
    Can you afford it? Just out of curiousity, wouldn't it be best t o get a home if you have a family? Otherwise getting a condominium or renting and apartment is what I see as a good option.
    "The best argument against democracy is a five minute conversation with the average voter." -- Winston Churchill

    Damn proud Classical Liberal/Minarchist!

  26. #25

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    Quote Originally Posted by theoakman View Post
    Well, wages don't really outpace inflation when inflation is significant. .
    I am not saying they do. I am saying that historically, that you will end up with more money in your pocket at the end of the month if you choose fixed rate, rather than adjustable, housing costs.

  27. #26

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    I'm surprised no one linked to this.

    http://media.lewrockwell.com/media/2...s_a_renter.mp3

    Peter Schiff: You're Better Off as a Renter
    "Any fool can make a rule, and any fool will mind it." - Henry David Thoreau

  28. #27

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    Quote Originally Posted by theoakman View Post
    There are plenty of benefits to home ownership. Making money is not one of them.

    There are also plenty of drawbacks. Maintenance and upkeep are pains in the asses. Oh yeah, and bad neighbors are a nightmare. The biggest drawback however, is the fact that states are realizing that they can turn every homeowner into a renter through property taxes. There's no easy solution to protecting yourself in this crisis when the government changes the rules every other month.
    thanks. I agree too, that the government can at any time change rules to make it unfavorable for some to own houses. (assuming they don't outright make home owning illegal).

  29. #28

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    Quote Originally Posted by Mesogen View Post
    I'm surprised no one linked to this.

    http://media.lewrockwell.com/media/2...s_a_renter.mp3

    Peter Schiff: You're Better Off as a Renter
    OUCH! Not that I think Schiff is right about everything (but I have yet to find what I disagree with him so far on)

  30. #29

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    Quote Originally Posted by angelatc View Post
    I am not saying they do. I am saying that historically, that you will end up with more money in your pocket at the end of the month if you choose fixed rate, rather than adjustable, housing costs.
    that much I agree.

    Adjustable is another sucker for people who wishfully think banks are stupid.

  31. #30

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    Quote Originally Posted by The_Orlonater View Post
    Can you afford it? Just out of curiousity, wouldn't it be best t o get a home if you have a family? Otherwise getting a condominium or renting and apartment is what I see as a good option.
    Currently no.

    But I won't buy a house unless i see myself paying it off in 10 years.

    Yes, having a house is better than not if you have a family.
    And I thank God every day I have nobody else to feed but myself.
    Talk about freedom?

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