Bloomberg has an interview transcript with investor John Paulson, and it has the catchy headline Billionaire Paulson Who Shorted Subprime Calls Crypto ‘Worthless’ Bubble. He does say that, but the interview also includes some insights on many other topics like asymmetrical trades, gold, the highly-limited supply of crypto leading to high volatility, interest rates, and controlling how you spend your time.
If you are having trouble getting around the paywall, let me include this quote:
If somebody came to you and asked how they should invest $100,000, what would you tell them?
I always say the best investment for an average individual is to buy their own home. So if you take that $100,000, put 10% down, get a $900,000 mortgage, you can buy a home for a $1 million. It was just reported that home prices were up 20% in the last month. So if you bought a home for a $1 million with $100,000 down and the home was up 20%, that’s $200,000 on a $100,000 investment. The longer you wait, the more the house is going to appreciate and the greater return you’ll have on your equity investment. So I think the single best investment for anyone with that type of money would be to buy their own house or apartment.
Basically, mortgages offer cheap leverage on an asset that he believe will keep going up for a while. A person can take $50,000 and control a $500,000 asset. If it goes up 10%, you just made another $50,000 and doubled your initial $50,000.
Yes, we learned that leverage works both ways in the 2008 Financial Crisis, meaning that if that $500,000 drops by 10%, you just lost your $50,000 downpayment. That’s what Paulson is most well-known for – making $20 billion betting against subprime mortgages during that crisis. In fact, I recall Paulson saying something very similar back in 2014 or so, that housing prices are going to keep going up. Here is the S&P/Case-Shiller U.S. National Home Price Index chart from Calculated Risk:
With this interview, I guess he doesn’t see this trend ending soon. I’m not saying I necessarily agree with this answer, but it is an interesting one when you consider all of the possible options.
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I struggle with this idea. I agree with Paulson in some ways, however I can’t take my eyes off this 100 year long term inflation adjusted Case Shiller housing chart from the following web link: https://www.multpl.com/case-shiller-home-price-index-inflation-adjusted
It gives a bit more perspective than the above chart that only goes back to the late 1980’s. Most people probably already know this intuitively even without seeing it but this chart shows we are at historically hugely overvalued home price levels. My understanding of a successful investor is buy low and sell high, not buy high and hope it goes higher. (Or at least buy low and don’t sell – if it’s your forever home). So home prices have been rapidly appreciating for 10 years straight without any correction or downturn, and yet NOW would be a good time to buy? I’m just not seeing it. I would love to hear someone tell me what I’m missing here (other than FOMO).
There is a long-running inventory ‘gap’ in housing, based on population growth and demand versus the dramatic construction pull-back in the aftermath of 2008 market. https://www.cnbc.com/2021/07/07/us-housing-shortage-will-last-for-years-to-come-taylor-morrison-ceo.html
Also, viewing housing over a one hundred year period introduces a lot of noise. For instance, think of the dramatic economic swings over the last hundred plus years – increased efficiencies in agriculture which drove people from rural areas to the cities, the introduction of the thirty year mortgage, the information economy, zoning restrictions, homeowners’ associations – if you want to try and introduce longer periods into your analysis, I don’t think you can look prior to the post-War years.
Finally, one thing I’m curious on is the inflation adjustment rate of the Case-Shiller index. As we’ve all seen, certain items have long outpaced average inflation – higher education costs and medical costs, among others. It would not surprise me that housing does as well – while we’ve figured out how to make computers faster and more efficient, or introduce robots into auto manufacturing to drive productivity, the home construction process of today does not look terribly different than it did forty years ago. Some materials are different, sure, but people did not make a massive pivot to pre-fab homes or mobile homes. The same amount of labor, using similar materials, building larger homes than before, on less available lots – it logically makes sense that housing costs would outpace average economic inflation.
Your chart is inflation adjusted, not interest rate adjusted. If interest rates do rise, sure maybe housing prices come down, but your monthly payments are going to be the same. I’m not personally concerned about prices. I bought what I can comfortably afford and simply pay my mortgage in lieu of rent. If your able to successfully time the market and buy low and sell high–that sounds like the most promising strategy for sure. (I wish I had that ability)
I did some number crunching to see how much I was saving on taxes versus the mortgage interest paid in 2020 via turbotax software. When I removed the mortgage interest my taxes were down by 4k. I paid 26k in mortgage interest. Basically, you have the onus to make twice your mortgage rate to break even since the tax deductions aren’t adding up to much. Yes, this does depend on where you live with SALT deduction cap and of course your MAGI.
So, the bottom line is it worthwhile to get the mortgage paid off as quickly as possible or do you DCA into the stock market?
Thanks for all you via this website!!!
I’m curious if your mortgage size caused a reduction in what you were able to deduct against taxes, especially if you are a single filer. $26k in taxes, to me, suggests an $800k+ property value. If you are a single filer, you are only able to take advantage of deducting up to a $375k mortgage, which has some sort of pro-rated deduction by the IRS if it exceeds that amount
https://www.rocketmortgage.com/learn/mortgage-interest-deduction
My mortgage was close to 1M and mine was grand fathered to get the 1M max mortgage interest deduction
I am no expert but I would look more towards index funds. Even if his plan to invest in a house works you will be house rich and cash poor meaning about the only way to get to the cash is to sell the house and that might be a little hard and would take sometime to sell especially if it’s your primary resident. (moving furniture, finding a buyer, the time to wait for closing, etc.} I would use half of the money for a house and the other half invested in index funds if I need a house at all.
What about a cash-out refi or a HELOC? That’s a simplistic analysis.
What about a cash-out refi or a HELOC? That’s a simplistic analysis.
That would be a ideal but I don’t know if it’s all that simplistic it would cost you especially in big city’s like NY where banks don’t treat cash-out refi’s so kind where in a lot of cases the interest rate will be higher and closing cost could be 10,000 to 15,000 or more plus you will have to restart your mortgage and qualify for the refi on top of the red tape the underwriter puts you though. Just my thought.
Thanks for your comments.
Next hypothetical question – at what point would you think paying off the entire mortgage makes sense? If lets say the mortgage amount is 800K and you have 2x/3x/4x that much in a bank?
Also, wouldn’t it make sense to pay off the mortgage and then you DCA the mortgage interest amount into index funds each month as though you are still on a mortgage.
There are many different opinions on the subject of paying off a mortgage and it might be that there is no wrong answer for the most part but my opinion is if you have a low interest rate mortgage 3,50% or less I would not rush to pay it off but rather take the cash you was going to use to pay it down and invest it. there is a good chance you will make more than the interest rate on the loan in the long run. This goes back to my previous post if you pay down the mortgage and a emergency comes up where you might need that money you won’t be able to get the money out that you paid the mortgage down with. If you invest instead that would give you a avenue in which you could cash out for that emergency and or later if you decide to use that money to pay off the balance of your mortgage but if you have excessive cash in the bank it’s your choice to pay it off.
Thanks for your reply again.
With market, there is always risk and also timing of when you need it back versus market conditions apply. I agree completely with your point about emergency funds. However, my point of comparison is – instead of paying the mortgage interest, you DCA that amount only into index funds and your comparison will be always be net positive since the interest was always an expense. Assuming you have enough emergency funds to cover for 1 year of expenses lets say, wouldn’t it be better to go with –
paying off your mortgage + DCA the equivalent of mortgage interest that you would have been paying?
I’ve written about post about this somewhere, but basically my rough rule of thumb for timing the payoff of your mortgage with your financial independence date. If you play on working to 65 anyway, then I don’t see an important urge to payoff the mortgage super early – just keep your retirement investing on track. On the other hand, if you consider yourself “retired”, then why not just pay off the mortgage and fully de-leverage yourself?
It might make sense but there is no better feeling than having a home that is paid off
Buy a smaller house then? I understand circumstances may differ, but it doesnt follow that buying a home necessarily makes you “cash poor”
Leverage is the power you’re unleashing with a home purchase. If someone offered to lend you 4x your money at 3 percent interest for 30 years to invest in index funds, I would advocate jumping all over that too
I agree that the interest rates are low and it absolutely doesn’t make sense to pay it off.
However, if you read the thread above it says that in John Paulson’s view –
“If somebody came to you and asked how they should invest $100,000, what would you tell them?
I always say the best investment for an average individual is to buy their own home. “
I’m not entirely sure what your arguing?.. my statement is pretty consistent with what Paulson said. If someone told me they have an extra 100k laying around that they are trying to invest, I would not take that to mean that is all the wealth they owned. I would assume they still have a healthy savings for emergencies in addition to the 100k, and like Paulson I would recommend they buy a house (I would actually recommend they buy and “house hack” if their lifestyle allows for it)