How much cash depreciation should I expect in the current environment?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
softmax
Posts: 173
Joined: Tue Feb 04, 2020 1:27 am

How much cash depreciation should I expect in the current environment?

Post by softmax »

Hi bogleheads,

Half of my NW ($~250k) sits in a "high"-yield savings account (0.8%) which is mainly used to fund a future house and emergencies.

I figured that this forum generally prefers renting to buying, but I treat owning and maintaining a long-term home as a lifestyle that I'd like to pursue.

I'm willing to pull the trigger any time, but it seems to me that people in my area (Greater Seattle) are panic buying houses and I've seen some mediocre houses sold at 20% above the listing price. My chance of winning an offer at a reasonable price is relatively low, so it could be marathon for me.

The Fed is pumping more money into the market and I believe the cash is depreciating at an unprecedented speed. My question is, how much cash depreciation should I expect? Is 5% a good estimate?
magicrat
Posts: 1105
Joined: Sat Nov 29, 2014 7:04 pm

Re: How much cash depreciation should I expect in the current environment?

Post by magicrat »

Do you mean inflation? Inflation is less than 2%
Topic Author
softmax
Posts: 173
Joined: Tue Feb 04, 2020 1:27 am

Re: How much cash depreciation should I expect in the current environment?

Post by softmax »

magicrat wrote: Wed Aug 26, 2020 3:58 pm Do you mean inflation? Inflation is less than 2%
Not exactly inflation since the money is not used to buy commodities in the short term.
gabbar
Posts: 89
Joined: Fri Aug 13, 2010 1:41 pm

Re: How much cash depreciation should I expect in the current environment?

Post by gabbar »

OP, I used to be in your position and threw in the towel in 2018. Real estate prices have continued to go up since I purchased my tiny townhouse. I waited for 4 years before my wife decided - no more waiting for a correction. As you can see, she is smarter than I am.

Nonetheless, if you are working from home, consider buying outside the Seattle area.
Last edited by gabbar on Wed Aug 26, 2020 4:22 pm, edited 1 time in total.
magicrat
Posts: 1105
Joined: Sat Nov 29, 2014 7:04 pm

Re: How much cash depreciation should I expect in the current environment?

Post by magicrat »

softmax wrote: Wed Aug 26, 2020 4:03 pm
magicrat wrote: Wed Aug 26, 2020 3:58 pm Do you mean inflation? Inflation is less than 2%
Not exactly inflation since the money is not used to buy commodities in the short term.
Then what do you mean by cash depreciation, if not the impact of inflation on cash?
Topic Author
softmax
Posts: 173
Joined: Tue Feb 04, 2020 1:27 am

Re: How much cash depreciation should I expect in the current environment?

Post by softmax »

magicrat wrote: Wed Aug 26, 2020 4:20 pm
softmax wrote: Wed Aug 26, 2020 4:03 pm
magicrat wrote: Wed Aug 26, 2020 3:58 pm Do you mean inflation? Inflation is less than 2%
Not exactly inflation since the money is not used to buy commodities in the short term.
Then what do you mean by cash depreciation, if not the impact of inflation on cash?
I think I meant how much I should continue adding to the fund annually to prevent derailing my house buying goal.
User avatar
Quirkz
Posts: 466
Joined: Mon Jan 14, 2019 5:32 pm

Re: How much cash depreciation should I expect in the current environment?

Post by Quirkz »

There may be more going on than just inflation. Low interest rates tend to cause house prices to spike, because people can buy more house for the same payment.
Topic Author
softmax
Posts: 173
Joined: Tue Feb 04, 2020 1:27 am

Re: How much cash depreciation should I expect in the current environment?

Post by softmax »

gabbar wrote: Wed Aug 26, 2020 4:19 pm OP, I used to be in your position and threw in the towel in 2018. Real estate prices have continued to go up since I purchased my tiny townhouse. I waited for 4 years before my wife decided - no more waiting for a correction. As you can see, she is smarter than I am.

Nonetheless, if you are working from home, consider buying outside the Seattle area.
I'm working from home but it won't be long term. My job requires my presence in office.

Are you suggesting me buy as soon as I can if I've made up my mind to buy?
texasfight
Posts: 82
Joined: Mon Jul 27, 2020 3:12 pm

Re: How much cash depreciation should I expect in the current environment?

Post by texasfight »

Looks to be about 15% annually vs. asset price inflation.
fyre4ce
Posts: 1155
Joined: Sun Aug 06, 2017 11:29 am

Re: How much cash depreciation should I expect in the current environment?

Post by fyre4ce »

softmax wrote: Wed Aug 26, 2020 4:03 pm
magicrat wrote: Wed Aug 26, 2020 3:58 pm Do you mean inflation? Inflation is less than 2%
Not exactly inflation since the money is not used to buy commodities in the short term.
"Cash depreciation" is not a term that's widely used in financial circles, so that's why there is some confusion. "Depreciation" in general usually refers to spreading out the cost of a large capital purchase (building, expensive machine, etc.) over time for accounting and/or tax purposes. For example, if you buy a rental property, you can deduct 1/27.5th of the purchase price of the dwelling on your taxes each year, against rental income from the property. It sounds to me like you're talking about inflation instead.

"Inflation" just means a decrease in the purchasing power of money over time. For example, a loaf of bread used to cost $3 ten years ago, and now it costs $4. I'm not sure why you're tying it to the purchase of commodities. While there is no perfect measure of inflation, the US government typically uses changes in the Consumer Price Index, or variations thereof, to approximate inflation and decide how much extra Social Security to pay people, etc. If your savings account is paying less interest after taxes than the rate of inflation, then your money is losing purchasing power.

It's not accurate to say that this forum generally prefers renting to buying. There are some only-rent Bogleheads who prefer for their capital to be maximally invested in the stock market and minimally invested in real estate. There are also those who strongly prefer owning, even for short periods, and these people sometimes lose money. The general consensus is that if you expect to live in the same location for at least ~5 years (and this number can vary a bit based on local market and other factors), it's better to buy than rent. In the long run, buying should beat out renting, because there's ownership and a higher level of risk involved. This is much the same way stocks should beat out bonds in the long run. But there is no great force that will guarantee that these "shoulds" will hold, nor is there a guarantee that the "long run" is a time frame that will work for your needs. "In the long run, we are all dead." - John Maynard Keynes

Hope that helps.
User avatar
lthenderson
Posts: 5423
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How much cash depreciation should I expect in the current environment?

Post by lthenderson »

softmax wrote: Wed Aug 26, 2020 3:40 pm I figured that this forum generally prefers renting to buying
Really? I always had the sense that most of us own homes and the only decision up in the air is whether to pay the mortgage off early or make minimum payments and invest the rest in the stock market for higher returns instead.
anoop
Posts: 1992
Joined: Tue Mar 04, 2014 1:33 am

Re: How much cash depreciation should I expect in the current environment?

Post by anoop »

softmax wrote: Wed Aug 26, 2020 3:40 pm Hi bogleheads,

Half of my NW ($~250k) sits in a "high"-yield savings account (0.8%) which is mainly used to fund a future house and emergencies.

I figured that this forum generally prefers renting to buying, but I treat owning and maintaining a long-term home as a lifestyle that I'd like to pursue.

I'm willing to pull the trigger any time, but it seems to me that people in my area (Greater Seattle) are panic buying houses and I've seen some mediocre houses sold at 20% above the listing price. My chance of winning an offer at a reasonable price is relatively low, so it could be marathon for me.

The Fed is pumping more money into the market and I believe the cash is depreciating at an unprecedented speed. My question is, how much cash depreciation should I expect? Is 5% a good estimate?
Until the fed backpedals on its accommodative policy...

Depreciation relative to CPI -- about 2% per year.
Depreciation relative to stocks -- could be as bad as 30-40% per year or even more.
Depreciation relative to house prices -- depends on where you live and for Seattle could easily be 10-20% per year.

I bought a house in 2015 and often regret buying it, because I'm single and I find it too much work.
aristotelian
Posts: 8591
Joined: Wed Jan 11, 2017 8:05 pm

Re: How much cash depreciation should I expect in the current environment?

Post by aristotelian »

The value of cash doesn't matter for your purposes as much as the value of real estate. You need to keep 20% on hand of the type of house you are looking to buy. That value may go up or it may go down. It may go up by a lot more than 2%.
User avatar
JoMoney
Posts: 10523
Joined: Tue Jul 23, 2013 5:31 am

Re: How much cash depreciation should I expect in the current environment?

Post by JoMoney »

lthenderson wrote: Wed Aug 26, 2020 4:49 pm
softmax wrote: Wed Aug 26, 2020 3:40 pm I figured that this forum generally prefers renting to buying
Really? I always had the sense that most of us own homes and the only decision up in the air is whether to pay the mortgage off early or make minimum payments and invest the rest in the stock market for higher returns instead.
I also think it's a mis-characterization.
I would agree that the forum is not gushingly pro real estate as an "investment", and the forum is prone to pointing out that there are factors an individual needs to consider, that it's not automatically better to buy rather than rent... Which is starkly different then the advice you'd get from the very hyped market of realtors and mortgage brokers... but that doesn't mean the forum "generally" prefers renting to buying. The forum prefers making smart informed choices.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
fourwheelcycle
Posts: 1043
Joined: Sun May 25, 2014 5:55 pm

Re: How much cash depreciation should I expect in the current environment?

Post by fourwheelcycle »

lthenderson wrote: Wed Aug 26, 2020 4:49 pm
softmax wrote: Wed Aug 26, 2020 3:40 pm I figured that this forum generally prefers renting to buying
Really? I always had the sense that most of us own homes and the only decision up in the air is whether to pay the mortgage off early or make minimum payments and invest the rest in the stock market for higher returns instead.
My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better. I'm sure houses across the US in HCOLs and LCOLs have done better or worse, but I don't think it is a slam dunk that owning is better than renting.

We have two sons in their mid to late thirties, both married, with children. One has owed a home for six years and the other is still renting. The one who is renting frets about buying, mostly to get a house and yard they can enjoy and develop for their family, rather than a house and yard where they are only renters. I keep assuring him this is a lifestyle decision and he is not passing up an important investment opportunity.
smitcat
Posts: 6968
Joined: Mon Nov 07, 2016 10:51 am

Re: How much cash depreciation should I expect in the current environment?

Post by smitcat »

fourwheelcycle wrote: Thu Aug 27, 2020 7:46 am
lthenderson wrote: Wed Aug 26, 2020 4:49 pm
softmax wrote: Wed Aug 26, 2020 3:40 pm I figured that this forum generally prefers renting to buying
Really? I always had the sense that most of us own homes and the only decision up in the air is whether to pay the mortgage off early or make minimum payments and invest the rest in the stock market for higher returns instead.
My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better. I'm sure houses across the US in HCOLs and LCOLs have done better or worse, but I don't think it is a slam dunk that owning is better than renting.

We ave two son's in their mid to late thirties, both married, with children. One has owed a home for six years and the other is still renting. The one who is renting frets about buying, mostly to get a house and yard they can enjoy and develop for their family, rather than a house and yard where they are only renters. I keep assuring him this is a lifestyle decision and he is not passing up an important investment opportunity.
"My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better."
Interesting - so I am not sure exactly what you are describing here. Are you saying that you also lived in it for 'free' and when it is sold there will b e no taxes on any gains? So equity/index fund + free rent + no taxes due?
User avatar
lthenderson
Posts: 5423
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How much cash depreciation should I expect in the current environment?

Post by lthenderson »

fourwheelcycle wrote: Thu Aug 27, 2020 7:46 am
lthenderson wrote: Wed Aug 26, 2020 4:49 pm
softmax wrote: Wed Aug 26, 2020 3:40 pm I figured that this forum generally prefers renting to buying
Really? I always had the sense that most of us own homes and the only decision up in the air is whether to pay the mortgage off early or make minimum payments and invest the rest in the stock market for higher returns instead.
My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better. I'm sure houses across the US in HCOLs and LCOLs have done better or worse, but I don't think it is a slam dunk that owning is better than renting.

We have two sons in their mid to late thirties, both married, with children. One has owed a home for six years and the other is still renting. The one who is renting frets about buying, mostly to get a house and yard they can enjoy and develop for their family, rather than a house and yard where they are only renters. I keep assuring him this is a lifestyle decision and he is not passing up an important investment opportunity.
I rented for years but got tired of the irritations. I was irritated because the neighbors felt their snow belonged on my driveway. I was irritated because the person upstairs was evidently a member of Riverdance. I was irritated because others felt their packages and newspapers were mislabeled with my name, mistakenly delivered to my door and took them. So I bought a house and later another. Neither of my houses have kept up with the stock market, mostly because I live in the rural Midwest where life just proceeds at a much slower pace. I probably lost a few thousand dollars on the sale of my first home but I lived there for ten years and when you would have figured out what I would have paid in rent during the same time frame, I came out ahead. I've lived in this home for ten years now and it is worth about what I paid for it plus most of the improvements I have made. In other words, I might come out even again should I sell it. I don't regret the purchase at all but I have never considered a house an investment due to my location.
fourwheelcycle
Posts: 1043
Joined: Sun May 25, 2014 5:55 pm

Re: How much cash depreciation should I expect in the current environment?

Post by fourwheelcycle »

smitcat wrote: Thu Aug 27, 2020 7:50 am "My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better."

Interesting - ... Are you saying that you also lived in it for 'free' and when it is sold there will be no taxes on any gains? So equity/index fund + free rent + no taxes due?
Hmm, I guess I did not address the issue of saved rent. When we were paying off our mortgage I always felt the sum of our mortgage payments, house maintenance, and property tax was in the ballpark of "rent" (I realize we were accumulating principal in the house, but the interest payments each month were much larger than the principal). Now that we have paid off our mortgage, I feel like the opportunity cost of having all that money in my house instead of in the stock market, plus the cost of house maintenance and our very high local property tax, is more than the cost of rent.
smitcat
Posts: 6968
Joined: Mon Nov 07, 2016 10:51 am

Re: How much cash depreciation should I expect in the current environment?

Post by smitcat »

fourwheelcycle wrote: Thu Aug 27, 2020 10:22 am
smitcat wrote: Thu Aug 27, 2020 7:50 am "My wife and I have owned our home for over forty years. As an investment, including the money we have put in for new roofs, new furnaces, a new asphalt driveway, new appliances and carpet, etc., I would say it has possibly kept up with stock market equity index funds, but I would not say it has done any better."

Interesting - ... Are you saying that you also lived in it for 'free' and when it is sold there will be no taxes on any gains? So equity/index fund + free rent + no taxes due?
Hmm, I guess I did not address the issue of saved rent. When we were paying off our mortgage I always felt the sum of our mortgage payments, house maintenance, and property tax was in the ballpark of "rent" (I realize we were accumulating principal in the house, but the interest payments each month were much larger than the principal). Now that we have paid off our mortgage, I feel like the opportunity cost of having all that money in my house instead of in the stock market, plus the cost of house maintenance and our very high local property tax, is more than the cost of rent.
"When we were paying off our mortgage I always felt the sum of our mortgage payments, house maintenance, and property tax was in the ballpark of "rent""
If that guess was accurate and you had rented instead of purchasing what total value would you have now from all the past years rental payments?

"but the interest payments each month were much larger than the principal)"
And each year you paid the mortgage inflation eroded the value of the moneys paid as well.
Post Reply