Can't speak for Boarder42 specifically, but here's one error; you've calculated the 7 year periods incorrectly, again adjusting for inflation (CPI, apparently) for a comparison against a fixed-rate loan. A quick re-run of the numbers would give you this:
1) 1.58%
2) 2.15%
3) (2.2%)
4) 5.4%
5) 3.7%
6) 3.5%
7) 4.3%
8) 5.8%
9) 8.0%
10) 14.4%
I'm still uncertain why you're sticking with these 10 subsets of the last 17 years, except that it seems designed to capture the great recession in the middle. Given the market returns of the last 6 years it seems unlikely that several more periods won't also be substantially positive, even with a sudden 20-30% drop.
Second, this entire comparison is a bit frivilous, as you can't take the prime rates available today and retroactively apply them to loans taken out in other time periods. If mortgage rates were 7%+ as they were in the early 2000s the calculus would be different comparing them to rates around 3%.It isn't an apples-to-apples comparison here. L
Third, your instance of using a 7 year time horizon further skews the results. If that is your particular time frame before selling, fine, but it is not (as you assert) the 'average length of home ownership' - that's closer to 13 years (source). Re-running the market returns over 13 year periods shows >90% outstripping the 3.x% threshold you determined. Here's where its helpful for the individual to calculate based on their own circumstances. If you plan to stay in a home for 4 years your numbers and preference may differ from someone who plans on it being their 'forever home'.
I didn't personally calculate the returns, I used a calculator online from Jan 1 of each timeframe accounting for CPI inflation
S&P calculator from dqydj.com
I did revise the numbers some January to January.
-1.591
-5.811
-7.68
4.137
1.215
2.552
4.556
4.84
4.946
13.228.
They still don't match yours exactly but the point is the same. Over half of the timeframes the leverage strategy loses.
I explained why I started at 2000 in a prior post. It is not cherry picked. It is the beginning of when most on her started buying homes. It is true that timeframe captures the 2007 and 2008 markets, but that is a reality that happens, and will happen again.
People had this argument in 2000, a year after the 1999 stock rocket. The market couldn't drop. Tech stock are the future. Housing can't go down. The market is solid. Until it isn't.
I ran the numbers back 50 years to 1966 just to see as well. The average 7 year return was 5.59%. Subtracting the current rate and tax and the net benefit is minimal. Less than 1% for taking on market risk. And that is over 50 years, which is way too long of a time horizon for me.
I agree with your prime rate comparison. This leverage idea is fairly new. 15 years ago it made no sense due to the math as mortgage rates were much higher. Now it makes little sense due to the risk of mean reversion.
I see you are a statistician, and you noted a recent report that increases the homeownership length to 13 years. That may be due to that recent survey by the NAHB but the longer term data still supports the 7 year timeframe. Over the past 10-20 years, it still averages out to 6-7. This is likely due to the 08 crisis as well, which skews data as we just discussed.
From Keeping Current
"The National Association of Realtors (NAR) keeps historical data on many aspects of homeownership. One of the data points that has changed dramatically is the median tenure of a family in a home. As the graph below shows, for over twenty years (1985-2008), the median tenure averaged exactly six years. However, since 2008, that average is almost nine years."
We can skew numbers however we want. We can look at 50 year periods, or 2 year periods. But it really doesn't matter.
The only thing that matters is what is likely to happen in the future.
For some people, they care about the near term. The next 5-10 years. For others, they are comfortable with a time horizon that is 40 years out. I care about the next 5-10. Once that book is done, I'll open the next one and re-evaluate.