Lovely example, very simple, very direct succinct manner. One reason many folks don’t buy RE bubble theory is because most folks out there want a single paragraph executive summary or bottom line on what they should do (buy/rent).
Folks saying that the person B will get the mortgage at higher rates (7%) are at odds with the bonds market. The chances of Fed lowering rates lower next year (as recession kicks in) are higher than Fed raising rates next year. Long term rates shouldn’t change by 50bp in a year though as I don’t expect the Fed to change interest rates by a lot within the next year. So folks, person B most probably will be paying same 6.5% if not less, next year.
I accept the 10% return rate is slightly aggressive for average investor. But theoretically, SP500 or a well diversified portfolio will return from 8-10% in 30 years and this is historically correct. Problem is that an average Joe wouldn’t be disciplined enough to save these $600 for 30 years. It is also unlikely that he will have a well diversified portfolio. However, if I had to do this, I would simply choose SP500 or one of those target funds (30 year target).
