LY THANH PHUONG
People often say, “Investing in gold may lead to losses, while real estate helps grow your money.” As history shows, both gold and real estate prices increase over time. But as far as I see, if you keep cash, the cash is always devalued due to an average inflation of 4% a year and can also be depreciated by the policy of printing more dollars to offset the deficit in the budget. Gold prices rise but not much, just enough to withstand inflation. The cost of housing in crowded residential areas in America, on average, doubles every 10 years. If you use Rule 72 (a mathematical discipline in finance, divide 72 by the annual interest rate to get the number of years that the investment doubles, for example, the interest rate is 8% per year, then 72/ 8 = 9. That means with such interest, it takes nine years for the investment capital to double), house prices in the US increase by an average of 7% – 8% per year.
Just think about it. The earth remains the same size while the population on earth is continuing to grow over time. Lands, cities, administrative centers, financial centers, industrial areas, markets, schools, recreation areas, resorts often attract more people than other places. The economy of capitalist society is always governed by the law of supply and demand. When supply is limited and demand continues to increase, it is a matter of fact that prices must increase.
House prices in America are no exception. There are 50 states in the United States, of which California is the most populous state with more than 30 million people (as of 2024). California can be said to be the most prosperous state in the United States, with a temperate climate – not too hot, not too cold; with a vast geography of forests, mountains, beaches, agricultural lands and deserts; a rich economy, from industry, agriculture – fisheries to commerce, and a remarkable tourism industry. In addition, it has a system of prestigious universities, of which the most famous are Stanford, USC, UC Berkeley, and UCLA. It is such an ideal place to live, study, and work. In California there are three regions: North – Central – South, with the three famous cities: San Francisco – Los Angeles – San Diego. All three cities bear the typical identity of the aforementioned California.
With such an ideal land, California not only attracts Americans, but is also a place where the richest people in the world invest their money, send their children to school, and choose to be a place for them when they retire. In recent years, especially in San Diego, the city where I live, I see a lot of rich people from China and Vietnam send their money to their relatives to buy houses here for their children to live and to rent.
In a market economy, prices may rise for a period and then fall during times of crisis—what economists refer to as a “correction period.” Real estate has experienced such cycles throughout history. However, in many areas of the U.S., such as San Diego, home prices have historically doubled approximately every 10 years.
Now in 2024, the average price for an average house located in an average neighborhood in San Diego such as in Mira Mesa is about $1,000,000. What is an average house? An average house is a separate house just big enough for a family of a couple with two small children. A house like that, by American standards, consists of 3 bedrooms, 2 bathrooms, and a 2-car garage. Often the area of the house is about 1500 square feet (150 square meters), with front yard and backyard. In 1984, when I first settled in San Diego, such a house was priced at $60,000. Today after 30 years, the same house now sells for nearly $1,000,000.
With the fiscal and tax laws, along with the impetus of the supply and demand law, the average price of a house in a region is related to the average income of a family living in that area. The average income in San Diego is about $200,000 a year, while the average house is $1,000,000. That said, the price of an average San Diego house is five times the average income of families living in San Diego. This is a spontaneous result, driven by the law of supply and demand.
Typically, a family with an annual income of $200,000 a year must use about a third of their income to pay income tax and social security taxes. The next one third is used either to pay for rent or for mortgage together with utilities like electricity and water. The remaining one third is for food, transportation, and other miscellaneous things. If they set a careful budget, there might be some savings. Seven years later, they can save about $200,000 for a typical down payment to buy a house.
To buy a house that’s worth $1,000,000, it might take you a whole lifetime to save enough $1,000,000. Fortunately, to encourage homebuyers, the US government always has what it calls the “Fiscal Policy” (a program that helps the nation’s economy grow). One of the most popular policies is to encourage homebuyers to buy by offering bank loans to them and lowering their taxes. Such policies encourage people to become homeowners. It also promotes other related sectors from land planning, construction materials production, household goods production, labor in related industries, construction workers, banking services, brokerage services, and other real estate services. All these occupations belong to the “housing sector”, which accounts for 25% of the nation’s economy. What a wonderful policy!
To buy a $1,000,000 house, an average family just needs to pay 20% or $200,000 called a “down payment”. The remaining $800,000 or 80% can be borrowed at a very reasonable interest rate, currently not exceeding 7% per annum. To qualify for such a loan, the bank requires the borrower to have an annual income of at least 20% of the loan amount, i.e. 20% x $1,000,000 = $200,000. Furthermore, the borrower must have a good credit score of 670 points or more.
An individual’s credit score in the US is provided by private credit agencies. Currently there are 3 agencies: Experian, TransUnion, and Equifax. An individual in the United States, when born or newly accepted to immigrate to the United States, is given a number called the Social Security Number. This number represents the individual in financial services and taxation throughout his/her life. Later, when the individual has financial activities, such as renting a house, opening electricity or telephone line, buying things on installment, buying cars on installment, and even borrowing money to buy a house, the record shows whether the individual is paying properly and on time, and an appropriate point will be given to his/her social security number. They call it credit point.
Why do banks want homebuyers to pay 20% in advance and they only want them to borrow 80%? Banks are the type of business that mobilizes capital of those who have extra money in the form of savings and banks pay them interest. Currently the interest in saving is about 4% a year. Banks use the money in the savings fund for others who need a loan with a profit margin of about 7%, so they will earn a difference of 3%. But banks cannot give money to everyone who needs a loan because if they choose the wrong person, they can lose money and will have to compensate the savers. Therefore, they must have standards to protect their loans. The first criterion is to have good credit before you start talking about borrowing. The second criterion is that homebuyers must put down at least 20% of the value of the house. According to statistics, US housing prices have sometimes declined, but on average never dropped by more than 20%, which is why they use 20%. If a homebuyer wants to borrow up to 90%, 95%, or even 100%, the banks may still consider the loan, but the borrower must buy an insurance called “Private Mortgage Insurance (PMI) ” to insure the difference from the 80%. The third criterion is that borrowers must have an annual income of at least 20% of the loan amount. Only with such income can borrowers afford to pay monthly to the bank besides paying income taxes and other expenses for their families.
In summary, a family in America, if not buying a house, must rent a house to live in. The cost of renting such a house is usually equivalent to the amount of money paid to the bank. But the difference is that the rent is considered a waste, while the mortgage will go to the house, which when paid off, usually after 30 years, the house will belong to the buyer. Buying a home with a mortgage is a great way to reduce your income tax, so if you combine the pros and cons, this is one of the best options for housing. Not to mention the factor that every 10 years the price of houses doubled. So, one might say “It would be unwise not to buy a house.” What an attractive investment!
If you have cash and put it in your bank savings account, you only earn 4% a year, while your current inflation rate is 4%. If investing in gold, I think the average gold price increases just enough to compensate for the inflation. Investing in stocks is even more uncertain; it requires investors to be knowledgeable about finances, to be patient, and to know how to invest; if not, you can easily lose it all. Buying a house is the best way to invest. It’s “slowly but surely”. Buying a house to live is entitled to all the benefits mentioned above, as well as a sure investment. If someone has the money to buy more houses for rent, Even though rental properties may not offer the same personal tax deductions, it is still a good investment, better than other types of investment. Through my experience living in the US, I find that a Vietnamese family, if the couple live in harmony, and if they do not have gambling problems, after a dozen years of working and doing business, they will be able to buy a few houses.
From the same author: https://www.toiyeutiengnuoctoi.com/category/tac-gia/i-to-p/ly-thanh-phuong/
