A poor reflection on the USF MBA program

Memo to universities: if your enrollment standards are so low that you admit complete idiots, at least tell them not to talk to the press.
"My mortgage broker wasn't accepting zero down," says Alfonso Rey, 32, who in February bought a one-bedroom, one-bath condo in San Francisco — one of the nation's most-expensive markets — for an eye-popping $714,000.

Rey and his wife had been outbid on 16 properties until they offered $62,000 more than the asking price for the condo — and wrote to the owners, pleading with them to accept their offer so they wouldn't have to move out of the city.

To scrounge up a 5% down payment, Rey and his wife sold their cars and cashed out the entire $36,000 Rey had socked away in his 401(k). To keep their monthly payments low, they took out a loan that lets them pay only the interest for the first five years. They're taking a calculated risk, though, that the value of their condo will rise. With their interest-only loan, Rey and his wife will owe the same principal balance in five years. And their mortgage will reset, possibly to a higher interest rate.

Rey says his parents and friends told him he was crazy to use his retirement savings to buy a home. But Rey, who is halfway through an MBA program at the University of San Francisco, says he feared that if he didn't buy now, he would never be able to afford a home, because he expects real estate prices in San Francisco to continue rising.

Let's look at the numbers. Giving Alfonso very favorable assumptions, let's assume that some silly lender gave him a very generous 6% interest-only loan. That's $3400 per month. Then condo fees and insurance: easily $400 per month in San Francisco. Then property taxes: $750 per month. All in, at least $4550 per month for a 1-bedroom condo. Now let's credit him $1100 for the deductibility of his interest. He probably won't be able to deduct his property taxes because of AMT. So net of income tax deductions, he's paying at least $3450 per month for one bedroom. And we haven't even talked about utilities yet.

Now Alfonso could rent a nice one-bedroom apartment for around $1500 per month (near USF even!). Renting that apartment and saving the $1950 difference each month at a conservative 3.5% after-tax return, Alfonso would save $127,482. Plus his 401(k) would continue to grow, instead of being zeroed out (and whacked with big taxes and penalties), and he'd still have a car.

To just break even on his condo over the next five years, he'll need it to appreciate 18% from today's all-time record prices -- all-time in terms of price-to-rent ratios, price-to-income ratios, and any other measure you can think of.

I forget: when tech stocks hit all-time high valuations in 2000, did they go up another 18% over the next five years?

Maybe they don't teach finance in the University of San Francisco MBA program.

Addendum: Just for the sake of argument, let's say the San Francisco market does appreciate 20% over the next five years, making it the greatest and longest real estate boom in the history of the developed world. Alfonso is a winner, right? WRONG!!! Now he's 37 years old, sharing a 1-bedroom condo with his wife. Think they might need a little more space? Maybe want to start a family or have a garden? Maybe get a job offer in another city? Want to sell the place? WHAMMO!!! That's 6% -- $50,000 -- to the realtor. Oops. Alfonso would have been better off banking $127,000 and using it as a substantial down payment on something that's not so cramped.

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