Loving your house again

I can tell you're not convinced, so let's do some arithmetic. Say a real estate agent with a particularly reassuring grin talked you into buying a home in a decent neighborhood for $1.2 million in 2005, using $200,000 of your own cash and a million-dollar mortgage given to you by some dude you found on Craigslist. This is the higher end of the market, to be sure, but not out of the ordinary during the mortgage mania of the go-go Greenspan years. Now let's pessimistically assume that the credit crunch has destroyed a third of your home's value, so it's now worth a paltry $800,000.

Chances are, you feel like impaling yourself on the three-pointed star on your real estate agent's Mercedes. Before you do that, however, consider inflation. At its current unbowdlerized rate of 5%, inflation alone will devalue your million-dollar loan over the next decade to the "real money" equivalent of about $600,000, while at the same time causing your home to appreciate to $1.3 million (according to online inflation calculators).

Here's another reason to pat yourself on the back: You got a mortgage before banks stopped lending to anyone other than the king of Saudi Arabia, which means your interest rate is almost certainly much lower than the rate that will be offered to the likes of Mr. Hong when he tries to get back into the market on the cheap.

Indeed, interest rates are just as important as the asking price in calculating the true cost of a house. When foreclosure vultures whine about how even post-crunch house prices are too high compared with the growth in American wages since the 1970s, they conveniently fail to mention that interest rates have moved in the opposite direction since then and even now are cheap by historical standards. In the darkest hours of the Carter administration, a loan at 20% wasn't unheard of.

Aha, I can hear you say, but what about the dreaded A-word? Aren't we all doomed to bankruptcy because our mortgages will adjust? In a word, no. The payments on most pre-2007 adjustable-rate mortgages would go down if they reset today, because the indices on which they're based remain in the low single digits. Sure, if you have an interest-only loan, the payments will go up when you start paying off the principal -- but by then, inflation almost certainly will have started to work in your favor. Of course, you'll also have to pay property taxes, but thanks to California's Proposition 13, your property taxes won't change dramatically until the house is sold; and as with your loan, inflation will reduce the real-money burden over time. And let's not forget that property taxes can offset your income tax. Which brings me to my final point: the glorious all-American institution that is the home mortgage interest tax deduction.