I enjoyed this piece by Michelle Singletary of the Washington Post:
"A Mortgage Is for Paying Off".
Friday, August 31, 2007
Pearls of Wisdom
Posted by Harriet at 12:04 AM
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40 comments:
That is generally speaking very good advice. I have also been disturbed to see many self proclaimed experts attempt to argue that paying off a mortgage is foolish.
If anything I believe people should work to get out from under debt as quickly as is reasonable. A few extra payments a year will take care of a typical 30 year mortgage in a surprisingly short period of time.
You can't borrow your way to riches.
The writer of this article obviously doesn't understand the concept of "opportunity cost" ... nor does Leroy. A 6% mortgage after tax deductions costs less than 4%. Compare that to taking the money otherwise "invested" in the house and earning on average 10% or more on the stock market. You're a loser if you "invest" at the 4% rate of return vs. the 10%. The article should have instead addressed the problem of people not paying down the mortgage AND not investing the difference at 10%. Then it would have been correct. Also, an additional consideration is that with today's reverse mortgages, "Momma" can always take out a reverse mortgage that will let her use equity to pay off the existing mortgage ... and live without mortgage payments in old age.
But, this is all above Leroy's head ...
"The article should have instead addressed the problem of people not paying down the mortgage AND not investing the difference at 10%."
Yes, that's what happens when these interest-only loans and teaser-rate ARMs were marketed and made as affordability mechanisms, so that people bought more house than they could actually afford. That's what fueled the unsustainable boom.
I have no problem with any exotic mortgage per se, but it is irresponsible to use them as affordability mechanisms, especially if the point is, as Lance says, to invest the monthly payment savings.
I say get any mortgage you want, as long as you can afford the 30 year-fixed payment. Calculate that payment, then get any mortgage you want, and invest the difference.
Of course, I did even better. I just didn't buy in an overpriced housing market, and put the even larger savings in equities. Yee-hah.
I think Leroy has a point, though. One of the traditional arguments for buying a house is that it causes "forced savings," it makes people save money when they otherwise wouldn't have. Now, it seems to me like you can accomplish that more effectively simply by writing in a larger contribution to your IRA (unless you're already hitting the IRS max of 15K there), and maxing out your Roth, etc.
And I think the world is full of people who think they'll invest the difference between their interest-only payment and 30-year fixed payment and then fail to do so.
But I can imagine some people find it psychologically easier to save by double paying their mortgage or whatnot, and having the visceral pleasure of owning more of their house right away, than putting their money in some mutual fund. The latter might be better, but the first is better than nothing.
"The writer of this article obviously doesn't understand the concept of "opportunity cost" ... nor does Leroy."
This from the guy still trying to come to grips with the concept of "supply and demand."
"A 6% mortgage after tax deductions costs less than 4%. Compare that to taking the money otherwise "invested" in the house and earning on average 10% or more on the stock market. You're a loser if you "invest" at the 4% rate of return vs. the 10%. The article should have instead addressed the problem of people not paying down the mortgage AND not investing the difference at 10%. Then it would have been correct."
Obviously what you describe is possible, but few people have the financial savvy to actually make it happen the way they might. This is a lot like the whole "interest only" loan issue. In the hands of someone competent it can be a useful tool, in the hands of the average homebuyer they will just overspend and talk about the "payment" rather than the "price," forgetting that in the long run they must pay off the entire balance of the loan if they every want to truly own that house.
"Also, an additional consideration is that with today's reverse mortgages, "Momma" can always take out a reverse mortgage that will let her use equity to pay off the existing mortgage ... and live without mortgage payments in old age."
Yeah, you can always just borrow more right lance? I mean so long as you aren't really concerned about ever paying the money back it is like being rich without having to have all the money!
"But, this is all above Leroy's head ... "
Don't even try...
Lance,
I'm happy you can make an average of 10% return in the stock market and that you understand the costs of borrowing vs. investing.
It's well and truly difficult for many people to understand these concepts, though, without getting into trouble. Picking the right mutual fund that will definitely earn the 10% over time might be problematic. Also, in recent years, picking up the phone to call a lender for a reverse mortgage may have gotten you into a more risky situation than you understood.
Furthermore, if you'd bought in 1989 and in 1999 wanted a reverse mortgage, there wouldn't have been a whole lot of equity there, moreso if 100% interest-only financing had been around then.
"And I think the world is full of people who think they'll invest the difference between their interest-only payment and 30-year fixed payment and then fail to do so."
Exactly, Unless you are the sort of person that really has the discipline to carefully invest your money this is not a good course to take.
There are far too many Americans who have convinced themselves that credit is the same thing as income. They spend more than they make year after year and seem to think that this won't come back to them down the road.
If you use an interest only loan so that you can increase your other investments, you will probably come out ahead. The problem is that for most people that extra money just ends up burning a hole in their pocket and gets spent.
Leroy said:
"Yeah, you can always just borrow more right lance? I mean so long as you aren't really concerned about ever paying the money back it is like being rich without having to have all the money!"
I see ... so it's important to die with your house fully paid off because ... ?
Personally, I'd rather see my elderly mother enjoying all the equity in her property during her lifetime.
"I see ... so it's important to die with your house fully paid off because ... ?
Personally, I'd rather see my elderly mother enjoying all the equity in her property during her lifetime. "
That about sums it up...
Leroy said:
"That about sums it up... "
I'm not sure if you understood what I was saying. I'd rather see my elderly mother living a better life with her money/equity than her worrying about leaving it to me. Do you disagree with that? Why? I mean, I might prefer to inherit something .. but wouldn't that be selfish on my part?
It means you still live with your mother.
And that, you know, explains a lot.
Justin said...
"It means you still live with your mother."
No, it doesn't mean that. But isn't it just like a bubblehead to assume that everyone lives with their mother ... too?
Two points.
1) The after tax rate on a 6% loan is NOT less than 4%. Depending on your state and income you will same 25% off federal and 8% off state. You go do the calc, I'm know your wrong.
2) 4% of a 500,000 loan is a lot more than 10% of a 3,000 mortgage payment when townhouses, condos and townhouses have dropped in value.
25% + 8% = 33% = 1/3
6% less 1/3 = 4%
John can't add.
Nor can he do much other valid reasoning numberwise.
Lance said: "can't add.
Nor can he do much other valid reasoning numberwise.
It's that some can't imagine that all do not live the same lives that they do.
Someone in a high tax bracket might prefer to put money into sheltered investments, decline to use 401(k) savings to pay down a mortgage, keep their interest payments high.
Each circumstance is unique to the individual.
33% does not = 1/3, its not addition its multiplication.
67% of 6% is greater than 4%. But lets listen to Lance for once, he says you make more money investing in the stock market and spending any equity in our houses in case we die. Therfore we should never put any money into a house and never accually own one, just rent it from the bank. Thanks Lance I will concider your advice.
Some folks plan to die a million in debt, or even more. Would you agree that's a bad idea? Or a good one?
If it was truly a realistic plan to "invest" instead of paying down a mortgage, then the mortgage would not be offered on those terms because it would make the same greater sense for the mortgage money to be "employed" as is proposed for the borrower. What sense does it make to fund a mortgage at 6% if there is s sure-fire investment opportunity at 10%?
It is a minor quibble, but the "tax
deduction" angle also misses the mark. For one thing, only the interest is deductible - any payments you make that go to principle are not deductible.
Of course borrowers who have not made principle payments may not appreciate this distinction.
cheers
Ben wrote: "Of course borrowers who have not made principle payments may not appreciate this distinction."
I pay an extra amount to my mortgage every month but I have not calculated how much it shortens my payout. Some months it's only fifty dollars, some months it's a lot more.
I have enough in my 401(k) to pay off my mortgage and own my place out right. The fact that I don't do that is similar to someone who chooses to maintain a higher loan balance and pays into their savings, 401(k), or make other investments.
Everyone has their own concept of risk, benefit, and each situation is unique.
I had bubblehead pals telling me in 2001 and 2002 that I should sell, sell now, because the bubble was about to pop.
That was 2-300 thousand dollars ago.
Do not sell now KH. You will not get a good price. Wait until 2009.
Ben asked:
"If it was truly a realistic plan to "invest" instead of paying down a mortgage, then the mortgage would not be offered on those terms because it would make the same greater sense for the mortgage money to be "employed" as is proposed for the borrower. What sense does it make to fund a mortgage at 6% if there is s sure-fire investment opportunity at 10%?"
You answered your own question with your last sentence. As kh explained, different people have different levels of risk tolerance (in different instances) based on their plans, needs, and circumstances. A 10% equity-backed investment opportunity IS riskier than a 6% mortgage-backed investment opportunity. The 6% investment is collateralized with a piece of property. It would be almost impossible for one to lose their capital investment here since it would be almost impossible for that property's value to vanish. The 10% investment is an equity share in a business. Businesses can and do collapse and when they do you lose your investment in them. Of course there are many ways to minimize that risk such as spreading your risks across multiple equity investments as mutual funds do for you. And of course, one's circumstances greatly affect one's choices from one to the other. Typically retirees who must count on a predicatable income with little chance of it disappearing would take the 6% return. Someone building their nest egg for a future retirement would take the 10% return for at least some of their investments. On the other side of the coin (from a borrower's viewpoint), the retiree has less taxable income to shelter and thus benefits far less from the mortgage home deduction than does someone in the prime of their career with high levels of taxable income. This difference would influence their financing options on their home. The retire might decide to pay off their home while the mid-career person with the income to shelter would be very unwise to do so.
John said:"Do not sell now KH. You will not get a good price. Wait until 2009."
I won't. That is sound advice, for me, at this time.
Thanks.
yes kh, apparently John is a quick learner. But why even mention "selling"? I didn't buy my home for the primary purpose of selling it, did you?
Lance said:"I didn't buy my home for the primary purpose of selling it, did you?"
I bought and stay here to have a place of my own and to have control over my quality of life and for the employment options.
I rented when I was younger and did not like that lifestyle.
The real estate flat period of the 1990's was not a concern for me. It is amusing that bubbleheads are terrified of a couple years of slow growth.
In the 1990's, there was one year that my place lost money, according to the city's assessment. Many years were flat.
Through it, I did my thing, worked, played, lived my life.
Beginning in 2000, 2001, and through 2005, my assessment went up a lot. I kept doing my thing.
I appreciate the frustration that someone priced out of this market feels.
On some frugal-living boards, there are people literally praying for a housing price collapse because otherwise, well, you know.
I bought in Alexandria because it is close in, offers a good quality of life, and gives me a choice of job locations.
As for the collapse, it simply will not happen. I've tried to explain why but they don't get it.
The paradox is that they uniformly say, "I have some cash, when prices fall to my number, then I will buy."
What they never realize is that there are, 60 places for sale in my zip code and thousands of renters who "have some cash" but are priced out of the market.
The instant that prices fall, even a little, someone will make a move on the place.
This isn't like dot-com stock or gold or rural land.
This is a unique commodity. DC is a roughly 10x10 mile square, which includes Alexandria and part of Arlington.
100 square miles. much of it will never, ever be available for private ownership.
Between roads, parks, government land, corporations, I'm guessing there's only 20 square miles available. You and I own a portion of that.
Whatever we paid, whatever the current assessment, it's cheap at twice the price.
Another paradox are those who said, "DC, Alexandria, Arlington is too expensive, I'm buying in Manassas where my dollar buys more."
So where are prices falling and where are prices holding up?
It's scarcity, supply and demand, if you go out far enough, you can always buy cheap acreage.
If you want to buy close in, you pay what's asked. Most folk holding prime real estate are not selling.
There are thousands of homes in my zip code but only 60 for sale.
"Where would I go?"
"I like it here, even if I didn't, where would I go?"
kh,
Your post is very insightful. I suspect though that the hard realizations it brings to the surface may be hard to deal with ... hence why we've yet to see any comments on them.
Lance, KH's arguments are just variations on the old realtor saws "they're not making any more land" and "everybody wants to live here." Even his statement "I appreciate the frustration that someone priced out of this market feels" is nothing more than a common sales ploy.
He's also wrong when he says "If you want to buy close in, you pay what's asked." Ultimately, buyers and not sellers set prices.
He also states "Most folk holding prime real estate are not selling." The problem is that there is always someone who simply has to sell, at whatever price they can get, and those sales set the comps.
I am not a bubblehead. I have lots of arguments of some of the regulars over at Ben Jones' blog. Anyone who thinks that they are going to pick up prime property for "pennies on the dollar" is a kook.
Nevertheless, now is not a good time to buy, and those who resisted the realtor's mantra of "buy now or be priced out forever" during 2005 and 2006 will be vindicated.
georgesalt said:
"Nevertheless, now is not a good time to buy, and those who resisted the realtor's mantra of "buy now or be priced out forever" during 2005 and 2006 will be vindicated."
In some instances your 20-20 hindsight will have been correct ... but not in all (or even in most) ... and that is all that I (and I think kh too) has been saying.
I bought in 2005 and my property is today worth hundreds of thousands of dollars more than I paid for it then. No one can predict exactly what is coming down the pike. As such, if you have a current need for a house, and you can afford it (based on your longterm payments), then you're usually best going forward ... especially if you plan on staying there a while. Over the long haul real estate always holds its value. And waiting around for house prices to drop so that you can get what you really want is like waiting for restaurant prices to drop. Yes, you might someday be able to afford that filet mignon meal ... but the burger you can afford today is a better alternative to sitting around starving while you wait ... and wait.
Lance says: "I bought in 2005 and my property is today worth hundreds of thousands of dollars more than I paid for it then."
Wrong. Until you put your house on the market and find a buyer who shows up at closing with a check, you have jack.
"now is not a good time to buy, and those who resisted the realtor's mantra of "buy now or be priced out forever" during 2005 and 2006 will be vindicated."
Depends on what you mean by 2005. The city says my 2007 assessment is $95,000 higher than 2005.
The Post says that prices close in are climbing again.
I am talking hindsight, what is compared to what was.
I offered a few fact-based explanations for what happened. Traffic, limited land in the district/close in, the jobs, expanding population, quality of life, etc.
The bubbleheads are in predictive mode, "I wish that prices will fall, here are a few scenarios, ergo, prices will fall."
These scenarios include, "Prices seem high. Someone, please, someone will have to sell. You people on the sidelines, keep paying rent so I can get my bargain."
From this morning's (3 Sep) WashPost:
“Two years ago, Jose Rodriguez and his wife bought a $550,000 three-bedroom townhouse in Alexandria with a pay-option adjustable-rate mortgage. They also got a second mortgage of $55,000. They refinanced that one with HSBC to obtain a fixed rate and now owe about $105,000 on it after tapping into their equity for renovations.”
“Rodriguez said he has always paid on time, but he suspects that will change in December, when the lender for the first loan, Countrywide, will begin requiring them to pay principal and interest.”
“‘We are responsible people, we are working people, we have never been late,’ he said. ‘We’re trying to resolve this before December. Once we get there, it’ll get nasty.’”
“They are selling the house and got an offer for $499,000, which would cover what they owe Countrywide but not the HSBC loan and closing costs. They are now waiting for the lenders to agree to a short sale. If that doesn’t work, Rodriguez said, they will consider foreclosure or bankruptcy.”
Looks like some damned-fool buyer didn't get the memo about having to pay what's demanded if they want to live close-in.
"I offered a few fact-based explanations for what happened. Traffic, limited land in the district/close in, the jobs, expanding population, quality of life, etc. "
Fact based explanations? You somehow forgot to mention the credit bubble that funded this whole mess... it has been on the news some lately, perhaps you have heard of it...
I am so sick of hearing the exact same list of reasons why _____ metro area is different. Take your pick, from Manhattan to Nevada, there are people saying the same things and prices are falling in all of those places.
Your "fact based explanations" do nothing to justify the unprecedented run-up in prices. Those conditions existed 6-7 years ago before the run up, and they will exist once the bubble has finished popping. More desirable areas will remain more expensive than less desirable areas if that makes you feel better...
"The bubbleheads are in predictive mode, "I wish that prices will fall, here are a few scenarios, ergo, prices will fall.""
We are in predictive mode, but not for the reasons you seem to believe. I am starting to suspect you are another screen name for our more prolific troll if only because you two seem to share the same lack of ability to understand the fundamentals of economics.
Looks like some damned-fool buyer didn't get the memo about having to pay what's demanded if they want to live close-in.
Heh. Nice. The HH argument certainly has changed. Two years ago it was "Prices never go down." now its "Prices never go down in my neighborhood."
And regarding Ben's Housing Bubble blog, I agree a lot of the commenters are kooks. But Ben himself has been pretty accurate in predicting this downturn.
"Looks like some damned-fool buyer didn't get the memo about having to pay what's demanded if they want to live close-in. "
He is about to get the memo...
but don't worry, it just got easier for the next person to move close in. Hopefully they will have better financial planning skills.
mortonjr77,
Yes, Ben Jones seems like a level-headed guy and I enjoy his blog. Some of the regulars get on my nerves, though.
"Heh. Nice. The HH argument certainly has changed. Two years ago it was "Prices never go down." now its "Prices never go down in my neighborhood." "
Exactly... first they were claiming that what we were observing was the result of a "new paradigm" where prices would simply double for no particular reason and then stay high forever... (check out some of Lance's old posts on bubblemeter)... more recently they have been claiming that though prices are dropping dramatically around the fringes of the metro area, exactly as was predicted, THEIR neighborhood will remain untouched because it is simply different from those OTHER places.
"And regarding Ben's Housing Bubble blog, I agree a lot of the commenters are kooks."
Absolutely... it is amazing how little many of those people understand about what is taking place. I have to wonder if they honestly believe half of what they say. If so, the whole bunch of them are likely buying shiny metal and burying it in jars in the backyard while prepairing an underground bunker for the imminent zombie army attack.
"Wrong. Until you put your house on the market and find a buyer who shows up at closing with a check, you have jack."
While Lance has the house, he has an asset called real estate.
If he had two places, and rented one out, he is a landlord.
The corollary to "you have jack." is, "as long as you don't sell a losing investment, you haven't lost money."
I don't believe that saw, apparently you do.
" ... the whole bunch of them are likely buying shiny metal and burying it in jars in the backyard while prepairing an underground bunker for the imminent zombie army attack."
ROTFLMAO!
Those are the ones who get on my nerves - the ones always predicting Armageddon and the End of the World as we know it.
I think that the aftermath of the bubble will be profound and it will be with us for years; nevertheless, I suspect that we as a nation will muddle through, somehow. I expect this thing to unwind at a glacial pace - much like it did in Japan during the 90s. Of course, the analogy is not exact - the Japanese are a nation of savers who have considerable personal savings and that helped them to weather the storm; Americans have mountains of debt.
It is difficult to walk the line between recognizing that this is in fact not a "normal cycle" while at the same time not going overboard and predicting the end of our economy or financial system.
This demise of the bubble has already lead to a huge mess and the worst is yet to come, but that doesn't mean it is going to be the end of everything. The stock market bubble in 2000 didn't crush the US economy, the Japanese RE bust didn't crush their economy.
Both of those messes are still with us today to some extent, but as much damage as they did they didn't bring down the whole global financial system.
I expect housing prices to continue to drop nationwide and in the DC area. I expect price drops to accelerate through at least the rest of this year as the bust moves more and more into the inner suburbs. Eventually we will get a prolonged stagnation and things will slowly settle out to normal once again.
The longest lasting changes will probably be in the mortgage world. There is a 0% chance we won't see a raft of new state and national laws regulating lenders and preventing them from repeating some of the worst practices in this bubble. The secondary markets for mortgages are likely to be very very conservative for some time to come as well.
Of course, limited land use and commuting patterns also drive rents, but the house payment/rent ratio, which adjusts for interest rates, is well above historical rates, still indicating inflated prices that will continue to drop.
Outside the beltway and in many areas inside the beltway, prices are dropping rapidly. In some of the better areas, they're dropping slowly.
The only area that actually seems somewhat immune is Zip-20007, Georgetown. Every other area has been flat to falling. That includes 20009.
Oh, and by the way, on the old Housing Tracker as of Sept. 1, the median asking price in DC is now $400,000, which is 18% below the median asking 2 years ago. Given that the ratio of actual sales to asking has declined a bit over the last 2 years, that indicates an even greater decline in prices. Even if the median asking price stays exactly the same over the next two weeks, we'll be at a 20% decline over 2 years, or a 25% real decline.
That's exactly as David J (but not Lance or KH) predicted.
One more thing. Even if I bought Lance's desperate argument about his neighborhood, Lance continues to contradict himself by advising people to buy the "hamburger." Even Lance must concede that those who bought "hamburger" over the last two years now have a bad case of food poisoning.
Even if I completely converted to KH and Lance's position about inner areas, it nonetheless remains that, even according to KH and Lance's very own arguments, that those in the $400,000 price range have done very well over the last few years by NOT buying.
"Depends on what you mean by 2005. The city says my 2007 assessment is $95,000 higher than 2005."
That's funny. My 2007 assessment is about $80K higher than my 2005 assessment, but my house is actually only worth what it was on the 2005 assessment.
So my 2007 assessment is a product of the wishful thinking of a city with budget problems.
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