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Saturday, March 28, 2009
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37 comments:
Brief personal note - I've signed the papers to liquidate the property/business and have mailed them in.
I watch the investment news daily, trying to figure out what I'll do with the cash. One part of me says to make as many $5,000 stock investments as I can, basically shot gun the market.
Another side says that I should just pay off the debt on my hourse, to the extent that I can and be done with it.
I've learned from the "housing blogs" that there were people who took equity from their homes and bought coffee at Starbucks, cars, and nights on the town. They used their home equity to subsidize a lifestyle beyond their means. Others bought stock and lost in the recent crash.
If the payout from my share of that real estate business is hypothetically $100K and I have $100K left on the mortgage on my SFH in Alexandria, investing in stock seems like using home equity to buy stock.
If I buy a $20,000 car, I'm using home equity money, as long as I owe any debt.
Paying down debt is never a bad decision.
One of the better things to do is to figure out what your home interest rate is (which you know) then net out any possible tax savings from your home (probably negligible given that you seem to have been in the house for a while). Compare that to whatever earnings you expect on the stock market. I don't think you want to look at the stock market and say, "I should have been in on that!" but on the other hand, would you have really made those earnings?
For the sake of arguement, lets say your home interest rate is 5%. Given the choice of two savings accounts, one in which you are guarenteed 5% a year for 10(?) years or one in which you MIGHT earn as much as 10% a year but MIGHT also lose 10% a year, which would you chose?
Another thing to consider is that if you have no house payment, you're going to be keeping ALL of your income (obviously you will have to keep in mind property taxes and such) and the additional income in your pocket each month could allow you to "play the market" also.
Another way to think about it is like this:
You owe 100k on your house. If you pay off your house, you get 5% annual income for the next 10 years (by not paying the bank any more interest). On top of that, you can set aside your former house payment and invest in the stock market not only the original 100k but also the entire interest amount that the bank would have received. The investment would of course be spread across many years.
@J@
The key difference between you potentially having a $20,000 car note, and a "home owner" having a $20,000 car note is they couldn't pay for both notes with their income (so the house debt had to constantly increase). If you can, then it's not quite the same. Home debt is some of the cheapest debt you'll owe (thanks to Freddie/Fannie's government like guarantee and deductability).
If you want to shotgun the market, you'd be better off buying something like SPY (the S&P 500 index fund) management fees are something like 0.05% vs 0.15% for an index fund and if you send 100,000 in one shot the transaction costs would be pretty low (potentially one commission and it's liquid enough I'd guess you could structure your trade in a way that wouldn't move the market too much).
Adam, a one shot transaction doesn't seem wise. While that would cut down on the charges, it would significantly increase risk. I would suggest dividing it into 3 to 6 equal deposits and putting it into the market over a year (or so) in order to reduce risk.
Region's Jobless Rate Up Sharply
District Reaches Nearly 10 Percent
"The District, Maryland and Virginia continued shedding jobs at a rapid pace in February, according to government data released yesterday, with D.C.'s unemployment rate rising to nearly 10 percent.
Unlike the rest of the country, the area benefits from a growing federal workforce, which has helped shield it from the full brunt of job losses in manufacturing, retail and other private sector industries. Still, the unemployment rate in the District rose to 9.9 percent, up from 9.2 percent in January, according to the Bureau of Labor Statistics. City officials said late last year that they didn't expect the rate to get that high until 2010.
The city's figure far exceeds the national unemployment rate of 8.1 percent in February, up from 7.6 percent in January.
Maryland's unemployment rate has reached 6.7 percent, up from 6.2 percent during the first month of the year. And Virginia's jobless rate jumped to 6.6 percent from 6 percent. "
http://tinyurl.com/cfy9fq
Your tax dollars at work:
As Freddie Mac executives were preparing their annual 10-K financial disclosure this month, they reported that carrying out the Obama administration's housing plan would cost $30 billion this year. That sum would have to be covered by the Treasury Department. The federal government has pledged to cover $200 billion each in losses for Freddie Mac and Fannie Mae, of which the pair have asked for about $60 billion.
The housing agency asked that the cost of the program be withheld and that the firm soften language describing how government management was undercutting profitability, according to sources.
People familiar with the dispute offered different views about why the regulator sought to prevent the disclosures. One source said the regulatory officials didn't want to make it seem like government actions were causing big losses at the company and would require more taxpayer dollars. Another person said the officials thought that accounting rules would soon change, making the disclosure unnecessary.
Freddie Mac executives told the regulator that they had to disclose the information under federal securities law. The executives said they were prepared to seek confirmation from the SEC for their position if the regulator continued to insist that the information be withheld. But they also agreed to negotiate with the regulator over precise wording.
When the filing was made March 11, it included the following language: "We have made changes to certain business practices that are designed to provide support for the mortgage market in a manner that serves public policy and other non-financial objectives but that may not contribute to profitability," Freddie Mac's regulatory disclosure said. "Some of these changes have increased our expenses or caused us to forgo revenue opportunities."
The main way that the government is c ausing Freddie to incur losses is by requiring it to play a central role in the Obama administration's Homeowner Affordable and Stability Plan, a $75 billion effort launched this month. The program aims to restructure mortgages that struggling borrowers cannot afford, bolster the sagging housing market and bring down interest rates on home loans.
The Obama plan will require Freddie Mac to modify mortgages, which entails reassessing the value of loans and marking them down to current market price. The company must then record a charge to reflect these decreased values. Based on Dec. 31 figures, Freddie Mac said it would incur "an initial pre-tax charge" of $30 billion. That number could grow as the economy declines and would have to be offset by infusions of government capital.
"These initiatives are likely to have a significant adverse effect on our financial results or condition," Freddie Mac warned in its regulatory disclosure.
Jeff, your points are great and give something to think over.
This part, though, I have trouble with:
"Compare that to whatever earnings you expect on the stock market. "
I don't know what to expect. Is General Motors going bankrupt? What about Fannie and Freddie?
If I buy the dogs-of-the-Dow, apply that concept to former blue chips, I could blow the whole hundred grand or turn it into a million.
It's really an unknown as far as I'm concerned.
I need some advice about using a lawyer to purchase an unlisted property. The owner has mentioned a very attractive price, but we think he still has some room to reduce it a little more since we are not going to use agents.
We need to sign a binding contract because if we wait for more than a few days, someone else may talk to him---he didn't pressure us at all, but we just think at this attractive price, we need to move fast.
The property needs some fixing, which the owner said he would take care of. This is not a foreclosure or short sale. He is simply downsizing.
Should we ask a lawyer to formally list which upgrades he will do and then sign the contract right away, with inspection and other contingencies? Or, should we wait for him to finish the upgrades first.
Also, what is the upper limit of the legal costs in situations like this?
I know there are experts (CRT, The Annonymous) and those like John Fontain with experience in using lawyers in the past. I would like to hear from them.
Thanks in advance for all advice.
Jeff & @J@
If there's some need for the money, I'd recomend looking hard at corporate bonds which offer decent spreads over treasuries, and give you some (in many cases that's pretty limited) protection over equities. It was investment money before, so I'd be planning to take some risks.
http://www.uwlax.edu/ba/fin/Research/Dollar%20Cost%20Edited.pdf
Granted, 82 to 2001 and even the 20th century might turn out to be exceptions, but they cite enough papers to suggest that buy and hold beats dollar cost averaging in almost every circumstance.
If you'd rather DCA, I'd advise buying an index ETF, unless you want to do very small (less than 5% of the sum) in which case an index mutual fund would be a better choice, and still say there's a major difference between someone who has a 100,000 mortgage (especially on a currently valued 200,000+ house, but owns stocks or bonds, and someone who has a $200,000 mortgage on a $205,000 house (that they bought 3 years ago for $120,000) and who has repaid $30,000 in credit card debts every year with a refinance. There's a fundamental difference in the spending/income ratio.
I also like having the slightly additional flexibility that having keeping the $100,000 out of home equity (which might become difficult to tap in a serious enough emergency). You always have the option to repay the loan if you have outside investments in excess of the loan balance.
So, the reason I said the earnings "you expect" because I didn't want to make any assumptions for you. If you listen to some folks, the stock market never goes down, only up. These people are usually cheerleaders for the mutual fund because their livelihoods are defendant on you keeping your money with their funds (if that makes sense?). Basically, I wouldn't mind giving you some suggestions but I'm not trying to convince you based on "OMG YOU WILL MAKE SO MUCH $$$$$$" kind of arguments. I do not pretend to know the future or what the market will do. I'm sure there are some great equities out there and a fortune could be made but I'm equally sure that fortunes can be lost so I am not attempting to convince you based on that sort of argument.
Adam, previously he mentioned that he didn't need the money. If you are going for the bond market, I would suggest looking at state and local bonds. Some of those have great tax advantages. Many are completely free from federal taxes. Depending on the state, they may have some state tax liability associated. Regardless, the removal of federal taxes from the interest income puts you at a great advantage as it's like an additional 28%(insert your tax bracket here) added to it. In other words, if your tax bracket is 25% and you make 1,000 in interest income, you would normally pay 250 in taxes and get 750 for yourself. In the stock market, you would pay 15% and get 850 for your self (150 capital gains taxes). With non-taxable muni bonds, you get the full 1,000. This also allows the income to be available for fast withdrawal, especially if you use a muni-bond mutual fund.
Jeff, adam, ralph, all, you've given me more to consider.
Basically, I owe less than half of my last tax assessment. I have 401(k) savings in interest-style funds since last spring. My job is as secure as any, which isn't saying much.
In a sense this is an windfall as the man who was managing the business died and we are liquidating it.
This is probably the best time in decades to have cash to invest.
Thanks for your insight and suggestions.
For more on the oligarchy, at least we don't live in Texas:
NPR story on how Texas builders created their own regulatory agency to avoid ever being taken to court
(check out part 1 as well)
This begs the question, how are home-builders regulated in VA?
The WaPo has it's 2008 housing report up finally.
The zip code maps explain a lot. There's a reason I keep saying that houses are cash-flow positive near me and everyone else thinks there's no such properties in NoVa. I live at the nexus of price declines... But you have to check this out, multiple zip codes had median price declines over $100k. OMG.
WaPo map of FFX
TedK, I'm not one of the people you specifically named, but we have owned three houses, including once without agents, and have refi'd several times. My advice is get a good real estate attorney involved immediately to draw up the contract and accompany you to closing, etc. S/he will be worth every cent.
PS re: costs, they will generally charge you by the hour (minute) rather than a flat fee, which they often charge for routine closings with agents involved. But if you get a good one, s/he's worth it. For example, your seller has no incentive to do a really good job with the upgrades - just enough to pass inspection if that. There could be a dispute later over exactly what he was obliged to do. Better to communicate things clearly and in writing right now.
That Wapo map does a great job of illustrating the dangers of using parametric statistics, like the median, to draw conclusions.
For example, I've been tracking SFH in a few zips, including 22124, and when controlling for quality, home prices in that zip fell at least 5% from 2007 to 2008. Prices are even cheaper today, with houses that sold for $750k at the peak going for closer to $600k today.
pay off debt that will give you 5%
right now and safe investments are
running 1%.
Thanks Pat. I do need to make that my top priority. I had a couple debts, small dollar amounts but at more than 5%. I will pay those off.
Does anyone know where WaPo gets their data from? It's very different from MRIS, at least for DC.
For example, they say the 2008 median sale price was $520,000, but MRIS says it's $399,900.
I thought maybe it was that WaPo was including new homes while MRIS only included existing, but they actually report way fewer units: 2,239 compared to 5,563 from MRIS.
Are they not including condos?
It appears that the exclusion of condos is the issue: MRIS reports 2,858 houses sold in 2008; different from WaPo's number, but close.
Also, for zip codes where condos are practically the whole market (20036, 20005), WaPo reports next to no sales (1, 4).
It seems pretty dumb to me to exclude condos when they're 1/2 the market for DC and much more than that in some neighborhoods.
FYI - this probably skews the data for other jurisdictions as well.
Okay, I feel dumb -- I just saw that they do report on condos separately by county. For areas where there is a high volume of condos (Arlington, Alexandria, DC), it would probably be nice to see that broken down by ZIP code too.
Ace,
All advice welcome. Thanks for your suggestions.
"Paying down debt is never a bad decision."
Unless you suspect very high or hyper inflation in the future.
These maps aren't very accurate to a specfic area.It might be of use to determine if housing is down. I'm in zip code 20111 where the map shoes a 51% drop. The problem is, I'm actually in the county that shows less than 20% drop. Manassas Park had the extreme drop of 51% not 20111. These were the little 30,000 shacks that were selling for 300,000+ in 2006&07..really. My assessment actually went down less than 20%. Still sucks for me but the WAPO makes it even worse. A house that would have sold for 750,000 to 800 in 2006 now is worthless according to the Post. Remember we have already been lowered 18% in 2007 and 08. Does anyone think a house that would have sold between 750 and 800,000 in 06 would sell their property at a 70% discount on 09. Silly. But that is what buyers think when they read this stuff.
arkey,
It's by zip code, and as far as I can tell it's just a graphical representation of the MRIS data.
How many buyers do you think there are that can afford a >$500k house who both read the WaPo report and don't understand the concept of a median? Seems to me that these groups of people will have a marginal amount of overlap, such that I wouldn't worry about eliminating them from the pool of prospective buyers... Anyone who's thinking of buying a half a million dollar home should also be educated enough to understand the extent to which the different tiers inflated (and hence how far they might deflate).
Cara, I wish that was the case as you stated but alas it is not. I'll give you an example. Today a foreclsoure was lised for 409,000 or 70% of 08. It is getting lots of attention and its only 9am with 8 lookers. The kicker is the 09 for this was 400,600. Yep, it's 20112 and it dropped 184,100 in assessed vale or twice as much as mine. I've had 3 offers low-ball. My kitchen and baths are all updated or new and this is an as is fixer upper. So, somebody is going to buy a foreclosure thinking they got a deal because they over looked the resale market. I'm so tired. The only reason I'm still on is because my realtor wants to do a brokers open and I caved. Since 3/23 we have had 6 houses go under contract in 20111 and 20112..2>=500,000 3 > 544,000 and 1 at 419,000. 2 were ss and 1 foreclosure. My property has actually gone up about 4% in value since I listed. Get this; the kicker on the 510,000 ss...It was listed the second week as 469,000, bumped up to $510,000 on 3/23 and went under contract yesterday.
"Paying down debt is never a bad decision."
Unless you suspect very high or hyper inflation in the future.
Good point. I moved to the area in 1979, as inflation was approaching double digits. The people who had bought houses in the years before this, with 30 year fixed-rate mortgages saw inflation pay of a big chunk of the their mortgage every year, in real terms. As salaries came pretty close to keeping up with inflation, the real cost of the mortgage and the mortgage bite from the paycheck shrank year after year. If you have a 6% mortgage and inflation is 10%, and you get tax deduction on the 6% interest even though your real interest is negative, you make out pretty well. In this sort of environment, it doesn't take too long to see your mortgage balance cut in half in real terms, and having the maximum mortgage debt you can easily handle isn't a bad idea.
One caution though. If the issue is whether to put money towards a mortgage or to save/invest it in a high inflation environment, you have to make sure that the money you don't use to pay off the mortgage isn't being similarly devalued by inflation. You do have the advantage that your funds aren't tied up for 30 years at a fixed rate, below inflation, but in recent years as Government has seemed to favor borrowers over savers, it's been tough to get much of a positive return, after taxes and inflation, on your savings in standard bank products (savings accounts, money markets, CDs).
arkey,
I'm sorry, I can't follow your argument... First, because I don't know anything about your property. Secondly, how exactly is it that people who are buying the ss's and REOs are not getting a deal? Are they overpaying? Do they need 50-100k of work to get them up to snuff or even up to code, such that your resale would actually be cheaper in the long run?
Maybe the people who are buying the REOs simply can't afford your house with all its upgrades and are choosing to buy the bones of a house with potential and they'll update it later to suite their own tastes when they're making a little more money. But if you're seeing so much buying activity and not getting any action, then clearly buyers exist, but they just don't think your house is worth the mark-up. So you need to either, take it off the market and wait until the foreclosure tide abates and those cheaper options are gone, or you need to price accordingly... (If I'm guessing your price right, which I may not be)
Oh I'm priced right..a house on my same street not updated listed 100,000 more and another one to be listed list week for 40,000 more same age, same size lots. I priced for a quick sale in winter, they are pricing for spring. We are seeing forclosures listed at 105% of 08. I haven't sold due to a number(2 real buyers)buyer reasons...and 3 low-ball offers. I'm just tired and cranky because its been 62 days and the longest I've gone without a showing has been 3 days. we are pooped. I'm so looking forward to 4/15 because I can pull it off the market.
My point was the foreclosure in 20112 is listed above 09 assessment, needs work and is as is and they are probably looking for 10% over list. So, that 409,000bargine is probably going to cost you roughly the same as a 20111 resale house with a higher assessed value but 20112 isn't getting hammered by the Post. Cosemtic upgrades do not account in assessments.
arkey,
ah, okay, so your point was that if you use zip codes only to determine what the prices should be then buyers may be foolishly overlooking houses in nearby areas that don't happen to land in exactly the same zip code. And thus that they are overpaying for the privilege of being in a place that by the map looks like it has been hit less severely.
Fair enough. Buyers are fickle. There's tons of interest in your house, but no one who can get their act together. I can see how that would be exhausting and exasperating. Best of luck.
Yep..that's it in a nutshell. Oh yeah baby, I have buyer fatigue big time. I only wanted to sell so I could retire but this is way more work than working. I'm crying uncle bigtime. I only agreed to a4/15 extension because I'm hopeing that taxes, final four, Palm Sunday and Easter will keep everyone busy! or to busy to shop!
Keith, thats why Ive been telling people to buy TIPS. Even if the yield is zero, its as safe as any bank, and will protect you if we get the expected 40% inflation over the next 5 years that the FED is counting on to reduce its debt load.
Unless you are a wizard and know how to play the market of course.
I do have a poetic justice story on one of my low-ballers that bought in 20112. The house was listed for 549,000 when their realtor checked out our house he dropped it to $499,000. WE went to his open house. The place was all original in bad shaped and midlew everywhere..stunk to high heaven..at least 50,000 worth of work if you do it yourself. Original appliances, kitchen cabinets in dire shape.bad..just bad..assessed 100,000 less than my house. 20112 strikes again..I think this one might be back because I don't think it will appraise. We figure he paid close to list with his 15,000 closing costs because they had just dropped it 50,000. It only assessed for 392,000 so if he paid close to 485,000 with at least 50,000 in repairs..he is so hosed and it makes me so happy he used a buyers agent. The road he bought on is a very busy, narrow 2 lane commuter route, too.
tedk,
just hire and lawyer, tell him what you are trying to achieve and he will write out contract terms that deal with your issues.
it is well worth the price paid, especially since it sounds like you and the seller have come to terms on the big stuff.
an hour or two of legal time should suffice. should be $250 an hour or so at a sole practioner's office.
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