The Old Standby: the 30-year fixed mortgage

[jk]

Re: The Old Standby: the 30-year fixed mortgage

As a fellow 'tuliper put it so well,

no, the way i expect the mortgage to become negligible is not by my paying it off; it is by inflation making its nominal value insignificant.

[lektrode]

Re: The Old Standby: the 30-year fixed mortgage

no, the way i expect the mortgage to become negligible is not by my paying it off; it is by inflation making its nominal value insignificant.

+1
my bill has been going up appx 10% (ok, maybe something in the 8's or 9's, but i'm stickin at 10) per annum.

know anything (sides au) thats goin up 10%/year, virtually 'guaranteed' ?
(and taxfree, since ole ben (the guy on the 100) used to say: a penny saved, is a hundred earned - via helicopter money from the other ben...)

the benefit$ - to the individual consumer (citizen) are nearly immediate in the case of a blackout of the grid... 'on any given day'
1 second without backup power and yer whole day could be ruined, if depending on the digital stuff, especially (IYKWIM)

so yeah - if i havent gone on (and on) too far already...

[lektrode]

Re: The Old Standby: the 30-year fixed mortgage

I hate to rain on the parade here, ....

Things actually could get so bad in a few weeks that it would not be a question of whether to buy or to rent, but it might be a question of moving to some other country.
....

what 'other' country would that be, mr steve?

(and if the FAA dont function, how would we get there?)

[don]

Re: The Old Standby: the 30-year fixed mortgage

no, the way i expect the mortgage to become negligible is not by my paying it off; it is by inflation making its nominal value insignificant.

The gamble you're playing is hoping inflation in housing offsets your interest payments, repairs, insurance, property taxes, etc. and that inflation feeds at least, if not more, into your income. Living in a house owned, without a mortgage, if anything strengthens that bet. Unless one believes there's a large return coming to savers anytime soon. That's another bet!

[mesyn191]

Re: The Old Standby: the 30-year fixed mortgage

no, the way i expect the mortgage to become negligible is not by my paying it off; it is by inflation making its nominal value insignificant.

Your wages have to go up accordingly for this to work. Wages are trending down or stagnant while costs are rising and will likely continue to do so for a long time due to the government and businesses anti labor stance. To reverse this trend labor must gain some political power, but that is unlikely to happen soon if ever since there is no effective organized Left.

Things actually could get so bad in a few weeks that it would not be a question of whether to buy or to rent, but it might be a question of moving to some other country.

If a default actually occurs it will be too late to move for the non rich. You have to move before the default occurs not after. Personally I think this is just more kabuki theater from the politicians, but we'll see. They could actually be stupid enough to try and force a default.

[don]

Re: The Old Standby: the 30-year fixed mortgage

the following is a decent summary of factors that should see the bear RE market continue to advance. Nothing we don't know but a good reminder that what worked so well in most of our lifetimes, banking on housing appreciation, may now be obsolete.

1) Declining level of wealth of the general population. The middle class has been hollowed out, middle class jobs are declining and with it middle class wealth. The average american family income hasnt grown (in inflation adjusted terms) since the 70′s and to add insult to injury, non-inflation adjusted income has actually had NO gains in the last 10 years and savings are practically at all time lows. with unemployment at all time highs.

2) The supply/demand and the dynamics of post bubble collapse. Banks have slowed down foreclosures quite a bit and in some cases are taking years to foreclose. This is artificially lowering supply, but the banks will have to take that hit at some point in time and the supply will overwhelm demand in combination with a rising interest rate environment.

3) High interest rates. For the most part, housing depends on monthly payments. In fact when rates go up house prices will most likely take a hit to bring the principal amount owed down to keep the payments in line. Alot of families (those that still have good credit) simply cannot afford these high prices in a high interest rate environment; thus lowering the pool of eligible buyers. House prices for the most part go inverse to interest rates since they are are a leveraged, debt sensitive investment..

4) High Utility Costs: Everyone is already seeing the impact of high gas costs, which are by and large a byproduct of high Oil costs. The other side of that is high utility costs. Gas prices filter through to almost everything in a modern society. Utilities like heating and air-conditioning will most likely get more expensive as the dollar declines and loses value… For reference think the “oil shock” of the 70′s. As utility costs rise this adds yet another expense to a home owner who’s take home pay will likely not rise as high as the inflation we will see; due to the high unemployment.

5) Bankrupt local govts that could easily raise property tax rates to almost confiscatory levels… Alot of folks are already seeing this. Property taxes are not coming down for a majority of homeowners, even as prices continue to decline, as bloated county and state govts are currently scrambling to make ends meet in a post bubble world. Property taxes are an expense as such, high property taxes diminish income coming from a property thereby lowering its value to an investor and raising the expense of the property for an owner occupied home owner.

6) Psychological bubble impact on families and children impacted by foreclosure. About 1/3 of mortgaged homes in the US are now underwater. Alot of families have lost their homes and in conjunction lost alot of their family wealth in this last devastating bubble. I believe that this bubble has alienated alot of current families and future homebuyers (current children) who witnessed first hand the destruction of their way of life and in alot of cases the humiliation of being evicted when they quickly came to grips that they were not as wealthy and entitled as they had believed. Once burned, twice shy.

7) Baby Boomer Retirees Selling: The baby boomers are getting to an age where they would like to retire and enjoy their lives (those that still have savings/cash). In the coming years as baby boomers begin to hit an age where they either need more family care or nursing home care they will likely need to sell or downsize their homes to either a smaller home or for cash liquidation to live off of. This will only add to the supply of homes on the market.

8 ) Poorer follow-on generation: The children of the baby boomers and the middle class (and formerly middle class) have their own headwinds to deal with… For one they are poorer than their parents were; thanks in large part to the high un-employment rate after the bubble collapse and the burdensome amount of (non-bankrupt-able) debt they have taken on in order to get their college degree. They are taking longer to find jobs and start their professional careers and as such are taking longer to get married and start a family of their own and are essentially missing out on the formidable wealth generation years their parents were able to have access to. In essence the baby boomers will be selling into a poorer market demographic.

http://www.libertadme.com/2011/07/19...k.net#post-294

[don]

Re: The Old Standby: the 30-year fixed mortgage

and for those who demand equal time the following is best enjoyed with a big cup of Jim Jones Kool-Aid. The omissions could fill the Grand Canyon . . .

July 13, 2011

Dear Sir:

The author ignores some important facts in arguing against the financial benefits of owning a home (“A Home is a Lousy Investment,” July 11, 2011).

First, most home buyers do not pay cash for a home, but instead take out a mortgage along with a down payment. Following the author’s example, a home buyer in California who purchased a median priced single-family home in 1980 ($99,550) with a 20 percent down payment ($19,910) would see that investment grow to $296,820 when the home was fully paid off in 2010. Investing the same $19,910 in the Dow-Jones Industrial Index in 1980 would result in a balance of just over $238,000 in 2010 and be subject to taxes on the investment gains along the way.

Second, during the 30-year period while the homeowner is whittling down their mortgage balance and banking home equity, the renter has been paying rent that has increased by an average of 3.7 percent per year even as the monthly principal and interest payments on a 30-year fixed rate mortgage remain level. Based on rental trends, it is not too difficult to come up with reasonable scenarios where the investor who rents a home will pay significantly more in rent than the homeowner will pay in mortgage interest over the span of the 30-year mortgage. That’s because rent payments for a comparable home could easily exceed the principal and interest payment on a 30-year fixed rate mortgage in as few as seven or more years. In the end, the homeowner will have a free and clear asset while the renter will continue to pay rent.

Third, many homeowners also are able to take advantage of deductions for mortgage interest and property taxes when filing their federal income tax return making the cost of ownership even more favorable compared with renting. Furthermore, a capital gains deduction of up to $500,000 ($250,000 for single homeowners) applies when the home is sold.

Fourth, homeownership builds wealth. According to the Federal Reserve’s 2009 Survey of Consumer Finances, the median net worth of the typical homeowner exceeds $190,000 but is less than $4,000 for the typical renter. Given this difference, it’s hard to see how long-term renting is a strategy for financial stability and independence.

And, finally, people who buy homes well within their budget are long term planners. Research suggests that people who are long term thinkers and willing to forego short term gratification do well in many dimensions of life-wellness measures. That is why homeownership meets long term objectives and provides great incentives for people to work hard and lay the foundation for a stable and successful country.

Lawrence Yun

Chief Economist, NATIONAL ASSOCIATION OF REALTORS®
Washington, D.C.

Yes, that does read Chief Economist . . . .

[Starving Steve]

Re: The Old Standby: the 30-year fixed mortgage

what 'other' country would that be, mr steve?

(and if the FAA dont function, how would we get there?)

The American refugees might flee to Mega's Blighty, i.e, to the UK. Or they might flee to Canada, but the beaver buck is backed by U.S. dollars thanks to the stupidity of Prime Minister, Pierre Trudeau in the 1970s. Or Americans might flee to Mexico where it's warm. At least, the Bank of Mexico had the wisdom to buy gold a few months ago. Or maybe American refugees might flee to China and at least prosper. --- flee to Moscow, Russia?

Mentioning Moscow, residential property in Moscow is now so desirable that property is in the top fifteen of the world's most expensive urban housing markets.... and this, while Americans slept.

[gwynedd1]

Re: The Old Standby: the 30-year fixed mortgage

Just the opposite Steve.

It's the hidden costs of owning that can be very high. If anything goes wrong in your home, you have to repair or replace it. Washing machine breaks, damp got in somewhere, painting, roof tiles. Any maintenance whatsoever and the bill is yours.

At the end of 10 years in the rent scenario you have no property, but in the 10% decline scenario on selling, you also have no capital made so you are in the same boat.

Its an interesting debate, but based on what little people do on their residential properties, a huge edge goes to renting. This is especially true of single people or families of less than 4. Laundry is probably the only real advantage, unless of course you rent a unit with its own machine like I did. Though other considerations are gardens or productive landscape. Most people like to buy inferior produce or expensive organic food that still does not quite meet home grown standards. It can be worth at least a month's mortgage payment in actual value. This also includes transportation expenses unless again, fresh means nothing to you. Other considerations are car maintenance which tends to favor home ownership. Home businesses can alter this equation considerably. I did save a bit on storage expenses. Then, if one enjoys the property, they may also save on entertainment expenses or hosting events in homes rather than socializing at restaurants. Though the way our culture works, most of that benefit is not only squandered, but even intensified. Lawn's are just money pits.

[don]

Re: The Old Standby: the 30-year fixed mortgage

Lawrence Yun

Chief Economist, NATIONAL ASSOCIATION OF REALTORS®
Washington, D.C.

now I'm not suggesting this quote hangs from the wall at Mr. Yun's digs . . .

"The receptivity of the masses to information is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must repeat these until the lowest member of the public understands what you want him to understand by your slogans...The law of selection justifies this incessant struggle, by allowing the survival of the fittest."

quote comes from: http://jessescrossroadscafe.blogspot...wheres-my.html

[lektrode]

Re: The Old Standby: the 30-year fixed mortgage

The American refugees might flee to Mega's Blighty, i.e, to the UK. Or they might flee to Canada, but the beaver buck is backed by U.S. dollars thanks to the stupidity of Prime Minister, Pierre Trudeau in the 1970s. Or Americans might flee to Mexico where it's warm. At least, the Bank of Mexico had the wisdom to buy gold a few months ago. Or maybe American refugees might flee to China and at least prosper. --- flee to Moscow, Russia?

Mentioning Moscow, residential property in Moscow is now so desirable that property is in the top fifteen of the world's most expensive urban housing markets.... and this, while Americans slept.

jeeeeze mr steve, with those 'choices' methinks that with perhaps the exception of alberta (calgary and west) that staying put in The US and working on our problems might be the best bet, considering the problems the rest of the above - moscow?

i also get a kick out of the Calif crowd all heading down to places like costa rica, where the same thing that happened in locales like portland and bend is quite likely to occur: a flood of new money from the 'refugees' jacks up the prices so the locals (most of them anywy) can no longer afford to live there - how long do you suppose costa ricans will welcome this 'development' ?

wonder how the vancouver crowd is liking whats been goin on up there the past everal years (hell, never mind since 1997...) hint: about same as the locals out here since the late 80's

[lektrode]

Re: The Old Standby: the 30-year fixed mortgage

[I]..... banking on housing appreciation, may now be obsolete.
.....
4) High Utility Costs: Everyone is already seeing the impact of high gas costs, which are by and large a byproduct of high Oil costs. The other side of that is high utility costs. Gas prices filter through to almost everything in a modern society. Utilities like heating and air-conditioning will most likely get more expensive as the dollar declines and loses value… For reference think the “oil shock” of the 70′s. As utility costs rise this adds yet another expense to a home owner who’s take home pay will likely not rise as high as the inflation we will see; due to the high unemployment.
...

while i dont presume to know his reasoning on precisely why he did it...
i think the factor (issue) that jk is 'banking on' is he's intending on living in his house til 'the end' and he indicates he's seeing an IRR of 10% based upon the savings on heating costs (cooling too?) achieved by his investment in a geothermal heat pump - this ends up being a self-liquidating(amortizing?) loan whereby the savings in utility bills covers the servicing of the loan, at a rock bottom int rate, with a tax free return (pennies/dollars saved), to boot

and if one is a believer of the inflation thats coming, his rate of return will escalate in direct proportion to the rise in utility costs = GUARANTEED RATE OF RETURN, unless one thinks that perhaps electricty prices will be going down any time soon?

[Milton Kuo]

Re: The Old Standby: the 30-year fixed mortgage

The gamble you're playing is hoping inflation in housing offsets your interest payments, repairs, insurance, property taxes, etc. and that inflation feeds at least, if not more, into your income. Living in a house owned, without a mortgage, if anything strengthens that bet. Unless one believes there's a large return coming to savers anytime soon. That's another bet!

Repairs, insurance, and property taxes must be paid regardless of whether one owns one's home outright or not. The only variable to consider is interest payments. While there is a speculative element to it, one could take the proceeds from a cash-out mortgage and put the proceeds into something like gold. With 30-year mortgages at around 4.5%, it seems to be a relatively high-probability bet that gold will average better than a 4.5% per annum return over the next few years.

This is about as close to a relatively big carry trade as a retail investor is ever going to get.

[jk]

Re: The Old Standby: the 30-year fixed mortgage

The gamble you're playing is hoping inflation in housing offsets your interest payments, repairs, insurance, property taxes, etc. and that inflation feeds at least, if not more, into your income. Living in a house owned, without a mortgage, if anything strengthens that bet. Unless one believes there's a large return coming to savers anytime soon. That's another bet!

i designed my home and moved into it 31 years ago. i love it, i love its setting, and i'm not going anywhere if i can help it. so the repairs, insurance, taxes are there whether i have a mortgage or not.

i disagree that a house without a mortgage strengthens the inflationary bet. i took out the mortgage as an investment position, a bet on inflation.

as it happens, my prior mortgage was at a somewhat higher rate, and my cash out did not increase my monthly payments, but - as has been pointed out- i am earning a tax-free 10% return on the cash out via my total annual energy cost savings [12 mos of electricity and - in the past- heating oil]. actually, the return is probably higher than that- the 10% return is based on heating oil prices in the winters of '07-'08 and '08-'09. heating oil prices this past winter were significantly higher, so my savings are actually even more. and as i expect oil prices to continue to rise faster than electricity prices, i think my savings will continue to grow.

further- i would like to have as much fixed rate debt as i can get. if i could get more long-term fixed rate debt, i'd take it in a flash, and invest the proceeds. i've been making between 11 and 12% compounded for the last 20 years or more, and i expect the real value of my fixed rate debt to decline significantly because of inflation.

[don]

Re: The Old Standby: the 30-year fixed mortgage

In no way am I contesting what you've done. I've done much the same thing. I am questioning if it can be counted on to repeat. The last 30 years were one of rising housing values and even incomes for many. Today's climate is a game changer. Something that should be taken into consideration, regardless how successful mortgage debt has been in the past.Your investment returns of 11-12% are admirable. A hearty congratulations!