Housing - From Boom To Bust

[Nbadan]

If you've been waiting like I told ya too, your ship is gonna come in...


NEW YORK (CNNMoney.com)-- Homebuilder Toll Brothers said the current slump in residential construction is unlike any it has seen in 40 years as it became the latest to warn of a glut in new homes for sale and a slowdown in the closely watched real estate market.

The builder of luxury homes also reported weaker than expected preliminary results for the just completed quarter and cut its outlook for the homes it will sell in the current period. Toll Brothers (Charts) shares fell 4 percent in premarket trading.

The housing and homebuilding markets have helped drive the national economy during the past few years. Any downturns in these critical sectors could add to the problems of an already unsteady situation.

In a statement, company chairman Robert Toll warned there is a glut of supply of homes for sale in the market, as the building boom of recent years seems to be turning into a bust.

CNN (http://money.cnn.com/2006/08/09/news/companies/toll_brothers/index.htm?cnn=yes)

San Antonio is on the tail-end of a sellers-market. The economy continues to be strong, but investors are shying away from the quick turn-over deals in real estate from just 2 years ago figuring the market is stagnant. Now there are many empty homes on the market, with even more neighborhoods still under construction in the burbs. Homebuilders, like American automakers, are always the last to get the memo, but the real winners this time will be those who waited.

[01Snake]

San Antonio is on the tail-end of a sellers-market.

Tail-end my ass. The SA market is thriving.

[01Snake]

dan hates america and wears a tinfoil hat, so go ahead and make those real estate investments snakey bakey

Believe me..I have and making a hansome return doing so. Thanks.

[Nbadan]

San Antonio is one of the few markets were you can still make a buck in real estate because homes are still moderately affordable and it's a developer's city, very few barriers to entry, low building regulations and lots of affordable land. A similiar size home in Austin could cost 2 or 3 times as what it would cost in San Antonio. The high costs of building or remodeling a home in Austin has led to housing booms in surrounding small towns, mostly affordable family homes, but not so for SA, you can still find moderately priced homes for the square footage in the city and that lends to a good investment opportunity, trouble is appreciations have been going up so fast in SA that it makes some people feel artifically rich and it gives people like Snake a feeling of invulnerabilty, while those on fixed incomes or with salaries that aren't keeping up with inflation (a majority) are left to struggle with the higher taxes and insurance costs. Everything else being equal, a housing boom can become self-sustaining, but only as long as the next sucker will come along and over-pay. Still, there are worse things than being stuck with a home in SA.

[RandomGuy]

San Antonio is one of the few markets were you can still make a buck in real estate because homes are still moderately affordable and it's a developer's city, very few barriers to entry, low building regulations and lots of affordable land. A similiar size home in Austin could cost 2 or 3 times as what it would cost in San Antonio. The high costs of building or remodeling a home in Austin has led to housing booms in surrounding small towns, mostly affordable family homes, but not so for SA, you can still find moderately priced homes for the square footage in the city and that lends to a good investment opportunity, trouble is appreciations have been going up so fast in SA that it makes some people feel artifically rich and it gives people like Snake a feeling of invulnerabilty, while those on fixed incomes or with salaries that aren't keeping up with inflation (a majority) are left to struggle with the higher taxes and insurance costs. Everything else being equal, a housing boom can become self-sustaining, but only as long as the next sucker will come along and over-pay. Still, there are worse things than being stuck with a home in SA.

Bingo.

Real estate is one of those real "get-rich-quick" things that people pile into when the economy favors it, then cry in their beer and blame others for when it doesn't.

The high rates of return are garnered to compenstate for losses in economic downturns. A simple tenet of finance.

[Nbadan]

WEB EXCLUSIVE
By Jennifer Barrett
Updated: 6:35 p.m. ET Aug 8, 2006


Aug. 8, 2006 - When Shawn Howell saw the house in the summer of 2004, he thought he couldn’t lose. The location-close to family and in an upscale subdivision in Louisville, Ky.,—was perfect; the three-bedroom plus loft was just right. The price was a little high at $217,000—especially as Howell's wife, Niki, had just given birth to their second child. But the couple learned they could purchase it with no money down by taking out two adjustable-rate mortgages. The monthly payments would start at a manageable $1,100. And Howell figured the value of their home could only go up in the five years they planned to live there. Instead, two years later, the family have put their home on the market for less than they paid for it—desperate to find a buyer before the bank forecloses on the property. "Looking back, I wouldn't advise anyone to do what we did," says Howell, an Iraq war vet who worked two jobs but still fell short on the monthly payments after they jumped by more than $300. "We just couldn't afford the house anymore."

Across the country, millions of homeowners are finding themselves in a similar situation. Real estate purchases that once seemed like such moneymakers have become financial burdens instead. U.S. homeowners now owe about $9 trillion in mortgage debt. Of that, about $425 billion in adjustable-rate mortgages-initially pegged at historically low rates, but designed to shift with market trends after periods ranging from one to 10 years—will reset sometime this year, according to Freddie Mac, a government-sponsored housing financing company. Another $600 billion in home equity lines of credit (or HELOCs) and second-lien mortgage loans, which became popular when rates were low as a means of paying off credit card debt or financing home improvements, are also being readjusted. Those with fixed-rate mortgages payable over 15 or 30-year periods may be seeing little change, but those who banked on rates remaining near the 4.6 percent lows of 2003, are getting some unpleasant shocks when their mortgage bills arrive in the mail. As their payments rise, many are struggling to keep up. Foreclosures and delinquency rates are rising. And with the markets cooling in many regions—existing home sales across the country have slipped for three months straight and new home sales nationwide have declining as well—there are growing fears of a looming crisis. Howard Dvorkin, president and founder of Consolidated Credit Counseling Services, a nonprofit debt management organization, says up to 10 percent of those now seeking counseling are being squeezed by adjustable-rate mortgages or home equity loans. "And this is just the tip of the iceberg."

MSNBC (http://msnbc.msn.com/id/14251743/page/2)

Its people like this who overextend themselves on credit that help create the very bubble which crushed him.

This guy thought he would take a free ride on the housing bubble, he thought he would get it all, no money down, ride the appreciation wave and then cash out in a few years. He lost, its 100% his own fault. All the signs were there interest was only going to go up and he should have planned appropriately.

[cheguevara]

sorry but the poor dumb SOBs that get ADJUSTABLE RATE mortgages deserve it.

[Nbadan]

sorry but the poor dumb SOBs that get ADJUSTABLE RATE mortgages deserve it.

Your assuming that fixed rate mortgages are available for everyone, but your right, if you have to buy a home with an ARM to meet the payment, don't buy the house.

[01Snake]

San Antonio is one of the few markets were you can still make a buck in real estate because homes are still moderately affordable and it's a developer's city, very few barriers to entry, low building regulations and lots of affordable land. A similiar size home in Austin could cost 2 or 3 times as what it would cost in San Antonio. The high costs of building or remodeling a home in Austin has led to housing booms in surrounding small towns, mostly affordable family homes, but not so for SA, you can still find moderately priced homes for the square footage in the city and that lends to a good investment opportunity, trouble is appreciations have been going up so fast in SA that it makes some people feel artifically rich and it gives people like Snake a feeling of invulnerabilty, while those on fixed incomes or with salaries that aren't keeping up with inflation (a majority) are left to struggle with the higher taxes and insurance costs. Everything else being equal, a housing boom can become self-sustaining, but only as long as the next sucker will come along and over-pay. Still, there are worse things than being stuck with a home in SA.

Bingo! SA (and a few other cities) are seeing the exact opposite of the rest of the country.

[RandomGuy]

Your assuming that fixed rate mortgages are available for everyone, but your right, if you have to buy a home with an ARM to meet the payment, don't buy the house.


Yup.

Better to live in an apartment, sock away money for a couple of extra years to get a larger down payment.

People always say that renting is "throwing away money". To a small extent that is true, but then again, so is making house payments that are 90%+ interest for the first few years of a 30 year loan.

The best thing to do instead of an ARM, is to rent and live beneath your means for a few years, and sock away a good chunk of money every month for the express purpose of getting a house.

I DO feel that a house is a good investment, and one of the first I will make.

Invest in your house.
Make your normal payment each month.
Write a separate check at the same time for the amount you want to "invest", and be sure to write "principal only" in
the memo portion of the check.
Make sure that your mortgage company allows you do to this first. Most do, but read your mortgage first.

Example of this in action.

Your 30-year mortgage amount: $150,000
Your interest rate: 7%
Your normal payment $997.95

Amount of that.........You will pay your
second check...........mortgage off this much earlier
$100 ---------------7 years
$200 ------------- 11 years
$300 ------------- 14 years
$400 --------------16 years
$500 ------------- 18 years

Once your house is paid off, you can then start investing that $997.95 (plus your extra) per month, and be able to afford good advice on how to do it!
You will lose a slight tax deduction for the interest paid, but having the extra to save will make a big difference in the amount you end up with at retirement.

People worry a lot about how to invest, but an investment in one's own debt is a good place to start, even if you don't know much about investing.

[RandomGuy]

Bingo! SA (and a few other cities) are seeing the exact opposite of the rest of the country.

They are indeed, due to local fluctuations in economic growth. Do you know when the SA market will cool off?

[scott]

They are indeed, due to local fluctuations in economic growth. Do you know when the SA market will cool off?

When people stop moving here... I don't see it happening.

[2centsworth]

The high rates of return are garnered to compenstate for losses in economic downturns. A simple tenet of finance.
Dude, where are these tenets you always refer to?

[Ozzman]

Your assuming that fixed rate mortgages are available for everyone, but your right, if you have to buy a home with an ARM to meet the payment, don't buy the house.


that's like "if you can't pay the insurance on the car, you can't afford the car."

Genius.

[smackdaddy11]

The S&L collape of the late 80's along with the real estate collape in SA happened after the rest of the country had already cratered. It will happen here, just delayed.

[Clandestino]

i've talked to a shitload of realtors and homesellers recently... our housing market is is slowing down just a bit... houses that were selling in weeks are now takings months... i don't think we'll see some sort of crash that will happen in other areas though... our homes have always stayed reasonably priced...

FYI: no financial planner will tell you to make extra mortgage payments on your home. not a good investment

[DarkReign]

Michigan saw a HUGE housing market couple years back (maybe 4-5). Subdivisions went up over night, old farms were being bought for millions to build million dollar homes.

Im not kidding when I say that (total guess, but close) 20-40% of those houses are completely empty.

Some of the smart contractors didnt build houses until the lot sold....you see alot of subdivisions with 4 houses out of 30 lots.

Unbelieveably bad here. Im no economist/real estate agent either...just a guy that drives by these abandoned subs every day to work.

[boutons_]

U.S. housing boom appears over

Web Posted: 08/09/2006 08:13 PM CDT

Martin Crutsinger
Associated Press

WASHINGTON — The "For Sale" signs are staying out longer. House prices are easing as sellers try to lure in buyers.

The big question now: Will the nation's five-year housing boom turn into a bust that could derail the overall economy?

"We recognize the risk ... and we are watching it very carefully," Federal Reserve Chairman Ben Bernanke told Congress recently.

The Fed's interest rate increases, which have helped push mortgage rates to the highest levels in more than four years, have put a damper on housing.

The central bank acknowledged that fact Tuesday when it decided against raising a key short-term rate for an 18th time.

Richard Dekaser, chief economist at National City Corp., has done a study with Global Insight that identified 71 metropolitan areas, representing 39 percent of the single-family home market, as extremely overvalued. Of the top 25 cities, 14 are in California and seven in Florida.

San Antonio is bucking the national, trend, however, and making its mark as one of the country's hot real estate markets. The median sales price for the year's first six months reached $139,400, an 8.6 percent increase over last year, the San Antonio Board of Realtors said.

The median sales price for June alone was $149,000.

Construction of new homes is soaring. The city saw more new homes started in the past 12 months than in any period in its history. Builders started 18,598 houses between July 2005 and June 2006, a 26 percent increase from the previous year, according to a report from Metrostudy, a housing research firm.

David Lereah, chief economist for the National Association of Realtors, predicts that the U.S. sales slowdown is about to bottom out. He said stubborn homeowners are starting to realize they will need to lower their asking prices to attract buyers.

==========================

What the planners/developers call in-filling is occuring in San Antonio. Lots that have been vacant for decades next to residential developments are being built on. Old houses/lots are being purschased and razed for luxury homes (Alamo Hts, Terrel Hills, vicinity). Big lots are being sub-divided to put up large luxury homes out of character with the neighborhood, causing the recent re-zoning/density battles in SA.

=============

San Antonio Express-News (TX)

Inside the loop

Jennifer Hiller EXPRESS-NEWS BUSINESS WRITER

Publication Date : July 30, 2006

Most San Antonio home buyers head straight to the suburbs.

Others go on a more elusive search: trying to identify the next King William or Monte Vista.

Interest in San Antonio's older neighborhoods is picking up, in part because of rising gas prices, traffic congestion and a desire for distinctive architecture.

But with home prices skyrocketing in some of the city's original suburbs, some buyers are turning to other neighborhoods where entry-level homes can still be had for a song -- and maybe a lot of elbow grease.

Buyers, architects and real estate agents looking for the next big thing are targeting neighborhoods that include Mahncke Park, Government Hill, Alta Vista, Beacon Hill, Lavaca, Tobin Hill, Woodlawn Heights and Olmos Park Terrace.

For entry-level buyers, the homes there represent a more realistic option than the high-end homes in Alamo Heights, Olmos Park, Terrell Hills, King William or Monte Vista -- a few of the neighborhoods where sales prices can be hundreds of thousands of dollars higher.

Many real estate professionals point to the Broadway corridor south of Hildebrand Avenue as an area primed for renewal.

Nearby, developers have started turning the 22-acre Pearl Brewery into a mixed-use urban village. Also along Broadway, the refurbishing of the old Butter Krust bakery into C.H. Guenther & Son's headquarters, an expansion proposed at the Witte Museum and the construction of a high-rise condominium on the site of the former Earl Abel's are helping drive interest in the area's neighborhoods.

Prices have already spiked in Mahncke Park, located off Broadway near the San Antonio Botanical Garden, but there are still a few deals to be found there -- if a buyer wants to do a lot of work on a house, real estate agents say.

Sales prices in Government Hill, farther south off Broadway and near Fort Sam Houston, are much lower, said Julie Hooper, owner of King William Realty.

Government Hill has been on the brink of a comeback for some time. It was designated as historic by the city and lately has attracted local artists as buyers. But neighborhood revitalization is rarely a smooth and rapid process.

"Hopefully it will be a natural progression now," Hooper said. "There are some fine houses there."

Architects, contractors and real estate professionals say excellent architecture -- or "good bones" -- is one thing that helps older or historic neighborhoods attract new buyers.

Most people attribute Monte Vista's continued popularity to its housing stock -- large, unique homes built primarily of rock and brick in the Spanish Eclectic, Craftsman and Colonial Revival styles.

Mike Idrogo, a real estate agent with Bradfield Properties, said the historic designation in 1975 helped improve property values in the neighborhood.

Now he sees the same thing happening in Monticello Park.

Monticello Park, west of Interstate 10 and off Fredericksburg Road, recently was designated a historic district. It includes Art Moderne, Spanish Eclectic and Gothic Revival homes built in the 1920s and 1930s.

"It hasn't really kicked up like Monte Vista," Idrogo said. "There's still some you can get deals on."

Pat Howell, a real estate agent with Bradfield Properties, also likes Woodlawn Heights, near the Monticello Park Historic District.

"They look real similar to little Olmos Park homes, but they haven't been touched yet, which is really good," Howell said. "I try to get my investors to look over in that area. I think it might take a while to catch on, but I love the homes."

Howell also said buyers can still find reasonable prices and good architecture in Olmos Park Terrace, northwest of Olmos Park, but they have to move quickly.

Liz Chiego, a real estate agent with the Phyllis Browning Co., said Monte Vista's popularity is helping drive renovation in the neighborhoods that fringe it.

"There's a proximity to downtown, and gas prices are very high," she said.

Edward Alanis, also with the Phyllis Browning Co., said prices in nearby Alta Vista and Beacon Hill are moving higher and that homes are moving off the market at or near asking price. Alta Vista is near San Antonio College and San Pedro Park, and Beacon Hill is west of Monte Vista.

Buyers also are looking to renovate and remodel in Tobin Hill, south of Monte Vista.

"People seem to be proud of them even if they're in terrible condition," he said. "To get a deal you may have to spend tens of thousands of dollars in renovation."

Darryl Ohlenbusch, an architect who lives in Lavaca, which is near King William, recently purchased a 90-year-old Craftsman-style home in the neighborhood near St. Cecilia Church.

Ohlenbusch and others describe the St. Cecilia area, south of Lavaca and King William near Roosevelt Park, as a once-middle-class neighborhood that declined in the 1960s because of nearby freeway construction.

"It's beautiful housing stock," he said. "I don't think the noise is really an issue."

Ohlenbusch, his mother, an aunt and other friends recently have bought homes in the neighborhood and started renovations. He and his business partner, contractor Robert Alvarado, say it's one of a few areas where it's still affordable to buy and renovate or restore a historic home.

"After King William it was Lavaca; after Lavaca it was St. Cecilia," Ohlenbusch said.

There's an inherent risk in buying a home in a neighborhood that might -- or might not -- be on the fringe of a comeback.

But buyers can take comfort in this: The King William Historic District, which houses some of San Antonio's best residential architecture gems, was famously forgotten for several decades. Its Victorian, Greek Revival and Italian villa homes declined with neglect, then were rediscovered in the 1960s.

This year's average sales price: $139 per square foot, with many homes in the half-million-dollar range.

[email protected]

[RandomGuy]

Dude, where are these tenets you always refer to?

Generally they are in the textbooks of my finance classes, and are harped on repeatedly by the PHDs that teach the classes.

Risk=Demanded Rate of Return.

This is why low risk borrowers like the US government get 3-5% interest rates on US treasury bonds, and you get 12-22% on your unsecured credit cards.

Rates of return for any investment works the same way.

[RandomGuy]

When people stop moving here... I don't see it happening.

It will at some point in the future that neither of us can get at. It is statistically certain.

You are right in saying that it probably won't be any time soon. I would however always advise a bit of caution and common sense when looking at any investment. It would be very easy for builders in the SA area to overbuild, as is always the case in any "hot" market.

[RandomGuy]

i've talked to a shitload of realtors and homesellers recently... our housing market is is slowing down just a bit... houses that were selling in weeks are now takings months... i don't think we'll see some sort of crash that will happen in other areas though... our homes have always stayed reasonably priced...

FYI: no financial planner will tell you to make extra mortgage payments on your home. not a good investment

It is if you don't like being in debt. I hope you realize that the extra payments are towards the principle and not just "extra payments" as in principle+interest.

It is also a good investment for real novices who are very shy of stocks and such.

I would also ask any financial planner to find an absolutely 100% guaranteed 7-8% return for 20 years. Again, you will miss out on a small tax deduction on the interest, but I think it is outweighed by the fact that one gets out of debt quicker.

The thing about investing in a home that most financial planners will miss, is that you can take tax-free capital gains when you sell a house.

Buy into a mutual fund, you have to pay overhead, and might just as well throw darts at the Wall Street Journal as far as returns go.

Buy into stocks directly and unless you have a LOT of capital up front to diversify, you are taking on a lot of risk.

[RandomGuy]

One other small thing that paying off your house early will do for you:

Cash flow.

Let's say you pay off your house early and now suddenly don't have to worry about not being able to make house payments, and can just worry about the relatively minor insurance and taxes.

What does that really free you to do?

Take that cash flow and invest in something that earns truly massive returns. Yourself.

Start a business and/or add to your education. These two things will add more to your earnings potential in the long run than anything else.

"But RG, don't most small businesses fail, and won't that leave me in a bad spot?"

If your business fails, the bank won't repossess your house because you can't make the mortgage payments.

I really truly believe that this is a very solid way to go. If this parts ways with most financial planners, so be it.

[Extra Stout]

I would also ask any financial planner to find an absolutely 100% guaranteed 7-8% return for 20 years. Again, you will miss out on a small tax deduction on the interest, but I think it is outweighed by the fact that one gets out of debt quicker.

Scenario 1:
Home costs $160,000
I pay 20% down: $32,000
Payment: $1000/mo, $120 principal, $880 interest
Rent: $600/mo

1 year later:
House value: $172,000
My equity: $45,440
My total payments: $44,000
Rent would have been: $7200
Plus I got a tax credit of $2640
So my net payment = $34,160
So I'm ahead $11,280
Return = 33%

Scenario 2: I make an extra payment 6 mos. after purchase
I don't refinance, so my payment schedule stays the same.
I pay an extra $1000 and get $1000 additional equity.
Equity: $46,400
Total net payments: $35,160
I'm still ahead $11,280
But my return is 32%.
I'll get my $1000 back in 29 years when it is discounted to $550 or so.

Sounds like extra payments are a bad idea to me.
An exception would be if your interest rate is lowered once you hit a certain equity trigger (sometimes done on PMA for purchases w/ < 20% down).

[Clandestino]

also, many houses are financed at 5-6%. with the tax deduction the rate is even lower.. plus, you lock up money in your house... you can get a HELOC, but then you just borrowed your own money at a higher interest rate!

also, paying extra you forego earning higher interest rates the market brings.. you can find tons of mutual funds with rates higher than 10% averages over the past 10-20, even 30 years..

[RandomGuy]

also, many houses are financed at 5-6%. with the tax deduction the rate is even lower.. plus, you lock up money in your house... you can get a HELOC, but then you just borrowed your own money at a higher interest rate!

also, paying extra you forego earning higher interest rates the market brings.. you can find tons of mutual funds with rates higher than 10% averages over the past 10-20, even 30 years..

You are assuming the average couple has the cash flow to afford mutual funds.

Most studies I have seen have put the performance of mutual funds below or well below market performance.

Factor that in for starters.

Factor in the fact that most brokerages that set up investment accounts will charge fees for not having enough money. That reduces the rate of return earned on having money there if you are just starting out.

Another happy fun thing about mutual funds is that one never knows what one is getting into. The "timing" scandals as well as tons of other brokerage scams that have happened with alarming frequency and almost invariably involve taking money from small investors.

I will readily accede that, in theory and in the past, one could earn a slightly better return in the stock market.

In practice, however, that increased rate of return has come with a price to pay in terms of income volatility.

Let's say you sock your money away in mutual funds and keep that house payment.

You get sick or lose a job, and have to live a greatly reduced income, AND the market at that time tanks reducing the rate of return on that invested money. You then have to no only use up the interest, but start eating the principal as well, taking money out and paying taxes on the interest and any capital gains.

Pay off the house sooner, and you can afford to either refinance, and reduce your cash flow requirements, or were lucky enough to have paid off your house, having a greatly reduced cash flow requirement.

I am not saying to sock everything in your house. One still needs to diversify eventually. But if you really want a conservative investent, with a 100% guaranteed return, investing in one's debt, such as a mortgage loan, is a very good way to go.

You don't have to waste time picking a mutal fund/broker, you don't have to worry about paying taxes on a good chunk of the capital gains, and you don't have to worry as much about the state of the economy.

Any difference between the two options is more than made up for by the financial security of home ownership, and the fact that after you finish paying the thing off you can take the cash flow that was going into the mortgage and stick THAT into the stock market.

Granted, it will not have the time to compound that the dollars that would have gone into the market would have, but you will have a LOT more money to stick into other investments at a time where the increased liklihood of illness and/or joblessness makes that security a lot more valuable than any difference in return would indicate.

In any good portfolio, you will have a mix of investments, that offer differing amounts of risk, from stocks to bonds, to treasury securities. Investing in your own debt (paying it off sooner) is absolutely riskless. This makes it on par in terms of risk with treasury securities that average 3%5% (at the moment). Sooooo if you have any debt at all that is accumulating at a higher rate than that, you would do better to put that money into that debt than in US treasuries.

[RandomGuy]

Heh, although the BEST way to make money on the stock market is to...


Write a book about making money on the stock market. :lol

[Clandestino]

get in the game for real and out of your finance class and you will probably have a different view. remember, most teachers are teaching and writing books about theory and not practice...

[Clandestino]

Factor in the fact that most brokerages that set up investment accounts will charge fees for not having enough money. That reduces the rate of return earned on having money there if you are just starting out.usually negated by higher returns...

Another happy fun thing about mutual funds is that one never knows what one is getting into. The "timing" scandals as well as tons of other brokerage scams that have happened with alarming frequency and almost invariably involve taking money from small investors.higher an advisor.


Let's say you sock your money away in mutual funds and keep that house payment.

You get sick or lose a job, and have to live a greatly reduced income, AND the market at that time tanks reducing the rate of return on that invested money. You then have to no only use up the interest, but start eating the principal as well, taking money out and paying taxes on the interest and any capital gains.you would be worse off if all your money was stuck in your house... you would have to pull out a loan at 8-9% to get you by.

Pay off the house sooner, and you can afford to either refinance, and reduce your cash flow requirements, or were lucky enough to have paid off your house, having a greatly reduced cash flow requirement.

I am not saying to sock everything in your house. One still needs to diversify eventually. But if you really want a conservative investent, with a 100% guaranteed return, investing in one's debt, such as a mortgage loan, is a very good way to go.i think you've been listening to dave ramsey too much...and he is rich not bc he is/was an investor... he sells 44.95 get out of debt programs...



In any good portfolio, you will have a mix of investments, that offer differing amounts of risk, from stocks to bonds, to treasury securities. Investing in your own debt (paying it off sooner) is absolutely riskless. This makes it on par in terms of risk with treasury securities that average 3%5% (at the moment). Sooooo if you have any debt at all that is accumulating at a higher rate than that, you would do better to put that money into that debt than in US treasuries.

[Nbadan]

Scenario 1:
Home costs $160,000
I pay 20% down: $32,000
Payment: $1000/mo, $120 principal, $880 interest
Rent: $600/mo

1 year later:
House value: $172,000
My equity: $45,440
My total payments: $44,000
Rent would have been: $7200
Plus I got a tax credit of $2640
So my net payment = $34,160
So I'm ahead $11,280
Return = 33%

Scenario 2: I make an extra payment 6 mos. after purchase
I don't refinance, so my payment schedule stays the same.
I pay an extra $1000 and get $1000 additional equity.
Equity: $46,400
Total net payments: $35,160
I'm still ahead $11,280
But my return is 32%.
I'll get my $1000 back in 29 years when it is discounted to $550 or so.

Sounds like extra payments are a bad idea to me.
An exception would be if your interest rate is lowered once you hit a certain equity trigger (sometimes done on PMA for purchases w/ < 20% down).


In your first scenario, interest payments of $880 per month would add up to $10,560 in the first year alone on a $128,000 loan (160-32), that's an annual interest rate of 8.67%, that's a bit high, most new home loans hover around 6.25% or lower. In fact, if you paid $1,000/month you would actually be paying off your mortgage balance faster.

Your scenario:

128K balance after 20% down
30-year fixed
8.67% annual percent
Payment = $1000.00



Closer to reality:

128K balance after 20% down
30-year fixed
6.25% annual percent
Payment = $788.00 (overpayment per month = $212.000)


*minus taxes, insurance, points, etc...

My point is that by making even a few dollars extra in payment on your mortgage every month you can chop off years off the standard 30-year mortgage. Even under your 8.67% scenario, your last payment is $992 in Principal and only $7 dollars in interest, by paying a little extra every month you are subtracting directly from the end of the loan, meaning that every $992 dollars extra you pay, you remove 1 payment from the books, and it only accelerates after that as your balance drops. Based on your scenario of an extra ~1,000 you could cut your payment period down to 17 years and that gives most people valuable years to invest for retirement when they could have still been paying off the original home loan.

[RuffnReadyOzStyle]

Hold on for the wild ride on the downside of the economic cycle, 'cause here it comes. Slowing house prices and rising interest rates are historically the first indicators of a recession on the way, and it is not going to be fun for anyone. With interest rates and inflation rising, and the oil price going through the roof, anyone recall the oil shocks of the 70s? All we need right now to send the world into recession is the situation in Iran or Iraq to worsen.

Batten down the hatches, put as much money away as you can right now, and make sure you have a secure job, because the end of this decade is going to squeeze us all.

[Nbadan]

It will be the high gas prices that do us in. Consumers can survive $3 gas for awhile as long as their credit holds out, but they will need to sacrafice on other things and that is exactly what people have been doing, consumer product sales are down in most sectors when compared to the same numbers in 05. New home construction was keeping the economy going, but now that this has slowed in most parts of the country, there really isn't anything out there to keep the economy chirning. There will be slow growth if any until we attack Iran, but the stock market wonn't care, they will keep on dumping money into their crap game, it's like these guys live in their own Kleptocracy or something.

[Clandestino]

however, most of you are forgetting what really makes money grow.. it is not putting in large sums 15 yrs down the road... it is putting in steady amounts now and letting the money compound.

basic rule of 72.

[RandomGuy]

get in the game for real and out of your finance class and you will probably have a different view. remember, most teachers are teaching and writing books about theory and not practice...

Actually I read a lot outside of class.

[RandomGuy]

however, most of you are forgetting what really makes money grow.. it is not putting in large sums 15 yrs down the road... it is putting in steady amounts now and letting the money compound.

basic rule of 72.

I acknowledged as much.

I ran the numbers.

Assuming:
$150,000 borrowed.
9% rate of return on invested capital (10%-tax effect)
6% interest on loan (6.5% + tax effect)
$100 each month towards your mortgage instead of invested.

At the end of 30 years, the difference in money is:
$7,422 in favor of taking that $100 and investing it.

For that $7,422 of forgone income you gain:
Home ownership 7 years earlier.

Home ownership=security. Provided you have also mitigated your risk of loss with good insurance, of course.

The difference does get wider as more money is put towards the mortgage.
A payment of $200 means a difference after 30 years of $34,000 in favor of investing.

BUT

You are NOT guaranteed that 9% return for 30 years. Assuming that any future rate of return will equal the same as the past is patently and dangerously false. One CAN say that it is PROBABLE but not CERTAIN.

If you start investing that money in a downturn in the economy, the benefits of that compounding will disappear. Note: This should never discourage you from investing. Worrying about "timing" the market is foolish. Do it anyways. The reason for this is a whole other thread.

Paying off debt IS 100% certain in terms of payoff.

Paying off debt DOES allow for living on reduced cash flows. Pay off the house sooner, you can retire sooner, if you so choose. It also provides something of a form of insurance against homelessness. Lose your job, and you don't have to worry about losing your house.

The economic value of that house will rise no matter what. The cost of housing tends to follow the pace of inflation. If you insulate yourself from those increases, you have insulated yourself from housing inflation.

[RandomGuy]

Hmm. Interesting. I upped the tax bracket for that scenario from 10% to 20%, and the home investment actually came out ahead in both the $100 and $200 per month scenarios.

[RandomGuy]

Clandestino comments in blue


Factor in the fact that most brokerages that set up investment accounts will charge fees for not having enough money. That reduces the rate of return earned on having money there if you are just starting out.usually negated by higher returns...

You mean the higher returns are partially negated by the extra fees? :lol

Another happy fun thing about mutual funds is that one never knows what one is getting into. The "timing" scandals as well as tons of other brokerage scams that have happened with alarming frequency and almost invariably involve taking money from small investors.higher an advisor.
An advisor who can no more say who is crooked than you can.

Let's say you sock your money away in mutual funds and keep that house payment.

You get sick or lose a job, and have to live a greatly reduced income, AND the market at that time tanks reducing the rate of return on that invested money. You then have to no only use up the interest, but start eating the principal as well, taking money out and paying taxes on the interest and any capital gains.you would be worse off if all your money was stuck in your house... you would have to pull out a loan at 8-9% to get you by.

You can sell your house for tax free gains if you really need to. My understanding of personal unsecured loans is that they are more than 8-9%.


Pay off the house sooner, and you can afford to either refinance, and reduce your cash flow requirements, or were lucky enough to have paid off your house, having a greatly reduced cash flow requirement.

I am not saying to sock everything in your house. One still needs to diversify eventually. But if you really want a conservative investent, with a 100% guaranteed return, investing in one's debt, such as a mortgage loan, is a very good way to go.i think you've been listening to dave ramsey too much...and he is rich not bc he is/was an investor... he sells 44.95 get out of debt programs...

I have heard about this guy. Never read the book though. As I have said before, the surest way to make money on the stock market is to write a book on making money on the stock market. :lol

In any good portfolio, you will have a mix of investments, that offer differing amounts of risk, from stocks to bonds, to treasury securities. Investing in your own debt (paying it off sooner) is absolutely riskless. This makes it on par in terms of risk with treasury securities that average 3%5% (at the moment). Sooooo if you have any debt at all that is accumulating at a higher rate than that, you would do better to put that money into that debt than in US treasuries.

[Extra Stout]

My point is that by making even a few dollars extra in payment on your mortgage every month you can chop off years off the standard 30-year mortgage. Even under your 8.67% scenario, your last payment is $992 in Principal and only $7 dollars in interest, by paying a little extra every month you are subtracting directly from the end of the loan, meaning that every $992 dollars extra you pay, you remove 1 payment from the books, and it only accelerates after that as your balance drops. Based on your scenario of an extra ~1,000 you could cut your payment period down to 17 years and that gives most people valuable years to invest for retirement when they could have still been paying off the original home loan.
You have to quantify a discount factor for a long-term return, which won't be the same for every person.

[Extra Stout]

RG, you are waaaaaaaaaay too conservative in your investment strategy. Your strategy makes sense for a 55-year-old who cannot afford the risk of investment volatility.

Volatility for a young person is considerably less of a problem.

Your argument that a person with cash flow trouble could just sell their house (and presumably downsize) neglects 1) the illiquidity of real estate and 2) the expenses of moving.

[RandomGuy]

RG, you are waaaaaaaaaay too conservative in your investment strategy. Your strategy makes sense for a 55-year-old who cannot afford the risk of investment volatility.

Volatility for a young person is considerably less of a problem.

Your argument that a person with cash flow trouble could just sell their house (and presumably downsize) neglects 1) the illiquidity of real estate and 2) the expenses of moving.

#1 and #2--yup on both counts.

Now let's take it a step further and put it in a bit of a different light that really makes this make a bit more sense.

You are entirely correct about this form of debt investment being conservative. As I stated before, a good investment strategy is diversified with a mix of returns, and you would agree I am sure.

Investments when young should be mostly higher risk followed by medium risk, followed by low risk in decending order of amounts. Say you have $600 to save in any given month, you put $300 in risky (stocks), $200 in medium (corporate bonds), and $100 in safe (US treasuries). This mix should change towards less risk as you age.

I would and do argue that given the choice between giving up a small amount of investment income is a small price to pay for the security of housing. This is what economists call "utility". What price are you willing to pay for the security of not having to worry about house payments?

BUT

Let's hold your and clandestino's point that investing in your mortgage makes no sense when you substitute it for stock investing as a given.

What about when you substitute it for the safe investment portion of your portfolio?

US treasuries generally pay LESS than any home loan. That hypothetical young person should pay towards the mortgage rather than earn a lower return on US treasuries, yes?

As you stated before, you do lose some liquidity, but if most of your investing is mostly liquid, such as stock or bond funds, then you have only given up a small amount of liquidity and gained a higher return. Add to that the financial security of reduced housing cash outflows, and it makes even more sense.

[RandomGuy]

Take the whole idea of debt investing a step further.

IF you have any balance on your credit cards that you are paying 20% on, does it make sense to invest in stocks that historically average 10-15%?

Nope. THAT is the most basic concept of accumulating wealth that most people miss, and one of the things that is hurting the US consumer more than many realize.

[RandomGuy]

Let me make one thing clear:

These are my opinions alone. I read a lot of investment columns, study the topic in school, and read an occasional book, but these are more my opinions than anything else, albeit opinions based on education about the subject.

It is ALWAYS good to do your own homework, and I DO recommend sitting down with a CERTIFIED financial planner to set out a plan, even at the extra expense.

[RandomGuy]

#1 and #2--yup on both counts.

Now let's take it a step further and put it in a bit of a different light that really makes this make a bit more sense.

You are entirely correct about this form of debt investment being conservative. As I stated before, a good investment strategy is diversified with a mix of returns, and you would agree I am sure.

Investments when young should be mostly higher risk followed by medium risk, followed by low risk in decending order of amounts. Say you have $600 to save in any given month, you put $300 in risky (stocks), $200 in medium (corporate bonds), and $100 in safe (US treasuries). This mix should change towards less risk as you age.

I would and do argue that given the choice between giving up a small amount of investment income is a small price to pay for the security of housing. This is what economists call "utility". What price are you willing to pay for the security of not having to worry about house payments?

BUT

Let's hold your and clandestino's point that investing in your mortgage makes no sense when you substitute it for stock investing as a given.

What about when you substitute it for the safe investment portion of your portfolio?

US treasuries generally pay LESS than any home loan. That hypothetical young person should pay towards the mortgage rather than earn a lower return on US treasuries, yes?

As you stated before, you do lose some liquidity, but if most of your investing is mostly liquid, such as stock or bond funds, then you have only given up a small amount of liquidity and gained a higher return. Add to that the financial security of reduced housing cash outflows, and it makes even more sense.

Hmmm. Didn't get a reply on this one... BUMP

[RandomGuy]

RG, you are waaaaaaaaaay too conservative...


TAKE THAT BACK!!!! YOU WANT TO RUIN MY REPUTATION OR SOMETHING?!?!

[Clandestino]

rg, you finally made some sense about people sitting with a cfp... all the rest of your advice(and math) has been a little off..

it is extemely evident that you have no real idea or EXPERIENCE in the world of personal finance

[RandomGuy]

rg, you finally made some sense about people sitting with a cfp... all the rest of your advice(and math) has been a little off..

it is extemely evident that you have no real idea or EXPERIENCE in the world of personal finance

Is there any guarantee that future returns on ANY form of investment will match the average returns of the last 30 years?

[RandomGuy]

I noticed that you also didn't comment on the strategy of paying off your mortgage earlier with the proportion of your investment money used for low risk investing...

[RandomGuy]

rg, you finally made some sense about people sitting with a cfp... all the rest of your advice(and math) has been a little off..

it is extemely evident that you have no real idea or EXPERIENCE in the world of personal finance


Ok then go back to my post at #36 and give me some numbers based on EXPERIENCE.

I am always willing to learn something new.

[2centsworth]

Let me help you out a little Random Guy.

#1- Not buying too much house is very important. This will allow you to purchase disability insurance (cause of 50% of foreclosures). You can get short term disability for about $300 a year. Selling your house or borrowing from your house makes no sense if you're sick/disabled.

#2- I'm in total agreement that paying off a home is very important. However, at times it's a balancing act between your house and investments. Stick to a 15 year mortgage for discipline.

#3- The average return in the stock market has been over 10% since the civil war. However, if you use the NYSE numbers stocks have done over 11% since 1924. What's interesting is that the average investor has experience a much lower result due to buying high and selling low.

[RandomGuy]

Let me help you out a little Random Guy.

#1- Not buying too much house is very important. This will allow you to purchase disability insurance (cause of 50% of foreclosures). You can get short term disability for about $300 a year. Selling your house or borrowing from your house makes no sense if you're sick/disabled.

#2- I'm in total agreement that paying off a home is very important. However, at times it's a balancing act between your house and investments. Stick to a 15 year mortgage for discipline.

#3- The average return in the stock market has been over 10% since the civil war. However, if you use the NYSE numbers stocks have done over 11% since 1924. What's interesting is that the average investor has experience a much lower result due to buying high and selling low.

Yup. Index funds, index funds, index funds.

The interesting thing about owning a house is that the value of the housing, in terms of cash flows/opportunity costs, goes up with inflation, i.e. once you own your home, you avoid increases in the other option to owning-- renting.

Heh, find a financial advisor who has taken a course in cost accounting. :lol

[boutons_]

August 23, 2006

Home Sales Fall to Unexpectedly Low Rate

By JEREMY W. PETERS

Sales of existing homes fell in July to an unexpectedly low rate, a sign that a widespread softening of the housing market is taking hold.

The National Association of Realtors reported today that purchases fell 4.1 percent last month to an annual rate of 6.3 million homes, the slowest since early 2003. The rate was 11.2 percent higher a year ago.

At the same time, the inventory of unsold homes on the market swelled to a 7.3-month supply, the most in more than a decade.

The national median price of a sold home held steady in July at $230,000. But the association said that prices fell in most areas of the country, and in many places are now lower than a year ago. Only in the South are prices still rising: the median home there sold for 3.2 percent more last month than a year earlier. Had it not been for that gain, the national median home price would have declined for the first time since 1995.

“This surge in excess supply is having a major effect on house prices,” Capital Economics wrote in a research report today.

The number of homes changing hands fell in every region, with the West experiencing the sharpest decline, of 6.4 percent. Sales volume was off by 5.9 percent in the Midwest, 5.4 percent in the Northeast and 1.2 percent in the South.

When combined with other recent statistics showing falling real estate investment and fewer application for building permits, the sales figures today make clear that a housing slowdown is now underway. Most economists, including Federal Reserve chairman Ben S. Bernanke, still expect the slowdown to be orderly. But it remains to be seen just how far home sales will slide in the coming months and what the impact on the economy will be.

Economic expansion in the second quarter slowed to a 2.5 percent annual rate, down from 5.6 percent in the first quarter. Because housing has been so central to the overall health of the nation’s economy in recent years, forecasters are concerned that a steep decline in home sales may help push the economy into a recession.

But so far, many economists are predicting a slowdown, not a collapse. “The trend here is one of stabilizing prices after the sharp gains seen for many years,” said Joshua Shapiro, chief United States economist with MFR. “While certainly a change in trend, so far the official data are not corroborating some of the more alarmist stories being bandied about recently.”

Copyright 2006 The New York Times Company

=============================

I read one article last week that said that unending health care inflation will push health care from 16% to 20% of GDP in a few years, and that sick people/health care will be a major driver of the economy.

I find there's something totally sick about driving an economy with health care products and sick people.

[Nbadan]

Yup. Index funds, index funds, index funds

Growth funds, stock funds, bond funds, international funds, even Index funds can make your head spin.

:spin

[2centsworth]

Yup. Index funds, index funds, index funds.

:lolThe S&P500 Index over the past 20 years has averaged 13% per year. The average investor in the S&P500 Index earned a little more than 3%.

The point is whether you index, use active mgt., or anything else, the biggest obstacle is controlling ones emotions.

So NOPE, Indexing makes little to no difference.



The interesting thing about owning a house is that the value of the housing, in terms of cash flows/opportunity costs, goes up with inflation, i.e. once you own your home, you avoid increases in the other option to owning-- renting.

In English, owning a home should be everyone's first investment.

[Nbadan]

Whenever anyone pimps the economy you can bet that things will soon go sour.

OFFICIAL FSP RECESSION ALERT - Ignore at your own peril...


WASHINGTON (MarketWatch) - The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.

Writing on his blog on Wednesday, Roubini repeated his call that the U.S. would be in a recession in 2007, arguing that the collapse of housing will bring down the rest of the economy. Read more.

Roubini wrote after the National Association of Realtors reported Wednesday that sales of existing homes fell 4.1% in July, while inventories soared to a 13-year high and prices flattened out year-over-year.

"This is the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices," Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.

And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, "a scary signal" of how much pain the drop in household wealth could cause.

Market Watch (http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=mktw&guid=%7BE18E95AF%2DDBFF%2D4EE4%2DACF7%2D530A3CD714 D3%7D&symbol=)

I hope at least some of you took my warnings seriously. I really do.

[RandomGuy]

The S&P500 Index over the past 20 years has averaged 13% per year. The average investor in the S&P500 Index earned a little more than 3%.

Heh, you will never get the rah-rah stock guys to admit that. It is one of my biggest complaints about most "financial advisors". They hear all sorts of rah-rah propaganda about investing in stocks and other stuff, and go charging off and thinking that stock markets are the end-all be-all of retirement planning.

As I have said before, there are SOME good ones out there that have some certification, but no small number of them I consider to be charlatans.


The point is whether you index, use active mgt., or anything else, the biggest obstacle is controlling ones emotions.

I bought Merck stock at 75. Today it (and the medco spinoff) make my shares worth roughly half that. Why have I not sold it? Because I have set aside my emotions and realize that it offers a dividend reinvestment plan. Dividends for large mature companies rarely decrease. So when the stock tanks I get to buy more shares with my (normally) unchanged dividends. Vioxx shmiox. My investment time horizon will be looooonng after the last vioxx suit is settled, and by then those constant reinvestments in depressed stocks will have paid hansomely. (look up "dollar-cost averaging")

You might also want to mention the famous "dart-throw" challenge that the Wall Street Journal used to do.

They would have an intern toss darts at the stock pages of the WSJ and then put together a portfolio based on those dart tosses.

They would then invite "experts" to pick a stock portfolio and compared the results after a year.

Care to guess which portfolios tended to do better?


So NOPE, Indexing makes little to no difference.


I would say that depends on the fund. Low/no load funds with LOTS of diversification are the way to go. They take the emotion out of it.


In English, owning a home should be everyone's first investment.

Yup.

I believe that the US economy is in for a very bumpy ride as we transition to more expensive energy over the next 40 years. The best bet against any uncertainty from that is to own a house.

[RandomGuy]

Bump.

[Extra Stout]

OK, RG, I can agree that accumulating home equity is a decent low-risk investment in lieu of acquiring T-bills.

[RandomGuy]

OK, RG, I can agree that accumulating home equity is a decent low-risk investment in lieu of acquiring T-bills.

YAY!

Sorry to belabor the point. It is something I believe strongly in, and something people should know about.