If Housing Was Overpriced, Is It a Bad Thing Fewer Americans Own Houses?

Our story thus far: Thanks to a combination of tulip-bulb-style mania among investors (either stupid or greedy, depending on your predilections), government policies (mortgage-interest deductions for two homes, subsidized loans, giant agencies instructed to buy up all private mortgages, etc.), and Fed policy (keep interest rates as low as possible for as long as possible), record numbers of Americans bought houses (read: took on debt), typically at inflated prices (partly due to other government policies that restricted supply).

You know the next part: The housing bubble popped, leaving lots of people underwater (owing more than their houses are worth at the moment) and triggering a financial crisis (panic probably a better term) that somehow was solved by bailing out big financial houses in such a way that there are fewer of them but they are bigger and more powerful than ever.

Despite (read: because of) legislation that is supposed to make sure this never happens again (read: sometime again, probably sooner than even cynics believe).

Here's USA Today on the latest home ownership data:

The U.S. Census Bureau reported Tuesday that the nation's homeownership rate fell to 66% in the fourth quarter, continuing a seven-year drop from a fourth-quarter peak of 69.2% in 2004.

At the same time, U.S. home prices fell 1.3% in November from October and were 3.7% below 2010 levels, the Standard & Poor's/Case-Shiller home price index indicates….

As of November, average U.S. home prices were back to mid-2003 levels, S&P says.

"Americans are less keen on homeownership knowing now that prices can fall," says Paul Dales, economist with Capital Economics….

Many economists expect home prices to continue to fall this year and maybe into next year before stabilizing and then showing little or no appreciation for some time….

On a year-over-year basis, only two cities showed rising values. Detroit was up 3.8%, and Washington, D.C., 0.5%, the Case-Shiller data show.

More here.

This sort of report is typically uttered with the sort of whispering tone one reserves for the bedside of a dying relative. But with the exception of the slight year-over-year increase in house values in DC, shouldn't this all be cause for celebration? It means that housing prices are heading back to where they were before the bubble inflated like one of Newt Gingrich's chins right before the former Speaker is about to rhapsodize about rent-to-own living pods on the Earth's moon?

Here's the Census Bureau's figure on home ownership since 1995:

Lest we forget, housing has never been the rock-solid investment we've been told it always was. Reason Foundation analyst Anthony Randazzo distilled this insight simply by adjusting the housing price index for inflation. What he found:

Randazzo figures that housing prices still have a ways to fall to get back to their pre-bubble long term average and I suspect he's right. Still, it's always a good time to buy. Or to rent. It depends on your personal situation - geographic, professional, financial. But living indoors almost always is better than living outdoors for any length of time.

But the question of renting versus owning? That's really not such a big deal as people think.

Comments

[robert]

Most encouraging numbers on the economy I've seen in a long time. Is that weird?

[robert]

Oh, and fist.

[Combaticus]

Whose fist?

[nobody]

Question for you housing dorks - I'm 29 (nearly 30!) and rent a place in South Philly together with my girlfriend. Our combined annual income is right around $100K. We've just started talking about maybe buying a home. Naturally I'm skeptical that prices are still too high nationwide, but it seems like some good deals are there to be had in my neighborhood. We currently pay $1,200/month in rent; meanwhile there are plenty of similar homes on the market for between $150K and $200K. Is this an option that I should be running away from?

[anon]

I've found that being 28 and owning a home for 3 years now, I've lost a lot of opportunities to move for a better job.

Not paying rent is nice, and being able to do whatever you want to your house is nice, but I've missed out on at least a 20k/year raise.

If I ever get to sell this place, I won't buy again until I can purchase outright.

[sarcasmic]

I'm in the same boat.

[RedDragon6009]

I feel your pain. My wife and I bought our house 8 years ago and feel that it's still a bargain versus paying rent, but not being able to sell it has trapped us in Florida. We've both missed opportunities at much higher paying jobs elsewhere. Combined, we're probably making $60k less than we could be making elsewhere.

[+]

What you should be running away from is asking advice from strangers on the internet.

[nobody]

These people aren't strangers! These are my HnR bros. If AnonBot says 'buy' then I will 'buy, dude!'

[+]

Remember when normal people derided virtual friendships?

Good times.

[Kip]

Plus Sign, don't be jealous that I've been chatting online with babes all day.

[RedDragon6009]

Statistically, 1 in 4 of those "babes" has a penis.

[Barely Suppressed Rage]

You say that as if it's a bad thing.

[R C Dean]

A few thoughts:

(1) Don't think of housing as an investment decision, think of it as a consumption decision.

(2) Really think about where your subjective desire to own v. rent comes from. I'm one of those people who just has a bone-deep desire to own real estate. I've never had a house that was a good investment, and that's OK by me; I get a lot of just plain old pleasure out of thinking "This is mine. My turf. My place." Its irrational and subjective and so what?

(3) Owning can tie you down. If you're the footloose sort, or want to be part of a job market you can't drive to from your house, then think twice.

(4) Being house-poor is a Very Bad Thing. If you buy, buy a house you can easily afford. If you don't have a 20% down payment, you can't afford it.

[John]

"If you don't have a 20% down payment, you can't afford it."

That is just Dave Ramsey level horseshit. Either you can afford the payments or you can't. If you are not planning to flip the house, it makes no difference how much you put down. In fact putting a huge amount down sticks you with the opportunity cost of what you could have done with that money in other places. I would rather have a larger mortgage and money somewhere else earning a good rate of return than a bunch of money tied up in equity on a house.

Think about home equity. What does that money do for you? You can't to it if you need it without borrowing and paying interest. If the housing prices fall, you lose it. It is more or less unusable wealth.

You are much better off to make the minimum down payment possible and keep your money in an account that pays and that you can get to when you need it.

[sarcasmic]

I think the point of putting 20% down is so you can still get out if the market turns.

You may not recoup the down payment, but that may being underwater.

[sarcasmic]

insert * be better than * between "may" and "being".

[John]

You can get out of it anyway. Most mortgages are nonrecourse. But damn that is a hell of a price to pay for freedom. If you are that concerned about leaving, just rent?

[sarcasmic]

By "get out" I meant "do the honest thing and sell the house to pay off what you owe".

[John]

See my comment below. No recourse means no recourse. The bank knew you could do that when they signed the contract. So there is nothing dishonest about using the terms of the contract to your advantage.

[sarcasmic]

That is a very lawyerly comment.

[John]

Look at it this way. If I sign and ARM, is the bank unethical for later raising my rates? No way. I knew they could do that when I signed the contract. Same thing here only it goes to the borrowers advantage.

[sarcasmic]

I understand. However I happen to find it unethical to borrow money with no intention of paying it back, even if the contract says it's OK.

[Kwanzaa Cake]

But John the mortgage is also your promise to repay the loan. That's what you are doing by signing it, promising to repay. The fact that the bank's remedies upon default are limited to repo'ing the house doesn't mean that you haven't gone back on your word by mailing the keys back to the bank.

Yes, legally, you can mail the keys back with impunity, save for the destruction wrought upon your credit score. Doesn't mean it's not a dick thing to do. In the lawyer world we call it "bad faith."

[Greg]

I'm not saying you're wrong, cause I'm really not sure. But isn't what you are saying similar to saying that it's okay to run red lights, you just have to pay $150 (or whatever) fee if you get pulled over?

[robc]

Actually, large majority of states are recourse states. Under 20 are nonrecourse. Not surprisingly, most of the ones with the biggest bubble were nonrecourse.

[Kwanzaa Cake]

Think about home equity. What does that money do for you.

_____________________

Millions of people who would like to sell but are upside down might now say they wish they had home equity. No equity can lock you into a very bad situation. Not to mention that if you are going to choose to be a homeowner you might want to actually own the home.

[John]

Most states have non-recourse loans. If you are that desperate to leave, just walk away from the house and the loan. And if you are not willing to do that, then don't buy a house and keep your 20% and invest it somewhere else and rent.

[Kwanzaa Cake]

I know that, but call me old fashioned -- I don't sign a document promising to pay and then just decide to walk away on a whim. I put more than 20% down precisely because I don't view the house as an investment and want to eventually own my home.

[John]

Fair enough. And that is a choice. And I am not going to say it is a bad one. Where I take issue is with R.C's claim that anyone who can't do that "can't afford the house". And that is just horseshit. The amount of down payment is a function of how you want to invest your money, not whether you are buying something you can afford.

[Kwanzaa Cake]

I hear you, though I think the banks are largely enforcing the 20% down rule these days. So practically, lacking the 20% may mean you can't afford it b/c you can't get the loan. I'm sure there are lending exceptions out there here and there.

[John]

I am not experiencing that at all. I have banks lining up to give me loans with little or no down payment. I haven't taken them up on it yet because I refuse to pay 800K for a shitty split level not as nice as the house I grew up in. But that is just the Washington housing market.

[R C Dean]

The amount of down payment is a function of how you want to invest your money,

Bzzt. You don't invest money in a house you live in. Your house is not an investment, any more than your car is. Its a consumption decision, not an investment decision.

I use the 20% number because, among other things, it gets you out of the total waste of money that is mortgage insurance, and gets you out of having the bank escrow taxes and insurance.

Its also a good indication of whether you actually have the kind of steady, surplus income and restrained spending habits that you should have before you buy a house.

It also acts as a psychological check on buying too much house; when you actually spend your own money on something, it changes your thinking.

Just think of the millions of people who are in economic misery right now because they didn't go by this rule of thumb.

[John]

If you don't look at your house as an investment, they you are exceptionally stupid for putting a lot of money down. Why are you saving money if you are not going to invest that money? Why not just bury it in the backyard?

All you are saying it that someone needs to put 20% down so they make sure they don't do something stupid. Maybe you need that. But I don't. I know how to figure things like interest and opportunity cost. And I know how to do a basic budget and plan for unknown expenses. I fully plan to buy a house I can afford and put my cash money where it can do me some good.

[R C Dean]

If you don't look at your house as an investment, they you are exceptionally stupid for putting a lot of money down.

I guess I'm stupid for wanting to keep my debt to a minimum. I don't borrow to buy cars, guns, food, or any other essentials. Dumb old me.

[John]

"I guess I'm stupid for wanting to keep my debt to a minimum."

From a strictly economic perspective, yes. Not all debt is bad. Should you be going into debt to buy food? Probably not if can at all be avoided. But should you be going into debt to make large capital purchases like a home, especially when said purchases allow you to write off the interest? Most definitely.

[robc]

Most states have non-recourse loans.

False. Majority of states are recourse states.

[robc]

Actually, Dave Ramsey doesnt suggest 20% down.

You can argue with his suggestion that no one get a mortgage longer than 15 years, or his upper boundary of 25% of take home pay. But he doesnt have a specific suggestion on down payments.

Personally, I think the 20% rule is a good rule, if you havent saved 20%, rent another year.

[Kwanzaa Cake]

Agree 100% with RC. 20% down is the starting point. Then, your monthly payment should be in the range of 25% of your take-home pay. This is not just good advice but may be absolutely necessary. Word is that most banks will be very hesitant to make you a loan if you don't come pretty close to meeting these criteria. I bought a new house about 16 months ago and Wells fargo underwrote the shit out of that loan even though I put down more than 20% and my payment was a small fraction of my pay.

Owning can not only tie you down, but is just harder than renting. As a renter, your fridge/dishwasher/etc breaks down, you call the landlord. When you are an owner, no such luxury.

As for whether the places you are looking at are bargains, I don't know. But consider than prices almost everywhere continue to fall despite record low interest rates. What happens to prices when mortgage rates return to something like 6%? I don't know, but there is risk.

[John]

"What happens to prices when mortgage rates return to something like 6%?"

Housing prices will fall further to adjust for the increased interest cost. That is another reason not to view your house as an investment. And further reason why 20% down is a stupid deal to be avoided if possible.

[John]

And one other thing. With mortgage rates sitting at 4%, that 20% down payment is essentially earning you 4% return in forgone interest less the decreased tax deduction. Even in this economy you can get better than 4% return. So that money sitting in your home is costing you the difference between the rate you could be earning in the market and whatever your interest savings are.

Sorry RC, but that whole, make huge down payments on your house canard is terrible financial advice.

[anon]

Yeah, with 4% rates it's silly to pump money into your house. Not to mention the interest deduction that makes it effectively around 2.5%.

[Kwanzaa Cake]

Yes, you can get a greater than 4% return if you take on the associated risk of an equity investment (as we know, bonds and CDs are currently paying nothing unless you step pretty far out of investment grade stuff). Of course, you can't live in 1,000 shares of IBM, and you had better be ready to ride out the volatility of having your money in equities. Some people can hack that. Most can't.

[John]

But if your house goes down in value, you lose your down payment too. Both sides have risk. But only with housing equity do you have to take a loan to get to your own money.

[robc]

But if your house goes down in value, you lose your down payment too.

No I dont. I have the exact same amount of house as I had before.

Its not an investment, it shouldnt be treated like one.

[John]

Depends on how much the house goes down. If the house ends up being worth less than you paid for it, you lost some of your down payment.

[robc]

Depends on how much the house goes down

No. At the end of the mortgage you will own 100% of the house no matter whether it goes up or down in value.

[John]

True, but if the house is worth less at the end of the mortgage than you paid for it, you will have paid more money than it was worth and effectively lost your down payment.

[robc]

Only if you consider the house an investment, which I dont.

My car is worth less now than when I purchased it too. Did I "lose" my downpayment (which was 100%)?

[John]

Even if you don't Rob. You have say 30K to put down on a house. If you end up with a house that is worth less than you paid, that 30K is gone. You could have done something else with that money.

[robc]

It doesnt matter whether I put 100% down or 0% down.

Lets take an example.

I buy an 100k house. 15 years later it is worth 90k.

In case A, I put 100k down. I "lost" 10k.

In case B, I put 0 down, but paid 200k over the 15 years (I dont know what exact rate that is, but go with it). I considered that stream to be equivalent to 100k in current dollars. I lost 10k.

It matters not at all whether I put a big or small downpayment, the loss is the same.

[John]

Yes Rob, you do get some of your money back in forgone interest. But you also lose money by forgoing the interest that down payment could have earned had you invested it differently.

[robc]

I didnt invest it to begin with. So I couldnt invest it "differently".

Repeat after me: A house is not an investment. A house is not an investment. A house is not an investment.

Good, got it?

[R C Dean]

Sorry RC, but that whole, make huge down payments on your house canard is terrible financial advice.

So, you think people who own their houses outright, or don't refi periodically to take cash out of their house and keep their equity value low, are idiots?

[John]

"So, you think people who own their houses outright, or don't refi periodically to take cash out of their house and keep their equity value low, are idiots?"

Yes. Owning your home outright is exceptionally stupid. You are giving up the tax shelter completely.

Look at it this way. Suppose you own a home worth 500K outright. Now it is true, you don't have to pay rent on that house. That means that 500K you have tied up in that house is producing whatever the rental value you are saving as income minus of course the lost tax breaks and the maintenance and tax costs. When you add it up, that is a pretty shitty return on 500K. With interests rates sitting where they are, you would be much better off having a mortgage on the place and taking that borrowed money and investing it somewhere else.

I suppose you could pay down your mortgage and then refinance every once in a while to take that money out. But what is the point of that? Why not just save that extra money in first place and just make your normal house payments? Then you don't have to bother with refinancing to get your money.

Home equity is really a pretty shitty place to have your money sitting.

[robc]

Home equity isnt an investment.

[John]

Home equity isnt an investment.
reply to this

Which is why you should tie up as little money as possible in it. Your money should go into places where it makes more money.

[robc]

My investment money should go there. My consumption money will go wherever the fuck I want to consume it.

And I chose to consume a house (well, most of it - 49% down).

[BakedPenguin]

What would the rental value of the house be? If owning that 500k house saves some family 3k a month in rent, staying in the house is essentially "returning" 36k a year. That's 7 percent.

[John]

7% minus the forgone tax break and maintenance costs BP. That lowers the return a bit. It is not a bad return I suppose. But it is hardly great or something that is obvious everyone should do.

[Kwanzaa Cake]

Owning your home outright is exceptionally stupid. You are giving up the tax shelter completely.

__________________

But you are getting a place to live that you own. I look at a mortgage payment as handcuffs -- it can tie you to a job you might hate. Being debt-free is a really good thing for one's sense of financial freedom.

Not to mention, you are getting a tax shelter by paying interest, but you are still paying interest. Those payments are adding nothing to your wealth. Over the course of 30 years the amount of interest paid is fairly staggering.

[John]

At this point there are two reasons to buy a house. One if for the tax write off. And the other is to hedge against inflation. If you get a fixed rate mortgage, your housing cost is now fixed for up to 30 years. You don't get that kind of certainty by renting.

[R C Dean]

You're leaving out the most important reason to own a house:

Because you just like owning a lot more than renting.

Seriously, from a purely economic perspective, renting and owning are virtually dead even. As the charts above show, housing isn't even much of an inflation hedge.

[John]

How can it not be an inflation hedge RC? If I buy a house tomorrow with a fixed rate mortgage, my payments are going to be exactly the same for the next 30 years regardless of the rate of inflation.

Housing costs are a pretty good chunk of your living expenses. Fixing those for 30 years sounds like a pretty good hedge to me.

[Night Elf Mohawk]

I put down 5% and bought a house that cost about 2/3 of what I make in a year. I think I can still afford it.

[Number 2]

Aren't you all forgetting something?

Nobody in the past decade or so made a rational, informed decision to buy a home. We were all duped by evil banks and mortgage companies into buying homes we couldn't afford. None of us is responsible for the money we spend, the debt we incurred, or the hardship we may now face.

After all, Obama said so. It therefore MUST be true.

[John]

And don't forget. None of those poor banks are responsible for the money they loaned. They were just forced to do it.

Yeah, we are all responsible for where we are, lenders and lendees included.

[Barely Suppressed Rage]

Being house-poor is a Very Bad Thing. If you buy, buy a house you can easily afford. If you don't have a 20% down payment, you can't afford it.

THIS. More the latter half. Too many people get qualified for huge mortgages and are convinced they can "afford" it. They end up getting the biggest, fanciest house they can "afford."

There is a decided, qualitative difference between "affording" a house and actually living comfortably in it.

If the realtor or mortgage company says you can "afford" a $300,000 mortgage, go for a $200,000 mortgage. Everybody wants a big house with lots of bathrooms and granite countertops, etc. What they forget is how expensive it ends up being not only to pay the mortgage, but also the taxes and utility bills.

I see people in these big houses, with no blinds or curtains on the windows, because they can't afford them. They sit on folding chairs at a card table while they eat their Ramen noodles, because all of their income is going to pay for the house - which they can "afford", but they can't afford to do anything else.

I'm not in that boat at all, but I've already decided that my next house will be smaller and simpler, but on more land than I currently have. I'll be setting my purchase price about $100,000 lower than we paid for our current house.

[John]

You should definitely buy a house you can afford. And you have to consider the maintenance costs and not be house poor.

But that is a totally different question than how much money you should put down. There is no reason to dump a bunch of money down on a down payment.

[Ice Nine]

Yes.

[rather]

Not to be indelicate but do you plan to knock her up?

If so, you don't want to be living in an apartment but I wouldn't buy a house with anyone while dating
-makes for a hell of a breakup

[rather]

BTW, 20% is a low down payment. Some states require you to buy mortgage insurance for a low deposit.

If you buy an old house, you need to budget repairs.

New house? Budget for fuck-ups

[Brandon]

What the hell are you talking about? 20% is not a "low" down payment by anyone's definition. It's pretty much the highest down payment that will ever be required for a mortgage.

[rather]

This
http://www.scsbnet.com/current....._rates.asp

[Brandon]

What? You just proved my point. "Adjustable rate mortgage products and low to no down payment financing options are available."

The page doesn't mention anything about down payments over 20%. So saying 20% is a low down payment is flat-out wrong.

[rather]

20% is the minima in most states to forgo mortgage insurance.

If you fall under the state-mandated pigeonhole, you are further required to follow their dictum. Your mortgage holder has final approval on your property 's insurance. Often overly insured on land value, more so than structure.

[Legate Damar]

So I looked up the payment tables and it looks like your monthly payments would be equivalent to your rent (which is something I had not immediately gleaned from your problem statement.)

RC Dean's advice really is quite good. (2) really is key. Do you look around your rental and think of all the things you'd like to customize or improve, but can't? If so, you have to at least investigate the market, even if you're not going to commit to buying.

[John]

People get into trouble because they forget the maintenance costs associated with owning.

And yeah, you never want to be house poor. Which is another reason not to put a huge down payment down. Keep some of that money where you can get to it if you need it.

[robc]

The biggest reason people are house poor is that the monthly payment is too large a percent of their income.

A larger downpayment lowers the monthly payment and makes you LESS house poor.

[John]

Buying a cheaper house with a smaller down payment does the same thing.

[robc]

This is true.

Buying a cheaper house with an even larger downpayment does it even better.

[John]

Again though, you have all this money sitting in your house. What do you do when you need that money? And what about the forgone income that money could have been making you had you invested it elsewhere?

[robc]

Neither of those have anything to do with being "house poor".

What do you do when you need that money?

Emergency money is not used for a down payment. So, I should never need that money.

And what about the forgone income that money could have been making you had you invested it elsewhere?

Opportunity costs exist for everything I purchase. The house isnt an investment, it is a consumer purchase. When making the consumer purchase I clearly am valuing the house over the potential investment elsewhere.

Just like when I buy any other product.

[John]

Rob, you never know how much money you need because you don't know what the emergency will be. It is always good to have access to your money.

[robc]

I have access to my money.

However, like with other consumer goods, I dont have access to the money I spent on my house, because I have the good instead.

[John]

True Rob. But I would rather borrow the money to pay for that and keep my cash.

[R C Dean]

If your housing costs are so high that you need to draw down savings to cover either housing or other costs, you are house poor.

[John]

This may come as a shock to you RC, but life changes. You may be in great shape with your 20% down and flat out house rich. And then you get sick, or one of your parents get sick or you have some other calamity that requires cash now not later. At that point, your housing equity is not very much good to you.

[R C Dean]

Leverage only makes those kinds of risks worse, John, because leverage makes any kind of risk worse.

[Brandon]

And learn to fix and maintain shit yourself. Saves thousands.

[NotSure]

See it is as having your very own home first (which one cannot get with renting), and then as an investment second. So go for it, buy yourself a house, if you wait for perfect conditions to buy, you will wait till the end of time.

[kinnath]

I was 48 when I bought my first house.

So that means I rented for 30 years after leaving home at the tender age of 18.

[Restoras]

My two cents:
Wait until you are married to said girfriend and have your second kid on the way. In the meantime, save as much as you can so you can put down at least 20% and still have 6-9 months of living expenses in the bank. Don't be house poor.

[Red Rocks Rockin]

Not much I can add here, but if I were in your shoes, I'd only buy if you honestly believe you are going to be in the same area for quite some time.

I understand a lot of people argue that you're building equity with a house, but in my mind, I'm in hoc to someone else for tens of thousands of dollars on something that isn't really mine until the balance is paid off.

I rent, and I have NO debt--no car payment, no student loans, no credit cards, nothing. Unless you're in a similar situation, you can't imagine how good it feels knowing that I don't have to wonder month to month, "How am I going to pay this bill?"

To me, it's an issue of personal freedom, and there's two ways to do that--be extremely wealthy so you never want for anything, or cut your expenses and obligations to the bone so no one can hold anything over your head. Since I'll never be wealthy unless I win the lottery, I trend towards the latter.

[Old Soldier]

Most Americans are terrible at saving money. The biggest benefit to widespread home ownership - assuming people are eventually paying down their mortgages - is that people are building equity. So some risky saving versus none at all.

If you don't own a home, use different savings methods. If you do own, save anyhow and don't expect a big gain when you sell.

[Bilbo]

Well when the hyper inflation hits, I sure wouldn't want to be stuck renting. A cheap locked in rate on nothing more than a 15 yr note will be nice.

[sarcasmic]

Didn't you guys write a book or something?

[P Brooks]

I was recently talking to a wealthy individual I am acquainted with. He was telling me about two of his children (more like bragging about their financial acumen) who are contemplating walking away from defaulting on their home loans because they are under water.

He started to chafe a bit when I told him I think people who voluntarily entered into a contract based on a price they believed was reasonable at the time, and who still have the cash flow to make the payments they agreed to, should honor the terms of their contracts.

We didn't even get to the part about how in my view, if you default on your home loan, you should suffer real adverse consequences, like not being able to get another mortgage without putting half down.

[John]

Last I looked contracts mean what they say. The bank signed the contract knowing it was no recourse. Should you shield them out of that risk out of charity? They knew there was a risk you could walk away and presumably priced for that. So walking away is hardly unethical.

[Err]

Just shut the hell up, John. Nobody gives a shit what a war-mongering neocon thinks.

[robc]

Minority of states are nonrecourse.

[RBS]

I like how John has repeatedly ignored this.

[John]

Even if they are so what? That doesn't mean people shouldn't walk away from loans where they are or that everyone should put 20% down on their house.

[Kwanzaa Cake]

You will suffer some consequences -- your credit will be destroyed, making it hard to get another loan regardless of the amount you put down.

[Night Elf Mohawk]

I'm sure I must be looking at this in the wrong way, but is a drop from a peak of 69.2% ownership to 66% now really that much of a reason to freak out?

[Brandon]

It is if you're a government lapdog looking for reasons to tell people to freak out and give more power to the government to "fix" the "problem."

[Brian]

Over the long term I really don't know why everyone thinks falling home prices are bad? Any other consumer product, falling prices would be considered good. The fact housing if more affordable is good despite almost half of Floridians being underwater on their mortgages.

Interesting I did the same analysis as Randazzo did over a year ago and I came up with pretty much what that chart was showing. When housing prices in my area Orlando (Tampa would be the closest Case-Shiller index) go to 1997 prices after inflation, then I might take the bet prices will not drop anymore.

On the other hand price to rent ratios in Orlando have gotten to the point where if I loss 10% after three years on a house I would break even compaired with renting over the same time period for equivalent square footage/location.

[John]

I agree with you Brian they are not. Housing equity is not wealth. It does us no good. It really is a case of zero sum game. Every dollar of equity you gain from the price of our house going up is a dollar someone who buys that house loses.

[T]

Every dollar of equity you gain from the price of our house going up is a dollar someone who buys that house loses.

And in one fell swoop you invalidated the free market. Seriously, voluntary exchange, John. If the house was worth the extra money to the purchaser, he didn't lose shit.

[John]

"John. If the house was worth the extra money to the purchaser, he didn't lose shit."

But if the government artificially props up the housing market, he did lose something. Take away the artificial stimulus, he could have gotten that house for less. Sure, he would have paid more. But he would have been better off if he hadn't. Therefore, every dollar I earn comes at his expense. It is not like I produced the house. I just bought it and waited for the government to inflate its value benefiting me and screwing the next guy.

[T]

Bullshit. Voluntary exchange doesn't result in a loss. The buyer either values the house that much or he doesn't. If he doesn't, he doesn't buy.

[John]

Okay T. So if the government mandates that you spend an extra 1000 dollars on your next car, that is not a loss to you? I mean it is a voluntary transaction isn't it? You still think the car is worth it or you wouldn't buy it right?

But you are still paying an extra $1000 that you wouldn't have had the government not mandated it. That sounds to me like a loss to you.

[T]

Yup. I wouldn't buy the car if that 1000 bucks was a problem. And strangely enough, that's about what I'll be paying in TT&L when I buy a truck in 6 weeks. And yet I'm still buying it...

Yeah, ceteris parabus and all that jazz, but the additional cost is factored into my purchase decision. Not worth it, no pay.

[John]

Not worth it, no pay.

Sure. But you are still getting fucked. You just think the fucking is worth it. That doesn't make the fucking a good thing.

[Pro Libertate]

It's the idea of a home as an investment. It is in a certain sense, but that shouldn't be the primary motivation--not for your residence, anyway.

I plan to stay local but also intend to move within the area, so if housing keeps going down, then all the better. Means more house and goodies for me.

[robc]

Houses are not investments. Like cars, they go down in value (just much more slowly)

Land, on the other hand....

[Pro Libertate]

Not to quibble, but they are investments. Just not very good ones.

About real estate in general, commercial and land investments aside, a finance guy I know said that individuals who get into rentals should only do so when they can afford multiple properties. You can work up to that, of course, but the idea is that merely owning one rental isn't worth the time and expense.

[robc]

A house that your purchase for living in is no more an investment than a car.

There are exceptions. In both cases, if you purchase it to rent out, its an investment.

And there are a few cars/houses that have historic or other value that might make them investments, even if you live/drive in them.

But for the normal case, the investment is the empty lot of land under the house, not the house itself.

The house (without maintenance) will eventually crumble and have zero (or possibly negative) value. The land will continue to have value.

[Pro Libertate]

Yes, but houses, historically, have much longer lives than cars. They're expensive to maintain over that time, but if you owned one outright, that cost is probably better than renting over the life of the house.

Of course, with taxes and insurance costs continuing to spiral, that match gets worse and worse.

[P Brooks]

Last I looked contracts mean what they say.

Does that include the part about, "I agree to repay this loan"?

[robc]

Also, no* bank would give a nonrecourse mortgage if the state laws didnt make them.

*well, there might be someone out there willing to do it, but how much higher would the rate be?

[R C Dean]

I would point out, also, that the non-recourse bit doesn't arise in the agreement itself, but arises in state law.

Somebody who "strategically defaults" on a loan they could afford to pay because they know state law will let them walk away from the shortfall is a rent-seeker.

[robc]

Somebody who "strategically defaults" on a loan they could afford to pay because they know state law will let them walk away from the shortfall is a rent-seeker.

Bolded for emphasis.

[John]

The bank knew the law when they signed the agreement. So it is effectively in the agreement. And there is nothing wrong default. Businesses do it all of the time.

In between the gay Indian feminist critiques, did they teach you guys contracts law and strategic default at Harvard?

[John]

So when a construction business gets a better offer and breaches a contract because they can make more money doing the other project and paying off the first customer, they are rent seekers?

Everyone knows the law and the rules of the game when they sign a contract. Using that law to your advantage is what people and businesses do all of the time. You don't think banks do that? There is nothing sacred about a contract beyond abiding by the law and not committing fraud.

[robc]

Good God, that is as bad as the government is society guy in the morning links.

Contracts can exist outside the law. Its nice that the law exists to adjudicate differences that arise, its one of the reasons Im not an anarchist, but a contract is more than just about abiding by the law.

The contract should provide terms for cancellation, and Im fine with anyone abiding by those terms and paying whatever penalties are called for. But not realizing that the state is fucking around with contracts and messing with the market is another thing altogether.

[John]

No Rob, fucking with a contract is changing the rules after the contract has been signed. But as long as everyone knows the rules when it is signed, then neither side can complain when the other uses the rules to their advantage.

The fact that contracts can effectively be canceled in bankruptcy creates a risk for the lender. That risk is then priced into the loan. I am not getting that ability to walk away for free. I am paying for it in the form of higher interest. Therefore when I use it, I am doing nothing wrong.

[robc]

The whole concept of rent-seeking it taking advantage of the law as it currently is, when the law differs from what the free market would provide.

Im not going to criticize anyone for walking away from an underwater mortgage, but Im willing to call nonrecourse loan laws rent-seeking.

[John]

The nonrecourse loans cause everyone to pay a higher interest rate in return for the right to walk away from the house.

It really is a question of who wants to assume the risk of the house going down in value. If we didn't mandate non-recourse loans, you could probably still get one. They just would have a higher interest rate.

Look at it this way. Suppose I went to a bank and said "hey, I want a loan but if the house goes underwater, I want to be able to walk away from it with you bearing the cost of that". And then the bank said, "fine we can assume that risk, but your interest rate will be 5% rather than our normal 4%". And I say great.

If we sign such a deal, would I be wrong to walk away from the house? I did negotiate and pay for that right didn't I?

[robc]

The nonrecourse loans cause everyone to pay a higher interest rate

Not me, KY is a recourse state. And as Ive pointed out repeatedly, and you keep ignoring, the large majority of states are recourse states.

[John]

So what Rob. My point still stands. I would imagine I could get a non recourse loan in Kenntucky, if I were willing to pay for it.

[robc]

So what Rob. My point still stands. I would imagine I could get a non recourse loan in Kenntucky, if I were willing to pay for it.

It is the difference between negotiating and rent-seeking.

[robc]

My point still stands.

Also, your point doesnt stand. The point I was disputing was that EVERYONE pays a higher rate due to nonrecourse laws. This is false.

Only those in nonrecourse states pay higher rates, not everyone.

[robc]

If we sign such a deal, would I be wrong to walk away from the house? I did negotiate and pay for that right didn't I?

I would have no problem with it.

But in the small handful of nonrecourse states, you would be a fucking rent-seeker.

[sarcasmic]

There is a difference between signing a nonrecourse loan because those were the terms you explicitly negotiated, and signing a nonrecourse loan because the government won't allow there to be any other kind.

[John]

No there isn't sarcasmic. If the bank doesn't want to give non recourse loans, they don't have to make loans in that state. By giving the loan they are agreeing to make it non recourse. They know that and price it accordingly.

[sarcasmic]

I meant you, not the bank.

Sure you could choose not to buy or move to a different state, but wouldn't it be better if the fucking government just let people determine what kind of loan they want themselves?

[John]

Sure it would. But it didn't do that. And the banks know the rules and chose to make loans anyway. So I have no sympathy for them.

[robc]

Who is showing sympathy for the banks?

Im telling the rent-seekers to fuck off.

[sarcasmic]

You see John, I happen to be an ethical person who doesn't walk away from my debts, and have no desire to enter into a contract where I pay for that choice.

But I am forced to anyway.

That's what I meant about there being a difference.

[John]

I agree with you sarcasmic. You should be able to do that. But the fact is the rules are what they are and we all pay a premium for them. So fuck them. I am going to take advantage of the premium I have been forced to pay for.

[sarcasmic]

In my book that just makes you an asshole.

Not that that changes my opinion of you.

😉

[John]

Maybe so sarcasmic. But I have made borrowed and spent a lot of money in my life. I think the banks have made their share off of me.

[Pro Libertate]

I have to agree. Is it legal to walk away? Sometimes it is. Is it moral to do so? Not in my book. I understand situations where there are no other options, but many who walk away do so for less dire reasons.

I read something about when Samuel Clemens went bankrupt. He worked his ass off on the lecture circuit to restore his fortune and to pay off his creditors. The ones who he no longer had to pay off. I love that story.

[robc]

Since he was brought up earlier, Dave Ramsey did the same thing.

He felt that in the line of work he pursued after going bankrupt that he needed to be an example, so paid back all the creditors that had been dismissed via bankruptcy.

[John]

I look at it in economic terms Pro. Everyone knows the law when they sign contracts. And the law says I can under a given set of circumstances walk away from a loan. The guy who made me that loan priced that risk into the interest I pay. I pay that interest premium whether I walk away or not. So I am not getting the right to walk away for free. I am paying for it as part of my contract.

For that reason, I have no problem with walking away from a debt provided it is legal and in my best interest.

[sarcasmic]

This is why I have a very low opinion of lawyers.

[John]

That is why you should hate bankruptcy laws if you hate anything. The bankruptcy laws create a risk in every contract that has to be priced for. You pay higher interest rates as a result of that.

[sarcasmic]

I didn't say "hate".

[Tim]

Forget it, he's rolling.

[Pro Libertate]

Hey!

[P Brooks]

Any other consumer product, falling prices would be considered good.

Unfortunately, "we" have been duped into thinking of houses as (in many cases, short term) financial instruments instead of consumer durable items.

[Old Mexican]

Lest we forget, housing has never been the rock-solid investment we've been told it always was.

A house can never be an "investment" unless you're talking about a whorehouse. Houses are goods for consumption: you consume a space that happens to have a roof and windows, at least for the time you care to be there, you die or the place burns down. Houses are food for termites, they require yearly maintenance just to keep them from falling apart. NO investment *I* know makes you incur in such expenses while bringing no output, besides the pleasure of nob being wet during downpours and having shelves to place the photos of the kids and wife.

In Mexico, people are accostumed to describe their homes as a "patrimonio", a word that can be translated as "legacy" and at the same time as "asset." To any fool I hear using this word to describe his home I tell them he is being foolish. My mother's house can't be more of a legacy than her car, as I don't want either, and as an asset it certainly increases in value in the eyes of the greedy government, but the goddamned masonry box has so many ant-made passageways that I could call it Spongebob (most houses in Mexico are made of brick but, in my hometown of Monterrey, houses are built with masonry blocks,) which makes it more of a liability than an asset. I found the hard way that the transaction costs and taxes for getting rid of my house in Monterrey (almost brand new house) ate up any "profits" I could have expected. So much for the "investment."

If people started to look at their houses as one looks at any other good for consumption with a certain staying power (for instance, I don't know, a Winnebago?) then maybe people would stop acting like fools and look for better deals instead of chasing dreams.

[John]

I totally agree Old Mexican. A house is an asset. It is an asset you have to either buy or rent. But it is an asset.

[Jack the Reaper]

"besides the pleasure of nob being wet during downpours"

Your wife likes it when it rains too?

[P Brooks]

But as long as everyone knows the rules when it is signed, then neither side can complain when the other uses the rules to their advantage.

Wait- "I just don't feel like paying you back" is part of the rules?

[P Brooks]

The bankruptcy laws create a risk in every contract that has to be priced for. You pay higher interest rates as a result of that.

Talk about moving the goalposts...

[John]

How is that moving the goal posts? I have never not paid a debt in my life. And I have paid a premium in interest rates for the risk of my going bankruptcy that entire time. If the time ever comes where I need to declare bankruptcy, I won't bat an eye about doing it. The banks knew the risks. And I for years paid extra as a result of it. They have a right to charge that premium. Why do I not have a right to take advantage of my end of it?

[P Brooks]

"Strategic default" is not bankruptcy.

[John]

So what Brooks? They knew the risk of strategic default and priced it accordingly. And if they didn't that is their problem not mine.

Strategic default is a fact of life in the business world. Businesses and especially construction contractors do it all of the time.

[P Brooks]

Anybody who thinks mortgage interest rates accurately reflect risk should rush out and borrow money to buy this bridge I have for sale.

[John]

If they don't, then whose fault is that? Is it my or your responsibility banks are stupid?

[P Brooks]

They knew the risk of strategic default and priced it accordingly.

The borrower knew the risk of price fluctuations, right?

[John]

Yes he did. And he, like the bank, knew that the law said that the bank, not the borrower, assumed that risk. For that reason the borrower was more likely to be willing to borrow more money. And the bank, if it was smart, wanted a higher interest rate. Both sides knew the risks and rewards and got what they wanted or they wouldn't have signed the contract.

[P Brooks]

Is it my or your responsibility banks are stupid?

Ask Barney Frank and Chris Dodd.

You're pretending the banks are acting in a regulatory vacuum, just to justify your "Fuck Teh Evul Greeeeeedy Banksterz!" populism.

[John]

Woe the poor banks. No one made banks go into the mortgage business. Clearly they thought they could make money or they wouldn't have done it.

[R C Dean]

I am just astonished that John is advising people to borrow all they can, for everything they can, in order to free up cash to invest elsewhere.

John advises people to pay cash for nothing they can borrow for - cars, houses, whatever. I am gobsmacked. Am I taking crazy pills here, or what?

Haven't we learned yet that interest is a deadweight cost, that leverage is risk, and that pissing money away on interest while increasing your risk is an excellent way to terminally wreck your economic prospects?

To me, the purpose of money is to provide material security. Anything you owe money on is a source of material insecurity. No one is more economically secure than the man who owes nothing, and owns outright what he needs/wants. Nobody is more economically insecure than the man who owns nothing outright, and is leveraged.

[Jack the Reaper]

^^this^^

[John]

No RC. I advise you to act like a business and borrow for long term capital purchases like cars and houses and such. I would never advise going into debt for ordinary consumer goods.

Think how businesses operate. No business in the world is going to dutifully save millions of dollars to purchase a new plant outright. No, they borrow that money to spread the cost out over years.

A household is no different. If I plan to use a car for ten years and I can get a good interest rate, there is nothing wrong with borrowing the money and paying it off in five year.

You seem to not understand the time value of money. If I take 30K and pay for a car in cash, true I am saving the interest. But I am losing all of the things I could have done with that money for that five years.

We live in a world where interest rates are wildly low. If interest rates go to 20% then the calculation changes. But at current interest rates you are stupid to pay cash for large capital purchases. And even the interest rates go up, the rate of return on investments will probably go up with them so you would still probably be making a mistake.

And debt on the right things is not a bad thing. I currently owe a little bit on my car. There is nothing insecure about that debt. If I couldn't pay it, I would sell the car and pay off the debt. Maybe for the first year or two I am underwater on the car, but after that I am fine even if I can't pay the loan.

There is nothing wrong with debt, as long as it is going towards something you need and use and lasts longer than the term of the debt and you can make the payments.

[Jack the Reaper]

And yet I am "saving" the $500/month in payment that is being used for another "investment". Or you just keep yourself in debt barely making ends meet. For most people, this is the way it is.

I like owning all I have and when payday rolls around, I have most of it to spend on whatever I want. Maybe another rental property. Maybe a new motorcycle. Just purchase some guns. It used to be when payday rolled around and it was "in one hand, out the other" I got this creepy oh shit feeling.

[John]

I do the same thing. When I pay off a car, I keep it. I don't buy a new car every year. This summer I won't owe a dime on a vehicle. And I will probably keep it that way for a few years.

I have debt and am more than able to make ends meet. But I will be damned if I am going to save 30K only to drop it on a new car, when I can borrow that 40K at a lower interest rate than my 30K cash can make sitting in an investment fund.

[R C Dean]

When I pay off a car, I keep it.

Why not sell it, borrow to buy a new car, and invest the difference? If the car loan is just a great source of cheap investment capital, why not always have the biggest car loan outstanding that you can?

[John]

Because I have no need to consume a car every five year. I bought the car. I would like to keep it and let it continue to produce value after I have paid for it.

A car loan is only a good deal because I need a car. Once I have paid for a car and don't need one, there is no reason go get a loan to get a new one.

All I am saying is, borrow money to purchase long term assets. Why pay for the whole cost of the car in one year, when the car is going to be producing value for 10 years of more?

[R C Dean]

You're flopping back and forth between a car loan as a source of investment capital, and a car as a consumer good.

The reason to go out and borrow to buy a new car is because you are leveraging your car for investment. Aren't you?

[John]

No RC. You are totally missing the point. I buying a car because I need one. It is a capital asset. The question is how should I pay for it. If I pay for it with cash, I lose access to that cash. If I borrow, I keep the cash and can do something else with it, minus of course the service on the debt.

Generally, you are better off finance a capital asset because the cash is more valuable in hand and since the asset produces value over a period of years, it is better to spread its cost over years rather than at one time.

That is business 101. Didn't you ever take any economics or business classes?

[sarcasmic]

Shit. I'm just trying to get to Baby Step 1.

[Jack the Reaper]

Mostly I agree with what you are saying.

The problem I am having is the same as most others in that I feel that a contract to buy something means that I agree to pay to the best of my ability until it gets paid off.

Sometimes, what is legal isn't always moral. But, one is set in stone and the other varies by individual.

A recent anecdote, my in-laws are suffering some health problems and were having difficulty meeting their mortgage. Their son told them to just walk away from the loan and buy a trailer or rent an apartment. I told them no way. I bought them a condo to live in near us and have them renting their house until they could at least sell it for what they owe on it. The rent on it is good (I have several rentals and know how this works).

Good advice or not John? Should they just have walked on it instead of turning it into an investment property that is actually going to make them some money? And yes, it will be a net gain over the years.

[John]

If the house is worth more than they owe, then walking away would not have screwed the bank. They are better off selling the house for what they owe because it would save their credit and all of the hassle.

But if they were sick and didn't have you to help them and it was either walk away from the mortgage or not get medical care, I would tell them to walk away from the mortgage. The bank can take care of itself.

[Jack the Reaper]

But BANKZ are people tooo!!!!1!!

Couldn't help myself.

But, there is truth in that. A lot of banks at one time started as an investment for some lone entrepreneur. Working long (banker) hours, makeing the numbers work within the bounds of the legal system to try to make a profit. Only to fail because of bad investments in people because legally they could just walk away from what should be a just contract of "I'll loan you some money, and you pay me back."

I know what you are saying though. If you put less down on a house, you pay a higher interest rate. Why? Because the bank is taking on more of the risk that you will just walk away.

Comes back to the legal vs moral aspect to me.

[John]

You should try to pay your debts. It sucks when you don't. But if you can't pay your debts, don't worry about it. It is a business transaction. It is as they say business and not personal.

[Jack the Reaper]

But that doesn't seem to be where you are arguing from. You seem to be arguing from the "if it makes good business sense, and its legal, walk away" standpoint. I know there are times when it just has to be done due to financial crises but to walk away because you can doesn't seem right to me and to most people here.

[John]

That is a good point Jack. I guess I would have to say there isn't a moral dimension to it. If I were sitting on a house that was underwater, I would probably not walk away from it because I like having good credit.

But if I got offered my dream job somewhere else, I probably would and not think a thing about it. Take the nonrecourse thing out of it.

What is immoral about me walking away from the note and then assuming the difference in an unsecured debt? I am still paying it aren't I? Did I really sell myself into slavery by taking the note?

[Jack the Reaper]

If I got offered my dream job, I would try everything in my power to keep the house and honor my part of the contract. That may mean renting it out or selling it. Last resort would be to just walk on it.

You didn't sell yourself into slavery, it was more of an indentured servitude. Kind of like where that really came from and someone couldn't afford the boat ride here back in the Good Old Days(TM). They worked off the debt, then were free to do what they pleased.

[R C Dean]

You seem to not understand the time value of money.

I understand that interest is an expense I can avoid by paying cash.

Take a car. I can pay, say, $20,000 in cash for it, or I can borrow and pay, say $25,000 for it including interest. When the loan is paid off, I have the same car, and $5,000 less cash.

But, you say, you could have invested that $20,000 and made at least $5,000, thus showing a profit.

Oh, really? I certainly can't invest it in bonds or anything safe that will pay me more than the interest rate on the car. So, I have to invest it in equities or other risky investments. How likely am I to come out ahead on that deal? In most of the years since 2000, money that you borrowed to invest in the stock market would result in a loss.

I don't borrow to invest, because it moves my breakeven point on the investment up, making it more likely I will lose money on the investment.

[John]

And RC you pissed away whatever use you had for that money for five years. And even if you say that you shouldn't buy the car, that doesn't apply to houses since you get a tax break with houses. Given the mortgage interest deduction, you are crazy to buy house cash.

I don't see any economic reason to avoid debt at the rate you do. It is all just emotional. And if it gives you emotional satisfaction, good for you. But I don't have emotional issues with debt. It is all numbers to me. So I am going to borrow when I think it is smart and pay cash when I think it isn't, period.

[R C Dean]

Just a little digging on this.

Car loans have averaged 5% over the last several years. If you borrow $20,000 for a five year loan, you will pay $2650 in interest over the life of the loan.

That means that you will need to earn about $3000 on a five year investment to break even after taxes (long term cap gains rate), a five year ROI of 15%. Since 2000, that has never happened (based on the 5 year return on the Dow, which ranges from -1.7 to 5.4%).

[John]

So what RC? Maybe you are better off paying cash for a car. That doesn't mean you are better off paying cash for everything and certainly not a home where the interest is deductible.

And there is also a question of having access to that money. The assets I have in my cars do one thing, give me a car to drive. The assets I have in cash or other fungible things, do anything I want them to. That is worth something.

I value that more than I value the relatively small amount of interest I pay on a car loan. $25K is a lot of money to go without. Better to just pay it off over five years and keep the cash. I could buy a car with cash if I wanted to. But I have no desire to deplete my accessible assets like that.

It is a question of what you value. I value the cash and the security of knowing I have it. You value the security of not having any debt. Neither way is necessarily bad depending on your values.

[R C Dean]

That doesn't mean you are better off paying cash for everything and certainly not a home where the interest is deductible.

I would also note that, assuming an after-tax effective mortgage interest rate of, say, 3%, you would still be losing money investing that money in the Dow over any five year period since 2000.

[John]

Then don't invest it in Dow. Invest it somewhere else. All you are telling me is that the Dow is a bad investment. You are not telling me that having a mortgage is a bad idea.

[R C Dean]

What do you mean, so what? I thought the whole point of borrowing rather than paying cash was to invest the cash you borrowed. If you come out behind on that investment, you would have been better off paying cash.

And you would be behind on that investment.

[R C Dean]

SO, don't invest in bonds (they are a sure loser for leveraged investment).

Don't invest in large caps (they are also a loser for leveraged investment).

The only way I can get my leveraged investment to pay off is to invest it in something even riskier than large caps?

Go right ahead. I'll pass.

[John]

When you buy a car with cash RC, that car loses value every year. Every year it is closer to dying and every year its resale value is lower. A car is an asset not an investment for that reason.

Maybe you have so much cash that you can write a check for things like cars and have it have no noticeable effect on your cash in hand or any of your investments.

If 40K is petty cash to you, I salute you. But to the rest of us, that is a fair amount of money and a big investment. Better make that over a five year period and let our cash and investment assets grown on their own.

[DesigNate]

But if you buy that car outright, you'll have that $500 a month to spend on other things. Isn't that a good thing?

[libertarian viking]

John, hypothetically, if I steal from you, but the law says you have no recourse, then is it still wrong to steal?

[sarcasmic]

That's what taxation is all about.

[John]

Not analogous. You never agreed to let me steal form you or ever entered into a contract knowing there was a chance I could default.

[libertarian viking]

Sorry John, apparently too subtle. Obviously too complicated as well, seeing as how you switched the scenario from me stealing from you to you stealing from me.

[John]

It is called pricing for risk. Why that is such a difficult concept for you is beyond me.

[libertarian viking]

I have no problem with the concept of pricing for risk. But that risk should be that the other party is UNABLE to uphold their end of the contract.

What I have DO a problem with is intentionally not living up to a contract just because the law prohibits recourse.

[John]

You assumed that risk. Tough shit.

[libertarian viking]

*DO have*

That is similar to debating if the penalty for murdering someone is worth the crime. Regardless of what the penalty is, intentionally killing someone is still wrong.

[John]

But when you kill someone they didn't make an agreement with you or in anyway assume the risk that you would kill them.

In contrast, a bank loans money knowing full well that some people will not pay and prices all of their loans according to that risk. So the bank is covered because for every loan that defaults there are plenty of others who don't and are paying a premium to cover those that did.

[sarcasmic]

Unless you're a cop or a soldier.

Then killing people is part of the job.

[P Brooks]

I wonder what John would say if the banks started charging a risk-adjusted rate of 22%, based on the increased incidence of strategic default.

[John]

I would say bully for them. And would be borrowing a lot less money.

[applestooranges]

Also, I believe usury laws on the state level wouldn't allow a bank to do that.

[Jack the Reaper]

They already to this but 22% is hyperbole.

[John]

This has been a fun thread. Rarely do I get to put on my top hat and monocle and be an actual capitalist on this board. You guys are all such good little Puritans on this issue.

[R C Dean]

No, I am being a capitalist, John. See my post above about what a losing deal borrowing money at 5% (the typical car loan rate) to invest in the stock market has been.

[John]

See my response above. It depends on what you value. And cars are not houses.

And I was speaking more to the horror expressed over strategic default.

[T]

Really, what most of this thread comes down to and hasn't been very well explicated is risk tolerance.

You lessen risk by outright purchase. Borrowing involves an increased level of risk. John is clearly more risk tolerant than most of us. Whatever works, I guess.

[John]

Depends on the kind of risk. If you are asset rich and cash poor, you run risks doing that too. In the end I am really adverse to the risk of not having cash assets to deal with an emergency.

[R C Dean]

Look at it this way, John.

You are borrowing to maintain a cash reserve. However, the interest you pay eats into your ability to accumulate that cash reserve.

The risk you are hedging by borrowing is the risk that you will need that cash in the short run.

So why not keep some credit cards with zero balances to provide that emergency liquidity? That way, you can save the interest payments, and you have a line of credit for emergencies.

[John]

First, I am not borrowing to invest. I am borrowing to buy a car. I borrowing to buy a asset I am going to keep for 10 years.

Second, pulling money off my credit card at 14% interest is truly a last ditch effort to stay afloat. I would rather just pay the five percent interest on the car and have the cash and never run the risk, (hopefully) of taking a 14+% short term loan.

Better to borrow some money to buy something I actually need and that will be paid off in five years.

I am not borrowing money to play the stock market. I am borrowing money at reasonable rates to buy capital assets that I need so that I can have money on hand to use elsewhere. There is a difference.

[R C Dean]

First, I am not borrowing to invest.

A little while ago, you were. I quote:

With interests rates sitting where they are, you would be much better off having a mortgage on the place and taking that borrowed money and investing it somewhere else.

Ah, you say, but I am not investing the money I borrow to buy a car. That money I am saving.

Fine, but you are effectively borrowing the money that you are saving, and paying interest on it. You are saying that the risk of having to dip into a line of credit at some point over the next 5 years at 14% exceeds the 5% you are paying on the car. I question that.

[John]

What are we talking about here? If you are talking about a case where you own a house outright, assuming I had an income, I would borrow against that house in a heartbeat and take that money and use it and also get my home mortgage deduction.

And if you are talking about the car, I find it absurd to lose access to 30 or more thousand dollars for five years in return for saving a few thousand dollars on a note. Borrow the money, make the payments and keep that 30K and invest it somewhere and keep it where you can get access to it if you need it. Then when your car is paid off, take your car payment money and save it for a couple of years too. Then every 8 or 10 years buy yourself a new car and start the process over again.

That is hardly risky financial advice. You want to live like an old man from the 30s never borrowing any money and being significantly cash poorer in the short run for doing so. I do not see the point of that. There is nothing wrong with debt as long as it is manageable and taken for the right things.

[R C Dean]

I agree, T. It comes down to risk tolerance.

And you have to be extraordinarily risk tolerant to borrow money to invest.

[John]

And you have to be extraordinarily risk tolerant to borrow money to invest.

You have to have extraordinary risk tolerant to take a fucking car loan? Are you nuts?

[P Brooks]

You assumed that risk. Tough shit.

Who's an anarchist, now?

[John]

The risk is written into the law. We don't have debtors prison. We have bankruptcy. Everyone who loans money knows that default is a possibility. They therefore voluntarily assume such a risk by loaning money. For that reason I see no reason why I should feel bad for lenders whose loans go bad. It is part of the cost of doing business. If you don't want to risk people not paying you, don't loan money.

[Jack the Reaper]

Unless the lenders were forced by regulation to give bad loans.

Other than that, I agree with John on this point.

If I personally lent John $100, and he died, well I knew that risk when I lent it to him.

[libertarian viking]

But if he stood in front of you with a $100 bill and said he WASN'T going to give it back, would you feel what he was doing was right?

[Jack the Reaper]

That's where I disagree with him.

I would probably torch his Prius.

[John]

You really hurt men Jack. You actually think I would own one those rediculous little clown cars?

[Jack the Reaper]

I was going between that and a Chevy Volt. I gave you the benefit of the doubt. 😉

[T]

John lives dangerously. He drives the one that spontaneously combusts.

[Jack the Reaper]

Besides, I figured you for a Little River Band kind of guy.

[John]

Air Supply and a 1980 Chevette.

[Jack the Reaper]

I used to drive a 1980 Chevette. But I never listened to Air Supply! Did not!

[T]

Yeah, yeah, we know, your girlfriend left the tape in the car, right?

[Jack the Reaper]

Fuck...now I can't get I'm All Out of Love out of my brain...

...I'm so lost without you...

I hope someone else gets this earworm.

[Bee Tagger]

"Still, it's always a good time to buy. Or to rent. It depends on your personal situation - geographic, professional, financial. But living indoors almost always is better than living outdoors for any length of time."

Someone's channeling Cathy Young.

[John]

The Occutards seem to enjoy living outdoors.

[P Brooks]

the horror expressed over strategic default.

Contracts are based on trust. Maybe you think that's quaintly Puritan, but if you skip out on your debts, you're a deadbeat. Nobody should trust you.

[John]

Then every business in America is a deadbeat. Because every business at some point or another engages in strategic default, especially when it comes to service contracts.

Maybe we should just shut down all of these businesses and just get rid of this evil thing called credit.

[P Brooks]

You have to have extraordinary risk tolerant to take a fucking car loan?

If you think a new car is an investment, you're worse off than I thought.

[John]

Unless you are retarded Brooks, why would you think that I think a car is an investment? I have only said it is a capital asset that should be financed over its life like any other asset about 30 times on this thread.

Do you really not understand that concept?

[Jack the Reaper]

capital asset(fixed asset)?

noun
any long-term asset, as a building, tract of land, or patent.

[John]

Fair enough. It is still an asset though. It is not an investment. And it is the very kind of thing that it is okay to finance, assuming you need it and you don't buy a car you can't afford.

[Jack the Reaper]

Agreed. I could also call it an investment of sorts. I use it to make me some money at my job. If I did not have it, I would not be making the money I make.

(he says as he writes software* on his laptop at home in an easy chair with a roaring fire in the fireplace)

*blogs on HnR

[P Brooks]

Buying a new car makes you an idiot.
Borrowing money to buy a new car makes you an imbecile.

[John]

Your best deal on a car is probably a certified pre owned one that is a year or so old. Just like a new at used prices.

But why are you dumb to borrow for it? It is an asset you are going to have for years. The interest costs on a four or a five year note only add a couple of thousand to your note. And in return you get to keep this huge chunk of money. All you are doing is spreading the cost of aquiring something that will last years over the life of that something.

Businesses do that all of the time. By your logic every business in America are idiots. They are not. You shouldn't be running up credit cards to take vacations. But there is nothing with borrowing money to buy the right thing, namely assets that will last years and are something like a house or a car that you can't live without.

It amazes me how you and RC, who both claim to be such friends of the market, seem to know nothing about how the market and businesses actually run.

[R C Dean]

The interest costs on a four or a five year note only add a couple of thousand to your note. And in return you get to keep this huge chunk of money.

Well, no. You don't get to keep it over the life of the note. You wind up spending it, plus the interest, on the car.

Why do businesses borrow? Because they think the ROI on the investment in the business will exceed the carrying costs of the note.

That calculation simply doesn't apply when you borrow to keep cash for emergencies.

And, if you borrowing to invest in equities, you will probably come out on the short end of that calculation.

[John]

My car does produce money. I have to own one to get to work to make a living. That is why it is okay to finance it. I am not saying you should borrow to buy things you just consume.

[R C Dean]

Your best deal on a car is probably a certified pre owned one that is a year or so old. Just like a new at used prices.

This is good advice, although I'd stretch it out to 3 years (that way you get the lease turnbacks), and stick to the top-shelf brands.

[John]

The mark down on luxury cars is astounding. I can't believe anyone buys them new, especially with as well as cars are made now.

[libertarian viking]

Why does it matter if you can afford it. Your whole argument is that it's OK to default on a loan because the other party knew that was a possibility. Why not buy a car you can't afford and use it until it gets repo'd?

[John]

If you are willing to live with what it does to your credit, have fun. But the cost you will assume for doing that is probably not worth the few months you will have the car.

[R C Dean]

What's interesting about the back and forth between John and I about debt shows how fundamentally subjective it is, and not just in the way risk tolerance is subjective.

Mathematically, borrowing money to buy a car or a house is just about a sure loser. In almost any situation, you would be better off (more dollars in the bank) at the end of the loan period to have paid cash.

But, at the end of the day, we all look at money as material security. John gets a better sense of security from having a cash kitty, even if he pays interest for the privilege. I get a better sense of material security at the end of the day from having as little debt as possible, even if it means I have a smaller cash kitty.

YMMV. In fact, it certainly will.

[Jack the Reaper]

I agree. If John likes leveraging his money and debt, good for him. I prefer a more conservative approach. I didn't pay cash for my house but even after the losses in value, I am still at 80% loan to value and my payment is low. I own everything else though and pay cash for everything I want.

I hate debt...but I can deal with a mortgage.

[John]

That about sums it up. I don't see anything wrong with debt. And I also think money is generally better to have now than later.

You never know what later is going to bring. I could be dead or sick tomorrow regretting all of things I didn't do when I was young and healthy.

[R C Dean]

Just imagine having this conversation with your spouse.

Is it any wonder that money is the number one source of stress in marriages?

[John]

I have this comment with my spouse all of the time. RC if your forgo every pleasure, when do you plan to have them? And just how much money do you think you will need when you are 80 years old? What do you plan to do?

I don't plan to be poor then. But I really couldn't care less if I am rich. I enjoy the things I do now, when I am young and healthy enough to do them, a hell of a lot more than I will enjoy them then.

I know tons of people like you, who live their lives entirely for their retirement. Good luck with that. But I think what you will find is that you will never get back the things you deprive yourself of when you are young. You will never enjoy a vacation in your 80s as much as you will enjoy one in your 40s when your kids are small. And if God forbid something happens to your wife and you are a widower, you will spend the rest of your life wishing she were still there and wishing you had done more with her.

Not saying you shouldn't save and plan. But there is more to life than tomorrow. There is today as well.

[R C Dean]

I enjoy my life just fine right now. I would be hard-pressed not to, with a humidor full of cigars, a liquor cabinet full of, well, liquor, fly-fishing trips to New Mexico, etc.

But, I've been poor. I've actually donated plasma to raise the cash to buy Ramen noodles. I'm not doing that again, and knowing I won't need to is also a source of pleasure in the here and now.

Could we have more fun now? Sure, who couldn't?

But I find not living paycheck to paycheck, not worrying about how we will pay for things, having (finally) both cash in the bank and no debt except for the mortgage, to be kind of fun in its own right. And living somewhat frugally (I try not to spend more than $70 on a bottle of whiskey, or $2 a stick for cigars) and without debt is the only way to get to that point.

[John]

I do not live paycheck to paycheck. But I have for a fair amount of my life. I finally don't have to do that. And don't plan to return.

We are probably not that much different. You don't sound like you deprive yourself. If I could ever get my wife to agree to move to a cheap place to live, I could really save and invest then.

[R C Dean]

We are probably not that much different.

We 1%ers have to hang together, or we will certainly hang separately.

[P Brooks]

Businesses do that all of the time. By your logic every business in America are idiots.

Maybe you should do a little research on the difference between "investment" and "expense".

Borrowing money to obtain income-producing business assets is substantively different than pissing away a pile of money every month to impress the neighbors.

FYI: I have never owned a car less than ten years old (currently, I have a twenty two year old Honda, a twenty seven year old pick up truck, a thirty three year old Yamaha and a forty year old Porsche) I have never paid more than $1500.- for a car, and I always pay cash. Fuck the neighbors.

Same for houses.

[John]

"Borrowing money to obtain income-producing business assets is substantively different than pissing away a pile of money every month to impress the neighbors."

I don't know about you, but I use my car to get to work and make money. My car, next to my college degree, is probably the most income producing asset I have.

And I further, I have a nice car. It may be pissing money away to you but it is not to me. Why would I want to drive around in a car I hated and wasn't reliable? I have to spend my money somewhere. Some day I will be too old to drive. And when that day comes I seriously doubt I will sitting around regretting the cars I have owned.

If you don't like cars, don't spend money on them. But I am sure you like something. And I would hardly call your spending money on those things pissing your money away. So why don't you extend everyone else the same courtesy?

[Old Soldier]

There might be a happy medium between leveraging yourself to the hilt to impress people - and driving a shitbox and living in a trailer.

[John]

Yes there might be. And I wouldn't buy a damn thing to impress my neighbors. But I will own a car I like.

[R C Dean]

So, nobody, has this helped?

[rho]

John's advice isn't wrong, but it doesn't take into account risk.

If you pay for assets outright, you still have them if you lose your job, or get hurt and are unable to work.

I don't agree that you must have 20% downpayment before you can buy. It is preferable, though, if only so you don't have to pay PMI.

[John]

It is nice to own things. And that is why you don't lease. And why you keep your cars for at least a few years after you pay them off. But there is nothing wrong with borrowing to purchase them. Leasing is pretty stupid but not a car loan.

[Jack the Reaper]

I'm lying alone with my head on the phone
Thinking of you till it hurts
I know you hurt too but what else can we do
Tormented and torn apart

I wish I could carry your smile in my heart
For times when my life seems so low
It would make me believe what tomorrow can bring
When today doesn't really know, doesn't really know

I'm all out of love, I'm so lost without you
I know you were right, believing for so long
I'm all out of love, what am I without you
I can't be too late to say that I was wrong

I want you to come back and carry me home
Away from these long, lonely nights
I'm reaching for you, are you feeling it too?
Does the feeling seem oh, so right?

And what would you say if I called on you now?
And said that I can't hold on?
There's no easy way, it gets harder each day
Please love me or I'll be gone, I'll be gone

I'm all out of love, I'm so lost without you
I know you were right, believing for so long
I'm all out of love, what am I without you
I can't be too late to say that I was so wrong

Ooh, what are you thinking of
What are you thinking of
What are you thinking of
What are you thinking of

I'm all out of love, I'm so lost without you
I know you were right, believing for so long
I'm all out of love, what am I without you
I can't be too late to say that I was so wrong

I'm all out of love, I'm so lost without you
I know you were right, believing for so long
I'm all out of love, what am I without you
I can't be too late to say that I was so wrong

I'm all out of love, I'm so lost without you
I know you were right, believing for so long
I'm all out of love, what am I without you
I can't be too late to say that I was so wrong, so wrong

[I]

I never read pasted-in lyrics.

[Jack the Reaper]

Ah...but there are some closet Air Supply fans in the audience and it is for there benefit.

If you're not one of them, move along, nothing to see here.

[Jack the Reaper]

*their

[T]

Ah...but there are some closet Air Supply fans in the audience and it is for there benefit.

I think you're the only one and you just outed yourself.

[Jack the Reaper]

Actually it was thread fail. And...

John|2.1.12 @ 1:04PM|#
Air Supply and a 1980 Chevette.

[R C Dean]

What's the difference between

(1)doing a strategic, non-recourse default, because you know that the bank will take a $100K loss on the property and can't touch your $100K bank account, and

(2) finding $100K in a paper bag with the owner's name and address, and not returning it?

I'm not saying there's no difference. It sure looks to me like in both cases you wind up $100K ahead because somebody with a better claim to the money can't enforce their claim.

[John]

Because in the case of you finding the money, you never paid that person anything extra to assume the risk of you not giving them their money back.

[Johann Romas]

lol, yeah OK everything is overpriced lol.

http://www.puter-privacy.tk

[P Brooks]

I don't know about you, but I use my car to get to work and make money. My car, next to my college degree, is probably the most income producing asset I have.

Whatever helps you sleep at night.

[Pro Libertate]

What gets me is people who lease cars they can't afford. The car makers really hit on a great tactic when they made cars a status symbol instead of mere transportation.

[John]

What is with the car hatred? Cars are great things. They give us freedom. When well made they are marvels of engineering. Driving them is fun. The prettier ones are works of art.

You shouldn't buy things you can't afford. But of the things you can afford, why not buy a nice car you like? What are we all supposed to be good little communists and drive state approved Trabants?

[Pro Libertate]

Of course, my point being that you shouldn't buy things you can't afford or feel compelled to do so because of some absurd concern with status.

If you have the means, I highly recommend picking one up.

[T]

You recommend picking up a Trabant? I'm so confused right now.

Maybe I should stop drinking my lunch.

[Pro Libertate]

I'm referring to Cameron's dad's Ferrari, of course.

[John]

So Brooks, I could get rid of my car, yet still have a job even though I can't get to work? How does this work exactly?

[P Brooks]

I have nothing against cars, or toys in general. I enjoy the shit out of driving my Porsche (painted in a fetching array of shades of primer black) on windy roads. Some day I'll paint it, and put an interior in it; then I'll sell it, and buy something else to play with and restore.

I had a series of early '70s BMWs; I held onto one of the 2002s for twenty years, but you couldn't give me a new one, and you certainly couldn't get me to eat the depreciation by actually buying one.

If you want to pretend your car is an income producing asset because you drive it to work, go ahead.

[P Brooks]

I finally started work on my 1911, after letting the box of parts sit on the shelf taunting me for months while I worked on other stuff. It's coming along nicely, and will make a great plaything.

When it's done, it will unquestionably be worth more than the cash value of the parts, but I'm not going to pretend it's an income producing asset.

Unless I turn to robbing banks.

[New John]

I take my Libertarian stance on this like I do with all other topics. Whether you buy or rent it is entirely up to you and should be based on many factors that can influence your decision. According to these accurate charts there isn't much financial difference between either option. The only factor as I said above is the position you are in in your life. Understanding owning a house should not be viewed as an asset and obviously renting isn't either. I suggest only buying a house because you WANT that specific house and simply want the pride in owning property. How you save and where you invest your money is your business. But a house is not an investment which I think we all can agree on. My Libertarian stance is; let people decide on their own what is best for them and keep the government away from dealing with mortgage companies and banks. If they made a bad investment on a homeowner then they should go bankrupt on their own.

Good article by the way.