Debts And Assets

[irvinebullhousing]

I am curious as to what you guys think where we are, cycle, in housing market. Obviously, each of the category below
will have bias feeling about the current housing trends.

A - Realtor/Broker - The people that sell houses think its always a good time to buy and sell.

B - The investors - Timing the market.

C- The homeowners - always rely on affordability metric and looking in the long run.

D- Speculator - Quick gain and move on to the next unit for profit.

 

[Irvinecommuter]

I am curious as to what you guys think where we are, cycle, in housing market. Obviously, each of the category below
will have bias feeling about the current housing trends.

A - Realtor/Broker - The people that sell houses think its always a good time to buy and sell.

B - The investors - Timing the market.

C- The homeowners - always rely on affordability metric and looking in the long run.

D- Speculator - Quick gain and move on to the next unit for profit.

I'm a homeowner and see the beginning of the end.  Rising interest rate, high home prices, reduction of SALT deduction, and low unemployment mean only way to go is down. 

 

[Liar Loan]

It's a numbers game.  If your ROI > debt interest...you invest.  If the debt interest > ROI, you pay down your debt. 

This ignores the element of risk.  Paying off debt is risk free vs. stocks and bonds which come with varying levels of risk. 

Which option would you choose:

The time is January 2000 and you have been making a killing in stocks.  You have an 8% mortgage locked in for 30 years.

A. Put all funds towards paying off the mortgage early (boring!).
B. Keep investing in this new stock paradigm that shows no signs of slowing down.

Well, if you chose option B, you would still be trailing the guy that decided to pay down his 8% mortgage.  It's been 18.5 years and the stock return still lags the mortgage pay down return by a significant percentage.

The moral of the story is nobody can know what future stock & bond returns will be.  There's absolutely no guarantee that historical stock returns of 7-9% will continue into the future.  Whereas, paying down the mortgage is a "knowable" return and it pays a lot more than a simple savings account.

 

[Irvinecommuter]

It's a numbers game.  If your ROI > debt interest...you invest.  If the debt interest > ROI, you pay down your debt. 

This ignores the element of risk.  Paying off debt is risk free vs. stocks and bonds which come with varying levels of risk. 

Which option would you choose:

The time is January 2000 and you have been making a killing in stocks.  You have an 8% mortgage locked in for 30 years.

A. Put all funds towards paying off the mortgage early (boring!).
B. Keep investing in this new stock paradigm that shows no signs of slowing down.

Well, if you chose option B, you would still be trailing the guy that decided to pay down his 8% mortgage.  It's been 18.5 years and the stock return still lags the mortgage pay down return by a significant percentage.

The moral of the story is nobody can know what future stock & bond returns will be.  There's absolutely no guarantee that historical stock returns of 7-9% will continue into the future.  Whereas, paying down the mortgage is a "knowable" return and it pays a lot more than a simple savings account.

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

 

[irvinebullhousing]

I am curious as to what you guys think where we are, cycle, in housing market. Obviously, each of the category below
will have bias feeling about the current housing trends.

A - Realtor/Broker - The people that sell houses think its always a good time to buy and sell.

B - The investors - Timing the market.

C- The homeowners - always rely on affordability metric and looking in the long run.

D- Speculator - Quick gain and move on to the next unit for profit.

I'm a homeowner and see the beginning of the end.  Rising interest rate, high home prices, reduction of SALT deduction, and low unemployment mean only way to go is down.

I am a homeowner and I will be honest, my sentiment is the same. All of the indicators is pointing toward "The beginning of the End" as you stated the reasons for it. As a homeowner, who wouldn't want to be wealthier, at least on paper anyways, that their house worth X amount more than what they purchased. The sacred cow that no one want to talk about is the house loosing values. The house that I bought in good time rise in values could loose money, just as it was in good time that it took off like crazy. Those are realities. What keep me together is, 1- I have to make sure I love the neighbor hood, for long term stay. 2- I am comfortable with the payment and my debt is manageable. 3- I need a good place for my kids and my kids school. 4- I know that if it does goes down, it will bounce back up, just like housing cannot go on and appreciate forever. You have to be able to weather the storm. 5 - Its a house, you need a roof over your head. I hate to go back being poor. Yes, money does not always buy happiness, but it does provide some comforts.

 

[paperboyNC]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

 

[paperboyNC]

I am a homeowner and I will be honest, my sentiment is the same. All of the indicators is pointing toward "The beginning of the End" as you stated the reasons for it. As a homeowner, who wouldn't want to be wealthier, at least on paper anyways, that their house worth X amount more than what they purchased. The sacred cow that no one want to talk about is the house loosing values. The house that I bought in good time rise in values could loose money, just as it was in good time that it took off like crazy. Those are realities. What keep me together is, 1- I have to make sure I love the neighbor hood, for long term stay. 2- I am comfortable with the payment and my debt is manageable. 3- I need a good place for my kids and my kids school. 4- I know that if it does goes down, it will bounce back up, just like housing cannot go on and appreciate forever. You have to be able to weather the storm. 5 - Its a house, you need a roof over your head. I hate to go back being poor. Yes, money does not always buy happiness, but it does provide some comforts.

A part of me wants to sell my house and leave my equity in very safe places ready to pounce for the next downturn, but what I've found in life is that when I purposely try to time the market, I fail miserably. I've timed the market perfectly a few times, but it was always because some external force in life pushed me to make decisions when it happened to be the right time. (The one exception being my completely unwillingness to consider buying when I moved to CA in 2006 because renting was half the cost of buying and I wasn't ready to stay in one place for the long term).

 

[irvinebullhousing]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

I understand that thought too, however, the insurance that I've chosen is open up a max equity line of credit. You will never ever touch it, unless it is absolute dire situation. I would only tap it for absolute dire situation.

 

[Irvinecommuter]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

And during that same time...a lot of people had to sell their house fast or lose it. 

Liquidity doesn't mean just investing...it means having an emergency fund to cover your expense. 

4.5% is very low for investment purposes.  30 year bonds is at about 3% right now...so is inflation.    Stock market returns historically around 10%...you mix in some bonds...your ROI is about 7-8%
https://www.marketwatch.com/story/8-lessons-from-80-years-of-market-history-2014-11-19

 

[paydawg]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

Look at any 5-year period and you'll see that the market has been minimal risk.  Even if you were to invest all your money at the peak before the crash, within 5 years, you made your money back...and that's the worst case scenario.  In general, the stock market has (and will) outpace the real estate market. 

 

[Irvinecommuter]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

Look at any 5-year period and you'll see that the market has been minimal risk.  Even if you were to invest all your money at the peak before the crash, within 5 years, you made your money back...and that's the worst case scenario.  In general, the stock market has (and will) outpace the real estate market.

Not too mention that you are doing the exact opposite thing you are supposed to do..which is to diversify.  You already investing into your house every month with your payments...why add to it?  Also...the 4.5% "return" is at a decreasing you pay off your mortgage so the ROI is less and less with each payment. 

 

[Irvinecommuter]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

I understand that thought too, however, the insurance that I've chosen is open up a max equity line of credit. You will never ever touch it, unless it is absolute dire situation. I would only tap it for absolute dire situation.

Except that LoC can get cancelled or frozen without notice, especially in a time when home values are dropping.

 

[Mety]

Sell now or be priced out very soon!

 

[irvinebullhousing]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

I understand that thought too, however, the insurance that I've chosen is open up a max equity line of credit. You will never ever touch it, unless it is absolute dire situation. I would only tap it for absolute dire situation.

Except that LoC can get cancelled or frozen without notice, especially in a time when home values are dropping.

Not if your values exceed the heloc. Example: if your house is 1 million and completely paid off, you can open a heloc for 500k and it sit there. If you need 100k to cover for 1 year expense then tap the 100k and pay IO on that to get by. Again I have never touch it and use it for pure live or die situation. Some may call me chicken but that?s who I am.

 

[Irvinecommuter]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

I understand that thought too, however, the insurance that I've chosen is open up a max equity line of credit. You will never ever touch it, unless it is absolute dire situation. I would only tap it for absolute dire situation.

Except that LoC can get cancelled or frozen without notice, especially in a time when home values are dropping.

Not if your values exceed the heloc. Example: if your house is 1 million and completely paid off, you can open a heloc for 500k and it sit there. If you need 100k to cover for 1 year expense then tap the 100k and pay IO on that to get by. Again I have never touch it and use it for pure live or die situation. Some may call me chicken but that?s who I am.

It's definitely a way to go.  I have thought about it but working on having a big emergency fund.  I have investments to and can't figure out what to do with it so I just let it be.

 

[irvinebullhousing]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

I understand that thought too, however, the insurance that I've chosen is open up a max equity line of credit. You will never ever touch it, unless it is absolute dire situation. I would only tap it for absolute dire situation.

Except that LoC can get cancelled or frozen without notice, especially in a time when home values are dropping.

Not if your values exceed the heloc. Example: if your house is 1 million and completely paid off, you can open a heloc for 500k and it sit there. If you need 100k to cover for 1 year expense then tap the 100k and pay IO on that to get by. Again I have never touch it and use it for pure live or die situation. Some may call me chicken but that?s who I am.

It's definitely a way to go.  I have thought about it but working on having a big emergency fund.  I have investments to and can't figure out what to do with it so I just let it be.

Sometimes doing nothing is the best thing. Go figure.

 

[Liar Loan]

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

Look at any 5-year period and you'll see that the market has been minimal risk.  Even if you were to invest all your money at the peak before the crash, within 5 years, you made your money back...and that's the worst case scenario.  In general, the stock market has (and will) outpace the real estate market.

This isn't true.

The great depression took about 15 years to recover (assuming your portfolio didn't entirely go BK).

The Nasdaq took 15 years to recover.  It may not represent the full market, but it's what everybody was invested in at the time.  Real estate did far better from 2000 to 2015 than tech stocks, not even accounting for leverage.

The period from 1965 to 1982 also had very low stock returns during extremely high inflation (a loss in real terms).  If you look at real estate vs. stocks during this time period, real estate probably wins by a multiple of 10x.

 

[irvinebullhousing]

So when the lending industries run out of prime borrower, it will resort back to Subprime Lending. Only this time it morph into NON-PRIME. Its mission, find additional borrowers to finance and push the housing price further. History has always repeat itself.


https://www.cnbc.com/2018/04/12/sub-prime-mortgages-morph-into-non-prime-loans-and-demand-soars.html?__source=sharebar

 

[panda]

Liar Loan, Agreed that the stock market moved side ways from 1965 to 1982. Do you have any charts or source link that shows a 10X in real estate during that time period?

Risks is almost minimal if the investment is long term.  Yes there is risk but relative risk is very low.  You can have a huge depression in the market and your house dramatically fall in value.  Paying off principal is a form of investment...you just put it into your house rather than in stocks or bonds.

Inflation eats 2-3% a year anyways...so your are better off taking money now then giving it to the bank.

I call BS on minimal risk on long-term stock market investment. Many people got laid off in 2008-09 and needed to cash out their investments just as the time that they were down big. Others couldn't resist the urge to sell.

If you have a 4.5% interest rate on your home and are no longer itemizing deductions due to the new tax law, anything you put into home mortgage earns 4.5% "risk-free" and tax-free.

The main risk of paying down a mortgage early, is that the money can be inaccessible when you need it most. If you lose your job and want to cash-out refi, you can't.

The second risk is that with a mortgage, the bank (or lenders) are sharing the risk in your home. If anything catastrophic happens (earthquake, fire, housing market crash, etc.) and for whatever reason you are unable to rebuild with insurance coverage, the higher your LTV, the less you have to lose by walking away.

Look at any 5-year period and you'll see that the market has been minimal risk.  Even if you were to invest all your money at the peak before the crash, within 5 years, you made your money back...and that's the worst case scenario.  In general, the stock market has (and will) outpace the real estate market.

This isn't true.

The great depression took about 15 years to recover (assuming your portfolio didn't entirely go BK).

The Nasdaq took 15 years to recover.  It may not represent the full market, but it's what everybody was invested in at the time.  Real estate did far better from 2000 to 2015 than tech stocks, not even accounting for leverage.

The period from 1965 to 1982 also had very low stock returns during extremely high inflation (a loss in real terms).  If you look at real estate vs. stocks during this time period, real estate probably wins by a multiple of 10x.





[/quote]

 

[irvineband]

Panda to you last point stretched out 100+ years.
https://www.biggerpockets.com/renewsblog/real-estate-vs-stocks-performance/