<p>I have done corporate financial analysis for about 18 years. Often, that involves investment analysis and real options. I've also done a lot of analysis on my personal finances, and those of my friends. I could go on and on about financial principals and particular suggestions. However, one of my core financial observations is how powerful having the combination of good credit and no debt is. More precisely, have some credit that you pay off every month. If you have a student loan that's modest, that's ok. Keep 1-3 credit cards on automatic payment, and never let them have a standing balance. Pay something like your utility bill automatically with a credit card, and then have the credit card automatically paid via your checking account. This is economically the same as paying the utility bill from the checking account, but is much better for your FICO score. </p>
<p>If you don't have debt, the difference in how much you can save or spend gets to be quite large, and it happens pretty fast. </p>
<p>I have some observations about who NOT to get investment advice from: 1. Realtors. They have no specific training requirement in economics, nor do they appear to have anything resembling the "know your customer" rules that your stockbroker has to follow. 2. Anyone who wants to loan you money. 3. Jewelers. "This diamond is an investment..." If you mean something which can be sold in the future for a profit, it's quite a bit worse than housing, which is itself inferior to the stock market. 4. People who don't have any of their own money in the same type of investment.</p>
<p>Academic authors are usually much more thorough and less biased than people in the finance industry. Try doing searches about financial topics in Google Scholar, which restricts the results to scholarly and academic publications. <a href="http://scholar.google.com/schhp?tab=ws">http://scholar.google.com/schhp?tab=ws</a> </p>
<p>Don't get me wrong. The professional requirements for being a stockbroker are light years ahead of a realtor. They might not even be in the same universe. Stockbrokers and investment advisors have appropriateness and disclosure requriements, and pretty thorough background checks. Still, they want to transact business, and typical incentives are either to get more assets under management, more new assets (as distinguished from just getting good returns on what is already invested with them), or to generate more trading activity. It is very hard to find advisors or strategies which consistently beat market returns, once you adjust for transaction costs. Buy and hold for equities is a pretty good baseline strategy, and you don't need to know that much to do it. If something doesn't have long term returns of about 8% or more (like the equity markets) ask yourself why you would invest in it. Sometimes there are good reasons, like you need some liquidity in a money market fund or checking account, or shorterm loss of value could cause you real problems. </p>
<p>If you view a house as partly consumption and partly investment, you can see why it's good to buy something you like, but also why getting a bigger house than you need for "investment" reasons is usually a bad idea. You will probably not only pay more for it, but also furnish it, heat it, cool it, pay taxes on it, and pay higher insurance. The long term returns aren't as good as the stock market, you have poor liquidity in a house, and homes are not diversified investments.</p>
<p>As IrvineRenter and countless others have shown, this isn't a good time to buy a house. When the market is somewhere around bottom, and aftertax costs of homeownership are similar to rent, you should still ask yourself "Do I really like this house I'm looking to buy?" and "Am I buying something much bigger than what I really need?" Depending on interest rates, saving $100k on a house will give you about $500-600 a month aftertax to do something else with, every month. That's about the same as getting a $10,000 a year raise. </p>
<p>This actually gives me an alternative way viewing the current overpriced market. Instead of "you would need a raise of $xxx to be able to afford the median priced home" you could also say "waiting for prices to drop to levels consistent with historic fundamentals is equivalent to getting a raise of $YY". For example, if OC housing prices dropped $150,000, it would be the equivalent of giving the buyers a $12-15,000 raise in salary. For anyone who wants the calculation: after taxes and insurance, at 7% interest, $150,000 translates to ~$750 monthly. $750*12=$9,000 annually. At a 30% tax rate, that's equivalent to a $12,876 raise. At a 40% combined state and federal rate, that's a $15,022 raise.</p>
