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The Tug 'O War

Many have weighed in over the past 6 months since I have been here with views about housing, its "value" (and lack thereof or declining). With the recent developments in the stock market showing cascading losses, does anyone have thoughts or change of heart about a residence (not investor real estate) and whether or not putting money into your home (or paying down your loan) is prudent.  Just wanted to get thoughts and opinions from LO's RE agents and homeowners alike.

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October 09 2008 - US
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Replies (37)

Just looked and saw the Dow finished down 678 points and closed at 8,579. Ouch! With that said and the current "crisis" I would NOT recommend paying down your mortgage at an accelerated rate. We could very well be going back to a day when "cash is king." I would want my extra money set aside to prepare just in case. Many of us are so use to charging everything that we have lost the concepts of saving up and responsible spending. We may be forced back to this way of life (at least for a while) and people should start preparing now. Plan for the worst, hope for the best.

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October 09 2008

Hi Martin!  I think it depends entirely where you are.  Are you in a declining market, are home sales slumping, are you in a 'stable' area?  We are in a 'stable' area right now where I am at.  We have certain things going for us where we live, it's mountainy, 15 min from Downtown, 10 min to the freeway, no place else to build any where around here.  Home prices have remained very steady, I see people remoldeling homes here all over the place, lots of kitchen/master bathroom remodels and  the big thing is stucco over siding, its around $16k and I can think of a dozen homes, including my next door neighbor doing it.  If I was in Sacramento or Nevada, I would probably think differently. 

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October 09 2008

I don't know how prudent it is to pay down principle aggressively on your home.  You can't tap into the equity like you can more liquid assets.  I am sure there a more than a few folks that are wishing they stuck some cash in a regular old savings account or CD rather than stocks.  Your house is your home first and I would say the folks in the best shape are the ones that own them outright!

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October 09 2008

cash in the mattress!

 

Better bone up on your haggling skills. Retail stores will be a thing of the past, you know, since credit cards won't exist anymore (and there's nothing wrong with that), and we'll be buying stuff from each other at markets. We have this to look forward to:

http://www.youtube.com/watch?v=3n3LL338aGA

 

PS- no extra money toward the home. Agreed. Have we learned nothing from the 'illiquidity' problems?? ;)

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October 09 2008

So, remoldeling the home would be out for you guys?  That's money that is being put towards the home, maybe not towards principal, but regardless towards the home.

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October 09 2008

Well here in So Cal the only home improvement or add on I would recommend is a fall out shelter. Seriously though right now my thoughts are to keep the cash liquid...with what is happening right now I don't see any reason to rush into paying down your loan. Keep the cash on hand and when this passes if you still got it start paying down the mortgage then if you wish.

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October 09 2008

My question should have been not about preserving cash (which is today's issue), but the tug of war of whether or not you would reconsider the putting the money into your home versus the market.  Many INV wizards with charts of this return and that are all worthless right now but a constant was 1) the rate on your home loan and 2) the "value" of shelter.  I had read "why put the money into your home"  the market does much better.....  Or does it? It is not a "given" so many CNBCers have thrown around after all.  Just my thoughts and take on it all. 

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October 09 2008
Profile picture for Ken Kopper

Seriously Geoff! maybe some painting (done by yours truly) but I cant see doing any major improvements/renovations  that we dont absolutely need when it will do nothing to improve the value or quality of living.

 

I am putting a heavy buy recco on...

 

Ramen Noodles!

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October 09 2008

1. Optimistic

2. Pessimistic

3. Realistic

 

If you are too optimistic, you might not see the forest through the trees!

 

Nobody knows when this ride is going to stop or how bad it will get....thowing money on the side of the house because you like the way it looks doesn't seem to be a very wise choice.

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October 09 2008

Whew.........if the news tonight is going to be indicative of this forum, I think I'm going out this evening. I'm not quite as bearish as everyone here, but that's because I'm in Dallas. Home values have decreased 3.3% in the last year and that's a far cry from most other cities. There are a lot of people that would take that kind of return over the 38% loss in the stock market. I'm not adverse to paying a mortgage down, as long as one keeps sufficient cash reserves.

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October 09 2008
Profile picture for Rob Cochems

I am working on a huge project right now.  It involves installing a safe under my garage, to hold my gold.  As I fear it will be the only way to bribe border patrol, when I get the heck out of dodge.

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October 09 2008

I think that everyone should have some cash (savings) because nobody knows where this is going. I don’t think that you should look at your primary residence as an investment it is your home and if you plan to stay long term payoff what you can afford.
I have spoke to some in the credit card arena and they have been running credit and canceling card holders and cutting credit limits so if you think that you have a safety net with a credit line you should think again.
Some of what we are seeing is panic and it is creating a domino effect. Make no mistake about it this global melt down is not just because of the American housing market this goes a lot deeper.

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October 09 2008

At least some of us dont have a monthly grocery bill equalling a 2nd mortgage payment to deal with...

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October 09 2008

I have lived in my California home for 21 months. Bought near the top of the market in Jan ’07. Since then, property in my area has decreased by 64% and continues to drop. Ouch!!! At times, I chose to apply extra money towards principle. (Yes, I know, I was purposely putting money into a declining asset). Keep in mind, this is debt I need to pay regardless of whether property value is going up or down. My initial plan was to get my 2nd paid off as quickly as possible so I could significantly decrease the amount of interest paid to the bank. Why give the bank all that interest money if I don’t have to.

In the last month, I’ve had to rethink this strategy for a variety of reasons. Given the current economic conditions, I have revised my plan and am no longer making extra principle payments. I feel it is best to build up my cash reserves. Cash is King & bartering for goods & services will continue to increase. Bartering certainly plays a strategic role in a downward economy. That could be a whole new discussion thread.

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October 09 2008

Martin – I just re-read the thread & saw you rephrased your question. Money into my home or money into the market. Personally, from an investment standpoint, I’m not comfortable doing either. How’s this for an idea?  I won't make money but at least I won't lose any more than I already have between my house & the stock market. 

 

 

 

 

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October 09 2008
unless the house burns down.....
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October 09 2008

The average rate of appreciation on the median priced home over the last 40 years has been 6.47%.  The average first year rate of return on a 20% down payment has been 32.36%.  The demand for homes due to population growth will not diminish in the near future.  17mil College students will be graduating over the next 4 years and will be looking for housing.  Having experienced more than one down turn in real estate in the last 30 years I believe home prices will again start to rise as the current supply diminishes and the demand for homes remains constant.  Builder's have quit building which was adding to the supply this will help the demand catch up with the inventory.  Agreed that people will change spending habits and how they use credit or don't use credit, but most people have a very short memory.

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October 09 2008
Profile picture for Wayne.T_ .....Colo.


Great question .....
A proper answer must be relevant to your (or each person's) situation as each will be unique. All the basics still apply, so the answer depends on the individual. As an LO, I wouldn't suggest a purchase or refi until I knew the specifics.

For example, we purchased our home knowing (expecting) it to be our last. That plan has not changed, so we'll continue to pay extra reducing the mortgage. For someone who knows they are moving in a year or two, their answer might be different. That would also depend on their LTV (original and current due to local market).

Preserving cash: Yes, liquidity is important, but that is a constant and doesn't apply just to the current conditions. Do you have access to ready cash, say 6 months to a year's reserve to pay monthly obligations? (Not a HELOC either) If not, I wouldn't suggest putting extra on the house payment or in the stock market.

Stocks: Buy/Sell/Hold? again, depends on the individual situation. reminds me of Kramer on CNBC the other day in his usual exaggeration mode "Take your cash out of the market .... " The next morning he is qualifying his answer ..... which he should have done to begin with!

We are not concerned about our retirement funds because they have been managed well and properly allocated. Typically seeing strong growth over the last several years. While the growth slowed this year, this is a time for us to put extra into the account taking advantage of the bargains. Not everyone is in that position, and we realize we are blessed.

When the newscaster talks about trillions being lost, we don't panic. Why? Because our security is not in the bank, nor in the cash. Also, we are not drawing everything out of the account in the next week, so did we really "lose" anything? We invest for the long term, so just because the current value may be down, we look toward the future recovery and growth.

Remember that with each sale (stock or housing) there is also a buyer. Buy low.....sell high. That applies to homes as much as it does stocks. For some, this is a perfect time for buying an extra house as a long term investment.

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October 09 2008
Profile picture for Clearpoint

?????

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October 09 2008
Profile picture for Wayne.T_ .....Colo.

re:?????  

 

What wasn't clear enough or to the point? 

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October 09 2008

Interesting perspectives from everyone, though, there appear to be certain assumptions being made about the current state of things: 1) the market will keep hemorraging value in companies we know are worth more than what they're trading at, 2) that there aren't enough paying borrowers to justify banks lending to them at nice rates of return, 3) that banks will continue not to lend when they're no longer saddled with non-performing illiquid assets.

 

I guess we should always keep some liquid assets around in case of need for emergency funds, but in terms of overall return doesn't it still make sense to pay off a debt that is accruing at a higher interest rate than whatever rate of return you can on your investments.  There isn't an investment vehicle available that could guarantee a rate of return higher than what most of us pay on our current mortgages, so I still think it's prudent to pay off that debt. 

 

From what I've been seeing in the market, it's all knee jerk stuff again like with commodities speculation a few months back.  For the most part I think the markets runs on efficiencies, and I think time will bear this out.  Unfortunately, in the short term the markets are susceptible to, for lack of a better word, stupidity.  It is prone, like with other facets of our society, to extremism.  Everyone is fleeing stocks, bonds, mutual funds seeking safety.  But all this overreaction ignores the basic idea of value.  Companies are still producing things that people want and people will buy. Though the idea of homes as investments has been tarnished, people still see value (figurative if nothing else) in owning a home.  Whatever happened to Aristotelean moderation?  We're just so caught up in excess that we become irrational. 

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October 09 2008
Profile picture for Clearpoint

When the newscaster talks about trillions being lost, we don't panic. Why? Because our security is not in the bank, nor in the cash. Also, we are not drawing everything out of the account in the next week, so did we really "lose" anything? We invest for the long term, so just because the current value may be down, we look toward the future recovery and growth.

 

You derive security from what? Three magic beans you got for your cow?

 

We are not concerned about our retirement funds because they have been managed well and properly allocated. Typically seeing strong growth over the last several years. While the growth slowed this year, this is a time for us to put extra into the account taking advantage of the bargains. Not everyone is in that position, and we realize we are blessed.

I consider my investments well diversified, but everything took a beating.  What makes you so blessed as to not be affected by the current market?

 

 

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October 09 2008

CC- We could very well be going back to a day when "cash is king."

 

We're there!!!!!!!!!

 

 

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October 09 2008

Great thoughts. I am not classifying my residence as an investment, so I will not be disappointed in the return.  However, I do know of the given... Every  dollar of principal that I pay down, I am "saving" (penny saved is a penny earned) 4.875% (my rate). I think we all need to be liquid and solvent to insure of making it with minimal creict being extended  for some time as the lenders get shaken out and need to assess their leverage tolerance as well.  Tami, enjoyed your thoughts. The main question I was attempting to get was about the given return of principal reduction (known rate) versus the unknown rate of return in the "Market" (stock). To me it is the tolerance of the known versus the unknown and each's risk tolerance.  Cool thoughts.  Keep rockin'.  When the "stock market" has hit bottom... we will see all the funds and managers reset their ground zero or starting point from that bottom point.  I do think with minimized leverage going forward for quite some time...growth there will disappoint many fast money expectations.

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October 09 2008

Da Nile.....It's not just a river in Egypt.

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October 09 2008

I can't wait to see the 10-12 year charts for the MUT funds  in 2009/2010.  Nothing wrong with the truth of it all, just will be curious to see the spin.

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October 09 2008
Profile picture for Wayne.T_ .....Colo.

Larry,

Oh. ... No magic beans and the cow wasn't sold. (enjoy that story).

Seriously, I was introduced to the foundation of my security over 30 years ago during similar times. When the job was gone, no cash, no home, and a family counting on me for provision, I found the truth of what is really important. My world view had been "Its all up to Wayne" and that failed! None of us can be our own god ..... I found out who was really in charge and who owns the silver and gold. I've lived by Matt 6: 19 - 34 ever since no matter what is happening.

Being diversified is wise. Eccl 11: 1 - 3

None of this means our investments cannot be affected ..... it means we, personally are not shaken. Sadly, I've read accounts recently of desperate reactions, similar to actions taken during the 1929 crash, by some who have lost or are facing losing everything. It need not be that way.

 

We are blessed. 

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October 09 2008

WTC,

It will change many going through this and we will rest priorities and find out what really is the most valuable to us all. It's sad that it may have great pain involved for many, but there will be those who "make it to the other side" that will have their lives changed forever and will view this as a "blessing".  They just don't know it facing the storm.

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October 09 2008

rest  reset

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October 09 2008
Profile picture for Rob Cochems

Why would you accelerate your mortgage?  Wage inflation, continually makes the payment cheaper...no need to spend extra now...save and let it grow.

 

On another note, the stock market did not return to 1929 levels until 1954.  What makes one think this recovery will be any faster?

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October 09 2008
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