Wednesday, September 13, 2006

Peak Bubble: A Time To Remember

"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."

He called it "very unsophisticated." (Los Angeles Times Aug 28th, 2005)


  1. WHAT? I swear this guy is ridiculous.

  2. Lereah just wishes he could roll up in a ball right now as you drum up these Historical quotes.

    Keep up the great work!

  3. ok, so he is saying you should always be making a payment on your property. so he is saying you should always RENT. sounds about right to me

    i am disgusted with the greed

  4. NOTE:

    Mr. Lereah's Book "Are You Missing the Real Estate Boom?" has been retitled to

    "Why the Real Estate Boom Will Not Bust"

  5. let's see - Sold our house - $560 in earning an average over 5% - no GA income tax on earning - renting for less than earnings on treasury bonds - watching house prices come down - builders now cutting $15-20K on new houses - wow are we dummies or what!

  6. warmredblanket, I agree with you (for once.)

    WhiteTower said...
    "In the never-land of housingheads, carrying debt has no opportunity costs -- as if there's nothing else you could have done with your $500,000."

    uhhhh, Whitetower, you just made a case FOR not paying down your mortgage too quickly ... read Warmredblanket's explanation why a slow paydown (or even "no" paydown) can be better than a fast or complete paydown. I know we housing heads often discuss how if you buy vs. rent you eventually don't have a payment at all to make. That is really for illustrative purposes to bring home the fact that when you own at least some of that money is being paid back to yourself. In reality, it is better to take that money invest it in an assest and not leave it in your home which is really an expense which should be minimized over the long haul.

  7. Owning your home outright is being just like the rich people are. Paying nobody interest is just like saving money. Using your freed up capital to invest in other ventures is more rewarding.

  8. Well, since I have a 4.875% 15 yr fixed mortgage*, paying it off early makes no real sense. But you cannot say that having 100% equity in your home doesn't bring you any returns. The return that you recieve is the rental equivalent value of your home. That is the same return that you were receiving over the course of your loan.

    *the 15 year term is relevent because even in the early years of this loan, I'm paying more principal than interest. The closer that you are to paying off your house, the smaller returns that you get from paying extra principal.

  9. I guess I am one of those "unsophisticated" ones also. Many can argue the merits or demerits of paying your mortgage off. I personnaly have never felt freer being released of that burden from around my neck. Debt, in my view, is no more than slavery.
    We must remember where Lereah's viewpoint is coming from. He is a real estate pimp and could care less about you and I do as individuals. More loans made, the more money the industry he pimps for makes. Whether you go broke, have enough for your retirement, etc. is irrelevant to him as long as the suckers keep his game going.
    As my paternal grandfather said, "If you don't have the money to buy it, you have no business buying it". Hitting the half century mark in life, I can see the wisdom in that adage.
    P.S. I have read the book "The Millionare Next Door" and don't remember where it recommended to get in to debt inorder to invest in other areas of the financial world.

  10. sorry blanket and lance, you didnt really get what he said. he didnt say "If you paid your mortgage off EARLY, it means you probably did not manage your funds efficiently over the years." he was saying that it should NEVER be paid off, as in, after 29 years and almost paying it off, sell it and UPGRADE to a new house so you can keep paying a mortgage, and by selling and rebuying you, of course, use an agent and help out the NAR cause...

  11. anon 7:57 ... If you are looking at it purely from a financial perspective it doesn't make sense to ever payoff or paydown your mortgage. Your home isn't an investment vehicle, it is an expense. You want to spend the least possible on it possible over the longhaul. Having a high mortgage at a low rate is the ideal. That means less funds put into the house over the longrun and more available for other investments such as bluechip stocks that will give you a better return. Additionally, the higher the mortgage, the higher the tax deductible mortgage interest. Looked at simplistically, if you can "borrow" $100,000 from your house's equity at 6% and invest it in safe bluechip stocks and get 10%, aren't you better off? Again the objective is to minimize your housing costs over the longhaul even if it means renting. Historically though, renting has not been cheaper over the longhaul as rents always go up ...

  12. This is the point of the Millionaire Next Door - live below your means, don't compete with the Jones' family, forego the fancy new cars and clothes.

    We're going to make a bubblehead of you, yet, VaInvestor. ;)

    I would extend your advice to not buying a house at the top of the biggest U.S. RE bubble ever just for the sake of "getting into something", but to save your money for an even bigger downpayment on something in about three or four years when things are back to rationality, or at least something approaching rationality.

    Long-term, you're almost always better off owning, but short-term is a different story right now.

    Just don't blow the money you're saving by renting on bling. :)

  13. Another thing about VAinvestor's wise comment. If your life is all about acquiring the most Konsumer Krap you can, then you don't have much of a life.

    A Toyota Camry gets you from A-->B just as well (and probably more reliably) than an S-Class Mercedes. Inexpensive clothes keep you warm and non-exposed just as well as fancy clothes. A big screen TV just makes you waste more of the precious moments of your life watching other people do stuff rather than doing stuff yourself.

    Exceptions: don't scrimp on comfortable shoes and beds. Less is definitely not more when it comes to ergonomic sorts of things.

    Wow, I'm just full of advice. Guess I need more coffee. :)

  14. lance said
    "Additionally, the higher the mortgage, the higher the tax deductible mortgage interest."

    while true, i'd argue the converse (of course you will disagree)- the higher the interest rate the higher the tax deductible mortgage interest.

    i think you can also say that if you're saving 30% a month by renting, doesnt that beat a so-called guaranteed 10% apy.

  15. Most advisors would not recommend "getting into debt" to invest either. But a mortgage (and other large loans) are a different situation. Can you imagine the financial folly in paying $200K up-front for a house in order to avoid debt? That $200K would then be locked up with no way to access it ...

    But that assumes that you never make another dime in your life. If you can pay cash upfront for your shelter, all of that money that would have gone down the drain to pay interest can be put into investments.

    Now, I will agree that waiting decades to buy a house until you have 100% of the money is typically not the best decision if you can afford to buy a house now under traditional sound lending principles, simply because you do acquire equity over time, and you should still have money left for investment if you are only paying 25-28% of your income in housing costs. But these folks using toxic loans or paying 50-60% of their income just to "get into something" are almost universally making a foolish decision.

  16. Let me get this correct. If I am to be a sophisticated investor then I should take a cash-out refi and invest that in something that will return more than appreciation on my home?
    I got 1oo% in 6 years on the house, but that is over. With low interest rates I can refi and invest that into the next bubble.
    Keep riding the wave.

  17. whitetower asked:
    "Aside from the brass cajones it takes to make that assumption, I'm wondering what data you guys are using to justify this, especially given the current abnormally low mortgage inteest rates."

    Shiller's study, of course! The "return" on your house is only 1% above inflation, right? So, the less cash you put in your house, the more you have to invest elsewhere. Yes, you have to take into account what you are paying to borrow that which you otherwise would have paid for. Bottom, line is if you have a locked in longterm mortgage at something like 5%, how could you not be better off paying the 5% there and getting a higher return rate with Treasury Bonds or a blue chip stock? Over the long run blue chips return something like 10% ... BUT, yes, there is some risk in this. It's possible the US government defaults on its obligations or that a blue chip company such as IBM goes under ... It's just not very likely ... or even "a little" likely ...

  18. whitetower said:
    "There is nobody who has 5% 30-year mortgage interest rates. Mortgage interest rates have never been this low."

    Actually, I do. True, mine was through seller financing. But some 6 months before I bought, interest rates were down to 5.5% fixed (30 yr.).

  19. I paid off my house and do not believe it is the time to invest in both RE and stock markets. None can be sure you can get 8% return to bet on Stocks right now. What else I can do here? Put the money in CD for 5% and pay mortgage at 6%. It doesn't make sense.

  20. Yep, hold debt while dumping money into stocks and probably losing your shirt. Make the bankers and the market makers richer at the same time! Sounds like a real bargain.

    A hint of common sense sees through this bs.

  21. Its all about cash flow. Paying off our mortgage increased our cash flow by $1,500/mo. Now we are maxed out on our 401K, contribute more to 529Bs for kids college...

    Keeping a large lump sum of money liquid is too easy to spend. If its in the house, then I am less likely to want to spend it.

    At least thats my thoery.

  22. Lance
    "invest it in safe blue-chip stocks and get ten percent".

    Where are safe blue-chip stocks and get ten percent? It is a joke, especially in current market. The market has been flat for almost 5 years, and there is no sign it will go up in the near future. At least, just like RE market, it is not the time to get into stock market. The best option right now for the time being is to pay off your house.

  23. warmredblanket said...
    "Additionally - calling long-term stock market investing (30 year periods, like your mortgage) 'gambling' is ignorant. Long term you will do better in equities, period. Pre-paying a mortgage, especially at today's low rates makes no sense."

    Yes, long-term RE investment (30 years?)will definitely have a much better returen than current mortgage rate (6%). Why don't you just jump in to buy a few invest homes today and you will make a lot of money after 30 years.

    Do you also think now is right entry point to jump into the stock market ?

  24. VA Investor,

    Think back to your first fixer upper. What did it take to get the mortgage for the second home when you kept the first as a rental?

    I'm guessing that the rate did not increase on the first (as it is now an investment property) since that bank would probably never know the difference as long as they got their check. What about the new mortgage though? Did you have additional cash for the 20% downpayment or are you able to use the existing home's equity as collateral?

    Thank you,
    My $0.02.

  25. Many people have missed the point. Financially speaking, locking hundreds of thousands up in your house is in fact one of the biggest mistakes you can make.

    Anon at 3:05 on Sept 14 said "...I should take a cash-out refi and invest that in something that will return more than appreciation on my home?"

    Appreciation on your home has absolutely nothing to do with it. Your home will appreciate at the same rate whether you own it free and clear or have an 80% mortgage with a 20% second. A mortgage is the cheapest money you will ever get. Especially if you have a 30-year lock from several years ago and are somewhere around 5.5% to 6.5%, you will be far better off in the long run if you invest that in something that is likely to beat 4.0 to 4.5%, the after-tax cost of the mortgage. Over a 30-year span, there are plenty of investments that are likely (not guaranteed, but nothing is) to do that. So you come out ahead on the mortgage, and you still have whatever gains your house gets.

    It's just math, and rather straightforward. Lereah may or may not be right about much, but he's right about this.