"GETTING RICH IS SIMPLER THAN YOU THINK"-MSN

[retailguy]

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.


This is not true regarding the timing of my first home; I bought my first home 10 years ago. The 30 Yr Fixed Rate at that time was 7.75%.

I don't know about how strong the market was then; I was a teacher.

But the rates were not low at that point.

Perspective is a GREAT thing! I would characterize rates of 7.75% as historic lows... See, I remember 16% to 21% rates. 7.75% is what I financed a car for, when I financed cars, that was prior to 1991...

7.75% is a GREAT rate in my world, and rates went from 7.75% down to what, say, 5% at the lowest?

[retailguy]

Recently, one of the biggest subprime mortgage lenders (New Century) went bankrupt because they had so many foreclosures that they couldn't service their own debt. Behind that bankruptcy are thousands of foreclosures of good people and good families WHO BOUGHT SOMETHING THEY WERE NOT READY FOR, OR COULD NOT AFFORD. Everyone talks about their home being a "blessing" and the "best investment" they'll every make. Think it is true for those folks who are in foreclosure?


It's not fair to use the example of subprime lenders as an average example IMO. They are lending to high risk people at higher rates than normal.

Often they are lending to people who should not buy a home IMO. You are right in that regard.

But the home is the best or one of the best investments that I and many others have made IMO.

Well, the subprime market is where problems APPEAR, First. If these markets continue, they'll creep into your business as well, but, considering your model, they'll be less apparent. Face it, you focus on the "best" buyer out there, those, by default have "lower" risk. That's why they're the "best".

But, you're talking about a very small market segment, Bretsky, and probably the ones that can "handle" the most risk. Risk will still bite though, and hard.

[retailguy]

Bretsky says he "learned" to save by owning a home, and furthermore that he "learned" the value of building wealth by buying a home. I'd disagree with that, on my belief that the "habits" were present before they bought the home, but weren't being executed. They didn't learn it so much as they began to do it when they bought the house.


This is probably accurate. But I'd add that it wasn't going to get executed until home ownership. We were living the high life and needed added responsibility to watch our spending habits. And we're far ahead of where we would have been by buying a home with far less than twenty percent down IMO

Here's an article for you.... Some good info here, I agree with a lot of it, but NOT all of it.... But something to think about...

http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1

Why rent? To get richer

A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.

By SmartMoney

I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.

Stocks versus houses: Returns
Shares of businesses return 7% a year over long periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation, or "real," returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.)

Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long periods might surprise you: It's virtually zero.


Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year.

House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero.

Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. (More on them in a moment.) Even if we include these periods, houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the drain." If they do look at returns, they focus on recent ones. Those tell a different story.

Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.)

Stocks versus houses: Valuations

But though stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price-earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so the ratio of house prices to rents. In 1940, the median single-family house price was $2,938, according to the U.S. Census Bureau, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000, the ratio had swelled to 17. In 2005, it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney's hometown of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.

* Video: Should you rent or buy?

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan.

By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that homebuyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.

That means more Americans can win loans for homes, and they can win them for far more expensive homes than their incomes had previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

Stocks versus houses: Conclusion
For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks.

That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average.

So to sum up why I rent: Shares right now cost 16 times earnings and over long periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long periods return zero after inflation. And they look likely to return less than that for a while.

Questions and objections
In what follows I've tried to anticipate and address questions and objections:

"You can't live in your stocks" or "Renters throw money down the drain."

Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price-rent ratio of 19. House incidentals often cost around 2%.

If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)

Note that houses and shares have transaction costs, too. Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.

[Patler]

Bretsky,


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

......

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....

What you refer to as "lucky" is in fact just intelligent investing.

I have owned 5 houses. I have NEVER had a down payment of more than 5%. The original mortgage on each was 30 years. I have bought in all different markets, including once when mortgage interest rates were around 12-15%. When rates are high, few people buy, and it is often easy to find undervalued houses. As soon as interest rates decline, house values increase. That's what I did with my first house. I needed a 30 year mortgage to make the payments affordable, but I knew each year would be easier, and rates would have to come down. Rates declined, prices increased, I sold my house in just over two years for 80% more than what I paid for it. I had done some updating to it and a lot of cosmetic repairs that added to the investment cost, but it was still a great return.

While in graduate school I bought another, and stayed in it for a while after. A little over three years and I sold it for 50% more than I paid.

The key is to fall in love with an investment opportunity, not a particular house, if you are doing it for short term profit. Look at the dollars first and foremost.

[Bretsky]

Bretsky,


I do believe that EVERY homeowner should put down 20% on a home, and furthermore should carry NO GREATER than a 15 year FIXED rate loan.

Failure to do that ignores RISK and that risk will bite you in the ass when you least expect it. Timing has the "benefit" of making it appear that risk doesn't exist. When Bretsky bought his home, the market was strong, rates were low, at historic lows and headed downward. Those items OFFSET the risk, more luck than plan, and so buying without 20% worked out well for him. He beat the risk. It doesn't always work out that way.

......

Partial, I firmly believe if you don't have a 20% down payment, and cannot afford a 15 year fixed rate mortage - YOU CANNOT AFFORD THE HOUSE. It may appear that you can, but most likely you cannot. You might get lucky and buy in the right part of town, or in the right market, so that the risk doesn't hit you like a baseball in the forehead, but, if you've got my kind of luck....

What you refer to as "lucky" is in fact just intelligent investing.

I have owned 5 houses. I have NEVER had a down payment of more than 5%. The original mortgage on each was 30 years. I have bought in all different markets, including once when mortgage interest rates were around 12-15%. When rates are high, few people buy, and it is often easy to find undervalued houses. As soon as interest rates decline, house values increase. That's what I did with my first house. I needed a 30 year mortgage to make the payments affordable, but I knew each year would be easier, and rates would have to come down. Rates declined, prices increased, I sold my house in just over two years for 80% more than what I paid for it. I had done some updating to it and a lot of cosmetic repairs that added to the investment cost, but it was still a great return.

While in graduate school I bought another, and stayed in it for a while after. A little over three years and I sold it for 50% more than I paid.

The key is to fall in love with an investment opportunity, not a particular house, if you are doing it for short term profit. Look at the dollars first and foremost.

It's good that there are differentiating views in here.

There are different paths to get to where we want to be.

[Partial]

The message I take away from this discussion is to work harder in your 8-9 hour day than anyone else in the office does so you quickly climb the ladder and make the big bucks. Then, you can afford a home regardless!

[Bretsky]

The message I take away from this discussion is to work harder in your 8-9 hour day than anyone else in the office does so you quickly climb the ladder and make the big bucks. Then, you can afford a home regardless!

Among the best advice I've listened to was from Bruce Williams and Clark Howard, two all around brilliant people who host talk radio.

Every day, every hour, you make little decisions that lead to your future wealth, or lack of it.

It's not just about when to buy a house. Be conscious of fiscal matters with everything....buying a car/lawn mower/house/ what you spend for goodies and at restaurants/buying a round for the bar/ buying used or new goodies...etc

It's the daily decisions that will define you years down the road.

As far as this discussion goes, if you map out a path to take, and then execute the plan you will be better off that most. Sometimes the path gets changed or altered, but if you have one you will be further ahead than most out there.

[retailguy]

I agree with this Bretsky. The thing that gets missed here, is that it "sounds" so easy anyone can do it.

Patler chimed in about all the money and "flips" he's done in real estate. You talk about that too.

Yet no one warns what happens if things don't go well. No one "tells" those reading this "HOW" to do this "investing".

Quite honestly, luck plays a big part in the deal. Timing is CRUCIAL to making a real estate transaction successful.

But, the fact remains. If you put 20% down on a house, you are not likely to EVER lose that house in foreclosure. If you put down less money, the odds of having a crisis related to ownership of that property go up exponentially the less down payment you had.

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.

[Patler]

Patler chimed in about all the money and "flips" he's done in real estate. You talk about that too.

Really, just two flips, although they certainly weren't called that then. Both were houses that I knew I would not own long, so I looked for good deals. Investments. Houses that were very much underpriced. How did I know for sure they were underpriced? Because even the bank was willing to finance almost 100% of the purchase price, with insignificant cash from me. Of course 40 years ago we knew our bankers very well, and loan determinations were an individual thing among people who knew each other.

But, if you want to do that, DO NOT LOOK FOR AND FALL IN LOVE WITH A HOUSE! Look primarily at the financial deal associated with it. It's just like buying a stock. Don't fall in love with a particular stock. You must be dispassionate about it, and completely analytical.

[MJZiggy]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

[Patler]

But, the fact remains. If you put 20% down on a house, you are not likely to EVER lose that house in foreclosure. If you put down less money, the odds of having a crisis related to ownership of that property go up exponentially the less down payment you had.

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

[retailguy]

Hear this very clearly - THERE IS NOTHING IN THIS WORLD THAT YOU HAVE THAT I WANT IF I HAVE TO BORROW MONEY TO GET IT. NOTHING.

Wait 'til your car blows up (literally--thank goodness no one was hurt), you live a couple miles from a bus stop, you have to get to work, and the insurance company gives you crap for a claim settlement. You can only borrow Dad's car for so long before he gets a little testy about it.

I've heard this excuse a thousand times. Reality - a $100 car will get you to work. There are dozens of cars just outside the city limits on an old highway with a for sale sign in them.

You can "justify" any spending if you really want to do that.

[Bretsky]

I just spoke with a woman today. In her early 50's. Husband got sick, lost his job. They owe 115,000 on a 110,000 house, and their income got cut by 2/3rds... They HAD good credit. Their dream turned into a nightmare.... They WILL lose this house. He has no insurance, no job, no money and won't likely return to work. IF they had equity, at least they had something to sell. Now they have to beg the 2nd mortgage lender to let them short sale it....

It HAPPENS.


Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

[retailguy]

Whether or not a forclosure will happen isn't necessarily affected by how much equity you have in it. It becomes a cash flow problem. If you do not have the cash to make the mortgage payment for X months, the lienholder will foreclose. If the lady you mentioned and her husband have no income, it wouldn't matter if they only owed $50,000 on the house. If they don't make the payments thay will still lose the house eventually. The difference is that after the lienholder sells the property and recovers their costs, there MIGHT be something left for the original owner. Alternatively, the couple could make a quick sale themselves, to get out from under the mortgage, but they still would not have the house. Its lost either way.

What I did was as a young couple with my wife. If we made a mistake, we had time to recover. For us, buying the first two houses was not unlike starting a business. Both were undertakings to make money, and we really were careful in how we did it, even though it stretched us financially..

It strikes me that the people in your example have more problems than just the lack of equity in their house. Negative equity in their house, no insurance and apparently no savings of any sort, even though their best earning years may have passed. I'm not blaming them, because I have no idea what the causes may have been for the situation they are in, but they seemed to have piled risk upon risk upon risk. That is never wise, and it becomes less wise the closer you get to retirement.

I'm surprised the lender(s) didn't require mortgage payment insurance with the negative equity situation.

Yes it's a SERIES of bad decisions. If they only owed $50k they could sell PRIOR to the foreclosure, and pocket cash. Unfortunately, they "thought" they could pay their way out of debt with yet another loan. They never had "much" equity in the home, but they were not required to purchase disability insurance (another bad move).

Patler, I've experienced financial decisions on both sides of the fence. No one prepared me for the downside. Most of my clients would say the same.

I've handheld dozens of people through bankruptcy and losing everything. Not many have gone back into consumer debt, and most own a home now that is LESS than 25% of their take home pay.

There is a reason that the turtle usually wins the race.

[retailguy]

Maybe I'm dead wrong here, but I'd be surprised if that picture was ever perfect credit wise. Owing 115,000 on a 110,000 house goes against the common sense of a solid credit borrower. It sounds like bad decisions were already made. When they go over 100% they are probably going to a high risk broker with high rates and are already in trouble.

Banks will not loan over 100% at time of purchase; these warning signs could possibly have been seen before getting into the negative.

I've did over a couple hundred home purchase loans; two have went bad. Both due to mitigating personal circumstances beyond ability to pay.

Most first time homebuyers are doing 100% financing these days. I have not had one of those go bad in five ......knock on wood....years.

perfect? NO, but probably good enough for a loan from your bank. You wouldn't have done the second refi, but otherwise, you'd have been proud to have them as a client.

You have just emerged from one of the best 5 year track records for real estate in a long time. As I said before, you deal with the "cream of the crop" in terms of borrowers. If this market continues, you'll see a rise in your late pay rates, and an increase in foreclosure activity. Yours will never be very high though, for the credit risk reasons we've discussed.

New Century did go broke though, it's NOT a mirage. The secondary market does foreshadow to a small degree what happens in the rest of the industry.

Lets check back with this discussion in a year or two. We'll see what happens.