Archive for March, 2006

Date: March 28th, 2006, Filed under Uncategorized

I was reviewing some reports the past few days, and went back and re-read one that was interesting to me: Bank rate’s analysis of the mortgage market on March 23, 2006. I had read this article two or three times, but it wasn’t until last night that I saw a quiet little line that passed me by the previous reads through.

“Half of the mortgages out there are three years old or less.”

Half of the mortgages on homes are 3 years old or less. When an average mortgage is 30 years, and with homes being built for added demand, I can understand that newer mortgages might occupy a higher percentage of overall mortgages than the 10% of the years that they signify. I’d guess that figure might fall somewhere between 10% and 20%, but 50% is a really scary figure. 50% means half of all home owners own almost none of their homes, other than the downpayment. The first few years of your mortgage is mostly interest, in fact it is a significant portion of the interest you’ll be paying on the life of your loan.

I extended this information out in my head, and realized that when people move and upgrade, they’re usually upgrading to a bigger home with a new 30 year mortgage. This means re-starting the interest payments again, barely adding to equity. Real equity comes from paying off the principal — the equity gains we’ve seen in recent years has been directly created mostly from government devaluing the dollar by creating more of them.

As the available cash for mortgages falls due to increasing interest rates, there is a possibility that many of these 1-3 year old loans will end up being upside down. 1 in 10 home loans are already upside-down, and the percentage of interest-only loans has hit 50% in some areas, meaning no real equity is being built. Even worse, we’re seeing a significant percentage of zero-percent down payment loans versus normal 10-20% down payment loans, meaning that some households may not have any equity at all.

When the Federal Reserve devalues the dollar as it has for almost every week in the past 9 decades, the rising value of your home is not equity: even though your home is worth more dollars, those dollars are worth less in the market. If your home goes up 10% in a year in dollar value, consumer goods have to go up less than 10% for that equity to be real.

The overall market will be greatly affected by added interest rate increases, but this will affect more than just homeowners. Some cities are experiencing over 40% of job growth in the housing market, and a market crunch could bring those same towns an even bigger decrease as the jobs are lost. How many businesses opened up in those towns around the new income provided from these jobs? How many schools and government taxing bodies grew based on these jobs and this income?

The cost of government inflation is much greater than you might think — it causes many artificial booms that always end up with greater busts — and the reason the average consumer allows it is because they have something of value that keeps going up in value versus the dollar, but they don’t realize that the value going up is only temporary. The minute that the new dollars aren’t available in the market, people quickly realize that their items won’t keep going up and tend to sell off to try to hedge against a bubble burst.

Just as the dotcom bubble made millionaires of stock brokers and banks but destroyed the savings of millions of middle class Americans, the housing bubble will leave the same victims behind. Don’t thank your banker and your mortgage broker for the great deal they got you if your future value is based on speculation and hope. The job you have to pay for that big mortgage might not be there if the job’s income came from the people building the homes, the same people who won’t be building if the cash isn’t available to build more. Even if you’re not directly earning a living from the new cash, the economy is very fragile and has many connections to other industries — an interest rate hike or two can create a terrible, but much needed, correction in bringing money back to where it was supposed to go.

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Date: March 27th, 2006, Filed under Uncategorized

I’ve always been a fan of the 15-year mortgage: we tend to work from 21 to 65 (44 years) and I feel that paying off your home in that first third is very important to building real wealth. The problem with most 15-year mortgages is that you usually can’t buy the house you (or your significant other) really wants. We want to live like our neighbors, who also can’t afford the house they’re living in.

When I help give people advice on building wealth from the get-go, I always tell them to buy the smallest place they need — at least 1 bedroom per pair of people in the home in the home (2 bedrooms is perfect for a 4-person family), and 1 bathroom per 4 people in the home. This means the average family can do find with a 2 bedroom 1 bathroom home. Home many people do you see buying these tiny slivers of home?

Most people I know picked up a 30-year mortgage, but this idea is a fallacy. Almost everyone I know refinanced, and rather than keeping the same payoff date, they extended the loan another 30 years. I believe most people are on the 37-year mortgage: paying for their home for almost their entire worklife.

Around the corner (and even available now) is the idiot mortgage: the loan that you pay for longer than you work. We assume we’ll be provided for on the earnings of the next generation (that’s the Social Security game), so we over-extend ourselves paying 31% of our gross income to own a home, usually for our entire lives. We assume that home prices will always go up, and that wages will too, so we risk our futures by living beyond our means today. My fear is that everyone has these same assumptions, so they’re all buying beyond their true means — causing the prices to escalate due to reduced supply.

What are these idiot mortgages? These are loans that started with the interest-only loan: the idea that you’d pay interest for the first few years, with the hope that you’ll earn more money in the future so you can make a larger payment. I knew that the idiot mortgages wouldn’t stop there, though, because the Fed needs to continue extending more and more credit as it prints more and more money. The banks needed new ways to take advantage of the relatively cheap and easy cash they could get access to.

The idiot mortgages are all over the news, if you’re looking for them. I believe if you’re searching for the news, you’re probably in a situation that makes you think you require this bad idea just to make ends meet. You’re willing to give up the best years of your retirement to continue working, just to pay for the decades of errors where you didn’t build wealth but debt.

The Lexington Herald-Leader has the opening article today on these idiot mortgages: More lenders now offer 40-year mortgages. If you get a 40-year mortgage, your payment on a $150,000 mortgage will be $30 less a month, for 10 years longer. If you consider that most homeowners find a way to refinance, the 40-year mortgage could well end up being a 47-year mortgage after a refinance: 3 years longer than your tyical worklife. The article offers some even worse new: There is also some talk among lenders, who are always looking for new mortgage products, about creating a 50-year home loan. There’s a loan for people who want to own nothing 100% ever.

A few weeks ago the Charlotte Observer ran an article on the same idea: 50-year mortgages a hot topic. The real winning quote in this article comes from John Marcell, President of the California Association of Mortgage Brokers: “It’s a good idea for consumers. There’s nothing wrong with a 50- or 60-year mortgage.” We’re seeing 40-year mortgages available now, and people are pondering the 50-year mortgage. This guy goes beyond fact into fiction with the idea of a 60-year mortage. Buy at 25 and pay till you’re 85.

The idiocy is not just occuring in the wildly inflated US market, it seems to even have hit other friendly nations: Canada and the UK.

Instead of buying a cheap first home and paying it off in 15 years, people are buying their retirement homes right off the bat. This leaves a lot of unused space — before the kids are born — as well as unused space after the kids leave. Sure, most people won’t sit in their home 60 years (the average is 7 years that someone keeps a hope), but it also means that appreciation better happen while you’re paying mostly-interest in those 7 years, or you’ll end up significantly upside down.

The first 50-year loan was myth until Friday, when Statewide Bancorp released the first 50-year mortgage. This new loan allows consumers to qualify for more home and borrow over a longer period of time to keep payments manageable. There’s the first, with the hammer about to drop for everyone else interested in working the rest of their lives for a shell that hides their real fears with temporary beauty.

Not that long ago the amortization period of the average mortgage was 25 years. The move to 30 years came due to more people being unable to buy homes due to the easy credit and money that the Federal Reserve created (in the process destroying the American Dream). 30 years is a long time — but people don’t live in homes their entire lives as their parents had. Instead of trying to live the best way possible — in steps and with careful savings — we buy more than we can ever afford.

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