Entries Tagged 'Mortgage' ↓

Recently my mom was trying to convince me to buy a house again, and once again I had to tell her that San Mateo is ridiculously expensive and renting costs one half or one third of a mortgage.  I have said this about 10000 times already.  Yes, the median price has dropped over $100k, but it still costs around $640 per square foot in my zipcode.  So I said that investing my savings in the stock market is better at this point, and to this she retorted, “You think it’s easy to make money on the stock market?  There has been no returns on the SP500 for the last 10 years while real estate doubled and tripled!”

Superficially, my mom is right.  According to Vanguard’s SP500 index fund, the returns for the last 10 years is 2.85%, and that doesn’t even beat inflation.  In the same time period real estate prices did double and triple at least in California.  However, this doesn’t mean that the SP500 gave no returns during any of those years.  If you look at Vanguard’s fund record, the return for the last 5 years is more than 7%, and that handily beats inflation.  Most people I know who invest in the SP500 do so through 401ks and IRAs and contribute money as time goes on. So even if the money they put in 10 years ago did not earn money, the money they put in during the lowest years of the market would be earning quite a bit.  The only situation where someone would be earning 2.8% on all their money is if they put in all their money 10 years ago and left it there and that is hardly the case with most investors.

Additionally, investors in stocks are not restricted to buying stocks in the SP500.  In the last ten years international stocks in South America, Europe, Asia, and Oceania have been performing quite well. Investors could have bought REITs which get their dividends from real estate and participated in the real estate boom. The possibilities are endless.  Even in the current down market, it is possible to make money in the stock market.

Ultimately, hindsight is 20/20, and I think my mom is wrong in saying that stocks are the lesser investment because she is cherry picking a decade where real estate appreciated abnormally. Don’t get me wrong, I think it is possible to make money in real estate, too, but worshiping one asset class as the ultimate holy grail is a bit short sighted.  I like stocks for their liquidity and hassle-free nature.  For example, I never have to mow the lawn of my mutual funds or fix their roofs.  If I can get enough return from my funds to come out ahead, then I am happy.  Basically, I still believe that having a diversified portfolio of low cost funds is the way to build wealth.  Eventually I will buy a house, but I will probably be paying cash and the amount of cash I spend won’t exceed 25% of my portfolio.  I would do it this way so I don’t overload my portfolio with real estate.

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Lately, one news story that has been really getting on my nerves is that of Laura Richardson, the Southern California congresswoman who defaulted on three separate homes repeatedly and most likely used her influence to take back a home that has already been sold. The investor that bought her home has filed a lawsuit against the congresswoman and Washington Mutual for illegally rescinding a proper sale. I hope the buyer James York wins because there was no possible way that the congresswoman didn’t know about the sale. She didn’t pay her mortgage for more than six months!! What did she think was supposed to happen? After the congresswoman’s mortgage troubles were publicized, more information came to light that she has a history of being a deadbeat and owed property taxes and many other debts. She took money out of her three homes to finance her campaigns, and made only a few payments on her Sacramento home. If debtors’ prisons were still in operation, this woman would be sitting in jail right now eating gruel . Instead, she is being treated to a fundraising party in her honor to help her with her debts. One thing that made me laugh and cry at the same time was that in this AP article she said “she is like any other American suffering in the mortgage crisis and wants to testify to Congress about her experience as lawmakers craft a foreclosure-prevention bill.” Right, she is just like any other American that buys three homes, pulls money out, stops paying the mortgage and property taxes, and then denies that she knew anything about an oncoming foreclosure. That is really believable and poignant!

Apparently, Laura Richardson is not the only representative with mortgage woes. A less publicized case is of state Senator Julia Boseman of North Carolina. She and her ex-partner Melissa Jarrell haven’t paid mortgage on their $1.3 million dollar mansion since August 1, 2007. In order to clean her own hands, Boseman has taken herself off the home’s deed without her ex-partner’s knowledge. The house is set to be auctioned, and I hope Boseman doesn’t use her political clout to take the house back like Laura Richardson did.

Finally, we have the bizarre story of Shirley Huntley, a state Senator from New York. She stopped paying her mortgage intentionally as an “experiment” to see if she gets proper notification from her bank. After four months of not paying her mortgage and facing foreclosure, she paid up everything plus legal fees to avoid foreclosure. According to the article, her “original mortgage in 1976 was $28,500. Three decades later, she owes $290,000 due to repeated borrowing against her home”. So did she really conduct an experiment or did she just try to cover up some financial trouble? Either way, at least this woman owned up to her debt and paid it off. The alarming thing is that she used her home as an ATM so that her initial debt ballooned to more than 10 times of its original size.

With representatives like these, I guess I understand why the housing bailout is so popular. Congressional rules do not prevent representatives from voting on issues that help themselves financially because it is hard to avoid, but is supporting financial irresponsibility really wise? Anyway, all members of Congress and the Senate are required to report their personal finances and you can see the reports at Open Secrets. I encourage all of you to take a look at your local politicians and see how responsible they are with their own money, because I believe a person really needs to get his or her own affairs in order before making laws that affect millions of other people.

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Lately my mom has been telling me that several friends of hers are snapping up real estate in the East Bay because prices have fallen anywhere from 20% to 70%. She argues that if I ever see a property that has a mortgage lower than my rent I should just buy it. Well, San Mateo County hasn’t really fallen to the extent that any mortgage is cheaper than a comparable rent yet. The average price per square foot in my zipcode is currently $571. We live in a place that’s about 1040 square foot and pay $1700 a month. So the purchase price for a comparable property would be $592.8k and it still doesn’t make sense to buy since I am 99% positive prices are still going down right now. Financially, it’s more beneficial to us to invest all the money we are saving rather than being tied to a $3000+ mortgage.

Financial considerations aside, I don’t think we’re very enthusiastic to be homeowners because of the maintenance it would involve. I read a pretty funny article on Salon.com recently about a long time renter that turned into a homeowner. His conclusion was, “What the hell was I thinking?” He didn’t have the money to fix all the problems his home had and he didn’t have the skills to do it himself. While I am a renter I could just ask my landlord to repair the leaky pipes or replace the broken stove. Sure, I am paying rent, but I consider it to be outsourcing home maintenance to my landlord. The simple fact that renting is actually cheaper than the mortgage and property taxes makes the arrangement a sweeter deal for me.

Another ridiculous argument people have thrown in my face as why owning is better is that, “it’s better for the children.” I have no idea why this is remotely true. As long as children have a safe and loving place to call home, it doesn’t matter if their parents rent or own. I would actually argue that a home ripped apart by the financial stress of an unaffordable mortgage is a much worse place for a child to grow up than a family that happily rents without financial trouble. So before anyone tells me that I have to raise my kids in a place I own ever again, consider that I can rent in an excellent school district for less than 13% of our salary. On the flipside to own the same property in those school districts we would have to carry double or triple that cost. The money we save by renting could be used for tutors or a college fund for our kids. Renting gives us flexibility to live wherever we want, and that freedom is extremely valuable.

The hubby and I are pretty sure we won’t stay in our present condo forever, but I don’t know if homeownership is ever going to be right for us. I think I will only considering owning when it is cheaper than renting and we decide to stay in one area for more than ten years. If that never happens, then we just might rent forever. For me, I feel much more secure in managing a gigantic portfolio rather than a gigantic house. Currently my portfolio already generates enough income to cover approximately half of my rent, and to tie a lot of these perfectly sound liquid investments up in a house seems rather stupid at this point.

Anyway, here ends yet another one of my rants against the overrated ideal of homeownership. I think what frustrates me and several other of my friends is that our Asian parents are unhealthily obsessed with real estate and our parents want us to become indentured servants to the banks as soon as possible. I probably have enough material for that to fill up another ten blog posts, but I shall stop here. Finally I shall say that homeownership is not proof of adulthood or financial security. The ability to logically analyze your means and make responsible choices is better than succumbing to the pressures of society and doing something you regret later.

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A few weeks ago I stumbled upon a site named Angry Renter through a Google ad. I rarely click on Adsense ads, but this one intrigued me. The site presents a petition for renters to sign in hopes of stopping a housing bailout. I perused the site a little bit and figured that online petitions never really work, but I left a comment anyway and moved on.

Interestingly enough, this weekend I read an “expose” by the Wall Street Journal about Angry Renter. The gist of the article is that Angry Renter is a fake grass roots campaign run by a non-profit organization called FreedomWorks.org ran by a bunch of fat cats including Steve Forbes. They also listed the expensive properties the leaders of the organization owns. They also quoted the president of FreedomWorks.org saying “I’m an angry homeowner who pays his mortgage”.

I found it funny that the Wall Street Journal needed to write this article because it shows that maybe Angry Renter is really pissing someone off. So what if Angry Renter is run by homeowners? Homeowners pay income taxes also, and I don’t think any sensible person wants their money to be used to prop up bubblicious housing prices so that their children cannot afford a reasonable home. I also don’t think anyone wants to contribute their hard earned money to banks that scoop in billions of dollars a year by being legal loan sharks. Though the site is biased, some of the statements on Angry Renter are true. For example, renters do not get tax rebates for renting, and for all intents and purposes, renting serves the same basic need as buying a home. Why is there such a clear discrimination? Renters do wield less political power because they own less money as a whole compared to the banks and homeowners. So what is the problem with one little non-profit group with rich donors wanting to give renters a voice?  Additionally, it is also true that most homeowners are responsible and didn’t buy into the housing bubble so that they don’t need a bailout.  So why should all of us suffer for the folly of a few?

I am just surprised that all of this is happening in America, a place that prides itself on freedom, democracy, and free market.  Why should people have the freedom to be stupid and irresponsible, but not be encouraged to manage their money wisely?  A general housing bailout seems to send the message that saving money for a downpayment and renting is stupid because as long as you bought a house the government will protect you.  Why don’t they apply bailouts to obsessive gamblers that were “tricked” by the casinos, or stock speculators that lost their shirts during the dot com bubble?  Why is the housing bubble so special?  The answer is simply that the banks want their money back from people who can’t pay, and they are disguising their greed and grapple for survival as a humanitarian mission to “save the troubled homeowners”.  Give me a break because I don’t want to pay for mortgages that I did not sign for.

So the bottom line is, I don’t think you need to be a renter right now to be angry about the impending giant housing bailout. Currently, the House has passed a $300 billion bill for housing aid which President Bush and the White House is threatening to veto. Unfortunately, old George only has a few months left in office and as long as the Democrats stay in power this housing bailout will probably go on regardless of how many signatures people collect.  Anyway, I hope more bailout bills never go through, but that is probably just wishful thinking.  Meanwhile, I will be a patient and maybe slightly angry renter.

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I have decided to do the update of San Mateo homes every 4 weeks, and the last update is pretty interesting. In 4 weeks there were 126 unique properties totaling 142 listings that are listing less than their last sale price. This is an increase of 50% from the last report in January. Here are some highlights.

Total Count of San Mateo Home Sellers in Trouble for 1/14/2008 to 2/10/2008: 126

Average Time from Last Sale Date: 1.87 Years

Average Annualized Loss: 14.1%

Average Absolute Percentage Loss: 24.8%

Average Size of Home: 1224

Average Price Per Square Foot: $444.42

Biggest Loser: 649 Hurlingame Ave in Redwood City with an annualized loss of 77%

A notable home is this mansion in Hillsbourough, which sold for 7.9 million dollars in 2001, but is now listing for 6.95 million. I guess we are rolling back to 2001? It is a beautiful property from the looks of the pictures. This is the most expensive listing I have found to date.

In the spreadsheet you will see that over 1/4 of the properties have listing prices that are over 25% less than their last sale price. The worst example is a home that is listing for 47.5% less than its last price. It seems that the Goldman Sach’s prediction of Californian homes losing 40% of their value is coming true one house at a time.

I expect that the next report will be even worse as more people try to list their homes for the spring selling season. They will be competing with so many banks and other desperate home sellers who already have their homes on the market. There is quite a bit of news that many homedebtors are just mailing their keys back to their lenders, and that may be a prudent thing to do if it costs even more to carry the home and try to sell it.

Until next time, enjoy!

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