Sunday, September 16, 2012

QE3, Housing and Me


I just read the article, Behind the Fed’s New Round of Stimulus: Will It Help Housing. Plus, I have been thinking about buying a house for half a year, maybe longer. I read tweets trying to get people to buy a house. Often I read this stuff I get frustrated. People don’t get it!

For example, in the article by the Dutsche Bank analyst (being an analysis for a major bank indicates 1%er) “The level of mortgage rates isn’t the problem - it’s restrictive credit overlays. For example, we have been doing a rent vs. buy analysis for many years and the relative attractiveness of owning has been at historic highs for several years already.” Wow, where to start...

Rent vs. buy analysis, this makes me skeptical. First of all, I am sure they included the cost of maintenance of your home, which is covered in the rent, but can add up to significant sums of money. However, any 30 year prediction about the US is ridiculous if it assumes a constant growth rate or even an entirely positive varying growth rate, for anything not just housing prices. The 2008 crash showed us that prices can go down, way down. Sure that probably won’t happen in this decade, but what about 20 years from now? Second, Most people don’t have the luxury of selling their house when the market is good. They sell when they have to move for work or some other major life event. In other words, you could lose thousands on a house simply for selling it at an inconvenient time of year or during a couple bad economic quarters. Third, renting happens in cool places. Near downtowns, colleges, urban areas, restaurants, and the like. Buying happens in suburbia. A maze of the same mediocrely built developments far enough away from everything you have to drive to everything. 

Next, restrictive credit overlays, I’m not entirely sure what this means, but I think it means the only people left to buy are people with bad credit. Yours truly. I was 30-60 days late on a loan payment once two years ago, that I didn’t even know about. I have upwards of $32k in student loans, and I funded 2010‘s unemployment on credit cards which I am still paying off. With tens of thousands of dollars in debt, you want me to buy a house and put myself probably over $100k in debt? Why? So that I can pay more every month in interest? I’m not arguing with the author at all on this point, I’m totally agreeing, but I’m pointing out that those people with restrictive credit include fully employed engineers with a couple of degrees in the second quintile of household income. Really, I am a risk? In other words, I can’t get a good job without an education, but I can’t get a good education without significant debt, and you want me to buy a house on top of that? I suppose that I am more upset at the importance our culture places on credit score than on your ability to pay. For example, is it better to have a $200k mortgage and credit score of 825 or no credit score and $200k in the bank?

Another thing mentioned earlier in the article is that every half point that the mortgage rate goes down really just encourages people to refinance. Which keeps the banks busy. So they have no incentive to further lower interest rates. If I could lock in a 30 year mortgage at 2.X% or better, that would be more motivation to buy. Under 2% would be better. But before we get there most of my coworkers will refinance twice. There is also the mortgage tax deduction, but the problem is I oppose most tax loop holes, especially loop holes that reward people for additional consumption. So I would hope that in my lifetime we do away with a mortgage tax deduction.

Historic, that is such a loaded word. How long have we been measuring rent versus buy? 1950? Since the post WWII housing boom? Well, yeah then it’s a no brainer that it’s a great time to buy versus rent. But, and this is a big one, we have a very aging population that built houses for large families, and we don’t have the people to fill the rooms. In other words, the 4-5 bedroom 2-3 bathroom 2-3 car garage that typify most of what is out there is totally inappropriate for a huge portion of the population today. I don’t need four bedrooms! Sure I could rent out rooms, but I could also take that money that I would use on a downpayment and pay down my loans or invest in the stock market. What about all the single mothers with one or two kids? Do they need four bedrooms? If we go back in time we see that houses were smaller, and I feel, hope, that we are headed in that direction. I like large houses, but from an energy standpoint they take way too much. Too much to build, too much to heat and cool and light. For example, 90% of the waking activity that takes place in my parents house happens in a 15x20ft area with the kitchen, table, television, couches, and computers. Most of the activity occupies only 15% of the house. Why do we need an additional living room?

What I are trying to say is, if I had tens of thousands of dollars saved, and little or no debt, yeah I would buy a house and maybe rent out some rooms. However, when I have far more in debt than I do in assets simply because I paid for an education and I went through the year of unemployment, you would be mistaken to think I’m going to willfully triple down on debt with the ease that I bought a carbon fiber road bicycle. 

This all gets me fired up because I’m the guy people are looking for to spur the economy through consumption, but I’m doing what the 1% does and focusing on wealth creation and preservation and not consuming. For example, last I heard Bill Gates bought $560 million of John Deere stock when it was close to $60. Assuming he owns 9 million shares at a quarterly dividend of $0.46 per share he’s making over $16 million on the dividend alone per year. I spend close to 2300 hours there a year and make far less than 1% of what he does due to John Deere. He spends almost no time on John Deere and makes more than 100 times what I do from John Deere.  Between loans, rent, food,  insurance, taxes, and everything else I spend most of my paycheck every month. He on the other hand is taxed at 15% on dividends and since I know he has other investments does probably not need any of his John Deere income to buy groceries at Hy-Vee or pay for gas or FICA. In other words, at the end of the year he is left with roughly 85% of that $16 million but I am left with what, maybe 30-40% of the less than 1% that he made. And you want me to buy a house? Why don’t you get Bill to build a few thousand?

2 comments:

  1. Now you understand why you should NOT vote for any Republicans!

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    Replies
    1. Any is a strong word, but I certainly agree that many of the systems in this country are not friendly to low income or low wealth people.

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