sub-prime mortgages



Thanks for the excellent response, Mark. As I said earlier, I am i neither the "investment" nor "non-investment" camp. I think it is likely an investment, but I'm still reserving judgement. Actually I meant to focus my comments on whether it was appropriate to include a home in one's net-worth/financial planning (regardless of its "investment status"). I think I did a poor job of conveying that. Life insurance cash values also face a similar dilema. Sure it's fun to count the asset because it boosts your net worth, but what good is it for planning purposes? Most of the financial planning methods/software/ etc I have encountered include neither your home nor life insurance cash values into retirement planning if the client does not _intend_ to utilize that reasource.

Agreed, the wine is an investment. Again, how useful is it to be included in net worth for financial planning purposes if I'm going to drink it? Perhaps the fact that I could sell it, even if I intend otherwise, gives sufficient reason to include it. Perhaps it does not. I'm still unsure.

I'm not sure buying is always the right answer for every person at every time either. I think we agree largely agree and I muddied the waters by switching between "investment status" and "usefulness in planning".
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kastnna wrote: I am i

Then do you not consider jewelry, gold, rare stamps, fine art, and vintage cars not an investment and not to count in net worth? It just makes sense to me that these assets are certainly a hedge against stocks and bonds and deserve their place as an investment.
Chip
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Not if the client does not intend to utilize that resource by eventually converting it into cash. If a client had $1M in personal property (wife's jewelry, gold coins, stamp collection, etc) and $1M in an IRA, it would not be prudent to plan on retiring into an $80k annual income unless that client expressly intends to convert those collectible *investments* into cash. I contend that conversion rarely happens. It is not common place for the wife to sell the family jewels when it comes time to retire. Nor do most people take all the artwork off the wall an head to the auction house. And I would be incredibly reluctant to part with my wines. [please forgive the crudeness of the example. SS payments were ignored as were pensions, age, expected return, inflation, etc.... I also used the questionable 4% rule. Regardless, none of those things should detract from the point].
Depending on the specifics, the "investements" mentioned above might or might not have a place in your asset allocation. How much of a hedge does your wife's jewlery really provide? Is that changed if she will only consider selling as an absolute last resort? How much is gained from factoring a $5000 stamp collection into a $5,000,000 asset allocation? Perhaps more importantly, does the gain justify the extensive work that would go into valuing, possibly selling, and calculating expected returns, standard deviations, and beta for such an obscure "investment"? Does the answer change if the stamp collection is worth $5M itself and you bought it because you felt the stamps were undervalued and plan on selling them to retire?
Just to be clear, this is not simply MY stance. It's the general consensus among the financial planning industry. It is common practice to inventory personal property, real property, and life insurance cash values. In particular they are important factors into estate planning and taxation. However, the majority (if not all) of the programs (software and otherwise) I have encountered specifically ask if those items are being "used to fund retirement goals". If the answer is negative, they are not included in the financial plan, but simply documented for bookkeeping purposes.
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On 2008-07-09 18:30:30 -0700, "Elizabeth Richardson"
look at a home as an "investment" because it gets people out of a spending mind-set into a savings mind-set. Although it can be classed as shelter you must have and use every day, the house nevertheless increases in value over the years and provides a slow build-up of equity and inflation-protection that renters do not have. Putting money into a mortgage payment every month is a lot better than wastefully spending it. A few folks might have the discipline to put the difference between rent and a mortgage payment into a mutual fund every month, but I would guess there are not very many. Anyway, investment in mutual funds probably carries somewhat more risk than does counting on the equity in your house to increase.
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Don wrote:

I don't think that a house provides inflation protection since they generally rise in value with inflation. From an economic standpoint, it may actually be better to spend the mortgage money on consumption. But having said that, I agree with you that a house may provide a useful psychological crutch to get folks to accumulate wealth when they might not otherwise do so.
-Will
william dot trice at ngc dot com
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It is some protection, because rent increases over the years, while mortgage payments do not. And monthy payments for rent never end, while mortgage payments do!
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What? Rising in value with inflation is the definition of inflation protection. Of course, homes also provide a "yield" equal to what it would to rent a similar living space, from which costs such as property taxes, home insurance, and maintenance must be deducted.
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On 2008-07-11 05:45:26 -0700, snipped-for-privacy@aol.com said:

I read an article in a newspaper by a responsible financial columnist (the name escapes me) who claimed there are only two circumstances where long-term renting makes more sense than long-term home ownership. The first is the case of a depressed economy in a town where a factory has closed down, house prices have dropped, and it looks like they will never recover. The second is simply when you can't afford it: If you don't have enough saved for a substantial down payment, then don't go for easy credit and just keep on renting until you have enough saved. If you have the cash and the economy is not totally dead, then home ownership is the way to go. That point of view makes good sense. We need to re-emphasize what has been known to financial planners and commonly taken to be the rule for a long time: A home is the best INVESTMENT you will ever make!
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Yes, but if you have zero net worth and can somehow qualify for a mortgage, buying a home is like buying a call option. If the home appreciates, you benefit, but if it depreciates and you turn in your keys, the lender eats the loss. That's the law in non-recourse states such as California, and it seems to be the reality in other states as well. There is also the possibility the government will bail you out, as Congress is now considering. I won't defend the morality of this approach to buying a home.
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On 2008-07-11 10:19:20 -0700, snipped-for-privacy@aol.com said:

That may be possible, but I would guess it is a very risky plan. If a person has zero net worth and pays the mortgage every month on time and house prices kept on appreciating, then that person will indeed build up equity and profit over the years. But a person with zero net worth could have some bad habits as to saving vs spending and may end up in trouble if the same habits continue. And then if he turns in the keys he is not likely to get another chance to invest in much of anything for years to come.
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Things have changed, from the standard deduction having risen somewhat disproportionately higher to home prices going higher. Unless one does much of one's own home maintenance, then the cost of upkeep, taxes, and insurance often mean renting is the better option. Columnist Paul Krugman of the NY Times recently added another twist: Job insecurities mean that one may have to move a few times during the course of one's work life. The transaction costs of buying and selling a home and having a house mortgage can eat into any financial advantage a home offers, too.
The only thing I expect when I purchase a home is a nicer quality of life than an apartment. I do not bet on its value going up or even holding.
People talk about rent being money thrown away. What one puts into one's home year after year to maintain the lawn, shrubbery, concrete, roof etc. is also money thrown away until the house finally is sold again.
We disagree about a home being the best investment a person can make. The best investment a person can make is to live within their means and save regularly. If this means no house, then they are still doing quite well.
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I can say the same thing about my stock and mutual fund investments (without the nicer quality of life). They have done OK and not actually declined in value over the years, but the house I live in has increased in value far, far more.

I certainly agree with that. But I wouldn't call that plan an investment. It is a matter of acquiring habits and discipline early on that make successful investment possible at a later time.
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Don't think that is a universal comparison. Here is the rate of return over the years on three houses I have owned
Year Price Current ROR S&P500Ret AvgInfl 1972 $40000 $151000 3.76% 7.19% 4.76% 1980 $103000 $404000 5.00% 9.19% 3.12% 1986 $142000 $241000 2.43% 8.41% 3.15%
Year = year I bought house Price = what I paid Current = Zestimate from Zillow.com ROR = rate of return from purchase year until now S&P500Ret = geometric average ROR of S&P 500 from purchase year until now AvgInfl = geometric average rate of inflation from purchase year until now
I'm not sure I have the information I would need to calculate the rate of return on my actual investments over the given time periods, so I have included the S&P500 as a proxy for that. I've also listed the average rate of inflation over the time periods.
You can see that the S&P500 was superior to all three of my houses over the time periods shown. Only one of my houses has a ROR exceeding the rate of inflation, whereas the S&P500 did surpass inflation over those time periods.
Dave
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Dave Dodson wrote:

Has there ever been rental income, or are all three of these houses simply personal residences that you occupy at different times of the year? Over those multiple decades, have you never invested in any improvements, or had any casualty/theft losses?
That third house, the one that didn't even come close to doubling in value over the last twenty-two years, that was a stinker, wasn't it?
-Mark Bole
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Re a 1986 house whose appreciation lagged (oh the horror!) inflation

Surely you are not sporting the recently fashionable attitude of those who expect much appreciation from their houses, are you? <wink> Stinker, come on. A house is more than an investment. In such real estate one dines, puts a bed, raises one's family, and grows trees. The stuff of a healthy life, hopefully.
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Elle wrote:

The way the data was presented, it looked to me like some or all of the properties were actually rentals, in which case I was going to point out that rental income (including tax breaks) was also part of the ROI calculation, much like dividends with stocks.
(Another subsequent reply indicates that they were actually owned serially, as primary residences, and none are owned now.)
Look, many understand that home ownership equals investment+shelter, and when unbundled, the investment component can be fairly compared to other investments.
Some also also find it mentally helpful to ignore the real estate investment that they live in when looking at net worth. In a way, this becomes a forced savings plan for them, providing discipline they would not otherwise be able to muster, because after all emptying a savings account is one thing, but "losing a house" carries quite a bit more stigma.
Which brings us back to the original topic: if there wasn't so much propaganda in favor of being a homeowner, probably many of those hapless no-documentation borrowers would have stepped back and wondered whether buying a home at *any* price was necessarily a wise move for their financial situation.
-Mark Bole
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If you own a valuable painting and hang it in your living room so you can enjoy it every day, that does not mean that it is no longer an investment. You would not ignore its value in calculating your net worth.
Whether or not investment in art is wise or foolish is a question that cannot be answered in general terms that apply to everybody. Some people do well in that type of investment and some do not. It would be a mistake to say: "Buy paintings only for the purpose of enjoying them; never consider them as investments." In the same way, some investors in real estate do well, and some do not. The fact that your home you live in every day is also a potentially valuable investment should be looked upon as an opportunity, not something to be dismissed and forgotten.
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Don wrote:

No, it shouldn't be dismissed, nor forgotten. As I remarked to Elizabeth, for some a house can be part of a planned downsize. But for many, when planning for the long term, it's tough to be sure you are going to either downsize or move to a less expensive area. Which sort of leads to the double book-keeping, net worth, and net worth sans-maison. I would suggest that when one is planning for income replacement at retirement and seeking to achieve the 20X pre-retirement income level (adjusted for SS of course), that they not plan on the home equity to help out, better that they retire with the 20X+house, than to miscalculate their long terms plans and have a rude awakening approaching the end game.
Joe www.blog.joetaxpayer.com
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Agreed. But I would insist that real-estate investment can be one route to that net worth sans-maison goal. Also equity in a home at the time of retirement makes other financial decisions go more smoothly. People who own big houses with a lot of equity and overall net worth don't generally sell the houses and begin renting when they retire; they move to smaller houses, condos, or retirement communities. I have one relative who, although sick and unable to get around much, continued living in her big house until she died. She used other money to hire caretakers, nurses, etc. and got along fine.
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Don wrote:

First, I can share a similar anecdote - my 80 yr old client. Husband passed a few years ago, and I knew the house was a burden between the taxes and upkeep. Not for cash, but for the ongoing things that needed to be tended to. She sold it for $500K, and moved to a retirement Condo, which has assisted living as part of the complex. Unit cost $350K.
This validates your approach, but I'd suggest that it's far tougher to plan this so far in advance. At 45, I can know my savings vs my current income, I even have a fuzzy idea of my projected SS benefits, but I can't say when my wife and I are likely to build the retirement house, and therefore have no idea what fraction of my home's current value to count as being 'freed up' to add to my numbers. I'll concede that this isn't impossible. For some, even in their 40's they may know just where they wish to move and knowing the relative cost of living between the two cities, they are good to plan X% of their old house as part of savings. (maybe those good planners wonder why I am so clueless on that long term goal for myself.)
Joe
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