patrick.net

Same as all other assets.

Huh? This is is categorically false. People who own real assets (factory, real estates, farms) will do MUCH better than those who "own" cash.

People who are deeply in debt will be greatly awarded.

Cash is not necessarily king all the time.

FDIC insurance guarantess it will.

FDIC is a corporation. It can too go bankrupt.

Those with fixed mortgages will laugh in hyperinflation. Their money payments will equal the price of a hotdog.

And they will not have to face hyperinflating rent.

Then go out and buy some real estate and we’ll compare notes next spring.

1. There will be no hyperinflation
2. The real estate market will not crash yet by next spring (although we will see many angry homeowners beginning to panic)

Allah,

From the perspective of mental accounting, I agree with Schiff that you should not "count" home equity as savings if you are not planning to sell your house. He is right that your ability to reach this asset is subject to the whims of the market.

From a theoretical perspective, I suppose you could do some kind of NPV analysis of the present value of your house carrying costs vs. the present value of the future rent payments you will save by owning. This, I think, would yield a more accurate estimate of the value of your home. However, it is very hard to know what future rents, taxes, insurance and repair costs will be. Nevertheless, I think that for many recent buyers, such an analysis would reveal that the NPV of their house is negative even though they supposedly have equity in their homes since rents are still so low relative to home prices.

From the perspective of mental accounting, I agree with Schiff that you should not “count” home equity as savings if you are not planning to sell your house.

Then should a bank account be considered saving if you are planning to withdraw the money? Byt if you do plan to take money out, the account does not "always go up" in nominal value. :)

I think the line between equity and saving is quite blurry.

Those people, he says, would be better off paying down their principal. But like Franklin, he's not sure the new CMG mortgage is the best way to do it.

Gott says borrowers would need to make sure they don't jeopardize their federal tax deduction for mortgage interest with the new loan.

Huh?

It’s has already crashed!

We have seen nothing yet. Have you been through a real housing crash?

You better hope that it has not "crashed" yet. It is crashing though. :)

Inflation will be high, probably not 50% increase a month, but it will be high. At the same time, wage growth will be sluggish which means that when people have to pay more to buy food, they will have less to meet their monthly mortgage obligation.

In short, living standard will go down. This is a natural effect of globalization. However, having a fixed mortgage with interest rate priced at a low expectation of inflation is a very good thing with high inflation.

The only problem is falling real asset price.

Then should a bank account be considered saving if you are planning to withdraw the money? Byt if you do plan to take money out, the account does not “always go up” in nominal value.

I think the line between equity and saving is quite blurry.

Peter P,

I agree that it is a blurry line, but I think consumers should be conservative in calculating their net worth. Just as a company may value inventory on its books at the lesser of book value or market value (even though the inventory may ultimately sold for a much higher price), I think consumers should use the lower of book value (acquisition price) or market value (based on current comps/appraisals).

If Macy's buys 1000 units of perfume for $5,000, and the retail price of that perfume is $30,000, they do not assume that they will be able to sell all of the perfume at retail. They use their acquisition price to value the inventory.

Similarly, though the current comps may show that your house, which you bought for $300K, is now "worth" $500K, you should assume that you will be forced to sell it for the price you paid. (Unless you want to try to do the math to calculate the NPV, as I mentioned.)

It hasn’t hit bottom, but the market is crashed. No one is buying, sellers are still cutting, Inventories are rising fast.

eburbed will attest otherwise. People are still buying in the Bay Area, although the market is cooling fast.

I can tell you that my vision of crash has not materialized yet.

But it is in the bag. :)

Abstractions like "inflation," "deflation," and "hyperinflation" can cloud the picture.

What you should really be looking at is the expected rate of future housing appreciation vs. the cost of financing a house. If you expect housing appreciation to outpace your cost of funds, then you should buy. If, like me, you expect flat to negative nominal housing prices (and negative real housing prices), then you should not borrow money to buy a house right now.

It’s just unbelievable how people can take things to such extremes.

It is unbelievable what people can get themselve to believe. This is why we have asset bubbles.

And if you don’t believe my numbers give U-haul a call! I got the quote today (11/2).

Randy can show that such price difference does not necessarily imply the net flow of people.

This Mortgage Accelerator thing sounds great... but then i remembered this...

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."

I don't want Tony to call me a fool. :(

One thing: money matters only if the lack of it prevents you from serving your life purpose.

Ask yourself what your purpose is. Most people do not know. I do not have a clue.

eburbed will attest otherwise. People are still buying in the Bay Area, although the market is cooling fast.

People are still buying, people are still outbidding each other. Someone I know just bought and paid a couple tens of thousands over asking. (Though clearly the asking was low compared to comps.)

People are still buying, people are still outbidding each other.

Bay Area is full of engineer-types, who are usually devoid of financial sense. It is going to take a while.

Just as I stated many, many threads ago and Randy disagreed as usual.

I would be very careful in trying to argue with Randy though.

Bay Area is full of engineer-types, who are usually devoid of financial sense. It is going to take a while.

Heh, I'd imagine the "liberal-arts-types" would be devoid of financial sense.

So who's left then?

Allah v/s Randy is always an interesting debate ;-) In spite of the thankless job done by HARM as a translator there is still some communication gap.

I will add my own twist. I think the debate is about the term "savings". Buidling equity to me is not savings. It's "investment". The nominal value of the savings does not go down, but on investment, you can "potentially" loose everything. Presense or absence of inflation does not change this fact, it only changes the probability of this happening.

That does not mean one should not invest. Just that the risks are different. I think every mutual fund (including money market funds) take pain to express this - "you can loose your principal" thingy.

Re the CMG/CGM (the spelling alternates throughout the article ;)) accelerated mortgages, that lender has not operated in Australia to my knowledge, but many lenders were offering LOC mortgages in Oz for some years. My nominal g/f took a look at one of these about 3 years ago thru a MB and after some thought and possibly discussion with her cabal of mates, pointed out that it wasn't worth it, as the interest is higher (2% higher than ARM in the case of CMG). She's an auditor (and ex-tax auditor) so tends to find financial problems pretty quickly. LOCs seem to have been largely discredited every since as they were marketed unethically (surprise) and burnt a few people, I believe. Hence the 3 links pasted in from FIDO above -- to answer the thread question :)

They are [would be] a fantastic product IF you apply suitable discipline AND the interest rate is close enough to a regular mortgage.

except the former is a little unlikely and the latter is not the case :(

the whole thing about issuing a credit card on a LOC (or a CC at all) is to gouge people on interest at anywhere from 12-18%. the banks like to contribute to these pious news articles that say 1/3 of their CC customers pay off the full balance each month and never pay interest, but of course they're really hoping and praying ALL their customers will be in perpetual debt up to their necks at those rates, and rely heavily on those customers who don't pay them off, preferably for month after month...

ajh,

Thank you! That's the whole point. You don't have to make any "extra" payment! Most of us truly can't afford it. Banks work "the float" all day everyday, this is simply turning the tables. In that regard it really is nothing new.

Some have suggested, no insisted that a 15 year fixed AND making "extra" payments (I guess out of your trust fund) should more than negate any possible benefit of a mortgage accelerator. Fine. Do it. (This is if you live in Minot, North Dakota of course).

Folks, the problem is that you have effectively tied your own hands here. God forbid you get sick or one or both of you loses your job. Don't look for any brownie points from the lender if you fall behind on your payments. Imagine calling up and saying every year for the last 14 years I've signed my tax return, company bonus and bottle deposit returns over to you and and lived off of top ramen I have all this equity in my home! So I'm late 2 months after I lost both eyes in a tragic salt water taffy factory explosion!

Pffft. Guess what? Tough cookies pal.

Look, after everything that's transpired over the last several years I don't blame anyone for being skeptical. Even I am not 100% sold. There is much yet that needs to be determined. All I've ever said is that I bought way "pre-bubble" paid 130K, never missed a payment for 10 years and at the end of that time I owed 3K less than I originally borrowed. How's that grab ya?

And only a 155% increase in inventory! Let's face facts, FL is sliding into the ocean.

Allah,

Ric Edelman wrote about this scenario in his book, "The New Rules for Money" back in the 90's. Many people he said he was way out there. (In ways he is). In his example I believe he used employee A and employee B both working at the Caterpillar plant in IL.

One pours everything he can to pay down his mortgage and finds after the plant has mass lay-offs that what he thought was a "home equity loan" is actually a "job equity loan". Think about it, with no job, how are we going to pay back the loan?

reasonable points, DinOR -- the strongest selling point for LOCs seems to be that they are effectively an interest only loan with optional principal payments which are more 'forgiving' than standard P&I loans, which might benefit people whose incomes fluctuate heavily over time. but that seems to be their sole benefit over a regular mortgage, at least for regular people. the 2% interest premium means you may have to cough up, say, an extra $6,000 a year over a standard mortgage in interest payments, for a start. (for a $100K mortgage in detroit, on the other hand, you are looking at only $2k extra.)

people can consider this mortgage type if it suits their circumstances, but 1) it's complex, 2) it has been marketed as a kind of magic solution for everyone to pay their loan off quicker, but it seems the benefit is only minimal (or non-existent) when you take fees and interest into account.

regarding the caterpillar/taffy/car plant closing down, that's a risk everyone takes all the time when they take on a mortgage -- hence, the existence of mortgage insurance, income insurance, some emergency state benefits, and so on. the whole concept of mortgages has arisen from the understanding that people are willing to stay put and typically get a weekly paycheck which doesn't fluctuate much that they use to pay down the loan. when people relocate for employment reasons, they simply retire one mortgage and start another. plant closures and local recessions etc unfortunately add some spice into the mixture a la detroit. who ever said we weren't wage slaves with the mortgage as the substitute slavedriver?

(+ what happened to employee B? you didn't finish the story...)

p.s. you can also use a LOC loan as a substitute for a personal or small business loan at lower rates (but higher rates than a standard mortgage).

(how do these differ from a HELOC, by the way? aren't we really talking about using a HELOC as a 1st mortgage here?)

DS,

Basically it's the opposite of the tortoise and the hare? Employee B socks away tax refunds and "little wills" into a mutual fund and has all the options in the world after the plant closes. Including going back to school to learn something besides putting torque on lug nuts. Oh, and he was able to take vacations.

Where accelerator products are concerned I suppose it boils down to how much do you hate being a debt slave. Me no likey.

SFWoman,

Oh sure, and some folks do. The reason that most of us don't is b/c we fear the minute we do, the transmission on our car will fall out. The difference is in the financial architecture. A trad. mort. is a closed ended financial arrangement. Just b/c you chipped in an extra $100 or $1,000 doesn't reduce your "fixed" obligation the next month.

Most accelerator products have more flexibility. Again I realize the tutorials I offered earlier are overly simplified but they can and do work.

Where accelerator products are concerned I suppose it boils down to how much do you hate being a debt slave. Me no likey.

i don't think they necessarily will reduce your repayment time or amount, when you crunch the numbers at 2% higher interest -- that seems to be the trap. they will offer you flexibility, but you are only shaving a tiny bit off total repayments with the direct deposit of wages idea. as per my earlier post, the online calculator being used in Oz used a deliberately flawed comparison by making the interest rates equal, and ASIC made 100 lenders take the calculator engine down.

Ok, there are 52.18 weeks in a year, but it is assumed that you make a "monthly" mortgage, i.e., every 4 weeks. Ok just for fucking giggles what is four times 12? Oh, that's right, it's 48. Mortgage accelerator? Selling someone air. Oh, what's the matter fucked borrowers’ get a prepayment penalty loan? You pay ½ your monthly nut each biweekly paycheck and walla an extra payment off the principal. Shit I should get Wernher fucking von Braun on this one because one needs a fucking rocket Scientist to understand it. Are the greater unwashed really that fucking vapid that they don’t get this scam?

Jason, GO THE FUCK BACK TO OREGON! I kid I kid, welcome to the blog ;)

DS,

It's been my experience that most calulators available on line ARE flawed. I've yet to see a mortgage calculator account for far flung financial theories like uh..... taxes and insurance?

I can't say that I'm disappointed with the response this topic has received but to my knowledge today is the first many here had ever even heard of any type of accelerator program. All of a sudden every one is dog piling on this concept in an ugly way tugging at the first loose thread they can find. Someone mentions a new type of loan, one that might actually benefit the borrower and b/c it's "new" we've already concluded that it's just another way to shake down the consumer.

O.K. You win. Let's all go back to waiting for the other shoe to drop on the correction and sign up for the "30 to Life" program. I can't wait.

Surfer X,

That right, that figures. As soon as the rain starts the guy high tails it south! Need any help packing Jason?

X, as I mentioned earlier I tried to do a bi-weekly program in the early 90's. The technology just wasn't ther to support it. They withdrew money way before the dates there were supposed to and made a real mess of things. At the end of the day it amounted to ONE extra payment a year knocking off only about 6 years? There was no charge, then again there was no service.

I've always been obsessed w/ the notion of not having a mortgage payment and I've been willing to explore as many "dark alleys" as it took to find a program that permits and actually encourages just that.

no, the only reason i reject them is that my g/f looked at one several years ago (since they have been in Oz for some time) and worked out the catches, partly from listening to the grapevine. plus there were some media stories here about how some people ended up much worse off than on a regular mortgage as they'd been caught out by the spin, and ended up having LONGER to pay on their mortgages. finally, the ASIC (= SEC) website and its watchdog website FIDO also points out that the calculator actually cheats, as it does not include the extra 2% premium that the loan has over regular mortgages, which negates your saving -- that graph of the exponential curve collapsing in 15 years is actually a cheat. this was also included on the media expose. all in all, you may end up no better off with a more complex mortgage product, and may even be worse off. you may have to completely read between the lines on this one. according to FIDO, tho, you will only make a marginal gain with the daily interest calculation and putting all your salary into that bucket, cos of the higher interest offsetting the savings. IF the interest rate was the same as an ARM, and there were no extra fees, it would be a different story. i think surfer actually got it exactly and in the fewest words. am i wrong or am i wrong?

SFWoman Says:

> Does U-Haul have to pay people to drive back
> to exodus cities? It seems that no matter how
> well you were able to coordinate rentals a net
> outflow is an outflow.

U-Haul (and other rental firms) try and avoid paying people to drive empty trucks and trailers to exodus cities, but every now and then they have to.

The first time U-Haul had to pay people to drive empty U-Hauls “to” CA was in the early 90’s and it made the front page of the WSJ (since WWII U-Haul had been paying people to drive empty U-Hauls “from” CA).

I just had a déjà vu moment since it was not long after I read the WSJ article with the dot picture of a (white) family leaving S. Cal that the investment RE market really started to tank…

DinOR Says:

> Where accelerator products are concerned I
> suppose it boils down to how much do you
> hate being a debt slave. Me no likey.

Paying down a mortgage is a bad idea for most people since:

1. You don’t have to try real hard to beat the after tax savings you get from paying down a home loan.

2. If you need cash down the road you can liquidate investments, but may not be able to pull out home equity after paying a loan down (especially if you need the money because you lost your job).

I am no fan of debt, but I wouldn’t pay off a home loan until I had plenty of cash and investments giving me enough to live on without working (like my parents did when they finally paid off their home loan)…

Okay - so if you had followed my link to the UK loan - it has a calculator that would tell you how much you would save and also how many years it would take to pay off the loan and it tells you what fixed rate loan you would have to get in order to save the same amount! Mind you they don't have the government giving favorable treatment to mortgage interest over there.

The whole point of these loans is that you can draw on them if need be - as opposed to traditional loans.

I believe that the ones here might need a little time to mature though and may never offer such a good deal as some of the UK ones.