You're probably right...
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How we think about money
- Thread starter GFB
- Start date
The days of becoming a millionaire by crippling yourself with real-estate debt are largely over. Unless you started as a multi-millionaire. While living in an economy where the taxpayer subsidizes your first house purchase, and a pre-programmed 'target' annual inflation chips away at your debt was usually enough to keep you in the black, the future isn't so certain.
I don't disagree with your point here. My point is no one is loaning money without the "cost" (interest) of the amount being built in somewhere. Otherwise, gun dealers would be offering zero percent financing on expensive firearms in order to boost sales. Lowes, Home Depot, Costco, etc., shop models exclusive to their channel of trade to make actual price comparisons nearly impossible between chains.
The cost of the "interest free" is not absorbed by the shareholders. It is paid by the customers, cash or credit. If it works for your type of financial discipline, take advantage of it!
well....you can be a victim if you choose the "I can't do it" idea, or you can just get to it.....it's an equal playing field....sure, the millionaires child will have a bigger house at the end, however, typically a millionaires child will also have a bigger apatite as well....just do for yourself, let the millionaires child do for them selves
"I can't do it" is conditional on a couple of factors that many young people are in no control of nowadays. One of these is property prices themselves and another is interest rates. If a buyer RIGHT NOW stretches himself and buys at the limit of his budget, he's in for a world of hurt when real estate values fall. Starting out with a large, underwater mortgage on a property with little homeowner equity is no joke. It's a trap that takes decades to dig yourself out of.
The average starting salary in Georgia is a shade over $50,000 a year. Let's assume a motivated young individual has been working a few years and is on $60,000 and has a reasonable credit score.
Now go out and find that home he's going to get, with a budget of 3X his salary, and figure out what his monthly mortgage payments will be. No matter how motivated that person is, he's going to have a tougher time than back when I was in my early 20's and on my grind, and probably the same is true for you.
so, I suppose they should just rent, and never even think about buying a house.....it only seems tougher today....I'm sure, when I bought my first house, my dad was say'n what the hell....you gotta start somewhere, or you are going to end up no where....you think property values are going to collapse....well....just maybe they are not....AND if they do, they just do...you pay your way through that... just like 2009......I'm just not sold on the "we're all going to hell" theory....I think that home ownership is the key to success
I guess I'll have to concede that you're just not looking at the US economy the way that I am. I have no special insight as an economist, but I can see that people are having to make ends meet in a country where everything costs more than it did last year, but they're typically not being paid any more. That makes it hard for people to make a start in property ownership, and it's getting harder every day. For people on average wages for a 20-30 year old, it may even be impossible, no matter what your dad might want to tell them about starting somewhere and "sucking it up"
The secondary issue that is more speculative is that at some point there will be a significant market correction. These have happened in the past, and I think it's quite likely they'll happen in the future. These times pose a PARTICULAR threat to people who overbought/overpaid (and in the current RE market in Georgia, lots of people have overpaid recently) stretching their buying power to the limit with little or no equity in the property they just bought. IF they get caught in that trap, they'll own a property that is worth 80% or less of what they paid for it, in an economy where they're paying maybe 5 or 6%. If they were particularly aggressive, they will have bought on an ARM, where in afew years they will really get to experience some pain when the interest rate adjusts. To add additional pain, they really can't sell that house at a loss, because they're underwater on the property and they'll have to liquidate their mortgage and pay the difference with savings they don't have, because they sunk it all in the biggest house they could afford, because that was your cunning advice.
The world is a very different place than it was when your father developed his wisdom. It's very different at the moment to the way it was as recently as the early 2000's. Treating residential real estate as a "can't lose" investment nowadays - as a young person - is considerably more risky, and considerably harder to participate in. Sure, if your mortgage is about half of the current valuation of your property, you'll be fine. You can afford to ride out economic storms. But recent buyers with far less (if any) equity in their homes - are in a precarious position.
How do we know this? Because of interest rates.
In a normal, functioning economy that the politicians aren't manipulating, high interest rates are an indicator of higher risk of default and higher desire for profit by the lenders to offset that risk.
O.K....we can debate this all night...there are points to both sides....my first mortgage was with Decatur Federal, at 8.75%...1977...no indication of a market ready to collapse....the only collapse we have had witnessed to in recent times is 2009....I'm just not sure that gives us "experience"...AND values recovered....I don't have all the answers, however if you wait for the right time, it will never appear.....
Current interest rates, other than an inverted short end of the yield curve, are actually much closer to historical rates and where the rates should be to avoid valuation bubbles.
It's not the risk of default or desire for profit, simply time value of money and expected inflation. Credit spreads are fairly tight.
The problem now is not that the rates are high, but how much and how quickly they went up. Especially since a large share of outstanding assets was priced at ultra low rates.
That's why bringing up past double digit and high single digit mortgage rates is irrelevant.
You had an 8.75% mortgage for a house priced for people getting an 8.75% mortgage.
Now, price that house assuming 4%, since most shop on a payment, and recalculate the mortgage at 8.75%.
Simple example assuming no downpayment and full financing:
You buy a $100k house. 30yr 8.75% mortgage means a monthly payment of $786. Same payment at 4% means you can now pay $165k for the same house. And that's what people did.
Rates go back to 8.75% while the price doesn't change, now the same house requires a $1,300 payment.
Raise your hand if you see a problem with this.
well....you are simply not going to see home values fall that much....new home construction cannot follow, so how do you account for that...a simple item in the valuation process is the principal of substitution....(sorry, I'm actually a real estate appraiser over 30 years)I've heard/read all the stuff you pontificate, facts are that mortgage rates will probably not even get in the the upper 5% range anytime soon, if at all....so...we have a new normal.....high home values and interest rates possibly falling into the 5's....at best....in maybe 2 years...a 3% mortgage is a dodo bird....gone...meanwhile the yutes are to just sit on the side lines.... really doesn't matter if you raise you hand, or not
oh another thing to consider is that the rates were artificially low, due to interference...they should have NEVER have been that low, which made home values rise steeply....I do not expect a home value decrease to follow, as the interest rates remain higher....once again, back to the principal of substitution....the infrastructure costs for new home construction is getting close to 25% of the cost.....way out of line....cities, counties, permitting have found a new cash cow, and they are loving it!!! If the price of new construction cannot decrease the price of a used home will not either....done with this thread it's tiresome....
oh another thing to consider is that the rates were artificially low, due to interference...they should have NEVER have been that low, which made home values rise steeply....I do not expect a home value decrease to follow, as the interest rates remain higher....once again, back to the principal of substitution....the infrastructure costs for new home construction is getting close to 25% of the cost.....way out of line....cities, counties, permitting have found a new cash cow, and they are loving it!!! If the price of new construction cannot decrease the price of a used home will not either....done with this thread it's tiresome....
