Market Conditions: Chicago October Sales Down 39.5%; Median Price Continues to Fall
As expected given the preliminary numbers we’ve seen from many with access to the MLS, sales in Chicago in October fell off a cliff.
It was the lowest number in the last 4 years.
From the Illinois Association of Realtors:
October home sales were down 39.5 percent to 1,217 sales compared to 2,012 homes sold in October 2009.
The city of Chicago median price in October 2010 was $183,000, down 14.9 percent compared to $215,000 a year ago in October 2009. The year-to-date median sales price for the city of Chicago is down 7.3 percent to $208,500 from $225,000 in 2009.
The statistics for the last 4 years:
- October 2010: 1217 sales
- October 2009: 2012 sales (impacted by the first time homebuyers tax credit)
- October 2008: 1566 sales
- October 2007: 1959 sales
The Association, trying to spin these numbers, optimistically points out that sales are up 4.6% in the first 9 months of the year to 16,502 from 15,772 in 2009.
Will that hold in the final two months?
2009 saw a boost in November due to the end of the first time tax credit. We will not be seeing that this year.
“Tightened credit and an increase of distressed assets remain concerns for the city’s housing market,” said Mabel Guzman, president of the Chicago Association of REALTORS® and a REALTOR® with Envision Real Estate LLC, Chicago. “On a positive note, it appears as though the market is stabilizing, with only a 0.7 percent decrease in the October 2010 condo market’s average price over the same period in 2009, and nearly a quarter percent increase, respectively, in the city’s single family homes.”
Unemployment, which was 9.8% in Illinois in October, and foreclosures and delinquencies, both which have been increasing, will continue to impact the market.
“The Midwest continues to feature a housing market that is struggling to recover and the story in both Illinois and Chicago reflects the experience of the broader geographic region,” said Geoffrey J.D. Hewings, the Director of the Regional Economics Applications Laboratory at the University of Illinois. “The uncertainties generated by the foreclosure lawsuit processes may provide some temporary decrease in the number of foreclosed properties entering the market. However, this is likely to be short-lived; moreover, once the legal problems clear a backlog of discounted properties will enter the market.”
Illinois Median Price in October Holds Steady from September; Home Sales Activity Up Year-to-Date [Illinois Association of Realtors, Press Release, November 23, 2010]
The positive spin in the headline of their release was hysterical.
According to G’s data a while ago this was a 16 year low for home sales in Chicago. The YOY % decline is not going to get any better for a while because of the boost that the previous year had from that damn tax credit.
However, I am a bit mystified by something I see in the contract data. It’s not falling as dramatically as the actual closings and there is some evidence that a backlog of unclosed contracts is building. Perhaps short sales in waiting?
http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/2010/11/october-home-sales-chicago-real-estate-market-really-sucks.html
For all practical purposes, Bank of America is insolvent. It turns out that Countrywide (now part of BofA) never properly transferred the majority of their subprime mortgage documents to the Mortgage Backed Securities (MBS). So, in effect, all of these mortgages are still on BofA’s books. Read about it here:
http://www.nakedcapitalism.com/2010/11/countrywide-admits-to-not-conveying-notes-to-mortgage-securitization-trusts.html
“For all practical purposes, Bank of America is insolvent.”
Our government already bailed them out so for all practical purposes investors need not be concerned about taking haircuts on their BofA debt or equity securities unless our government stops bailing out the insolvent financial firms.
Remember here it is the taxpayers who take the losses not the investors. Privatized gains socialized losses is the mantra of western governments in dealing with this crisis.
Was not the median home price in the 290k range at the bubble’s peak–2006?
If you close your eyes and tap your heels together 3 times, you can forget for a moment or two that the double dip isn’t happening.
My current experience is that banks are even more ‘deer in the headlights’ than previously if you can believe it. As the market continues to fall they just cannot keep up with short sale contracts and fair market value. Aside from REO listers who I find to be amongst the the most careless and weak of real estate’s so-called professionals and some BPO agents, has anyone even heard of banks hiring knowledgeable real estate professionals to deal with their huge backlog of inventory? So presumably the same group of portfolio managers who mis-managed the bank’s exposure thus far are still in the driving seat?
Also I come back to the poor practice of listing way below market value without short sale approval thereby effectively holding a reserve auction where the owner is the very-slow-to-respond bank not the homeowner. The last thing this market needs is further impediments and yet that is what we are getting. You can nominate homeowners, banks and realtors for various parts of this I think.
In contrasting this market with the Tx market I came from I believe that lack of transparency and liquidity is a self-enforcing condition that will keep IL in its death spiral for some time.
I agree with clio to the extent I know at least 5 people who have good credit and 20% deposit to buy a place right now. All of these folks are being put off but the hugely opaque market situation and the desperately poor practices of the industry.
this is clearly the RE biggest story of the day. the chicago market has fallen off a cliff, more so than the rest of the country, and the freefall begins today.
“I agree with clio to the extent I know at least 5 people who have good credit and 20% deposit to buy a place right now. All of these folks are being put off but the hugely opaque market situation and the desperately poor practices of the industry.”
Why buy now? The past few years has been government spending putting up bumps on the roller coaster but its no longer there and we’ve just crested the second peak. Its going to be a wild ride down!
😀
the end is near! again!
only reason to buy now is prices & loans are cheap and you aren’t going anywhere. we’re refinancing from a 30 to a 15 just to take advantage of the rates.
with the rate decrease the monthly nut actually goes down a whisker, and we shave 8 years off the mortgage.
if we were the fiscally illiterate yoyos people on this site regularly condemn, we would have refinanced to a new 30, reduced our monthly payment some $600, and then blown that extra cash every month instead of reinvesting it.
I say this only to show that as bad as it is, there a few bright points for the fiscally conservative.
The only end that is near is the
End Of The Real Estate Bubble
RIP 1999 – 2010
End Of The Real Estate Bubble
RIP 1999 – 2010
LMFAO!..feel free to visit the grave and lay flowers (or mortgages).
Skeptic – I agree. I am now at a 3.125% 7-year ARM – my monthly nut is way cheaper than I can rent. I am hedging by paying an extra $1,000 a month toward principle. That added with the $8,000 from the home owners credit and the $6,000 from Redfin I feel pretty good. Even if I go to sell in 10 years and prices still haven’t recovered I still think I made the right decision.
Nobody ever said ” DOn’t buy” and there are plenty of good decisions to buy out there; however, a lot of the reasons NOT to buy are featured on this site. I’ve seen some pretty nice homes in my area sell in the $300,000, with 20% down, and taxes, it’s less than $2,000 a month which is what you pretty much have to pay to live in a larger house in my area. It’s just that there have only been a handful of them listed,ever, while everything else priced in that range is far far inferior.
“#B on November 23rd, 2010 at 4:00 pm
Skeptic – I agree. I am now at a 3.125% 7-year ARM – my monthly nut is way cheaper than I can rent. I am hedging by paying an extra $1,000 a month toward principle. That added with the $8,000 from the home owners credit and the $6,000 from Redfin I feel pretty good. Even if I go to sell in 10 years and prices still haven’t recovered I still think I made the right decision.”
“I am hedging by paying an extra $1,000 a month toward principle.”
Why are you wasting your money doing that? Why not put it into a dividend paying stock making 5%, 6% or 7% a year? In 5 to 7 years you’ll be way further ahead than sinking it into a non-appreciating asset when you have such a low interest rate anyway. The bank is giving you free money. Why aren’t you using it to actually make some money?
what stock is paying 6-7% (no seriously) which is not rated junk?
“what stock is paying 6-7% (no seriously) which is not rated junk?”
Plenty. CTL and MO to just name two. There are a bunch of others. You just have to look around.
Wow–Sabrina pushing Big MO. On CTL I’d never consider a telecom’s dividend on the same safety level as a tobacco. I like UVV better but it ain’t yielding 6%.
“The bank is giving you free money. Why aren’t you using it to actually make some money?”
You are assuming dividend streams are steady. Companies can and do often cut them as they’ve done lately. You can’t blindly say equities are better in this environment vs. a known 3% return. Also 3.125% isn’t free money, it’s 3%–that’s a pre-tax guaranteed yield of around 4%.
“Sabrina pushing Big MO. On CTL I’d never consider a telecom’s dividend on the same safety level as a tobacco. I like UVV better but it ain’t yielding 6%.”
He didn’t ask about safety. He said which companies pay that that aren’t junk? A bunch of them. And I never assumed the dividends were steady. Sure companies can cut them (and some do.) But there are a couple of dozen companies that have NEVER cut their dividend payments in 50 years. Why not check those out?
And yes- the money the banks are giving out is basically free. Why pay it off early? They are practically paying you to own the darn house. Make a better return somewhere else.
I have to agree with Sabrina. Never understood why people pay down mortgages early – especially in this environment. The government is paying you to borrow the money – shame on them – and interest rates are so low.
Over the past 30 years I’ve done way better in the market than the cost of any mortgage I could have had. There have been hiccups along the way but in the long run it’s been a nice ride – even the last few years. There are tons of closed end funds selling at discounts to NAV and paying nice dividends.
“Never understood why people pay down mortgages early – ”
In B’s case it makes perfect sense. He’s hedging his ARM going up in the future by pre-paying some principal now. When you look at it as much of the “extra” he is paying come from his savings on his low rate ARM vs. a higher rate fixed it makes sense (to me at least).
I, too, am trying to pay off all of my mortgages mainly because investments are a little shaky right now. I am not that confident in stock/bond/mutual fund market. At least if I pay off my house/investment properties, I know that I will be secure in the future. Speaking from someone who has lost 6 figures in the stock market over the past decade, I must warn people that it isn’t as easy as people think – (it is the same as people encouraging people in the mid 2000s to buy real estate because they could make so much money in it). Also, if you pay off/pay down your house, it doesn’t take all the time it would to research which stocks/bonds/funds in which to invest – that is REALLY time consuming. You also feel much better when you pay off a house- there is some psychological comfort -similar to paying off a car that you just can’t describe!!!
This is one point I disagree with all of you on. A mortgage is still debt. Debt does not equal wealth. Debt is still debt. Cheap money does not equal free money because it still has to be repaid. The same goes for student loans.
“You also feel much better when you pay off a house- there is some psychological comfort -similar to paying off a car that you just can’t describe!!!”
Wow…. I actually agree with Clio…… probably a first. No mortgage on my house, actually never had one. There is this psychological comfort here, which had allowed me to take greater investment risks. Additionally due to not having a mortgage/car payments my household cash flow allows for greater savings/investing while maintaining a lifestyle at my earnings level. I do have a line of credit on my home if for some reason I need to access cash. Also it should be noted that my home represents less that 15% of my networth so my situation is not typical. Now that being said if you are dumping all of your cash into you home to pay off the mortgage early, probably not good fundamental planning. IMHO the mortgage/no mortgage question has to be based on your situation not mine,sabrina or clios opinion.
“This is one point I disagree with all of you on. A mortgage is still debt. Debt does not equal wealth. Debt is still debt. Cheap money does not equal free money because it still has to be repaid. The same goes for student loans.”
HD…Debt does not equal wealth but debt creates wealth. Your comment is so narrowly focused, Sabrina’s comment was related to the highest and best use of capital….. Please HD take a economics course.
Hi everyone,
I’m soliciting opinions here. I have been a well qualified “sidelined buyer” for several years, and generally bearish on RE. But I’m close to pulling the trigger because I’ve found a very nice 2-3 BR SFH in short sale that seems to make sense. It’s pricing right around 2001-2002 levels, which was my target level to actively consider buying. With 20% down, the mortgage and taxes are a measly $1650 per month. The home really doesn’t need much work, and what it does needs is just light cosmetics.
As a contrarian, I love the fact that most people want to puke when they think about RE right now. All the negativity (mostly justified) makes me constructive on the investment. I’ve been waiting for the psychology to change for, oh, 10 years. And, here we are.
I’m not calling a bottom by buying, but I think we’re getting close to realistic prices via short sales and foreclosure deals.
My questions:
1) The home is 1 block east of the north end Horner Park (which I love), near Ravenswood Manor. But the area looks like it’s going to be short sale alley for the next 2 years. WHAT ARE YOUR OPINIONS ON THIS AREA? I’m not expecting economic miracles from the area, but I think it represents good value at 2001-2002 prices.
2) I don’t foresee needing to sell anytime soon. I can ride out the storm and would probably rent out it if I have a life change. Would a nice, clean SFH in this area cash flow as a rental given that my nut is $1650? I think it would, but I’m no expert.
Thanks for any opinions, and happy Turkey Day!
I’m torn on the mortgage issue, that is likely becausse it is situational. If I bought today I would likely pay it down slowly by making 2 pmts a month just to cut the amount of interest I’m paying. Once I have recovered savings to the point before I had to make the DP I would probably throw more $ after it. Not having a monthly mortgage payment could come in real handy when kids go off to college. I’d have the ability to either re-lever the house or use my income stream to pay tuition. I’d also have the freedom in retirement to move around easier – my parents and in-laws are stuck with mortgages on their suburb’mahals and can’t travel as much as they’d like with the cuts to pensions and all. I couldn’t imagine retiring with such a huge fixed monthly expense over my head but that’s something the 401(k) generation really needs to consider. Fixed income retirees are becoming few and far between. I can think of a ton of great reasons to not have a mortgage payment. (he says as he signs a new lease…)
valasko: You can’t borrow your way to prosperity. Debt is a tool and debt in and of itself is not wealth. If you’re leveraging your house as an investment you’ll eventually join the ranks of the rest of them.
TB: buy whenever you feel like you are ready, but prices will continue to decline.
HD – it is NOT true that prices will continue to decline in every area. Also, you really are taking a chance by waiting – prices are going to be steady and start increasing (at a very low rate) – but MORE importantly, rates (which make a HUGE difference) WILL ABSOLUTELY start going up in 2011-2012. Now is the time to start aggressively looking and, if you see something you like, jump on it. There is NO point in waiting.
HD, your views are so simplistic, if you don’t understand the point you will never achieve wealth beyond the average joe. I wish you luck, your going to need it. Maybe should try lottery tickets.
Keep drinking the kool-aid.
You remind of a mortgage broker I knew who was rehabbing a ‘million’ dollar home, but he couldn’t afford the payments on the ‘million’ dollar house so he got an option arm loan, and he kept saying in the thickest Chicago accent you can imagine, “yeah I know that my equity is being amortized on the back of the loan; but I figure if that I’ve got a mil and a quarter, i can amortize 5 grand a month, which is 60 grand a year; and after a year and a half that’s 90k, so 250-90k means I’ve still got at least 160k in equity; then I’ll refinance into another option arm and i’ll sell the house and use that money to rehab and even bigger house…”
The house is in foreclosure right now and due to all the contractor liens it’s been languishing in foreclosure for years.
I don’t have a simplistic view of debt, I have a realistic view of debt. Some people can handle a lot of it, but many others can’t.
It was the expansion of credit that got us here, and it’s the contraction of credit that is the cause of the great recession, just as in 1929, and in 1873, and all the way back.
I’m sure you can leverage yourself just fine and you can handle it all well. But 90% of the people I konw who’ve told me what you’ve just said, well, let’s just it was obvious to me they were playing a shell game with debt. I don’t know you and you sound just fine, no mortgage debt, or CC debt or car debt, etc. But 95% of people out there aren’t like you.
“#valasko on November 24th, 2010 at 10:01 am
HD, your views are so simplistic, if you don’t understand the point you will never achieve wealth beyond the average joe. I wish you luck, your going to need it. Maybe should try lottery tickets.”
“And yes- the money the banks are giving out is basically free. Why pay it off early? They are practically paying you to own the darn house. Make a better return somewhere else.
Sabrina, if you look at the actual numbers and differences, you will see that you are not going to make THAT much more money investing vs paying off your mortgage. For example, if you have 500k and decide to pay off your 4% mortgage, you are saving 20k in interest a year. If you take 500k and somehow find the elusive investment that pays 6%, you will make 30k/year. 20k will go for your mortgage interest (which you did not pay off) and 4.5-5k will go for capital gains tax – so your net gain will be POSSIBLY be 5k. More realistically, your investment will not bring you a steady 6% (ask any long term investor and they will tell you that if they found something that gave a guaranteed 6% return, they would invest all their money in it). So basically, your net gain will be less than 5k/year (on 500k) or about 1k/100k. In addition, you could actually lose money on investments and have a net loss – there are no guarantees. On the flip side, the peace of mind you would have paying off your mortgage is worth the potential 1k/100k you may gain investing. Also, there is no thought/research involved with paying off/down your mortgage.
Could we define “free money”? If you’re saying that the bank will give it to you and it never needs to be repaid, sure it’s free. I think most of us here are paying our debts so it really sounds like the loans are cheaper that they historically have been. I recently ran the financials on the mortgage deduction and for my little slice of life the standard deduction (which I still get by renting) is bigger (the double edged sword of low rates). So, I am having difficulty finding what this “free” money is.
Even though I originate mortgages, I think it is wise to get rid of your mortgage debt if you can. Not having a mortgage definitely provides a level of flexibility and peace of mind that I don’t think any amount of return in the market can measure.
If you are early in your life (20s – 30s), then a case can certainly be made for carrying a big ole mortgage, particularly given how low rates are these days. However, as you get older and more settled, getting rid of the mortgage to set yourself up for retirement is paramount imho.
Ironically, I tried to get a lot of folks to refi into 15 year loans with rates being so low that they could match or only pay slightly more than their current 30 year payment. Most won’t do it as they want the cash flow savings on a month to month so they rather reamortize a 30 year loan to save a couple hundred bucks in payments.
This isn’t rocket science, people. Some people (a very few–on this blog, I’m betting on Sabrina and Bob) have the discipline to not pay off a mortgage quickly and invest that money in other things that pay a higher rate of return. They will make more money in the long term.
But the vast majority of people (I am including myself in this category) do not. They are better off paying down their (hopefully modest) mortgage quickly (ideally in a 10 or 15 years) so they can have 1) a forced savings plan 2) the security and peace of mind that comes from knowing that one doesn’t have to worry or work to provide a roof over one’s head 3) a source of capital they can draw upon to pay for kid’s education, etc.
Let me conclude by saying the obvious: ‘the vast majority of people’ are not even that bright. They take on huge mortgages, leverage themselves to the hilt and are, in my opinion, going to have a pretty poor quality of life in their old age.
It’s probably better to just make an extra mortgage payment a year, so that you aren’t pre-paying too much of your extra cash flow. I would build up an emergency fund of at least 6 months of your actual expenses (could always cut back discretionary expenses due to a job loss which would stretch the emrgency fund another 3-4 months beyond the initial 6), and then start paying the equivalent of an additional mortgage payment each year.
HD, you don’t understand my point, and I am not drinking kool-aid. The above discussion was about hightest and best use of capital you do not understand the concept that was being discussed. No one was talking about taking on a mortgage they couldn’t afford- your like a broken record not understanding was is REALLY being discussed.
What is being discussed is taking your cash flow and investing it instead of repaying mortgage principal. Whereas some people here say it’s better to repay principal. Others like Dave M say do both.
What I’m saying is that debt is a tool that gets a lot of people in trouble and those who don’t appreciate its power usually get caught up in it. That’s not you, obviously, but, you said “HD…Debt does not equal wealth but debt creates wealth.” and everyday I see people who fell into that rathole. Including family members and friends.
HD, I understand you position and what you deal with on a daily basis. Most unfortunate circumstances, some took on too much debt others lost their job, I understand but this was not the discussion. We all view this through our own experiences, and I guess that my situation isn’t the norm. Let me try to explain the fundamentals of the discussion with a very simple example.
A person has 500k in the bank and wants to buy a 500k house, which option should he take.
Option A
500k house with no mortgage which equates to :
$0 mortgage Interest
$0 Investment Income
$0 Return on his 500k
Option B
500k house with a 500k mortgage at 5%
$25,000.00 mortgage interest
$50,000.00 Investment Income on 500k at 10%
$25,000.00 Return on his 500k
I know in reality it is more complicated than this and over time the percentages change but hopefully to get it.
“$50,000.00 Investment Income on 500k at 10%”
Bwahaha! Why not make the return 20%, or 100%?
Your entire argument falls apart on that 10% assumption, dude.
Also two other caveats on valasko’s scenarios: you have to pay tax along the way on those capital gains AND you get to deduct your mortgage interest. Additionally he does not take into account the Sharpe ratio, which is the return per unit of risk/volatility.
Dear Bobby,
my example was very simplistic trying to help HD understand the concept, as I had mentioned in my previous comment. If you wanted a real world example fine, take one of my long-term core holdings, Matthews China Fund 19.99% annualized return, if you invested that 500k 10 years ago it would now be worth $3 million. In terms of taxes if you max out your 401k and IRA and use these funds no yearly tax bill. As I said before bobby its more complicated than the example………
Valasko, that’s too textbook simple and doesn’t work in real life; primarily that it’s extremely difficult to find a safe high yielding investment that earns a higher rate of return than paying off the mortgage. Many junk bonds aren’t even paying 10%. Few subprime mortgagors were even paying 10% mortgages during the boom!
Sure, you can invest your money, but that’s risky (especially at a 10% ROI) and if you lose it…well, I’d rather invest money I could afford to lose, and if you’re investing money that could otherwise be used to repay debt, that’s not investing, that’s gambling.
In fact, I’m arguing a case Monday for a guy who took out a $100k HELOC against his home and used it as a downpayment on a new construction condo in the SLOOP. He thought he would just flip the condo, or get an option ARM loan and rent it out after it was built.
Guess what, Lehman & Bear imploded and those loans went bye-bye a few months before closing time. New construction contracts rarely have mortgage contingency clauses…especially high-rises. The developer refused to return the money.
This guy took a risk with money that could have otherwise been safe and secure as equity in his home. He lost it all AND he still has to repay the loan.
My case is a bit more nuanced with some pretty clear allegations of fraud against the developer but regardless, my guy is probably pretty screwed.
I understand that leverage can make you money; but it’s called ‘risk’ for a reason and in the end it all depends on what level of risk you want to take. No way in hell would I risk my equity in my home (or money that could become equity) ‘investing’ and I use that word loosely, seeking a higher rate of return.
I used to think that I could arbitrage my student loans…well, my student loans are at 2.45%; I can invest my $500 a month in a higher yielding vehicle…presto! Easy money!
Then I thought…how much am I really earning? I did math on a 5% return on $500 a month compounded over a couple of years and the difference was so minuscule; I’d much rather have a lower student loan balance than imaginary funny money in my investment account that could literally disappear overnight. Then I’d be out the money, and, I’d still have student loans to repay.
HD, look at the fund I mentioned above 19.99 annualized rate of return over the past ten years, my point is a simple one…. If you want to achieve any finical success in this world you need to take on risk.
Taking your pennies and putting them under a mattress isn’t going to do it.
Beleive it or not I am trying to help you out here……
“In terms of taxes if you max out your 401k and IRA and use these funds no yearly tax bill.”
1) 401k choices are very limited.
2) IRA contributions are limited to 5.5k/year.
“take one of my long-term core holdings, Matthews China Fund 19.99% annualized return”
What percentage of mutual funds have a 20% annualized return over 10 years, valasko? Infinitesimal (Yahoo finance only shows 42 funds with a 5yr return of 20%+, so fewer than those) The ONLY reason Sabrina’s argument had merit earlier is tobacco stocks are fairly safe and high yielding. Betting on China for the next 10 years isn’t safe at all, and yet you’re trying to say its smarter than pre-paying a mortgage with a guaranteed pre-tax yield of 4 – 6%? Puhleeze.
I’m confused. Do only fools buy now, or do only fools have mortgages?
Bob,
1. 401k choices are usally ver limited…. aggreed but when you change jobs you can roll them into IRA.
2. IRA contributions are limited to 5.5k/year. agreed but whats you point…..
“What percentage of mutual funds have a 20% annualized return over 10 years, valasko? Infinitesimal (Yahoo finance only shows 42 funds with a 5yr return of 20%+, so fewer than those)” again whats your point, if you do your research and get alittle lucky the returns are there…….. sorry bobby if you havn’t been as lucky as I…… btw how are those short positions from last year treating you.
This debate is futile arguing with young kids buried in debt and with limited job opportunities. That being said I fully understand why they take the position they have.
Also as I mentioned above I don’t have a mortgage on my house, never have. Additionally I have NEVER carried a balance on a credit card. Only paid cash for cars and have only bought used cars. The only debt I have or will take on is on investment/business related……
“btw how are those short positions from last year treating you.”
Stable–all the bleeding was last year. I’m going to let ’em ride as I don’t trust financial valuations.
OK, enough said on my end I have to catch a flight to NYC…. maybe I will hook up with Westloopelo. Everyone have a great Thanksgiving.
btw how are those short positions from last year treating you.”
Stable–all the bleeding was last year. I’m going to let ‘em ride as I don’t trust financial valuations.
Personally I think the market is over bought….. its going to be tough making money in 2011m and easy money was made last year. Holding at 55% cash now……
Don’t drink too much Natty this weekend bob, save some brain cell as they might come in handy latter.
“agreed but whats you point…..”
My point was he has an extra 12k/yr to invest. I don’t see how a Roth IRA is going to cover this amount.
“aggreed but when you change jobs you can roll them into IRA.”
True. Still you don’t have a lot of control over this account until you do actually change jobs.
And you seem to think the era of 20% annualized returns is the norm or possible. I beg to differ as only 42 mutual funds out of thousands matched this criteria.
I have reason to believe going forward even 10% returns will not be the expectation nor the norm unless we have a significant bout of inflation.
In a low inflation environment which we have today prepaying principal on a mortgage makes sense to me. If/when inflation changes the shrewd investor could always HELOC their house to the extent possible and invest that in higher yielding asset classes (assuming their mortgage was fixed).
“Don’t drink too much Natty this weekend bob, save some brain cell as they might come in handy latter.”
Actually my personal financial situation has experienced significant deflation as of the past year or so. I know someone who knows someone who gets very good deals on beers of higher quality than the ol’ Natty. Gonna ride that train to the last stop 😀
“This debate is futile arguing with young kids buried in debt and with limited job opportunities.”
Valasko, i understand what you are saying but I have been burned badly by investing money in stocks/bonds/funds. I would have been much better off paying down my mortgages. While it is true that some funds have HUGE yields, it is hard to predict which ones will do well and which will fail (retrospective view is always 20/20). I could use the example of real estate in the 2000s and say that everyone should invest in real estate because from 2000-2007 I made a 50% return on my money. This just isn’t true today.
The bottom line is that if you are mentally stressed and don’t have the time/energy skill to make good financial decisions in the stock/bond/fund markets, the BEST thing you could do is pay off/pay down your mortgage. While you may miss out on some profit (?1-3k/100,000) at the most, you will be mentally and temporally more stable and secure.
“I beg to differ as only 42 mutual funds out of thousands matched this criteria.”*
*At the five year mark. At the ten year mark I’d be surprised if it was even 5 funds.
Pretty good discussion here laying out the pros and cons of mortgage debt. A few rules of thumb that I have found helpful that I suspect (as others have pointed out here) are not typically followed and make fast mortgage paydown a good option for many:
1) Excess money not used to pay down a mortgage faster should not be spent but invested.
2) You need to spend a bit of time examining investment options. If you’re on Cribchatter 3 hours a day you don’t have time to find great investments 🙂
3) Invest for the long haul – 10+ years
4) Don’t try to time the market too much – stocks or real estate. This is actually a complex topic but with equities a periodic portfolio rebalancing is about all the market timing you need.
5) Be extremely diversified. I repeat. Extremely. That means 5 flavors of fixed income, every sector of the stock market, every country on the planet. Don’t concentrate your money in 10 individual stocks. If you can’t spread your money among 50 or more stocks stick with mutual funds (thought I’ve seen research that suggests 12 is enough I don’t buy it).
6) Every few points matter in the long run. That includes expense ratios and the difference between after tax mortgage interest and your investment return.
7) Max out every single tax free vehicle available to you – IRA, 401K. When you leave a company take control of the 401K money.
8) Live below your means
Legal disclaimer: please consult your own financial adviser.
“I have reason to believe going forward even 10% returns will not be the expectation nor the norm unless we have a significant bout of inflation”
For those younger investors or non-investors, don’t listen to people telling stories about 6%, 8%, 10%, 20% returns – they are the aberrations and you really have to be lucky (dumb luck) to come across one. Believe me, if any financial professional could guarantee even a 6% return for 10 years, I could get them over 30-40 million dollars tonight (not my money – but money from friends/colleagues). My point is that there is no such guarantee and any financial advisor could/would never be able to make such guarantees – but if someone wants to make this guaruantee (and back it up with proof), I WILL get you the money!!!
“While it is true that some funds have HUGE yields, it is hard to predict which ones will do well and which will fail (retrospective view is always 20/20).”
Clio its not so much about predicting it about understanding where the opportunities lie. Much of my work is in southeast asia, and I have many family members living there. The growth, job opportunities, and wealth creation in unbeleivable. If you talk to HD’s counterpart in China they have a completely different outlook on life and expectations of success. I fear that its over for the USA…
Good debate as always. 🙂
As far as why I am taking the extra money and paying down my mortgage: I budgeted X amount of dollars for my housing expenses in 2007. I saw the market tanking and waited to buy but I still had the X amount of money in my mind that I could spend on housing. I got a great deal and a great rate, so my actuals came in way under my budget (didn’t spend the ‘extra’ money on more house – once again stuck to the plan). I am not stretching to pay this, and I have other income I use to invest.
I could take that money, buy a bunch of PM, and even the sell calls against it to generate even more cash flow. Assuming I play it right I could generate 8%. But as others noted there is no sure way to make over 6%. There is not even a sure way to make over 2% today. If everyone could make an easy 6% mortgages would never go below that amount.
So I am sticking to my plan. Keep sending the housing budget to the house, and use my riskier investment money to invest. I have always done best in life by sticking to a plan that works. Everyone is different and has different thresholds for risk. It’s all about diversifying and hedging in my opinion – but that’s me. But I think everyone made a lot of great points. I just took a new job at an investment bank so maybe I will learn some tricks, I’ll be sure to sure them on this site. 🙂
“There is not even a sure way to make over 2% today. ”
There is for smaller players. Its just the duration of it that’s not guaranteed. Try reward checking accounts.
I just opened one up with Pelican State Credit Union. Up to 5% yield on up to 30k if you meet their requirements. I know those with a lot of moula this will be irrelevant to but for us small fries its definitely worth looking into.
Be creative when they ask you how you qualify for membership-. 😉
“I just opened one up with Pelican State Credit Union. Up to 5% yield on up to 30k if you meet their requirements. I know those with a lot of moula this will be irrelevant to but for us small fries its definitely worth looking into.”
These checking accounts really aren’t worth my time….. but good for you…… looking for opportunities NOW THATS WHAT I AM TALKING ABOUT.
“If you’re on Cribchatter 3 hours a day you don’t have time to find great investments”
It isn’t just about time. You could spend hours and hours a day researching, investigating investments and still do very poorly. The point I was making is that paying down/off your mortgage is a “known risk”. Investing in anything else is a complete “unknown risk”.
“I just opened one up with Pelican State Credit Union. Up to 5% yield on up to 30k if you meet their requirements.”
I don’t believe it for a second. Are you kidding?!! That is so unbelievable and outrageous – what is the catch? Either the money is not secure or there are some huge hidden fees. If not, then I would gladly invest multiples of 30k under several legal entities/names.
$60,000,000,000 worth of money went chasing a 10% yield, year in and year out, and it found a home…………with Bernie Madoff.
I’m not going to espouse my theory on investing or returns because 1) I’m not qualified to do so; and 2) no one really cares about prudence or what I have to say.
But regardless, Valasko, I’ve got an investment opportunity of lifetime for you…please send me $10,000 to my PO box in Nigeria to show me that you’re serious and then I’ll let you in on an opportunity to make millions.
“If not, then I would gladly invest multiples of 30k under several legal entities/names.”
Be my guest.
http://www.pelicanstatecu.com
“Meet these simple monthly requirements:
1. Receive electronic statements (e-Statements) and notifications
2. Receive payroll deduction or direct deposit
3. Access your account online at least once a month
4. Perform at least 15 debit card transactions per month”
Good luck getting your legal entities through the screening/membership process unless you stagger opening them over several months. And have fun with those debit transactions. Guess we’ll see you at Walgreens buying a lot of packs of gum with different PSCU cards? ;D
“I don’t believe it for a second. Are you kidding?!! That is so unbelievable and outrageous – what is the catch? Either the money is not secure or there are some huge hidden fees. If not, then I would gladly invest multiples of 30k under several legal entities/names.”
Clio, there are quite a few banks offering the 5% checking, but as bob mentioned there is no set duration (my guess is just a limited teaser rate).
They usually have a number of requirements that you need to meet, such as “x” number of online checks written per month. IMHO not worth the time or energy.
I love searching for higher yield for savings accounts as well. Went from ING in 2007 to HSBC, to SFGI Direct. Stayed in the accounts until the yields went down. Now the returns on cash are so low, that this Pelican account looks appealing.
If anything, you have to make measured bets to make larger returns. It is true that it’s tough to do this over the long run. You just have to hit a couple of home runs in a row, and you will be set for life.
“I’m not going to espouse my theory on investing or returns because 1) I’m not qualified to do so; and 2) no one really cares about prudence or what I have to say.”
Did you read my rant above….. I don’t have a mortgage, always pay off my credit card, only buy used cars. I am about a prudent as they come. I just understand the power of debt and investing.
But regardless, Valasko, I’ve got an investment opportunity of lifetime for you…please send me $10,000 to my PO box in Nigeria to show me that you’re serious and then I’ll let you in on an opportunity to make millions…
Sorry HD your late to the party, I get at least 3 invitations a day from a friednly Nigeria…… boy made a fortune with these guys…
invest now or be poor forever!
valasko, I thought you were catching a flight to NY for your big date w/ westloop.
“You just have to hit a couple of home runs in a row, and you will be set for life.”
Some did it in the past decade but timing the RE market was even harder than the equities bull market of the 90s as the government incentivized people to double up on RE via the tax code and the RE isn’t as liquid as equities. I think those home runs were far easier in the 1990s.
One tried & true strategy circa 2000 was to just short the new tech IPOs coming to market. So long as you could cover your margin calls when they went zooming the strategy invariable paid off when the market realized that companies without even a revenue model, much less profitability, likely weren’t worth the servers they were residing on.
valasko, I thought you were catching a flight to NY for your big date w/ westloop.
My flight is at 6:55, but I had a bunch of jobs to do before we leave (which I haven’t done) and my wife is going to kill me. Instead I am sitting here getting all worked up by HD’s commentary…. ughhhh.
Yes hoping to hook up with westie, ru jealous?
“Yes hoping to hook up with westie, ru jealous?”
Of course I am – after all, he is so experienced and has such rich and fabulous friends, who wouldn’t be jealous!!
Bob,
If it was that easy to make so much money, wouldn’t all the financial advisors be doing such? All of the finanical advisors/money people that I know (from my own experience as well as the experiences of my friends and partners – not sexual but business partners) are not rolling in cash (and these are managers that only take on million dollar plus clients) – this tells me that it is not that easy and is not a sure thing. I don’t know – the SAFEST thing to do is pay off your debt. It will make you more financially and mentally sound (also, stop listening to the stories about people making a killing in the markets – this is what got us into the real estate mess).
Yes hoping to hook up with westie, ru jealous?”
Of course I am – after all, he is so experienced and has such rich and fabulous friends, who wouldn’t be jealous!!
I REALLY hope he invites me over to his FABulous loft in Tribecca.
Off topic but did anyone catch that new home sales set a record low for the month of october?
“the SAFEST thing to do is pay off your debt.”
Done that. Now comes the savings routine for a few years to save up a downpayment and wait for the smoke to clear from all this RE wreckage. By my guess it should have bottomed by 2014 but that all depends on what our government does/keeps doing.
Here’s an interesting tidbit:
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/19/AR2010111901612.html?sid=ST2010111903594
Not sure that it applies to Illinois law but the whole idea of having the association *force* the foreclosure process seems intriguing.
“Off topic but did anyone catch that new home sales set a record low for the month of october?”
I saw it HD. Sales were down 8.1% from September and 28.5% from last October. The interesting thing is that last October’s sales were not even influenced by the tax credit because the first tax credit didn’t boost new home sales much (since you had to be both under contract AND close by November 30.) The tax credit only boosted the spring new home sales since you could close many months later.
It seems obvious to me that we are seeing a national double dip. It’s better in some areas and worse in others, obviously. But at this stage in a “normal” economic recovery, we should be building again and we’re not (for obvious reasons.)
I’m often surprised how few people know about reward checking accounts. A couple points for those (like several here, obviously) who don’t have much familiarity with them.
1) As Bob said, they’re not for huge sums of cash, since the best rates will usu cap out at ~25k, and always by 50k
2) Most are not teaser rates, and you can study the rate history with a little bit of research. They are, however, variable, and will drop when interest rates in general are going down.
3) Most that offer them are small banks and credit unions in need of deposits. All the usual disclaimers.
4) Other than attracting capital, the reason they can get away with the high rates are the fees they generate, plus the large percentage of depositors who end up not meeting the monthly requirements. If you do direct deposit and use your debit card regularly, it’s not hard and is a no-brainer investment for my money (need to look for one that refunds ATM fees though).
5) Rate-chasers w multiple accounts are often rejected when trying to open a new one; and it’s definitely a pain to try to keep up with the monthly requirements for multiple accounts in an attempt to skirt the max balances. For those with a lot of cash, it’s probably not worth it. OTOH, as Bob mentions, for someone with under 100k or so, very good option.
Some background reading:
http://www.nodebtplan.net/2010/10/07/dispelling-rewards-checking-account-myths/
There’s a very helpful site that compiles reward checking account info and account history (Deposit Accounts).
This has been your CC public service announcement for the Wed before Thanksgiving.
Happy Turkey Day, Chatterers. I’m thankful for Sabrina and the fun conversation this site generates!
“I don’t know – the SAFEST thing to do is pay off your debt.”
I didn’t mean to start a discussion about debt and paying off your house etc. All that “B” said was that he/she was taking $1000 extra a month and putting it into the principal. And to me, there are better places to park your money than pouring it into a depreciating asset which will return, basically, nothing over who knows how many years.
I’m not commenting on whether someone should be debt free when they retire or their kids go to college or anything else. That is a personal decision and is the right one for many people. And I’m not giving a scenario where you have $500k in cash and you buy the house outright or you buy stocks with it.
I’m talking about someone already paying their regular payment and who is deciding to put $1000 a month extra into the house. I think “B” said that he/she was already putting other money aside in investments/savings (in addition to the $1,000.) Great. Not as many people are so lucky to have that much free cash flow.
I think a lot of this discussion reflects the fact that we’ve been in a bear stock market for 10 years. No way anyone would NOT have been putting $1000 into stocks from 1990 to 2000. I think it’s interesting how people have soured on stocks but that is typical in bear markets.
Clearly, we are not yet in a bear market in housing or else everyone chattering here would not be obsessing about housing and telling people they should be buying now etc. etc.
For anyone stumbling upon this thread, you may need to be even more creative than before in establishing your place of residence or employment in getting the PBCU account mentioned by Bob above.
Difficult, but not impossible. Good luck!
“$60,000,000,000 worth of money went chasing a 10% yield, year in and year out, and it found a home…………with Bernie Madoff.”
It was only $60B (actually, somewhere b/t $65b and $73.1b) b/c of the phantom returns.
Total contributed capital was “only” about $20b. And something around half of that should be available for distribution.
Still incredible that Bernie and his family managed to spend ~$10b.