Do you consider your mortgage "debt"

[bizaro86]

Originally Posted by photon

Are you further ahead though?

Lots of people make good money but still rent; the money they save renting vs. owning they invest.

While this is a good theory, it doesn't work as well in practice due to a natural lack of self discipline. Paying the mortgage (including the principal payments) is a top priority because if you don't the bank takes your house (==debt). Those principal payments are forced savings.

But renting and investing the difference doesn't work that way. Sure, the rent gets paid (eviction still has you homeless if you don't pay your rent) but the savings part can become discretionary. (I need that vacation/new car/designer clothes/designer coffee, etc).

So 30 years later the renter hasn't saved as much as the "forced savings" of the homeowner, because they took a few months off here and there.

[photon]

Originally Posted by chemgear

I'm still finding it academically interesting how the last two years has shown the worst in terms of actual sales numbers/demand for housing in more than a decade - even with interest rates at essentially rock bottom (lowest ever?) levels. Heck, the population growth/number of homes versus 10+ years ago is pretty neat to think of in that comparison as well.

Why do you find it interesting, seems pretty straight forward to me, am I missing something?

[chemgear]

Originally Posted by photon

Why do you find it interesting, seems pretty straight forward to me, am I missing something?

Maybe I'm mistaken, but I would have thought really cheap borrowing costs would spur better demand than "normal" historical levels.

Compounding that, I would also assume that there would be more transactions and demand given the growth of the city over the last 10+ years; everything being equal of course. The city has grown what? 20-30% over that period?

[bizaro86]

Originally Posted by chemgear

Maybe I'm mistaken, but I would have thought really cheap borrowing costs would spur better demand than "normal" historical levels.

Compounding that, I would also assume that there would be more transactions and demand given the growth of the city over the last 10+ years; everything being equal of course. The city has grown what? 20-30% over that period?

A big factor in real estate is people's expectations. If everyone thinks house prices are going to keep going up like crazy, they'll buy as much real estate as they can, and it becomes a self-fulfilling prophecy.

On the other hand, if people have just experienced a crash (locally and by analogy in the US) they're less likely to feel a sense of urgency about buying property. This allows for a more measured market, which is probably a good thing.

Interest rate expectations also matter. If you can afford a house at current rates, but expect them to rise (as has been widely predicted by gov't and banks in the media) you would reasonably base your decision making process on the higher rates.

[Red]

Originally Posted by Slava

What are you getting at here? I haven't seen anyone suggest that you shouldn't pay your mortgage off...

That’s the trend these days. Commercials galore on why you should use your house equity work for you by investing.

Stuff like this encourages borrowing.

Forums like this one have people out right telling people they are missing out by paying off their debts.

Tons of stuff like this out there. Sorry, did not intend to make this personal.

[photon]

Originally Posted by chemgear

Maybe I'm mistaken, but I would have thought really cheap borrowing costs would spur better demand than "normal" historical levels.

All things being equal yes, as bizaro86 says borrowing costs aren't the only factor.

That we're still recovering from a recession is a big factor.

Originally Posted by chemgear

Compounding that, I would also assume that there would be more transactions and demand given the growth of the city over the last 10+ years; everything being equal of course. The city has grown what? 20-30% over that period?

That growth is what pushed the increase in prices.

[photon]

Originally Posted by Red

That’s the trend these days. Commercials galore on why you should use your house equity work for you by investing.

If people do that they still have to pay off their mortgage; they're just paying it and re-borrowing the money.

(Unless it's against increased value I guess)

[Tinordi]

A big factor in real estate is people's expectations.

That's a big factor in economics. Period.

[photon]

Originally Posted by bizaro86

While this is a good theory, it doesn't work as well in practice due to a natural lack of self discipline. Paying the mortgage (including the principal payments) is a top priority because if you don't the bank takes your house (==debt). Those principal payments are forced savings.

It's not forced savings though, because your house isn't a savings plan. You can't just withdraw money from your house, to access that money you have to sell, and then you'll be left homeless, or renting which will eat up the money you "saved".

Paying the mortgage is good (especially by retirement) because it increases your cashflow so you can either live the lifestyle you desire more easily, or make your retirement savings go much further without having to pay a mortgage.

But just because some people lack self discipline doesn't mean everyone does. Like every other decision in life, it has to be made in context; people who can't abide uncertainty get fixed rate mortgages and contracts for their utilities.. people who don't have the discipline to keep to a budget will enforce their plans by not using HELoCs or setting mandatory higher payments or something

Which is all fine, but you can't say something doesn't work in practice just because some people can't do it.

Originally Posted by bizaro86

But renting and investing the difference doesn't work that way. Sure, the rent gets paid (eviction still has you homeless if you don't pay your rent) but the savings part can become discretionary. (I need that vacation/new car/designer clothes/designer coffee, etc).

I'll let the people that I know who do this know their plans aren't working because they'll spend the money rather than investing it

[troutman]

Originally Posted by photon

It's not forced savings though, because your house isn't a savings plan. You can't just withdraw money from your house, to access that money you have to sell, and then you'll be left homeless, or renting which will eat up the money you "saved".

It only works as savings if you sell and take your equity out of the market, to another market where you get much more bang for your buck. Ex. Arizona or Belize

[Slava]

Originally Posted by Red

That’s the trend these days. Commercials galore on why you should use your house equity work for you by investing.

Stuff like this encourages borrowing.

Forums like this one have people out right telling people they are missing out by paying off their debts.

Tons of stuff like this out there. Sorry, did not intend to make this personal.

Its not personal at all, so no worries. I just think that money invested and then used to pay the house off gets you to pay that home off that much faster (usually about 3-4 years sooner, and with no more money put out than what you would otherwise do).

As with everything though you have some people who take these otherwise useful and reasonable strategies to excess, and then they become potentially devastating financially.

[photon]

Originally Posted by troutman

It only works as savings if you sell and take your equity out of the market, to another market where you get much more bang for your buck. Ex. Arizona or Belize

True, or a change of size, like a house to a small condo I guess.

[THE SCUD]

I was thinking of following this thread's trend and making a thread entitled:

" Do you consider suicide 'dying' ? "

[bizaro86]

Originally Posted by fotze

I think the paying off debt vs investing thing that made me lean to the debt side, was that paying off debt has zero percent risk. 100% chance of what you are doing with that money is going to what you want. All investments have significant risk. I'm not sure if the average person knows the math either. If you plop $20k on your mortgage, every morgage payment from that point on, you are saving i.e $150 that goes to principle and not the interest.

Couple that and my RRSP's and safe investments never making me any money anyway, it made it a pretty easy decision.

Paying off debt compounds at exactly the after tax rate of the interest rate on the debt. Unless you're confident you can compound money at a higher after tax rate than that, paying off debt is the right choice.

I happen to believe I can compound money at a higher after tax rate than my mortgage, but that's not necessarily the right decision for everyone.

[keratosis]

Till it's paid.
Then it's collateral.

[chemgear]

Originally Posted by THE SCUD

I was thinking of following this thread's trend and making a thread entitled:

" Do you consider suicide 'dying' ? "

The "good sort" of dying, or the "bad sort" of dying?

/cringe

[jonesy]

Originally Posted by fotze

I think the paying off debt vs investing thing that made me lean to the debt side, was that paying off debt has zero percent risk. 100% chance of what you are doing with that money is going to what you want. All investments have significant risk. I'm not sure if the average person knows the math either. If you plop $20k on your mortgage, every morgage payment from that point on, you are saving i.e $150 that goes to principle and not the interest.

Couple that and my RRSP's and safe investments never making me any money anyway, it made it a pretty easy decision.

you're such a chicken

[Travis Munroe]

aside from a few non contributing comments I actually found this thread very useful. While the topic was not brought to the table in the right way it turned out to have many different informative opinions.

[seattleflamer]

Mortgage is by definition a liability and therefore a debt. In my view, it is a question whether you have an asset on the other side of the ledger to balance or exceed that liability to define it as either "good" or "bad" debt.

Anytime someone is willing to lend you money at the lowest interest rates relative to other borrowing costs in order to purchase an asset that appreciates over the long term (it can be gold, stocks, house whatever), you do it. Furthermore, if they are willing to let you repay the cost to purchase that asset a little at a time and you simply have to repay it monthly, you do it.

In theory, over a 10, 20, 30 year timeframe, that asset should be increasing in value at least relative to inflation while the fixed low cost to borrow decreases again relative to inflation and what you pay down each month in principal.

Example du jour, uncle bought a house in San Francisco that forced him to work 2 jobs to just keep up with the mortgage payments. He was in over his head big time but paid the monthly amount and took the full 30 years to pay it off. He paid a lot in interest payments of course and couldn't afford or was unwilling to pay off it off quicker.

The year he bought was 1972 and the house was an outrageous $35K with a whopping monthly mortgage payment of a $150/month in the 6% range.

His first few years of mortgage payments took 2 full time jobs to pay off while the last payments in the early 2000s was less than his cable bill. Yes, he paid 3x as much in interest compared to the original borrowing cost so his total cost was ~120K for the principal plus interest (and orginal down payment). That house is worth north of $700K even in this depressed market.

Another way to look at it was his 'rent' was fixed at $150/month for 30 years plus property tax and maintenance costs and in the end, he gets $700K asset for his troubles.

That looks ridiculously low and of course, people will say it is different now or it is SF RE but to me it illustrates the power of inflation and having a fixed cost over the long term is very beneficial to the bottom line.

One of the greatest financial innovations since WWII is the 30 year fixed loan which existed in Canada (25 year fixed rate actually) till the 70's when the banking oligarchy figured out they were the ones bearing the entire risk and decided to pass it on to the Canadian consumer via the unfriendly consumer product called variable rate mortgage or the US equivalent ARM.

It probably makes sense to pay off a mortgage in Canada more quickly since the consumer has full interest rate risk or pay dearly for the "security" of a 10 year fixed but I haven't looked at it enough to make that call. In the States, the 30 year fixed, the bank takes the full interest rate risk. Or put another way, my uncle's bank was not making money on his 6% loan in the early 80s with interest rates in the mid teens. In Canada, my parents weren't so lucky and remember my dad rejoicing over his 11% 5 year "fixed" rate in '89.

I'm keeping my 30 year fixed mortgage and we'll see what happens in 2033 about whether it was a good idea not to pay this loan faster and letting inflation doing the heavy lifting for me.

[RogerWilco]

Originally Posted by photon

Are you further ahead though?

Lots of people make good money but still rent; the money they save renting vs. owning they invest.

I think home ownership should be a lifestyle choice; it's not an investment.

Right now buying is probably cheaper than renting because of low interest rates, but historically isn't owning typically more expensive than renting?

Very ahead, my payments are fairly equal to before. But I get some equity now. I renetd for years, you can't rent for less than a mortgage in this City. Not now any way.