Your House

by Dennis Bradford

in financial well-being

Your house is a place to live. It’s a shelter.

Please start thinking of it that way rather than thinking of it, as most homeowners do, as a good financial investment.

Permit me to assess the housing situation before I make some suggestions you may find beneficial.

Recently, the housing market bubble has propped up the American economy and the air has begun going out of that bubble.

It’s routine to use building permits and housing starts as a good way to take the economy’s temperature. The reason for that is that building a house has a positive economic impact.

It’s not just the materials for the house such as wood, drywall, plumbing, windows, wiring, and roofing. It’s not just the labor that goes into it. It’s also the furniture, furnishings and appliances that go into it. Furthermore, property taxes support governments.

Assuming that you are a homeowner, you have undoubtedly noticed how your taxes have been steadily going up for years. You may think that’s because the value of your house has been steadily going up for years.

Really?

I suggest to you that that is primarily because of the continuing dilution of the dollar.

The way to tell is to measure its value is in terms of some other asset such as ounces of gold or barrels of oil. If you take the trouble to do that, you may be shocked to find that it hasn’t gone up in value at all in recent years.

In fact, if you have dollars in your house, I suggest that you seriously consider doing your best to get them out. (I explain why below.)

Here are five options for doing that:

First, you may be able to sell it. Of course, whether or not that’s your best option depends upon the details of your particular situation. Even if you are able to sell it for about or above what you paid for it, obviously you’d still have to find another place to live and endure the disruption of moving there.

A key question to ask yourself is: “If I were to sell it, how many more investment dollars each month would I have if I rented a comparable house?” There are other questions to consider if you are thinking about selling, but the answer to that one is particularly important.

Second, if you cannot sell it, then you may be able to refinance it with, preferably, a 30-year, flat rate mortgage with a low (4 to 6%) interest rate.

If you already have a 30-year, flat rate mortgage with a low interest rate on your house and you purchased it recently (so you have little equity in it), it may not be wise either to refinance it or to sell it. It depends upon what rents are in your area as well as similar details. Again, it also depends upon how many more investment dollars you’d have each month.

Third, if you cannot refinance it, then you may be able to take out a loan on the equity in your house if there’s any equity in it.  You’d have to make more money using those dollars than they cost you in terms of interest to make this option viable.

Fourth, you may be able to do a reverse mortgage to get a pile of dollars out. This has disadvantages as well as advantages, but it can be a good way in certain circumstances to get dollars out of your house.

Fifth, you may be able to use your house as an investor would by, for example, renting it out or doing a real estate exchange to acquire an apartment building. (I once lived in an apartment while owning and renting out a house.)

Do not, of course, spend the dollars you get out of your house on consumer goods! Use them only to purchase hard assets such as silver, gold, or a cash-producing business such as an apartment building.

Unfortunately, about one-quarter of the houses in this country are now underwater. Sadly, none of those options may work for you.

The big problem comes from the popular groupthink belief that your house is a good investment. It’s not.

Here was the way it used to work some years ago. The idea behind buying a house was to provide long term shelter for you and your family.

Typically, lenders wanted you to show good character and to demonstrate that you had something important at stake by putting down a 20% down payment.

They also typically would not loan you more than twice your gross annual income and they wanted your total payments on your house to be only about one-third of that income.

As long as you didn’t lose your income and kept up the payments on your mortgage, taxes, and insurance, you’d eventually own your house free and clear, which would provide you with a place to live when you retired. Your income in retirement would likely decrease, but that was alright because you’d have no more principle and interest payments on your mortgage.

This policy of prudence was a win for the homeowner as well as for the banks. It kept a lid on house prices. They couldn’t get far out of line with either incomes or how quickly down payments could be saved.

For a number of reasons (such as adjustable-rate mortgages, aggressive mortgage brokers, foreign investment, and government securitization) that policy of prudence was undermined. Eventually, potential home-owners were sold a bill of goods to the effect that a house was a good investment. Many purchased houses that they would never have been able to purchase under the previous policy of prudence.

There are plenty of people and forces to blame. That’s not the point.

As I write this [near the beginning of 2012], houses across the country have lost an average of about one-third of their dollar value in the last five years. Worse, nobody yet knows where the bottom is.

Credit has contracted. Mortgage interest rates are extremely low, but mortgages are difficult to obtain.

The housing bubble is bursting. That’s the point.

For you, that means that the dollar price of your house will likely continue to decline.  (This has no effect on its value as a shelter.)

The Great Recession is not over.

It’s the “great” one because it isn’t like other recessions that would have ended by now. The deflating housing bubble is just part of the Great Recession.

The Great Recession is not just a severe recession; rather, it’s an economic transition. The dollar, which is nominally still the world’s reserve currency, is collapsing. Given globalization, the world economy is imploding.

The demand for housing is still there; many people still want to own their own houses. However, fewer people will be able to qualify for mortgages as we eventually return to a more traditional policy of lending prudence. House prices will fall while fewer people will be able to qualify for loans. Fewer houses will be built. The negative economic effects of this will ripple throughout the economy.

Eventually, the housing market will right itself. Mortgages will reflect market value.

Unfortunately, millions of people are going to be a lot poorer when it does. I wish that were not true, but the trends that I detect are all pointing in that direction (and they have become so obvious that even I am able to detect them!).

The sooner you stop thinking of your house as an investment and start thinking of it as a shelter, the better your decisions about it are likely to be.

Even if the dollar valuation of your particular house is not falling, the dollar itself is collapsing.

This means that everything valued in dollars (such as the price of your house or the equity in your house) is decreasing in value.

That is why I suggest that you get as many dollars out of your house as possible and then use them to purchase assets such as gold and silver that will withstand the forthcoming economic collapse.

 

 

 

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