Stupid people spend more than 1/2 their income on housing

[salm]

In a country where you have to own a castle in order to be accepted as a respectable human being a financial breakdown like we are seeing at the moment is probably the best thing that can happen. People need to (re-)learn the hard way that all their bullshit status symbols are totally unnecessary. I´m convinced more and more that the US (and probably a whole bunch of other western nations) needs to go down the shitter.

[aerius]

For the people stating that money in the house doesn't count since it's tied up to the house and you can't get to it unless you sell the house, the same can be said about stocks. You might get minute dividend payments but other than that the wealth is tied up to the stock until you sell it.

I can liquidate all my stocks at market price and have a briefcase full of dead presidents in my hands within 15 minutes. A house, yeah, good luck selling one these days. Even if you dumped your home at half the market price, you're still unlikely to have any money in your hands after a week. A house is not a liquid asset, it can't be sold & cashed out at will.

[The Kernel]

I can liquidate all my stocks at market price and have a briefcase full of dead presidents in my hands within 15 minutes. A house, yeah, good luck selling one these days. Even if you dumped your home at half the market price, you're still unlikely to have any money in your hands after a week. A house is not a liquid asset, it can't be sold & cashed out at will.

Bullshit. Stocks are not a short term investment unless you are gambling and never will be.

Oh sure, you can bail out of the stockmarket in a day, but depending on that means that if you pull out during a down market (and why would you be in an emergency to access you money in an up market?) you are looking at potentially flushing a large percentage of your investment's value.

The only true short term investments are money markets, CDs, savings, etc. The rule of investing thumb is that keep the money that you might need in a pinch within the next 12 months in an account like these. If you need access to the money in the 1-4 year timeframe, put it in bonds. They fluctuate more than short term investments, but they aren't as volatile as stocks. It's only if you don't need the money for 5 years that counting on tapping stock equity makes sense.

Oh, and if you want you can tap the equity in your house in a pretty straightforward manner without selling it. It's called a home equity loan, and you can receive one in an hour.

[General Trelane (Retired)]

I can liquidate all my stocks at market price and have a briefcase full of dead presidents in my hands within 15 minutes. A house, yeah, good luck selling one these days. Even if you dumped your home at half the market price, you're still unlikely to have any money in your hands after a week. A house is not a liquid asset, it can't be sold & cashed out at will.

Bullshit. Stocks are not a short term investment unless you are gambling and never will be.

I think you misunderstood aerius's post. All he said is that stocks are more liquid and a house. Liquid does not mean short term.

[aerius]

Bullshit. Stocks are not a short term investment unless you are gambling and never will be.

You've completely missed the point of my post.

Oh, and if you want you can tap the equity in your house in a pretty straightforward manner without selling it. It's called a home equity loan, and you can receive one in an hour.

Tried getting a HELOC lately? Banks ain't handing them out like candy anymore.

[The Kernel]

I can liquidate all my stocks at market price and have a briefcase full of dead presidents in my hands within 15 minutes. A house, yeah, good luck selling one these days. Even if you dumped your home at half the market price, you're still unlikely to have any money in your hands after a week. A house is not a liquid asset, it can't be sold & cashed out at will.

Bullshit. Stocks are not a short term investment unless you are gambling and never will be.

I think you misunderstood aerius's post. All he said is that stocks are more liquid and a house. Liquid does not mean short term.

I realize that, but I can't see any situation where the slight liquidity of equity in the market exceeds that of equity in a house in real world value. If you need to liquidate either stock or real estate equity so quickly that a few hours or even days might make the difference then you shouldn't be investing in the first place and all your money should be in a checking account.

[The Kernel]

You've completely missed the point of my post.

No, I get the point of your post. What I don't get is when in the real world would that quick access to your stock investments be any value to a responsible investor.

Tried getting a HELOC lately? Banks ain't handing them out like candy anymore.

Actually a family friend just got a home equity loan the other day to do some improvements. Sure the criteria have tightened, but as long as you are above water on your loan and have a good credit score you can still tap your equity.

[ArmorPierce]

So the people who lost their houses due to foreclosure were just shifting their wealth from one hand to the other? The good news is that they weren't giving away their wealth by renting!

Market upswings and down swings do occur. Historically real estate has increased by the real rate of money and it was only the latest bubble that real estate has not followed this trend.

If you purchase a house within your means (no outrageous mortgages, putting down a good amount of money straight up) purchasing property as a home is a pretty safe bet. Of course people that purchased property at the peak of the bubble are pretty much assed out.

So yes, rent you are throwing away money, property if you are able to hold on to it you're at worst is still worth something and tends to be a pretty safe bet.

Your argument can also be used against people purchasing stock because people that bought stock at its peak price were fucked when the stock market crashes. You're only fucked if you really leveraged your stock portfolio.

[General Trelane (Retired)]

So the people who lost their houses due to foreclosure were just shifting their wealth from one hand to the other? The good news is that they weren't giving away their wealth by renting!

You can still lose the wealth if it's tied up in real estate, of course.

It's just not the sure-and-certain loss, bye-bye, never even possibly see the dollars again parting with your $$$, represented by renting.

Neither will you ever see the money that you spent on mortgage interest.

No, the only point I'm trying to make is that the down payment must be considered if one is to make a wise decision as to whether to rent or to own. If I read AP correctly, he seems to think that you should be able to ignore it because it's 'just shifting the wealth'.

But that down payment can be invested in other ways all of which have different potential returns and different risks. Not to mention that the down payment has to be saved first. Which is why most people rent first in order to save up a down payment.

For the average American or Canadian, it probably makes sense to buy a home. But this isn't automatically true for everybody.

For me, personally, I bought a house 11 years ago. I put 30% down and finished paying the mortgage last year. But I have a second mortgage now (for renovations) that is actually larger than the first mortgage (the house is nearly 100 years old and needed some fixing). It's locked in at 5.5% and I'm paying on an accelerated rate at $350 per week; with a stay-at-home wife and two small kids, we're managing. Was it the best move? I have no idea, and I'm not enthused enough to actually crunch the numbers to see.

[General Trelane (Retired)]

Your argument can also be used against people purchasing stock because people that bought stock at its peak price were fucked when the stock market crashes. You're only fucked if you really leveraged your stock portfolio.

My 'argument' was simply this: "When you're comparing renting versus owning, you need to consider the time value of that down payment too."

Note that this wasn't an argument against buying a home. It was simply a statement that if one wants to make the best decision on renting versus buying, one needs to consider the down payment as well (and not just the monthly payments as Kanastrous seemed to be focusing on).

[Kanastrous]

So the people who lost their houses due to foreclosure were just shifting their wealth from one hand to the other? The good news is that they weren't giving away their wealth by renting!

You can still lose the wealth if it's tied up in real estate, of course.

It's just not the sure-and-certain loss, bye-bye, never even possibly see the dollars again parting with your $$$, represented by renting.

Neither will you ever see the money that you spent on mortgage interest.

I get some of it back against taxes, each year; mortgage interest is deductible. Not all of it, not close, of course, but it can be useful come tax time.

No, the only point I'm trying to make is that the down payment must be considered if one is to make a wise decision as to whether to rent or to own.

Well, yeah, either you have the $$$ available, or you don't. And your future earnings expectations might make purchasing a poorer bet than renting, if you don't know what to expect, or are expecting very limited earnings.

Does anyone not consider the down payment? Seems like the first thing one has to think about, if one is really serious...

But that down payment can be invested in other ways all of which have different potential returns and different risks. Not to mention that the down payment has to be saved first. Which is why most people rent first in order to save up a down payment.

For me, personally, I bought a house 11 years ago. I put 30% down and finished paying the mortgage last year. But I have a second mortgage now (for renovations) that is actually larger than the first mortgage (the house is nearly 100 years old and needed some fixing). It's locked in at 5.5% and I'm paying on an accelerated rate at $350 per week; with a stay-at-home wife and two small kids, we're managing. Was it the best move? I have no idea, and I'm not enthused enough to actually crunch the numbers to see.

On its face, what you're describing sounds good to me. Of course I'm not a financial planner.

But you already knew that.

[General Trelane (Retired)]

Neither will you ever see the money that you spent on mortgage interest.

I get some of it back against taxes, each year; mortgage interest is deductible. Not all of it, not close, of course, but it can be useful come tax time.

Similarly, in some areas rent is also tax deductible.

For me, mortgage interest is NOT tax deductible. . .unless it's on a property that is being rented out, in which case it is a business expense that can be claimed against the rental income.

On its face, what you're describing sounds good to me. Of course I'm not a financial planner.

But you already knew that.

You're not??!!!?!

[ArmorPierce]

Neither will you ever see the money that you spent on mortgage interest.

I get some of it back against taxes, each year; mortgage interest is deductible. Not all of it, not close, of course, but it can be useful come tax time.

Similarly, in some areas rent is also tax deductible.

For me, mortgage interest is NOT tax deductible. . .unless it's on a property that is being rented out, in which case it is a business expense that can be claimed against the rental income.

Do you live in the USA? I believe that mortgage interest expense deduction is a federal deduction.

[General Trelane (Retired)]

Do you live in the USA? I believe that mortgage interest expense deduction is a federal deduction.

No. Canada.

[Broomstick]

I get some of it back against taxes, each year; mortgage interest is deductible. Not all of it, not close, of course, but it can be useful come tax time.

Similarly, in some areas rent is also tax deductible.

For me, mortgage interest is NOT tax deductible. . .unless it's on a property that is being rented out, in which case it is a business expense that can be claimed against the rental income.

Do you live in the USA? I believe that mortgage interest expense deduction is a federal deduction.

The mortgage interest expense deduction is Federal

In my state, Indiana, there is a renting expense deduction from the State - which, if I recall correctly (I haven't looked at the form from last year for awhile and don't fell like digging it out at the moment) was $1,200 for us last year. Thus, the "tax advantage" of a mortgage over renting is not so great where I live. Granted, the deduction occurs in a different place than it would for a mortgage, but it still deducts from my total tax bill.

[Shrykull]

Are people that intimidated by social self-consciousness that they'll lock up 50% of their income in paying for a house?

Absolutely. It's built into our genetic code. Think of all the animals which use colourful plumage to attract mates even though it also attracts predators; they are literally risking a violent death in order to attract mates. What is an irresponsible mortgage compared to that?

The difference is the peacock never made a conscious choice to grow colored feathers, while these people could have made a choice to spend more wisely.

[Colonel Olrik]

And meanwhile,in France

French hold out against credit crunch

Unlike Britain, the US and many other countries, France appears to be weathering the credit crunch storm in reasonable shape.

The BBC's Emma Jane Kirby asks if other nations should take a leaf out of the thrifty Gallic book?

Shoppers in Paris
In France, it is very difficult to spend money you do not have

If I had to use one word to describe France's financial system, the word I would choose would be "cautious".

French banks are immensely careful about whom they lend money to and, to limit risks, they spread their investments much more widely than those in the US or UK.

Only about a quarter of banking activity is related to investment banking and dealer-broker activity - the rest is all to do with retail banking.

This meant when the credit crunch bit, the French banks were hit a lot less hard than those in many other countries.

But it is not just about banking investments - this country as a whole simply takes far fewer risks.


In London... it was as if wealth was something you could get from a bank, it's a sort of miracle people seem to believe in England
Francois Artignan, banker

Take the level of household debt. In France, it is at 47% of GDP, while in the UK it is well over twice that.

Its not that temptation does not exist in France - the lure of consumerism is just as strong as it is elsewhere.

But it is very difficult to spend money you do not have in France.

French credit cards are little more than debit cards, so there is no question of simply sticking a couple of flat screen TVs on your credit card and hoping to pay for them later - if there are insufficient funds in your account, your bank will immediately block the transaction.

In the wealthy suburb of St Germain-en-Laye, just outside Paris, I met Francois Artignan, a well-to-do banker who moved back to France two years ago after a long stint of living in the UK.

Francois Artignan dines with family
Mr Artignan was 43 when he bought his first house in France

Francois admits he misses the buzz of London living but says he was alarmed by the way so many British people lived on their credit cards and never saved money.

"It's true that you can note a big difference in consuming behaviours between the French and the English," Mr Artignan says.

"People here don't believe you can just put your debts together and get them refinanced... But in London... it was as if wealth was something you could get from a bank, it's a sort of miracle people seem to believe in England.

"It seems to me people there are very keen to use up all the money they have, and that's a worry when you wonder how people are going to have money for retirement for instance," Mr Artignan says.

Sluggish growth

From his Paris office, the chief economist for market analyst Xerfi, Alexander Law, has been comparing the spending patterns of France and Britain.

A woman looks at a real estate ads in Paris
A loan for a mortgage is impossible without a big deposit

Mr Law, who has dual nationality, believes that innate French prudence has saved it from disaster.

"Generally in France you spend what you have and not more," he explains.

"In the US and the UK, the economy has been driven by household spending, consumption has been driven by credit, and a lot less in France, so that's why when there were periods of expansion France grew a lot more slowly than the UK and the US but conversely when it's slowing down, it will slow down in a more moderate fashion than the UK or the US."

France's rate of growth is horribly sluggish - this year it looks set to hover around just 1%, meaning its likely to be way off target for meeting its promise to the EU to bring its budget deficit back under control by 2012.

But although its slow economy is hardly the envy of the world, its reluctance to tie its economy into the housing market in the same way the US did has also meant that when the American sub-prime market collapsed, it did not drag the French market with it.

There are far fewer household owners here than in the UK - about 57% of French people are on the property ladder, compared to 70% in the UK.

Although a high earner, Mr Artignan was 43 before buying his first home because in France, unless you have a big deposit, you can forget begging the banks for a huge loan.

Two conditions

President Nicolas Sarkozy is trying to push France into becoming a nation of house owners by building thousands of cheap new homes.

A cheap new house being built
Thousands of new cheap houses are being built across France

But France still believes in strict rules and regulations, Finance Minister Christine Lagarde says.

"Expect two conditions - a down payment of 20% of the value of the house plus mortgage [repayments] which will not exceed 30% of income.

"You already have a pretty good safety net there and clearly no real estate financing similar to the sub-prime market that has existed in the US and which has hurt the financial system so much," Ms Lagarde says.

France has long been feeling the pinch of the global rise in food and fuel prices and many people here complain that their spending power is falling fast.

In France, 46% of people chose to stay home for their summer holiday this year rather than splashing out on an expensive break away, and so many people are cutting back on dining out that some 3,000 cafes and restaurants went out of business in the first three months of this year.

Finance Minister Christine Lagarde
Ms Lagarde says many people are living in the "world of fantasy"

Sparse spending means sparse growth - but should other countries take a leaf out of the parsimonious Gallic book?

"I'm not suggesting that we have the basic principles right, I'm not suggesting that we can teach the world lessons," Ms Lagarde says.

"But I think it will be for each and every category of players, traders, regulators, supervisors, to examine what they have done, what they should have done and what they should be doing in the future to bring a bit more morality into the system.

"I think we have let this world of fantasy and virtuality overcome reality... There have to be more principles, more discipline and a bit more reality," the minister says.

Those dirty French, how dare they not be greedy and borrow in order to spend more that they have!

In Germany the situation is, as far as I know, similar. I'm turning thirty soon and the only friend I have around my age with his own home has it because he's from a rich family. Even married couples well in their thirties rent. Americans not used to these parts of Europe used to look at me crosseyed after hearing I'm still renting. I wonder if this will change now.

[The Duchess of Zeon]

And this just reinforces my desire to move to a Gallic region of the planet as rapidly as possible...

[Kanastrous]

Serious, or joking?

[Broomstick]

Oh, she's serious - France is actually a very nice place, I thoroughly enjoyed the time I spent there. Very different attitudes about things, though. Then again, my view on personal finances are much more like those described as French than typically American so it may be that I have more in common with the French than the typical American.

[Kanastrous]

It's true; there's a lot of beautiful stuff, and even some beautiful people, in France.

[Korto]

I'm sorry, did I read that right at 18% interest?

I can't say for sure, but I imagine that you read it right. That was about the interest rate high in Australia under the last Labor government, so it would make sense for Korto to use it as a frame of reference when determining what he could/couldn't afford.

And was even higher under the previous liberal government (21% under treasurer HOWARD, I believe), however my method used no such historical input. Instead, I worked out how much we could afford to repay after cost of living, and what interest rate would exceed that.

I also should pull my head in a bit, and say that I believe this would be far too dangerous in a country like the US. In Australia, we have Medicare and (no maximum duration) unemployment benefits to fall back on (it would suck to go back on the dole, but you do what you have to do).

[TrailerParkJawa]

Neither will you ever see the money that you spent on mortgage interest.

No, the only point I'm trying to make is that the down payment must be considered if one is to make a wise decision as to whether to rent or to own. If I read AP correctly, he seems to think that you should be able to ignore it because it's 'just shifting the wealth'.

But that down payment can be invested in other ways all of which have different potential returns and different risks. Not to mention that the down payment has to be saved first. Which is why most people rent first in order to save up a down payment.

For the average American or Canadian, it probably makes sense to buy a home. But this isn't automatically true for everybody.

For me, personally, I bought a house 11 years ago. I put 30% down and finished paying the mortgage last year. But I have a second mortgage now (for renovations) that is actually larger than the first mortgage (the house is nearly 100 years old and needed some fixing). It's locked in at 5.5% and I'm paying on an accelerated rate at $350 per week; with a stay-at-home wife and two small kids, we're managing. Was it the best move? I have no idea, and I'm not enthused enough to actually crunch the numbers to see.

I agree that you really need to think about down payment strategy. In a declining housing market it doesn't always make sense to put down more than 20%. It all depends on your goals and comfort level. I was going to put down 25% but settled for less so have X amount of extra dollars available for reserve or repairs.

As for your personal situation, paying off the house is good in my opinion. Although I certainly can imagine you have some big bills to fix up a 100 year old house.

[Dahak]

Well, as Olrik mentioned, it is not extremely common in my age bracket, around 30, to own a flat or house. Sure, you got them, but those are either rich or started working at an early age. For the normal graduate (around 25-30), you need some time to acquire the money for the first deposit. You could get "0% financing" offers (don't know if they still offer it...), which some took. But stil, buying here remains something most do only once in their life and hope to have paid of the credit in 20-30 years before pension hits. And just looked for statistics. Seems to confirm it. Around 48-50% rent here.

I sure would like to buy a flat, but I first want to get at least 20-30% of the price in cash, and this really takes some time...

[Illuminatus Primus]

[snip]

Yet another reason how quality and security of the livelihoods of the citizenry is not enslaved merely to the GDP growth rate. You take risks and court corruption and illiberalism if you grow too fast. America has paid quite the price for its heady narcissism.