
In Defense of Home Ownership - kareemm
http://www.nytimes.com/2010/08/28/your-money/mortgages/28money.html?src=me&ref=your-money
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kargdt
Interesting. The young couple in the article can't seem to resist the
historically low borrowing costs available to them and that renting their
place could be an option if they would not be able to sell, should they be
required to move. Question- Does purchasing a home drastically reduce labor
mobility as it stands in this country right now? In other words, if I want to
go out to California with a group of three partners to start up a company that
I think will have enormous impact and be disruptive to an existing industry,
would I be less likely to take such a venture if I thought that an obligation
like a mortgage would tie me down? With the rise in home ownership over the
last decade (now in reverse), have we prevented ourselves from geographic
mobility because of that dreadful debt burden in a 30 year fixed mortgage?
Richard Florida describes this same issue in his new book, The Great Reset. I
would agree with him that emphasis should not be as great on homeownership
(and accompanying tax credits) and instead should be more towards driving new
creative technologies and systems that this country needs to compete.

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kls
From the Article:

 _But a mortgage is still a form of long-term forced savings, after all_

No it is not, I don't understand why people cannot get debt and assets
straight in their head. A mortgage is a debt, it is theoretical money at some
future date. It is resold on the market as an asset when in fact it is not.

So here is the deal, If I buy a house today with all cash and the market
continues to erode it will eventually devalue other sectors in relation to it.
Because a house is a tangible asset and tangible assets have this tricky way
of devaluing other hard assets on their way down (eventually). So for instance
a house is today worth lets say 15 cars. No matter the dollar amount cars and
houses will roughly measure out to the same exchange scale give or take a car.

Just as we are seeing now the housing market is threatening to put us into a
deflationary spiral. In which other real assets will fall in line with the
monetary conversion value of housing. So no matter what the $ amount is, a
house will be worth 15 cars give or take a car. As A side note, if you can
time the times when they are significantly out of balance you can make some
money. It was once said that in the 1800's an ounce of gold would buy you a
nice suit and that today and ounce of gold will buy you nice suite. This has
held relatively true.

OK, so back to my gripe with the article, why is a mortgage not a form of long
term savings? Because the mortgage reflects the monetary valuation of an asset
at a certain point in time. After that point the monetary valuation of the
asset and the mortgage can diverge. The house still has roughly the save value
(or will adjust to), just not the same cash value. Mortgages are not written
on an index compared to assets so you are exposed to the risk of the asset
adjusting while you have a fixed monetary debt instrument.

This is why, one should be in an all cash or all asset position depending on
the state of the market. In a declining market one should take a cash position
and in an inflationary market one should take an asset position. Timing the
switch is the trick. Conversely, being on either the owning or receiving end
of a debt based security is not the same as being in a cash or real asset
position, no matter the direction of the market, but for some reason people
confuse this in their mind.

Purchasing assets on leverage always exposes you to the risk of adjustment, it
therefore cannot be considered a form of savings as there is not a guaranteed
return as we have witnessed so clearly as of late. One should always be very
cautious when leveraging an asset. They can and do diverge.

Not to mention that leverage causes assets to hype-inflate (bubbles) and then
many times rapidly deflate once over leveraging happens.

