San Diego Housing Bubble News and Analysis

Penalties avoided:

There is a first time home buyer exclusion that would spare us from the 10% penalty of yanking the retirement funds, but I'd still be paying 30%+ in income tax that year. (I actually ran some #'s the last couple of yrs and decided it was best to have the wife stay at home and help full time with our start up. Her whole income was going towards paying our income tax for the year by working outside the home. She wasn’t to upset about the dilemma… Basically 30% isn’t anything new, but we could avoid it if we're in a lower income tax bracket when we're 60 and pull the 401k then.)

Return on Investments in the market may be bleak:

I feel the stock market is ready for a down turn. Along with high p/e ratio over all, I feel the market has another debt to pay. Boomers are soon to be retiring in a big wave 3-10 yrs out, and their going to be pulling their retirement funds to live on. This is going to be a huge tax on the market when you guys begin to collect on your earnings. I’m hard pressed to find a safe haven for my $. This pushes me to invest in a safe bet like paying off the mortgage and saving 5-7% in interest guaranteed. Essentially a 5-7% risk free return.

Loss of potential gain if the market changes:

If I have the $ wrapped up in the house, it would be very ill liquid if I the stock market took a big upswing. But, now that I wrote that, I realize I’m a 1st mortgage/Refi away from liquidity. Boy that sounds stupid. Take $ out of my home to play the market?

Emotional return:

Our first House warming party AND mortgage burning party on the same day. OOH the dream. I could consider doing something else with life at 33. No more employment with the main goal of maximizing income.

Employment free of worry with the possibility of a better quality of life:

I honestly feel I may be able to make more doing something else but I don’t want to risk my income to find out. I think I could do it in a field that I have a passion for. W/O a debt load I could have the luxury of a long leave of absence in the hopes of coming up with “something better.” It sound a bit “dreamy” but I think I could find a way to “work smarter not harder” if I had the time to play with a couple of ideas. If nothing stuck in a year I wouldn’t have to worry about a year of lost earnings.

Give me some other insights, or tell me to quit bragging and go away…

Raiding the 401K is generally not a good idea. With taxes and early withdraw penalty you wouldn’t even clear you 100k out of 130K. 401K loans are also generally a bad idea, with compounding effects you stand to lose out years down the road. Are you counting on a company pension, social security to keep you solvent in your golden years? I personally don’t want to be eating cat food in a run down 1 BR apt with loud neighbors upstairs keeping me up at night. At 29, you have done a great job at retirement savings. I don’t know too many 29yr olds who have a decent retirement fund started.

Paying all cash (or very large down payment) will have its benefits 2-3 years down the road. Who knows where interest rates will be. We are still near historic lows. As the cost of borrowing (interest rates) go up and credit standards tighten, housing pricing will likely take a further hit.

There is nothing wrong with having a mortgage. There are good mortgages and bad. Just get one that is affordable and un-creative. Personally I don’t like interest rate risk on mortgages so I prefer a 30 year fixed. Last house I had was 30 year fixed, but I only kept it for 6 years. In hindsight, a 7 year ARM may have been better idea, but again I don’t like interest rate risk. We may be seeing large rate increases and bouts of severe inflation in coming years. Those who locked in low rates with 30 year fixed will be happy they did. Those with ARMS will be waiting with dread for their resets, unable to refinance into 30 yr fixed due to drops in their house value.

Tried turning off the bold but no dice. I guess this will just have to be a "shouting" thread...

The financial guys would probably tell you that parking all that cash in a house does away with your leverage of it. However, at 29 you'll have plenty of opportunity to make more money for investment purposes.

The freedom to pursue your career goals without having to sweat a large housing expense could have a huge payday. If you have the freedom to focus on something you like it's more likely you'll excell at it and rise to the top. You can take more risks because they aren't as risky for you.

Besides, life is about living.

Tried turning off the bold but no dice.

I went in and closed the tag on the original post so the boldness is fixed -- thanks for trying to help, Concho.

Here for the ride it sounds like you have it pretty well thought out. I am not a fan of raiding pretty much the last bastion of tax deferred investment vehicles that the government lets us have (IRA and 401K). So my opinion is that I wouldn't raid those funds but you have some valid points about not having a mortgage. Just consider that the first time buyer usually does not stay in the same home for more then 6-7 years. So your decision to tie all that money up in your home is something that personally I would not do but that is only me. I guess I am puzzled at why you couldn't rent (using you non IRA savings) and try the other profession or field that you could make more money in to see how things work out? I know the renting lifestyle blows (being a fellow renter) and my wife is very much fed up with it. The quality of life with homeownership I think is a factor that is overlooked on this board.

You are young and you have alot of things ahead of you so do what suits you best.

At your age, I was facing a similar situation. I had enough saved up from my business to pay cash for a custom home I had built in Diamond Bar. This was in 1988, and it cost me $435K. I was debating whether or not to pay all cash, which was mostly all my savings, or to finance a part of it. I decided to pay all cash, and I never looked back. The feeling of having no house payments at 30 years old was indescribable. I felt free. Really free. Six years later, the average holding period as SD Realtor says, I bought another home, again for cash, this time $1.275M. In late 2005, I sold that house for $2.0M and put the cash in the bank, as fast as I could! I am now renting. Get the point? I believe I was able to do this primarily due to all the interest I saved by not having a mortgage. I believe in cash. In God We Trust, all others should pay CASH!

We should talk sometime. I started my own small business about 3 years ago and might have some pointers for you. I am no expert in any one facet of finance, taxes, or real estate, but I have picked up some tidbits here and there. One big benefit is to incorporate your business. The tax benefits can be substantial...especially with things like vehicles, mileage, computers, etc.

I took more of a do-it-yourself approach to my start-up. I sat down and tried the whole business plan thing, but it just did not work for me. I think the business plans help provide some structure, but are mostly if you are looking to get a bank loan or other capital investment. Work on building your network now. And you might want to consider speaking to financial planning and tax specialists. They keep up with the latest laws and regulations, so you know you are getting current advice and not doing anything wrong. Rich (webmaster) and his associates are a good objective resource. I am sure there are many others out there as well...maybe even on this forum. PS: I am not affiliated with Rich's company.

The primary concern I would have is that you are taking a collection of diversified assets and betting them all on a single asset class. Whatever the "X" stands for in the sentence: "I'm taking all my cash, IRAs, and 401k accounts and putting it all into X" is a guarantee you're about to embark on the financial version of Mr. Toad's Wild Ride. The first principle of asset management is avoidance of concentrated risk.

Whether you should liquidate your retirement accounts to avoid a mortgage is a separable issue. Consider this, equivalent, situation: you own a house outright, and have a chance to take a 100K mortgage loan, have to government top it up, gratis, by 28% or so (insert your tax rate here); you can invest it in an account that protects it from all taxes for 30 years. Oh, and the government subsidizes your (30-year fixed!) loan, too, so the effective fixed rate is 4% rather than 6%.

Gotta get me some of that!

I also have an aversion to debt. I pay cash for cars... and I try to buy ones I can keep for 7 years. I pay off my credit cards every month. And I take the money I save on interest and put it toward retirement. I'm sitting on a healthy bundle of cash, yet when it comes time to buy a place I probably won't use all of it on the down-payment.

I like the security of having liquid assets. It makes me feel like my wife and I work each day at our own whim. If either of us feels compelled to quit on principle, we've got cash to cover us until we find something else. Saving for retirement helps me to remember that I won't always have to work. There's a future out there where every day feels like Saturday.

If I could get in the Delorian an go back to 29 y/o, I would have saved more. These are just my ideals. Don't think of that 130k in retirement savings in today's terms... think of it in terms of what it will be worth when you are sick of working. Don't bet that your house will pay for your retirement. It's hard to spin downsizing as anything but depressing. If you're worried about a stock market downturn, then put your money where you think the boomers are going. They certainly aren't going to be buying $300k starter homes.

For what it is worth, here's my advice. When its the right time to buy, put down as much cash as you have on hand while maintaining a liquid amount to make up for a year's income. Finance the rest with a fixed 15 year mortgage... you can burn that mortgage on your 45th b-day! Keep contributing as much as you possibly can to your 401k. Live within your means and teach everyone around you how rewarding that can be. You'll know the the time is right when prices fall and interest is such that you can comfortably make the payment on that mortgage out of 30% of your take home pay. Your take home pay will of course be lessened by your $15k/yr contributions to retirement.

You are way ahead of most people your age by even thinking critically about this stuff. Congratulations.

I think some here forget the usefulness of HELOCs. If you pay all cash for your house, but are worred about the lack of liquidity (need my cash, NOW!) then just get a HUGE line of credit on your house. This is your emergency fund. You won't pay interest because you WILL NOT put a balance on it.

Then, if you ever need the cash or lose a job, then the house equity is there to save you, in cash, today.

Don't wait until you lose your job before you go for the HELOC - you might not qualify. Oh, and don't get the HELOC if you're not certain you'll leave it alone.

There is a first time home buyer exclusion that would spare us from the 10% penalty of yanking the retirement funds

Are you sure about this? I know that Roth IRAs allow you to pull out money for use in purchasing your first home, as long as you've had the account for 5 years or more, but I've not heard of a similar exclusion for 401k accounts. If you are sure, would you happen to have links to more information about this? Thanks!

P.S. I would say go for it (if you're sure about no tax penalties) Most people don't even begin to save for retirement until they are in their 30s anyway. And not having a mortgage payment will allow you to dedicate more of your salary toward retirement.

There is a pretty good article in newsweek that takes an opposing view to many on this trhread. It gives an example of paying cash vs using a loan. Not surprisingly the benefit of having cheap maney and investing the difference comes out far ahead. Additioanlly buy locking in cheap money now you gaurantee your future liquidity. I would hate to see that 7 to 10 years from now something unforseen happens and now you ahve to tap the equity in your hmae and rather and having 6 % money to go to as is the case now you are looking at a 8 10 or who knows what type of interest rate invirenments. I would try and give it a read. Gives you the other side of the coin argument.

CASHMAN...

Unfortunately not everyone has $435K lying around to pay a home in cash. Having that kind of money makes things alot easier and pretty much assures that most likely whatever you do, the money will make more of it.

Not to mention that after using up all your cash and ONLY 6 years later you can afford a home CASH 3 times as much?

Honestly, I don't know many people who have the fortune of doing that and being that fortunate that things turned out that way.

Are any of these the article from newsweek?

http://www.keepmedia.com/pubs/Newsweek/2...

http://www.keepmedia.com/pubs/Newsweek/2...

I stand corrected. The article comes from Businessweek Feb 5 2007 entitiled Pay Off the House? Not SO Fast Pg 96 Goes through many of the simulated calculations you are considering.

Pay Off The House? Not So Fast

It may be smarter to invest the extra money instead of eliminating your mortgage

If you ask yourself whether you should pay off the mortgage before you retire, your first impulse may be to say: "Why not?" Many people have an instinctive desire to own the house free and clear before they stop working, figuring the absence of a monthly mortgage payment will help relieve the pressure of living on a reduced income.

But prepaying your mortgage may not be the savviest move, particularly from a tax standpoint. This is especially true when faced with the choice between fully funding a tax-deferred 401(k) or adding to your mortgage payment each month. It even applies when the alternative is to invest more in a taxable account.

The reasons to channel the money into retirement savings are clear. Every dollar you sock away in a 401(k), individual retirement account, or other tax-deferred plan saves taxes now and lets your money grow tax-free over the long term. Taxes come due only when you withdraw, usually when your income and tax rate are lower.

TAX SAVINGS
Take the case of a 50-year-old couple in the 33% marginal tax bracket who want to retire in 10 years. They have $400,000 left on their 30-year, 6% mortgage, and each is eligible to contribute $20,500 a year to their 401(k)s. Karen Folk, a financial planner in Urbana, Ill., calculated the impact of putting $41,000 a year into their 401(k)s vs. diverting it to pay the mortgage.

In the first scenario, the couple maxes out the 401(k)s. After 10 years, even earning a modest 6% return, the two accounts would accumulate $559,922. With an 8% return, the accounts would gain about $625,066. That's more than enough, even after taxes, to pay off the remaining mortgage debt of about $175,000. In addition, the couple would have saved nearly $200,000 in taxes--$59,000 from the mortgage interest deduction and a deferred amount of more than $135,000 because of the 401(k) contributions.

Alternatively, if they put the entire $20,500 each into prepayments, the mortgage would be paid off in less than six years, leaving them just four years to pay the full $41,000 into their 401(k). Under this scenario, they end up with a paid-off mortgage and $385,000, if the 401(k) return is 6%; $402,000, if the return is 8%. Tax savings from the mortgage interest deduction and the deferred 401(k) contributions come to about $81,000, less than half that saved by putting all the money into 401(k)s.

Even if you're already maxing out retirement account contributions, investing extra money in a taxable account may be smarter. After JPaul Dixon, 38, a vice-president at insurance broker Hylant Group in Ann Arbor, Mich., made a $110,000 profit on the sale of his home, he thought he could put more money into a new $435,000 house and therefore pay it off sooner. But his adviser showed Dixon that he'd benefit more by putting only 20% down and investing the $110,000. At an annual return of 8% over 20 years, Dixon would end up with $512,705, more than enough to pay off the balance on the $348,000 mortgage he just took on.

You should also keep the mortgage if a big chunk of your payment is tax- deductible interest. Frank Moore, Dixon's financial planner, says the aftertax cost of a 6% mortgage is about 4% for taxpayers in the 33% bracket. If you can earn more than 4% after tax, you're better off not prepaying the mortgage.

Of course, if you don't think you'll have the discipline to invest the money, or if you're close to the end of the mortgage anyway and the tax benefits have dwindled, you just might pay it off. And don't discount the emotional aspect of your decision, says J. Steven Cowen, a financial planner in La Jolla, Calif. Knowing that his own business could face a downturn at any time, Cowen and his wife decided to kick in an additional $1,000 a month to mortgage payments. Their desire to stay in their house for the rest of their lives was reason enough.

You guys have given more than a couple of things to consider, and I feel a little bad pulling more data w/o going over the advice I recieved on the forum over the weekend. Give me a week and I'll consider each sinario I've already been given.

Here's the thing. The article caught my interest. I think the #'s are wrong, but I'm not so hot with a mortgage calculator to be totally certain.

Buisnessweek calculates the intrest "earned" over the years if they were to invest it in the stock market, but I didn't see where they calculated the cost of mortgage, or the "loss" in the first senario. Right off the bat, if it cost me 6% in mortgage intrest, I would HAVE to make 6% in the market to be a wash? Add the tax break for the mortgage intrest, and subtract the same amount I would pay in additional income from the investment and I'm still at a wash, maybe 3/4 of a % in the black? Now my head hurts? That's a whole lot of stuff to accomplish for a .75% spread? What about the points up front to generate the mortgage and the small fee I pay to vanguard to hold my 401k? No fee's were calculated?

Who's good with a mortgage calculator and wants to proof the Article?

There's another factor: although you may not pay a penalty for first-time buyer withdrawals from certain retirement accounts, you do pay taxes. If you have a good income this is 30% or more off the bat. Figure out how long you have to save/invest or what return you need to make back that 30%.
Assuming 6% interest, it takes over 6 years just to get back to even, assuming you pay 30% in taxes. In many cases it's much worse (e.g. CA state marginal tax rate at 9.3%)

My guess is that tilts the spread much more than the 0.75% you figured.

My advice: Do not raid your retirement funds to pay down a house, unless it is in a year that you have little or no income so that you can minimize the taxes. When you buy, pay your house down as an ongoing living expense, just like you do with your rent today.

If you want to hedge your bets, raid your retirement for an amount that makes your mortgage roughly equal to rent after taxes. At the bottom this will likely be 20% down (as opposed to 50% today).

Well after all of the contimplation, I got the word back from my CPA. The IRA can be raided (if that word works) for a grand total of $10K with out a penalty. There are alot of exclusion with regaurds to the IRA that can get you out of the 12.5% penalty. The 401k can't be touched. All penalties apply to the 401k regaurdless of the sob story. Though I can borrow from the 401k, it wouldn't make sence borrowing from myself when I can barrow somebody elses $ in the form of a mortgage.

If some one really wanted to, they could fold the 401k into an IRA (depending on your employers rules) and then raid the IRA for the wopping $10k. Bottom line it wouldn't work like I had hoped for me or 90% of the population.

With reguard to the post above. I figure my tax bracket will be 30%+ at 60yrs of age (depending on how well the politicians learn to rape us in 30yrs), just like it is at 29yrs of age. The bonus would be the fact that my $200-$300k that I had in 2008 would be wrapped up into an asset that wasn't lost in the 2009 recession (obviously I don't know the dates but the point is valid). I'm thinking home prices will lead the loss, followed by the stock market. Essentially selling high (stock/401k), to buy low (home). I'm a bit worried about loosing my investment like I did in the tech bust.

I would be careful with your words with respect to raping you. You might consider the fact that it is the same system that is providing the opportunities that you have. Go live in a country like Brzil and Ruissia and then start complaining about taxes. Unitl then thank you lucky stars that you re able to make what you make and pay what you pay in taxes.

I'll make a bet that I pay as much as any person on this board in taxes and while it might be distasteful I tend to go to sleep at night thanking God for providing well for me and my family. I tend to find it distasteful to use words like rape when it comes to paying your fair share.