Over 21% of homeowners in SD County have paid off houses

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Submitted by earlyretirement on January 17, 2013 - 6:32pm

It was interesting to read that over 21% (1 in 5) San Diego County homeowners own their properties free and clear. That number actually surprised me as I figured it would be lower for San Diego. I know there is a lot of negative equity in San Diego County as well but it was nice to read this.

I'm sure many of them are people that bought many many years ago when real estate prices were fairly cheap. People like to throw around the fairly low median incomes in San Diego but for new people moving in it's a totally different story having to buy more expensive properties.

It was also interesting to read about the homeowners in the age bracket 20-24 that were free and clear. Obviously the money is coming from the parents. But still interesting nonetheless.

http://www.utsandiego.com/news/2013/jan/...

Submitted by flyer on January 18, 2013 - 12:30am.

Interesting--er, but not really too surprising, especially for those who have lived here for quite awhile.

Regarding the 20-24 age bracket and beyond, this stat reflects a trend we've been seeing for quite awhile also, since we, and lots of people we know have been buying real estate here for years, not only as investment properties, but for our kids and other family members.

Unless I missed it, the article didn't distinguish between condos, SFH's, or zip codes, so I'm guessing the stats are countywide, and include both condos and SFH's.

Overall, perhaps another indication of an increasingly tight market, and ever-escalating pricing the majority of young people, and future buyers in general may face in San Diego in years to come.

Submitted by earlyretirement on January 18, 2013 - 1:36pm.

Yeah Flu. I guess we've just heard so many years after the bubble burst about all the negative equity in San Diego County that you get stuck into thinking about that side of it.

My buddy that lives in Lemon Grove mentioned that many of the people there are older and have owned their houses forever and long since paid off. Same as in parts of Point Loma and other neighborhoods.

Property here in San Diego used to be affordable. I just figured that more people played the home equity ATM machine game.

No, I didn't see a breakdown of SFH's, condos, etc. I assume it's countywide.

Submitted by bearishgurl on January 18, 2013 - 2:48pm.

earlyretirement wrote:
Yeah Flu. I guess we've just heard so many years after the bubble burst about all the negative equity in San Diego County that you get stuck into thinking about that side of it.

My buddy that lives in Lemon Grove mentioned that many of the people there are older and have owned their houses forever and long since paid off. Same as in parts of Point Loma and other neighborhoods.

Property here in San Diego used to be affordable. I just figured that more people played the home equity ATM machine game.

No, I didn't see a breakdown of SFH's, condos, etc. I assume it's countywide.

ER, for the longtime-resident over-55 crowd in CA, it wasn't worth it for a lot of them to keep moving up to a bigger house. They felt they would have been eventually taxed out of it. The reason there are so many paid-off homes is because the assessment on them is so low.

If a long-owned CA property is only assessed at $34K this year, next year it will be assessed at $34,680. $346.80 would represent the annual "ad valoream" portion of their tax (acc to Prop 13) plus fees for local services and voter approved bonds. Their TOTAL TAX BILL for the year is likely $385 to $420!

IOW, 2% from "almost nothing" = "almost nothing" :)

In addition, most of LG (your "buddy's" town) has awesome long lots, many with 80+ yo trees!

If I had the good fortune of owning a CA property in a coastal county with these benefits attached to it, I would never give it up. Why would anyone? It doesn't matter how much money you have. If you don't want to live there year around anymore, buy a vacation home in another county/state! Or go live in your RV part of the year.

The "home equity ATM machine game" was played primarily by Gen X-ers and very late boomers (born ~1962 or after).

Boomers and generations prior to them don't have the same values as X-ers and beyond, thus their daily needs and wants aren't as great unless they are actually "wealthy." IOW, the older generations are more used to and inclined to live within their means.

Submitted by bearishgurl on January 18, 2013 - 3:14pm.

I forgot to add that 99% of the "paid-off" properties in CA lie in areas which are NOT FAVORED by or UNAFFORDABLE to the younger, family-raising set (read: OLDer areas).

The reason why you have been exposed to only the "over-indebted homeowner" crowd is likely because you have never lived in any micro-areas of CA where the overall indebtedness is low, ER ;=].

Nothing wrong with that, but just sayin' ...

Submitted by The-Shoveler on January 18, 2013 - 3:47pm.

IMO with rates this low, it only makes sense to have a paid off place if you are completely retired (well at least if you have some self control with spending etc..)

But that's just my opinion.

maybe BG is correct, maybe 21% represents for the most part the completely retired.

Submitted by bearishgurl on January 18, 2013 - 4:38pm.

Zillow, which typically analyzes negative home equity, switched gears this time to look at the share of homeowners with no mortgage. This is an important indicator because it points out a group of homeowners who may be more flexible than people with mortgages in putting their homes on the market, said Stan Humphries, chief economist at Zillow.

"By determining where these homeowners are located, we can also gain insight into potential inventory and demand in those areas," Humphries said....

Several factors help explain an area's mortgage-free rate. Obvious ones include the median age of homeowners: People 65 to 74 are the most likely to have no home-loan debt because they've had enough time to pay off their mortgages.

Even if every local agent/broker went door-to-door in their older "farm areas" to assess how many senior-citizens wanted to sell, I don't see them getting very many listings, if any at all.

Most will never sell ... they will simply leave the property to their estate, so their heir(s) can decide if they want to keep it "in the family" (individually or collectively) and thus inherit the old, low assessment.

As long as Props 58/193 remain "on the books" in CA, the bulk of these properties won't change hands (out of the family).

I really don't see a lot of current "demand" for these properties, anyway ... at least not in the areas more than 2 mi from the beach.

The current "family-raising" set of buyers doesn't want them. Largish lot aside, the floor plans of these seniors' houses don't necessarily "flow" and most have "dated" features.

The younger set would rather line up to bid on the over-taxed, over-indebted properties situated on miniscule lots.

I'm not trying to be facetious here. It's the truth :=0

However, the Zillow analysis also showed that nearly 35 percent of homeowners nationwide in the 20-24 category had no mortgage. The share in San Diego County is 42 percent.

Housing analysts said parents with enough means are likely helping these young adults take advantage of relatively low housing prices. They may be giving money or extending private loans to their children.

Of course, the "20-24 year-old" set is too young to have graduated from college and become established in a career. Obviously, parents/grandparents are paying cash for homes and then deeding them to their children. Or giving them a long-owned home that used to be one of their rentals. Even if the parents are extending "private loans" to their children, their lawyers would advise them to file trust deeds on those loans. Since there were no TD's recorded in the UT survey, then they were all-cash sales or intra-family transfers. And trust me when I say that parents who can afford to do this have lawyers chained to their ankles :)

The share of kids whose parents bought them a home in SD is higher because they are more unaffordable here than other parts of the nation. Local parents could have also deeded their kids a SFR or condo to live in while attending college so they would be less inclined to leave the area after graduation in search of work ;=]

In decades past and currently in the "flyover states," it was/is not uncommon for 20-24 year-olds to purchase their first home (yes, even in SD). But the type of homes they purchase(d) on their own are NOT what the typical families headed by a Gen Y would want to live in today, NOR were/are they located in areas that this buyer-group would be even remotely interested in.

Sorry if I sound like a broken record. I don't hate Gen Y. My kids are Gen Y :=D

Submitted by flyer on January 18, 2013 - 4:52pm.

BG, I think you're right that probably a fairly large percentage of the homes that are paid off are in "older" areas.

Of course, those who purchased homes here many years ago most likely have homes that are paid off, but, in general, it would still be possible, even for those who bought as recently as the late 80's and 90's, when property was much more "affordable."

For example, you could purchase a SFH in CV for under $200K during in that time period. Homes that are now $1M++ in LJ, Sunset Cliffs and Point Loma, Del Mar, etc. were not much more.

Just using my family and friends as reference points--along with the great areas in east and south county--there still seems to be quite a lot of interest in "older" areas such as Del Mar, LJ, Point Loma, Sunset Cliffs, RSF, etc., by the current crop of buyers.

Many of the folks in those areas also own their homes free and clear, so it would seem the distribution is pretty much countywide.

Submitted by bearishgurl on January 18, 2013 - 5:16pm.

flyer wrote:
BG, I think you're right that probably a fairly large percentage of the homes that are paid off are in "older" areas.

Of course, those who purchased homes here many years ago most likely have homes that are paid off, but, in general, it would still be possible, even for those who bought as recently as the late 80's and 90's, when property was much more "affordable."

For example, you could purchase a SFH in CV for under $200K during in that time period. Homes that are now $1M++ in LJ, Sunset Cliffs and Point Loma, Del Mar, etc. were not much more.

Just using my family and friends as reference points--along with the great areas in east and south county--there still seems to be quite a lot of interest in "older" areas such as Del Mar, LJ, Point Loma, Sunset Cliffs, RSF, etc., by the current crop of buyers.

Many of the folks in those areas also own their homes free and clear, so it would seem the distribution is pretty much countywide.

Yes, flyer, I used the term "2 mi from the beach" to denote that those properties situated within that parameter, regardless of age, are desirable to all age groups, and, regardless of initial cost, have more owner-residents "well-heeled enough" to pay all cash or retire their mortgages early. And I have posted before that I saw two listings (cosmetic fixers) situated on 1/2 AC+ lots located in your neck of the woods (Rancho Santa Fe) for $277K and $336K as late as 1994.

Bargains abounded in Coastal SD County RE (mostly cosmetic and heavy fixers) as late as 1997 in most desirable areas of SD County and as late as 2002 in a few areas. I observed a few heavy (structural) view-fixers get snapped up for cash in 92106 (Fleetridge, Roseville and LaPlaya) between 2001-2002.

I agree that it is entirely possible for a buyer from the early nineties to have retired their mortgage(s).

Submitted by flu on January 18, 2013 - 5:25pm.

I don't get the fascination in today's environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

Economic situation changes, and so does one's strategy. Maybe decades ago when mortgage rates were at the bendover 10+% rate, there was an incentive to pay off early...But look around. Mortgage rates are 2.5% for 15 years fixed, 3.375% for 30 years on a primary. Equity in primary home is pretty dead (at least until you move out or move up)...In this current environment, why do you want your money just to still there doing nothing?

Phillip Morris pays a 3.4% dividend, AN probably has a few recommendations on dividend stocks that do over 10%, and even the sucky Intel will be paying close to 5% dividend (though, it's still a crappy company)...And these rates won't ever change. Someone who is well qualified and who can take advantage of this. Hell, you probably can get more than 3% by buying and selling crap on craigslist.

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.

Submitted by earlyretirement on January 18, 2013 - 5:36pm.

bearishgurl wrote:
I forgot to add that 99% of the "paid-off" properties in CA lie in areas which are NOT FAVORED by or UNAFFORDABLE to the younger, family-raising set (read: OLDer areas).

The reason why you have been exposed to only the "over-indebted homeowner" crowd is likely because you have never lived in any micro-areas of CA where the overall indebtedness is low, ER ;=].

Nothing wrong with that, but just sayin' ...

Thanks for the good points BG. Yep, you're absolutely right. I've never lived or bought property in California prior to 2011 so I wasn't exposed to any of this. Most of the exposure I had was watching friends or former classmates buy properties they apparently couldn't afford. Or that they could afford and just milk the equity out of them. (None of them live in San Diego anymore).

And I LOVE LOVE LOVE Prop 13!

The-Shoveler wrote:
IMO with rates this low, it only makes sense to have a paid off place if you are completely retired (well at least if you have some self control with spending etc..)

But that's just my opinion.

maybe BG is correct, maybe 21% represents for the most part the completely retired.

The Shoveler. I agree it really makes sense to have a paid off place if you're completely retired. But even being semi-retired, I love the feeling of having my place paid off. I know it's super conservative to have properties paid off and not to have it leveraged but I've purchased several properties and waited until I had the funds to purchase them. In several parts of the world, mortgages either don't exist or they are extremely expensive to finance so in many parts of the world people buy with cash.

Americans are VERY fortunate (and spoiled) with these super low interest rates and the ability to pay over 15-30 years.

flu wrote:
I don't get the fascination in today's environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

In this current environment, why do you want your money just to still there doing nothing?

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.

Flu, definitely I can see your point and chain of thought. I agree in this very low interest rate environment many want to take on leverage and debt. But there is a segment of the population out there that is already well exposed to the stock market and other investments.

Absolutely no need to hit "home runs" or take on really any risk at all. I know several people like this. They don't need to take on any leverage whatsoever.

Submitted by bearishgurl on January 18, 2013 - 5:31pm.

flu wrote:
I don't get the fascination in today's environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

Economic situation changes, and so does one's strategy. Maybe decades ago when mortgage rates were at the bendover 10+% rate, there was an incentive to pay off early...But look around. Mortgage rates are 2.5% for 15 years fixed, 3.375% for 30 years on a primary. Equity in primary home is pretty dead (at least until you move out or move up)...In this current environment, why do you want your money just to still there doing nothing?

Phillip Morris pays a 3.4% dividend, AN probably has a few recommendations on dividend stocks that do over 10%, and even the sucky Intel will be paying close to 5% dividend (though, it's still a crappy company)...And these rates won't ever change. Someone who is well qualified and who can take advantage of this. Hell, you probably can get more than 3% by buying and selling crap on craigslist.

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.

I agree. At today's rates, there's not much incentive to pay it off ... even if/when you are able to.

The majority of SD's current crop of senior-citizen homeowners paid their properties off in the seventies/eighties (20-30 yrs after SD's postwar building boom).

Submitted by bearishgurl on January 18, 2013 - 5:46pm.

I find it strange that the local media is just now deciding to discuss this issue. For the last 30 years, I have been well-aware of the magnitude of free-and-clear properties here in SD County. But I have always lived in areas which were filled with much more than 21% of these types of owners (read: OLDer areas).

I think the UT is trying to put two Gen Y's heads together to scare up a story on how to increase SD County's MLS inventory, lol.

It won't work.

Submitted by flyer on January 18, 2013 - 5:49pm.

flu wrote:
I don't get the fascination in today's environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

Economic situation changes, and so does one's strategy. Maybe decades ago when mortgage rates were at the bendover 10+% rate, there was an incentive to pay off early...But look around. Mortgage rates are 2.5% for 15 years fixed, 3.375% for 30 years on a primary. Equity in primary home is pretty dead (at least until you move out or move up)...In this current environment, why do you want your money just to still there doing nothing?

Phillip Morris pays a 3.4% dividend, AN probably has a few recommendations on dividend stocks that do over 10%, and even the sucky Intel will be paying close to 5% dividend (though, it's still a crappy company)...And these rates won't ever change. Someone who is well qualified and who can take advantage of this. Hell, you probably can get more than 3% by buying and selling crap on craigslist.

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.

flu, I agree, for younger people who purchased their homes in the last decade or so, and paid hundreds of thousands more for their homes than previous buyers, keeping a mortgage might not only make more sense, but, in many cases, is probably a necessity. Personally, I always wanted to keep funds free for investment properties, so I had a different strategy when I was in the "buying" mode.

On the other hand, I can also understand why the younger folks (and/or their parents) who are part of the current 21% mentioned in the OP might want to be free and clear homeowners.

Even though, when we're young, we think we're invincible, when unexpected things in life happen, it's really nice to have your home paid off--just in case you lose that job, or have to pay all of your medical insurance, or, or....

To each his or her own--whatever works for your bottom line!

Submitted by bearishgurl on January 18, 2013 - 5:52pm.

Does any Pigg know exactly when the "30-year mtg" became available?

I believe it was around 1952 (with the older, 20-year option still available).

Gotta do some research on the FHA.

IIRC, ARMs were not in widespread use until about 1981.

Submitted by earlyretirement on January 18, 2013 - 6:05pm.

bearishgurl wrote:
Does any Pigg know exactly when the "30-year mtg" became available?

Even though, when we're young, we think we're invincible, when unexpected things in life happen, it's really nice to have your home paid off--just in case you lose that job, or have to pay all of your medical insurance, or, or....

.

It was right after the Great Depression when all hell broke loose. I believe mortgages started in the 1930's but it wasn't until the Great Depression that 30 years became the norm.

And I also agree with the point you made about everyone thinking they are always going to be invincible or even that they will always going to make $X per year. You never know in life what might happen. It's always a good feeling to have your primary home that you'll live in paid off.

One thing I've learned is you can't go broke being very conservative. And I've personally met several people that retired with millions without taking huge risks or over-leveraging. Never underestimate the power of compound interest.

Submitted by AN on January 18, 2013 - 6:09pm.

flu wrote:
I don't get the fascination in today's environment with the desire to pay a primary home off early, especially for someone who is young that has still a lot of earning potential and can afford to take risks and still recover.

Economic situation changes, and so does one's strategy. Maybe decades ago when mortgage rates were at the bendover 10+% rate, there was an incentive to pay off early...But look around. Mortgage rates are 2.5% for 15 years fixed, 3.375% for 30 years on a primary. Equity in primary home is pretty dead (at least until you move out or move up)...In this current environment, why do you want your money just to still there doing nothing?

Phillip Morris pays a 3.4% dividend, AN probably has a few recommendations on dividend stocks that do over 10%, and even the sucky Intel will be paying close to 5% dividend (though, it's still a crappy company)...And these rates won't ever change. Someone who is well qualified and who can take advantage of this. Hell, you probably can get more than 3% by buying and selling crap on craigslist.

Paying off early is sooooo old school. Hell, I was part of that old school of thinking. Not so much anymore.


I totally agree and that's my thought exactly. At 3.5% or less, why would you pay it off a day early. To me, it's all about net cash flow (income - expense). I rather have cash in the bank earning enough interests/dividend to pay for the mortgage than paying off the mortgage and not have much in the bank. You need cash to eat and you can't eat your house. So, unless you already have plenty of cash to cover all the costs during retirement, I don't see the need to pay off the house. I bet 10 years from now, we'll be looking back and telling our kids how lucky we were to be able to borrow at <3-4%.

Submitted by bearishgurl on January 18, 2013 - 6:15pm.

earlyretirement wrote:
bearishgurl wrote:
Does any Pigg know exactly when the "30-year mtg" became available?

Even though, when we're young, we think we're invincible, when unexpected things in life happen, it's really nice to have your home paid off--just in case you lose that job, or have to pay all of your medical insurance, or, or....

.

It was right after the Great Depression when all hell broke loose. I believe mortgages started in the 1930's but it wasn't until the Great Depression that 30 years became the norm.

And I also agree with the point you made about everyone thinking they are always going to be invincible or even that they will always going to make $X per year. You never know in life what might happen. It's always a good feeling to have your primary home that you'll live in paid off.

One thing I've learned is you can't go broke being very conservative. And I've personally met several people that retired with millions without taking huge risks or over-leveraging. Never underestimate the power of compound interest.

Thanks for your answer and also "quoting me" so eloquently, ER :=P

I agree that there's nothing wrong with living on a "cash basis."

It's what most of my relatives did/are doing ...

Submitted by carlsbadworker on January 18, 2013 - 10:16pm.

I have seen many arguments against paying off houses but still I am not convinced. Equity is like a bond (in fact you are buying your own mortgage bond) and I don't think it is a good asset allocation strategy to completely avoid bond.

I think it depends on the goal of your life. I would rather have 4 paid-off investment properties that generate cash flow every month than 10 investment properties that are cash-flow break-even. Besides, it is much easier to hold on investment properties with up and down in market value if it cash flows.

I do agree that equity in the primary home that you live in is pretty dead though...because by definition since you are living in it, the money won't generate any cash flow. (Maybe except at the very end of it, you save the extra mortgage payment)

And tell me how you can get more than 3% with craps on craigslist without much effort with $100K+?

Submitted by flyer on January 19, 2013 - 2:58am.

From my experience, I'm pretty sure the decision to pay off a house is not an either/or decision for most of the 21% mentioned in the OP.

I would venture to guess most of the 21% have plenty of cash/investments/pensions, etc. to cover living expenses/retirement, etc., AND pay their homes off.

Some of us bought our homes/investment properties for relatively nothing, compared to today's pricing. Others, who purchased their homes fairly recently, as some on this board have done, have come in with cash to purchase million+ homes--even at today's prices--so it is conceivable that both can be achieved.

Submitted by flu on January 19, 2013 - 6:50am.

carlsbadworker wrote:

And tell me how you can get more than 3% with craps on craigslist without much effort with $100K+?

I bought a set of used 15" rims for the POS miata for $100..Didn't like them, and ended up selling them for $200... I bought have a backend miata from a junkyard person on CL for I around $300, pulled the parts I wanted ,and then parted out the rest for $400. Oh and the POS miata itself I bought on CR for $2000, and immediately someone else working on a similar project wanted to offer $2400 since it ended up not being as big a POS I thought orginally.... (Though me putting in a suspension this weekend that costs have the price of that POS car isn't really gonna make it pencil out now...)....So you're right, it's not 3.5%. Plus, the remaining stuff I ended up bartering for free tattoo work that I would have had to pay 5% more if I actually paid cash... (Sorry, last part isn't true...Inside joke)

Submitted by flu on January 19, 2013 - 7:16am.

But seriously....Let's say your choice is to take $XXXk and pay off your house or $XXXk and say spread the risk among a rental property, a dividend fund, and maybe some cash....

Paying 30year off is 3.5% that one bought in recent times. Ok good. Now what? No income generated from it. No monthly income from it, all you got to count on is appreciation (which may/may not happen...what if you did pay it off, only to see your primary property value fall as some doomdayer's say it would...)...

On the other hand taking the same $XXXk+ and spreading the risk among say a rental which these days is like 5-8% (excluding any appreciation), a reasonably stable dividend fund (preferably tax exempt) which most likely is above 4% (excluding any gain recently), and CD is like 1%...

Again, if you're young, trying to build wealth. the riskier choice to me is to concentrate everything of the $XXXk into 1 asset class, your primary home, versus spreading the risk among different asset classes. Your primary home very well may underperform everything else.(I guess if you're already in retirement, with sufficient nest egg. Different strategy, because you want to try to be debt free as much as possible and preserve capital, versus try to accumulate wealth.)

And lastly, for people who can't pay off their home completely immediately, but try to "pay off early" at the expense of using that money to generate income elsewhere....To me that's the most risky strategy...Because while you're trying to pay off your primary off early, you're counting all your eggs on your primary home AND counting on everything else in your life to work out(like your career/health/job)
If suddenly you have no income because you lose your job/business/health (and yes, shit does happen).....your remaining mortgage on primary home becomes a huge dead anvil liability.....You still need to continue to make monthly payments, regardless of how much extra payments you've made...how much equity you have is meaningless(since you can't borrow/cash-out refi from it when you are unemployed)...and any potential future appreciation is meaningless if you have to sell at prevailing market condition when you are unemployed....And then you still will need a place to live... When you've concentrated everything into paying your primary home off early and did nothing else, you have no cash flow when your unemployed and no other stream of income....On the other hand, it's very unlikely that you will be unemployed at the same time that (a) all your tenants will also stop making monthly payments, (b) your dividend fund come crashing down, (c) your CD refuses to pay you 1%, and (d) stock market tanking simultaneously at the same.. If that's happening, the entire world is crumbling, and you've got bigger problems to worry about.

Submitted by earlyretirement on January 19, 2013 - 2:58pm.

flu,

You make some good points but you are also assuming that someone that comes into money and has the choice to either pay off their primary or do something else will be wise with those funds/cash.

I've seen plenty of people that come into money and aren't wise with what they do with it. Plenty of people blow extra cash on either bad investments or just spend the money foolishly. So you have to look at it from that angle as well.

Absolutely leverage can and does work out for people but it does people in as well. From my experiences over the past many years investing, I've learned that people are quick to tell you about all the great genius stock picks or other investments they have made that made great returns. However, they neglect to tell you about all the bad investments or stocks they have made that have lost a lot of money. (Especially on these message boards).

Submitted by scaredyclassic on January 19, 2013 - 3:45pm.

earlyret, i think what you're saying is, there are lots dumber things you could do with money...

and that's true...

but I'd say there are smarter moves, too...

for the dumbest, it's not all that risky to pay off the house.

luckily, with college tuitions on the horizon for the next 12 years or so, I will be fortunate to not have any extra money to worry about...

Submitted by earlyretirement on January 19, 2013 - 4:49pm.

squat300 wrote:
earlyret, i think what you're saying is, there are lots dumber things you could do with money...

and that's true...

but I'd say there are smarter moves, too...

for the dumbest, it's not all that risky to pay off the house.

luckily, with college tuitions on the horizon for the next 12 years or so, I will be fortunate to not have any extra money to worry about...

Oh yeah. By no means am I saying this is the smartest thing you can do with your money. Not at all. As mentioned, it only makes sense after your already well diversified or want to limit what you already have in the stock market or other investments/real estate.

I know how you feel about saving up for college. With young kids I started saving the day they were born and plugging away each year. It's insane the prices of some colleges these days and I can't imagine what it will be in the next 12-14 years once my kids hit college.

Submitted by carlsbadworker on January 19, 2013 - 5:00pm.

earlyretirement wrote:
Absolutely leverage can and does work out for people but it does people in as well. From my experiences over the past many years investing, I've learned that people are quick to tell you about all the great genius stock picks or other investments they have made that made great returns. However, they neglect to tell you about all the bad investments or stocks they have made that have lost a lot of money. (Especially on these message boards).

I am agreeing with ER on this one. What is so nice about other investments that are tempting people to leverage up at the moment? Jeremy Grantham's GMO is forecasting 0.1% annual return from U.S. large and -0.8% annual return from U.S. small in the next seven years. If U.S. stock is at the 2009 low, I would agree to leverage up. But what do you leverage up for right now? For rental property, it is not like you have many selections out there. So it is pretty much sitting in cash earning 0.1% anyway waiting for the right opportunity to come.

Submitted by flu on January 19, 2013 - 10:51pm.

earlyretirement wrote:
flu,

You make some good points but you are also assuming that someone that comes into money and has the choice to either pay off their primary or do something else will be wise with those funds/cash.

I've seen plenty of people that come into money and aren't wise with what they do with it. Plenty of people blow extra cash on either bad investments or just spend the money foolishly. So you have to look at it from that angle as well.

Absolutely leverage can and does work out for people but it does people in as well. From my experiences over the past many years investing, I've learned that people are quick to tell you about all the great genius stock picks or other investments they have made that made great returns. However, they neglect to tell you about all the bad investments or stocks they have made that have lost a lot of money. (Especially on these message boards).

I agree but there is is difference between coming to money as you say and gradual wealth accumulation. Gradual wealth accumulation isn't always feasible these days if one has a mortgage over property and putting everything towards paying it off early.

And while personally I wouldn't gamble on one stock , I wouldn't want to tie everything into a non income house either if I could do something else with it.

And the way it is...no risk no reward..taking calculated risk is different from being reckless. Though I would say most people whom you are referrinf to either had poor money management skills ( they couldn't handle an unexpected windfall ) or took on way too much risk beyond what they can handle.

It is also funny how your primary is often considered an asset when it more or less behaves as a liability. You have to make monthly for a god awful long time and even if you make extra payments you still need to make regular monthly payments. And yet when it comes to things like for example financial aid, some places love to count how much equity you have even though you really can't touch it (unless you want to cash out refi to pay for tuition).

Submitted by CA renter on January 20, 2013 - 1:53am.

flu wrote:
But seriously....Let's say your choice is to take $XXXk and pay off your house or $XXXk and say spread the risk among a rental property, a dividend fund, and maybe some cash....

Paying 30year off is 3.5% that one bought in recent times. Ok good. Now what? No income generated from it. No monthly income from it, all you got to count on is appreciation (which may/may not happen...what if you did pay it off, only to see your primary property value fall as some doomdayer's say it would...)...

On the other hand taking the same $XXXk+ and spreading the risk among say a rental which these days is like 5-8% (excluding any appreciation), a reasonably stable dividend fund (preferably tax exempt) which most likely is above 4% (excluding any gain recently), and CD is like 1%...

Again, if you're young, trying to build wealth. the riskier choice to me is to concentrate everything of the $XXXk into 1 asset class, your primary home, versus spreading the risk among different asset classes. Your primary home very well may underperform everything else.(I guess if you're already in retirement, with sufficient nest egg. Different strategy, because you want to try to be debt free as much as possible and preserve capital, versus try to accumulate wealth.)

And lastly, for people who can't pay off their home completely immediately, but try to "pay off early" at the expense of using that money to generate income elsewhere....To me that's the most risky strategy...Because while you're trying to pay off your primary off early, you're counting all your eggs on your primary home AND counting on everything else in your life to work out(like your career/health/job)
If suddenly you have no income because you lose your job/business/health (and yes, shit does happen).....your remaining mortgage on primary home becomes a huge dead anvil liability.....You still need to continue to make monthly payments, regardless of how much extra payments you've made...how much equity you have is meaningless(since you can't borrow/cash-out refi from it when you are unemployed)...and any potential future appreciation is meaningless if you have to sell at prevailing market condition when you are unemployed....And then you still will need a place to live... When you've concentrated everything into paying your primary home off early and did nothing else, you have no cash flow when your unemployed and no other stream of income....On the other hand, it's very unlikely that you will be unemployed at the same time that (a) all your tenants will also stop making monthly payments, (b) your dividend fund come crashing down, (c) your CD refuses to pay you 1%, and (d) stock market tanking simultaneously at the same.. If that's happening, the entire world is crumbling, and you've got bigger problems to worry about.

If you have no mortgage, the savings on mortgage interest is like tax-free income. This is "tax-free income" (savings) can be invested every month. This is one of the safest ways to make a return on your money, especially if you never intend to sell your house (don't worry as much about home price fluctuations).

Yes, the value of one's house can go up or down, but so can the value of all the other investments you've mentioned.

As far as you losing your job at the same time as a tenant not paying rent and the stock market crashing, etc...sounds exactly like what happens during severe recessions/depressions, which aren't nearly as rare as some might want to believe. With a paid-off house, if one is wise enough to set aside the money that's being saved by not making monthly mortgage payments, there should be sufficient enough savings to make it through a fairly prolonged period of unemployment, and you don't have to worry about losing your house because you can't afford to make the mortgage payment. For many people, this peace of mind is worth a million dollars.

Submitted by flu on January 20, 2013 - 10:51am.

CA renter wrote:
flu wrote:
But seriously....Let's say your choice is to take $XXXk and pay off your house or $XXXk and say spread the risk among a rental property, a dividend fund, and maybe some cash....

Paying 30year off is 3.5% that one bought in recent times. Ok good. Now what? No income generated from it. No monthly income from it, all you got to count on is appreciation (which may/may not happen...what if you did pay it off, only to see your primary property value fall as some doomdayer's say it would...)...

On the other hand taking the same $XXXk+ and spreading the risk among say a rental which these days is like 5-8% (excluding any appreciation), a reasonably stable dividend fund (preferably tax exempt) which most likely is above 4% (excluding any gain recently), and CD is like 1%...

Again, if you're young, trying to build wealth. the riskier choice to me is to concentrate everything of the $XXXk into 1 asset class, your primary home, versus spreading the risk among different asset classes. Your primary home very well may underperform everything else.(I guess if you're already in retirement, with sufficient nest egg. Different strategy, because you want to try to be debt free as much as possible and preserve capital, versus try to accumulate wealth.)

And lastly, for people who can't pay off their home completely immediately, but try to "pay off early" at the expense of using that money to generate income elsewhere....To me that's the most risky strategy...Because while you're trying to pay off your primary off early, you're counting all your eggs on your primary home AND counting on everything else in your life to work out(like your career/health/job)
If suddenly you have no income because you lose your job/business/health (and yes, shit does happen).....your remaining mortgage on primary home becomes a huge dead anvil liability.....You still need to continue to make monthly payments, regardless of how much extra payments you've made...how much equity you have is meaningless(since you can't borrow/cash-out refi from it when you are unemployed)...and any potential future appreciation is meaningless if you have to sell at prevailing market condition when you are unemployed....And then you still will need a place to live... When you've concentrated everything into paying your primary home off early and did nothing else, you have no cash flow when your unemployed and no other stream of income....On the other hand, it's very unlikely that you will be unemployed at the same time that (a) all your tenants will also stop making monthly payments, (b) your dividend fund come crashing down, (c) your CD refuses to pay you 1%, and (d) stock market tanking simultaneously at the same.. If that's happening, the entire world is crumbling, and you've got bigger problems to worry about.

If you have no mortgage, the savings on mortgage interest is like tax-free income. This is "tax-free income" (savings) can be invested every month. This is one of the safest ways to make a return on your money, especially if you never intend to sell your house (don't worry as much about home price fluctuations).

Yes, the value of one's house can go up or down, but so can the value of all the other investments you've mentioned.

As far as you losing your job at the same time as a tenant not paying rent and the stock market crashing, etc...sounds exactly like what happens during severe recessions/depressions, which aren't nearly as rare as some might want to believe. With a paid-off house, if one is wise enough to set aside the money that's being saved by not making monthly mortgage payments, there should be sufficient enough savings to make it through a fairly prolonged period of unemployment, and you don't have to worry about losing your house because you can't afford to make the mortgage payment. For many people, this peace of mind is worth a million dollars.

Why would I want to pay off my house now (which I can if I wanted to) at 2.5% when dumpy places here or Bay Area can produce 5-8% coc right now?
(And folks that have to ask where, obviously haven't been looking for the past 2 years..)

It's contrary to what you would believe if you think dollar is gonna weaken and home prices are not going to materially appreciate (although I think you believe home prices aren't going to rise, but I think they will)..

Present value of US dollar is worth more now than it will be 10-20 years from now. That's gonna be pretty evident, because we keep printing the toilet paper USD like there's no tomorrow.

"Hope" is hoping property values appreciate in a meaningful way such that what extra you put in now in cash is worthwhile. "Safety" is an illusion... There is nothing "safe", everything has risk to varying degree, whether one wants to believe it or not.

All those people doing refi's with negative points and getting cash back I couldn't figure out why for the longest time. But then when I ran through the numbers, it made sense. In some cases, doing a refi- with negative rebates added gave you a rebate of $XXXX dollars now... It added an extra total $XXXX+ZZ dollars to the entire balance on the new loan... The new ZZ dollars was so insignificant, that the cost of getting money $XXXX "now" was worth a hell of lot more than than $XXXX+ZZ, because ZZ extra dollar clearly was so small that it would be insignificant 30 years later....

Submitted by earlyretirement on January 20, 2013 - 11:50am.

CA renter wrote:

If you have no mortgage, the savings on mortgage interest is like tax-free income. This is "tax-free income" (savings) can be invested every month. This is one of the safest ways to make a return on your money, especially if you never intend to sell your house (don't worry as much about home price fluctuations).

Yes, the value of one's house can go up or down, but so can the value of all the other investments you've mentioned.

As far as you losing your job at the same time as a tenant not paying rent and the stock market crashing, etc...sounds exactly like what happens during severe recessions/depressions, which aren't nearly as rare as some might want to believe. With a paid-off house, if one is wise enough to set aside the money that's being saved by not making monthly mortgage payments, there should be sufficient enough savings to make it through a fairly prolonged period of unemployment, and you don't have to worry about losing your house because you can't afford to make the mortgage payment. For many people, this peace of mind is worth a million dollars.

Exactly. To be honest, I don't even care what housing prices are doing or how they might fluctuate. For the principle HOME that I live in, where I'll raise my kids for the next 15 years, I don't look at the house as an "investment". It's just a home.

Flu, you mentioned that these people are "hoping" that property prices keep going up but for the most part, for those that plan to stay in their homes for the long haul or raising kids in them....they could care less and don't even think about it.

I do own other investment properties so I understand your chain of thought flu. But on a principle home I don't look at it the same way.

Also, I probably won't sell this house in the future even after the kids finish high school. Maybe we'll rent it out as rentals are very solid and I think they probably will be in the future as well in good school district areas.

I totally agree with you CA Renter that there are many many scenarios where having a paid off place gives you great peace of mind.

I do agree that every person needs to look at their individual situation and see what makes sense to them but to dismiss people paying off houses as crazy isn't correct.

flu wrote:

And while personally I wouldn't gamble on one stock , I wouldn't want to tie everything into a non income house either if I could do something else with it.

And the way it is...no risk no reward..taking calculated risk is different from being reckless. Though I would say most people whom you are referrinf to either had poor money management skills ( they couldn't handle an unexpected windfall ) or took on way too much risk beyond what they can handle.
.

Well, I don't think it's just a matter of "gambling on one stock". It's easy now to sound so optimistic with the stock market up tremendously the past few years. But some people forget what it was like at the depths of the Great Recession. People don't realize just how close we came to a systemic crash in the financial markets.

I don't care how diversified you were, there was a period where everyone in the market (except short sellers) were taking big hits to the portfolios. Very few people didn't have any worries at all. So I guess I'd mention to remember that period of time.

And again, it wasn't just a matter of gambling on one stock. There are entire companies that aren't around anymore. So it's not a matter of waiting for their stock price to come back. Some of them are gone. Or others like Citibank which have rebounded, are still next to nothing compared to where they were.

The stock market is very frothy right now. I guess I wouldn't have much of a problem if I read the same advice several years ago but the market isn't a place I'd continue to expect these huge returns. The Fed has basically forced people to push their money into the stock market but it by no means is a safe place.

You mention investment properties. I know that area well as I own several investment properties. But I can honestly tell you it's NOT for most people out there. Being a landlord isn't for everyone. Most people just don't have what it takes to be a good landlord. (i'm not saying it's not a good investment because I do believe the returns from investment rental properties depending on where you buy are great). But no way I'd pretend that just anyone can be a landlord. Plus it sucks a lot of time as well.

Submitted by AN on January 20, 2013 - 12:42pm.

I think where you stand really depend on where you sit. earlyretirement is already retired with many investment properties, so I'm assuming he has $xM in the bank/investments as well. So, of course, have a paid off house makes perfect sense. Not because the number makes sense but because he can afford that peace of mind (if having a paid off house give you that).

However, for most people who are not there yet or will never be there, having a paid off house pose a significant risk. Lets take an upper middle class area today and your house is worth $700k and you owe $560k on it. Lets also say you have $1M in the bank, so you have an option of paying off the home or not. Lets take CAR scenario of great depression for example. How long can you live off $440k if you don't have a job but also have a free and clear home. Assuming your yearly expense is around $60k w/out housing. You're talking about 7.3 years before you're out of cash. Depression also mean your house value went to the $hitter so no refi to take money out. Now, lets take a look at what would happen if you didn't pay off the house today and have $1M in the bank. Your yearly expense would be $60k + $32.4k (housing) = $92.4k. Your $1M will keep you alive and housed for 10.8 years. That's assuming you make 0% on your $1M or $440k. Either way you have a much better chance of riding through the storm with $1M in the bank and a $560k mortgage than a paid off house + $440k in the bank. If it takes 8-10 years to get out of a great depression, you'd be in deep $hit if you paid off your house (you'd either have to sell your house or drastically change your living standard). If you didn't pay off your house, you'd have 10.8 years of buffer money.

So, it really depends on where you are in term of retirement savings. A paid off house is not risk free. If anything, I see that as a much bigger risk than having a mortgage.

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