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

[an]

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.

[scaredyclassic]

5 years ago my answer would have been pay off the house.debt is bad.

today, no.

diversification requires that you keep the mortgage.

that’s my final answer.

i would sleep better having the bank own a good chunk of my house.

it could be destroyed ina n earthquake, blaha blahblah….

maintain a Plan B.

[an]

My previous post also assume you’re one of the many few who chose to continue to pay your mortgage even when your house went down 50+% in a depression. If you’re like many who just send back your key, your $1M would go A LOT longer than 10.8 years. You just send back your key and rent a comparable place for less. Or you can can be like many who stop paying but still live in the house while waiting for it to be foreclosed. Or you can move to where the job is, or you can move to an area that cost a lot less to live while riding out the storm. Flexibility and cash is worth a lot when you’re hit with something drastic like a great depression.

[Coronita]

[quote=earlyretirement]
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.[/quote]

But here’s the rub ER…. We are all assuming that it’s “safe” to dump money into a primary home because are all thinking now that home prices won’t crater anymore…The same argument you make about equity market can be said the same thing for a primary home if one made the mistake of buying in 2005/6/7 and then on top of that decided to plunk in another 100k,200k extra to try to to pay off early, only to see the equity of that house vaporize and end up being considerably less than what he/she paid for.

And maybe really if one has enough money or has a nice inheritance such that one no longer need to count on a paycheck to make the mortgage payments on primary, the value of the primary does matter because in an emergency, one result might require that person(s) to sell versus keeping forever.
Add a job loss to the equation and not much cash reserves, the person would be screwed, because the person wouldn’t be able to afford future mortgage payments and at the same time a forced sales at that point might end up producing no cash after sales if the home was worth considerably less.

On the other hand, if that person didn’t tie up his/her money into the primary home and did something else with it (not necessarily stock or 1 stock), and the house was significantly underwater, and he/she lost the job…strategic default would have been just fine and the rest of the person’s finances would be left intact.

My point is that things roll differently when someone is building wealth and still need to count on a paycheck as a primary source of income versus someone that’s got a nice pot that can already live in whole or part off of investment income and doesn’t need to worry about having a paycheck.
You are probably retired and probably live off your rental’s income so at that point, you don’t need to necessarily continue to build wealth. And some people who inherited money probably don’t need to do the same thing. Other’s who are starting out probably need to do things that have greater exposure to wealth accumulation, especially in this environment, and gradually transition to different strategy as the money pot builds up…

And I agree. I’m not suggesting everything be a landlord, but then again there is a prevailing wind that’s blowing. And I agree about the stock market being overheated…I think a lot of people who are still in the wealth building phase underestimate the risk of putting all eggs into a primary home and doing nothing else, in as much I think it would be extremely risky to over leverage and not try to pay anything down on the primary and gambling completely in stocks, bonds, metals, rental.

That said: unlike most others, I’m doing a 15 year on the primary instead of 30 year. So go figure 🙂
But my rationale is I’m 1/2 from where I want to be financially…But I’ll refinance to oblivion if it puts be in a lower monthly and total payments in the end up being less than before… And to some extent I want to free up decent capital right now to speculate, because personally I think it’s a good time to speculate (well, maybe not right now at this very moment..The ideal time was two years ago across the board…But we all have perfect vision in hindsight)…

[earlyretirement]

Flu,

Your last post was great. I’m not even disagreeing with your points. I’m just throwing another perspective as I found these kinds of threads educational. I wish they were around a long time ago.

No, I’m not retired yet. I’m still building wealth (or at least trying to.. LOL). I’m still fairly young (or at least not an old fart yet…). The investment property income definitely helps but I still have many years ahead of me with young kids.

You make good points about time frame of buying. I absolutely wouldn’t have even bought real estate during the bubble as I didn’t find it a good buy. As we entered 2011 I thought it was a good price. But honestly even if I bought during the bubble and was in the same situation now buying for the long haul and buying to live in, I wouldn’t sweat the lost equity.

I’m by no means advocating people putting all of their eggs into one basket paying off their home. Not by a long shot.

But you make some excellent points as usual.

[Coronita]

[quote=earlyretirement]Flu,

Your last post was great. I’m not even disagreeing with your points. I’m just throwing another perspective as I found these kinds of threads educational. I wish they were around a long time ago.

No, I’m not retired yet. I’m still building wealth (or at least trying to.. LOL). I’m still fairly young (or at least not an old fart yet…). The investment property income definitely helps but I still have many years ahead of me with young kids.

You make good points about time frame of buying. I absolutely wouldn’t have even bought real estate during the bubble as I didn’t find it a good buy. As we entered 2011 I thought it was a good price. But honestly even if I bought during the bubble and was in the same situation now buying for the long haul and buying to live in, I wouldn’t sweat the lost equity.

But you make some excellent points as usual.[/quote]

Agewise, I’m not an old fart. Physically I feel like an old fart.

Actually, I wish I took slightly more diversified risks when I was younger, when I could afford to take them…Either I was too scared on some or too reckless on others…Balance would have been the key.

These days, it’s more like a game for me… I mean i enjoy trying to earn more in different ways. And oh yeah, I hate losing….:)

[flyer]

I agree with all of you “younger” guys, because I was doing the same thing when I was your age, but, building wealth then seemed to be less of a challenge than it it today.

Also agree that paying off a home while you are younger, and in the wealth-building mode, might not be the best thing to do–especially if you don’t have your ultimate nestegg, medical coverage, etc., etc., covered for the balance of your life–and that “number” will be in the millions for anyone in their 30’s and 40’s–if you want to live well.

Going back to the OP, I’d guess most of the 21% have everything covered, so it’s probably not a problem

[CA renter]

[quote=AN]

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.[/quote]

But in your scenario, the person with the paid off house still has the house at the end of that 7.3 years, and will NEVER have to make mortgage/rent payments for as long as he lives in that paid-off house. As his employment prospects pick up going forward, more of his income can go toward investments at a time when prices will probably be exceedingly low as a result of a multi-year depression (which is what it would be if he were totally unemployed for 7+ years) — exactly when you want to be getting back into investing.

Additionally, if the house were a nicer house, it could be rented out and the owner could easily downsize into a tiny apartment in a flyover state, giving him extra income for however long it takes to find employment and move back to his home area.

At the end of the 10.8 years with the “investor,” he is totally broke, has no home, and will be saddled with housing payments for at least 30 years (in most cases), preventing him from having that extra money for investments when it’s most valuable.

[earlyretirement]

[quote=flyer]I agree with all of you “younger” guys, because I was doing the same thing when I was your age, but, building wealth then seemed to be less of a challenge than it it today.

Also agree that paying off a home while you are younger, and in the wealth-building mode, might not be the best thing to do–especially if you don’t have your ultimate nestegg, medical coverage, etc., etc., covered for the balance of your life–and that “number” will be in the millions for anyone in their 30’s and 40’s–if you want to live well.

Going back to the OP, I’d guess most of the 21% have everything covered, so it’s probably not a problem[/quote]

Flyer, I totally agree with you that today it’s much more difficult to make money than in previous years. And I’ve always believed the older you get, the tougher it is to make money (at least the more traditional way being an employee).

The world is a much different place now than decades ago. Heck, when I was growing up I remember my dad always pushing the idea of working forever for a company, getting a pension and social security. Living a debt free life, having your house paid off as soon as possible and taking advantage of the power of compound interest even being fairly conservative.

I remember my next door neighbor. Amazing guy. I grew up cutting his lawn and shoveling his snow, etc. This guy went to the military out of high school for 20+ years and got a pension. Then he went to work for a Fortune 500 company for 20+ years and got another pension. Then when his wife died I think he got her social security and pension as well and of course when he was in his late 60’s he got his social security as well. This guy was getting something like 4 or 5 pensions a month! It was amazing! Things like this don’t exist anymore.

Now fast forward a few decades and pensions are like dinosaurs and for the most part they don’t exist or totally vanishing. The days of working 20-30 years for the same company is pretty much gone and even if you did, you won’t get a pension. Before the “company” would take care of you if you did the time. Now no one will really take care of you.

And for some of us, we don’t even believe social security will be available for us when we need it. I’ve paid a small fortune to social security and I’m not even sure it will be around for me by the time I’m eligible. Either that or they will keep pushing the minimum age up.

Like you said, it’s much more difficult to make money today. Heck, I remember a few short years ago just sticking money into CD’s and making 5.5%. Man I miss those days.

[quote=flu]

Agewise, I’m not an old fart. Physically I feel like an old fart.

Actually, I wish I took slightly more diversified risks when I was younger, when I could afford to take them…Either I was too scared on some or too reckless on others…Balance would have been the key.

These days, it’s more like a game for me… I mean i enjoy trying to earn more in different ways. And oh yeah, I hate losing….:)[/quote]

I DREAD birthdays and getting older. I always have. I hate birthdays and the type that ask employees NOT to celebrate it. It’s depressing getting older but having kids really helped on the outlook of getting older.

I do agree it’s important to take diversified risks when you’re younger. That’s the time to do it.

[quote=CA renter]

But in your scenario, the person with the paid off house still has the house at the end of that 7.3 years, and will NEVER have to make mortgage/rent payments for as long as he lives in that paid-off house. As his employment prospects pick up going forward, more of his income can go toward investments at a time when prices will probably be exceedingly low as a result of a multi-year depression (which is what it would be if he were totally unemployed for 7+ years) — exactly when you want to be getting back into investing.

Additionally, if the house were a nicer house, it could be rented out and the owner could easily downsize into a tiny apartment in a flyover state, giving him extra income for however long it takes to find employment and move back to his home area.

At the end of the 10.8 years with the “investor,” he is totally broke, has no home, and will be saddled with housing payments for at least 30 years (in most cases), preventing him from having that extra money for investments when it’s most valuable.[/quote]

My game plan has always revolved around despising debt. I know there is good debt and bad debt but I’ve hated debt of any kind. I graduated college with a 6 figure + debt and it was a horrible feeling for me. Many of my friends had wealthy families paying not only for their tuition but everything else. I was always envious of them. Fortunately I’ve always had great jobs, worked hard and made great income.

I guess one of my goals was always to pay off my house as quickly as I could. I’m sure it’s not for everyone but I’ve always loved the feeling of NEVER having another mortgage payment again. And although real estate is more expensive in San Diego vs. other places around the country, man I LOVE LOVE LOVE Prop 13! Some of the property tax rates in other places is insane! Yeah, you can buy a house cheaper in places in Texas but (a) you’re stuck in Texas and (b) you could end up paying more property taxes in Texas (some areas are as high as 3% a year).

My philosophy is San Diego is a wonderful place to be retired and own a paid off place to spend your glory years. Yeah, the taxes here are horrible in California but it’s as close to paradise than most places around the world. And I’ve been to many many cities around the world.

I have a friend that is exactly in the situation you mentioned CA Renter. He has a really nice townhouse in La Jolla. He was in exactly the situation you described. He lost his job but found another one in Dallas and is renting his place out for a VERY NICE amount. His house is also paid off. His plan is to return to San Diego again when he permanently retires.

[an]

[quote=CA renter]But in your scenario, the person with the paid off house still has the house at the end of that 7.3 years, and will NEVER have to make mortgage/rent payments for as long as he lives in that paid-off house. As his employment prospects pick up going forward, more of his income can go toward investments at a time when prices will probably be exceedingly low as a result of a multi-year depression (which is what it would be if he were totally unemployed for 7+ years) — exactly when you want to be getting back into investing.

Additionally, if the house were a nicer house, it could be rented out and the owner could easily downsize into a tiny apartment in a flyover state, giving him extra income for however long it takes to find employment and move back to his home area.

At the end of the 10.8 years with the “investor,” he is totally broke, has no home, and will be saddled with housing payments for at least 30 years (in most cases), preventing him from having that extra money for investments when it’s most valuable.[/quote]
With my scenario, after 7.3 years, you have no cash to pay for food. How are you going to eat?

If we’re talking about great depression, that house probably will see >50% decline. If you really must have a house free and clear, the $700k house can be bought for cash for <$350k. If you add in $140k from the original down payment, you'd own the same house for $490k vs $700k. Point is, you have the flexibility to do so. While the investor will be out of cash at 10.8 years, the owner of the free and clear house will be hungry for 3.5 years since they ran out of cash to eat 3.5 years ago. Now, if you're 50 and this happen, do you think someone who's in the 60s will be hired back into the work force who haven't worked for over 10 years? Also, we've only talked about a depression scenario. What if we see an inflationary scenario like we saw in 70s-80s? Houses tripped, income increased drastically in nominal term (while not enough to keep up with inflation). However, in inflationary scenario, it would make a lot more sense to pay back $700k with money in the future that's worth less than 1/2 of what it was. Lets look at what would happen if we see a repeat of 70s/80s where you can get CD rate around 15%. If you have $1M, your yearly interest would be $150k. If you paid off your house, your yearly interest would be $66k. After just 5 years, if you must have a paid off house, you can have it completely paid off in 5 years and still have $1M in your nest egg. While with the other scenario, you only have about $770k. So you're already $230k less well off. Going forward, you'll be perpetually in catch up mode compare to if you didn't pay off the house. Lets assume this inflationary scenario happen when you're still working. Your salary would drastically increase while your debt payment stay static in nominal term. So, if we see inflation, you lose if you pay off early. If we have a great depression, you still worse off. I fail to see under which scenario would it be better to pay off the house. We're talking about strictly number here and not the intangible factor of peace of mind.

[CA renter]

I’m with you, ER. The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.

Yes, the “unsuccessful” people might have times in their lives when they are totally flying high. I’ve known people who were living in very expensive homes in very high-end areas, owned exotic cars, vacationed in the most exotic locales, and had VIP memberships at the well-known clubs, etc., and I’ve watched these types crash and burn more often than not.

I’m the kind of person who likes to keep a low profile; maintain a consistent, disciplined focus on the long-term goals; stay the heck out of debt; and make safety and security a very high priority. We’re all different, and what’s right for one person is not necessarily right for another, but my way (our way, as Mr. CAR is 100% with me on this), has served us exceedingly well.

There is no doubt, though, that if everyone did what we do, the world would be set back about 200 years since we need the real “risk-takers” — those who do or who invest money in new start-ups, not those who invest once something has already taken off, or after something already exists — to bring all the new technologies and inventions to the market.

[an]

[quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]
That’s the funniest thing I’ve read in awhile. I guess all the doctors who had hundreds of thousands of student loan were unsuccessful. How about many many white collar workers who didn’t have a silver spoon who had to get student loans to get their BS/MS/PhD. How about the many small business owners who got their first business loan to start their businesses? How about the many small business owners who got more business loans to expand their business? How about the millions of people who got a loan to buy their first house, then their 2nd house and rent out their first house, then their 3rd house and rent out their 2nd house, etc? I can go on but you get the point.

[CA renter]

[quote=AN][quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote]
That’s the funniest thing I’ve read in awhile. I guess all the doctors who had hundreds of thousands of student loan were unsuccessful. How about many many white collar workers who didn’t have a silver spoon who had to get student loans to get their BS/MS/PhD. How about the many small business owners who got their first business loan to start their businesses? How about the many small business owners who got more business loans to expand their business? How about the millions of people who got a loan to buy their first house, then their 2nd house and rent out their first house, then their 3rd house and rent out their 2nd house, etc? I can go on but you get the point.[/quote]

Grants, scholarships, jobs, living at home, etc. while in college can all help to avoid student debt. In my family (almost all college educated, and most with graduate degrees or post-graduate credentials, etc.), very few have had any significant debt upon graduation (maybe $10K or less) because everyone did the community college->state university->more specialized/more expensive university for graduate work, if necessary. Everyone also worked their way through school, and most of us had a lot of full-time work under our belts by the time we graduated. This usually meant that it took longer than the standard 4-5 years for an undergrad degree, but we all had real work experience upon graduation, and this ended up being every bit as valuable as the pieces of paper in our hands.

As for small business owners, in many cases they can work their way up slowly, using profits to build up and expand their businesses. Others we know entered into partnerships and/or created privately held corporations and distributed shares to start-up investors.

Mortgages are okay, but I wouldn’t recommend borrowing more than 80% LTV, and would not recommend leveraging up to the max one can afford. Leverage is good when it’s going your way, but it’s probably the most common way so many “rich” people end up broke.

Yes, small amounts of *self-liquidating* debt can be helpful in some situations, but even in these cases, the people I know who managed to avoid the financial highs and subsequent crashes that so many experience were the ones who were always very, very conservative where debt and leverage were concerned. Most have made a point of avoiding, or at least minimizing, the debt they took on…and it was almost always “productive”/ self-liquidating debt, not consumer debt.

[an]

[quote=CA renter]Grants, scholarships, jobs, living at home, etc. while in college can all help to avoid student debt. In my family (all college educated, and most with graduate degrees or post-graduate credentials, etc.), very few have had any significant debt upon graduation (maybe $10K or less) because everyone did the community college->state university->more specialized/more expensive university for graduate work, if necessary. Everyone also worked their way through school, and most of us had a lot of full-time work under our belts by the time we graduated. This usually meant that it took longer than the standard 4-5 years for an undergrad degree, but we all had real work experience upon graduation, and this ended up being every bit as valuable as the pieces of paper in our hands.

As for small business owners, in many cases they can work their way up slowly, using profits to build up and expand their businesses. Others we know entered into partnerships and/or created privately held corporations and distributed shares to start-up investors.

Mortgages are okay, but I wouldn’t recommend borrowing more than 80% LTV, and would not recommend leveraging up to the max one can afford. Leverage is good when it’s going your way, but it’s probably the most common way so many “rich” people end up broke.

Yes, small amounts of *self-liquidating* debt can be helpful in some situations, but even in these cases, the people I know who managed to avoid the financial highs and subsequent crashes that so many experience were the ones who were always very, very conservative where debt and leverage were concerned. Most have made a point of avoiding, or at least minimizing, the debt they took on…and it was almost always “productive”/ self-liquidating debt, not consumer debt.[/quote]You’re talking about exception here. On average, that’s not the case. That’s why there are plenty of sayings, such as “high risk, high return”, “no guts, no glory”, etc. Bottom line is, you need debt to get anywhere close to be financially independent.

As for small businesses, most do not work up slowly. How are you supposed to open a restaurant by working up slowly? How much do you think it cost to start up a business like a restaurant or a electronic manufacturing business? Some of the equipment they need to even start the business cost hundreds of thousands. How long do you think it would take for someone to save up hundreds of thousands?

You say mortgage are OK but mortgage is a debt and for most, it’s the LARGEST debt they take on. So, you can’t possibly say: [quote=CA renter]The one difference I’ve noticed between successful people and unsuccessful people (my definitions, not necessarily mainstream) is that the successful people have tended to avoid debt at almost all costs.[/quote] then turn around and say mortgage debt is OK. BTW, 80% is a HUGE number.

You’re right, leverage is good when it’s going your way. That’s why there are saying like “high risk, high return”, “no guts, no glory”, etc. You take the risk, knowing that if things doesn’t go your way, you’ll be in a world of hurt. But on the flip side of that, if you don’t take the risk, you’ll never be financially independent. If you’re content to be in perpetual mediocrity and be dependent on your boss, then feel free and stay debt free. But for those of us who are trying to be financially independent and did not win the ovary lottery, we have to take those risk and leverage to get us there.

You like to point out that there are those who got burn due to leverage, but I also like to point out there are far more people who greatly benefited from leverage. I also like to point out that most of those who are debt free all their life tend to be renters. You can’t be debt free and little debt all of your life and own a home. We’re talking about needing to have hundreds of thousands in debt to buy your 1st home. Who do you know that buy their first home for cash from which they saved?

BTW, how many in your family is a doctor? How many in your family live in a city/town w/ no real good college? I’d like to see a single doctor who graduated debt free for w/ <$10k in debt w/out parents paying for part or all of the cost.

[sdduuuude]

I hate single data points.
What was the number in 2000? 2005?

[Author]

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