Interesting article on falling house prices and the 'wealth effect'

Walletwatch

carolt wrote: »

Apologies if posted before:

http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=11885272

An absorbing article. It goes to reinforce my beliefs around the decision on buying a house - following are the salient points

A house can either be an investment or an expense but not both.

1. If it is an expense, you should buy it because you fall in love with it, and fancy it as a place to live in and spend a considerable part of your life, and MOST IMPORTANTLY know for a fact that you can afford it. In these cases, you should not lose sleep over the house losing value. Treat it as any other expense item, which you have bought for consumption and not for resale.
2. If it is for an investment, Rich Dad Poor Dad corollaries apply - you make money when you buy an asset, not when you sell it, so do your calculations when you buy it. This invariably means all these nutty property seminars that have now become extinct should not be the reason for you to buy a house, but sound underlying fundamentals are important.

A lot of the above is derived from good old Mr Kiyosaki, but I still don't subscribe to everything that he says - he makes forays into the real estate business and stock markets sound like child's play in his books, but I personally have found him to oversimplify these things in his books.

Cheers
WW

Walletwatch

justpurchased wrote: »

Conrad spot on.

I had 10K car loan when we purchased our last house in 2001 @ 7.9% Mewed that after a year to 4.75. In total we purchased at £93K and during the 7 years there we spent £30K on house renervations and £25K in two cars, no debts and sold the house for £190K this year and had a mortgage to pay of £97K to pay off.

This is really interesting, and it gives me a new perspective to the concept of 'MEW-ing'. I now see it as an available overdraft, although the underlying amount varies with house prices. However, even if one were to regard it that way, placing myself in the shoes of the MEW-er, for me to go into overdraft, I would have multiple considerations - what is the interest that I am paying on the o/d, do I have a surefire way of paying off the o/d within, say, three months, etc... So even if MEW-ing is done to fund one's lifestyle, I am not going to judge the guy based on that - I would say the amount he MEWs and the extent to which he has a repayment plan in place for the extra amount drawn would be what I would base my judgment on...

Taking this comparison a little further, I think a MEW-er is luckier than a stock trader - he does not get margin calls to be funded in the next two days - the only time he has to worry is when he is close to the end of his fixed rate loan tenure, at which point in time, if interest rates and credit availability turned against him, he should anyway be looking at minimizing his principal borrowings.

Cheers
WW

Walletwatch

harbinger13 wrote: »

Simple examples that I have seen - people who bought their houses and then daily watched zillow.com show the higher prices on their property - adding $50 to $100 each day, just stopped cooking at home and daily drove to a McD nearby and ate 'healthy' food!

I can never understand people who MTM the house they live in... for god's sake, what difference does it make - it gives you a false sense of elation when it is 'in the money' and sleepless nights when you are 'out of the money'. While the sleepless nights may still be justified if the decline is steep and negative equity is a real risk, doing it during the upswing, IMHO, is unpardonable.

Let's analyse the three scenarios that you might get into - you might move out of the house to upgrade to a bigger house, keep staying in the same house, or downgrade to a smaller house to "release equity". In the first scenario, when you upgrade, the rate of increase or decrease of your house price will invariably be matched by the house you buy, give or take. So MTM really doesn't matter. If you stay in the same place, you're just wasting your time marking to market. Finally, if you downgrade, what applies for the upgrade scenario applies here as well, so you are not necessarily affected by the rise or fall.

I know I might have oversimplified the above, and stand to be corrected on my theory here, but frankly, life is short, is it worth losing sleep over the price of a place that you've bought to live in, in the first place, unless the purchase was irresponsible and has overstretched you, in which case, the lesson you learn anyway is well-deserved?

Cheers
WW

baby_boomer

From another era [March 2007 ] when equity release was still fuelling the dreams of many middle class families:

Telegraph

Meet the Lawtons & their £300K Buckinghamshire Money Box of a home:

"If I'm honest, sometimes I think we'll all just carry on taking out equity when we need it - to pay for medical bills and top up the pension, to help our children put down a deposit for their homes. And then just dying with the debt and the house going to the mortgage company."

WTF?_2

baby_boomer wrote: »

From another era [March 2007 ] when equity release was still fuelling the dreams of many middle class families:

Telegraph

Meet the Lawtons & their £300K Buckinghamshire Money Box of a home:

"If I'm honest, sometimes I think we'll all just carry on taking out equity when we need it - to pay for medical bills and top up the pension, to help our children put down a deposit for their homes. And then just dying with the debt and the house going to the mortgage company."

There is something very wrong when supposedly well-off people rely on equity withdrawal to fund their life.

The crash could be rather egalitarian in the way it affects a broad spectrum of people. I can see a huge swathe of 'Middle England' being hit hard as well as all the 4x4 driving, designer gear wearing ostentatious chavs who borrowed and p1ssed the cash away.

Those at the very top will be OK though, they always are.

justpurchased

Walletwatch wrote: »

So even if MEW-ing is done to fund one's lifestyle, I am not going to judge the guy based on that - I would say the amount he MEWs and the extent to which he has a repayment plan in place for the extra amount drawn would be what I would base my judgment on...

Cheers
WW

As stated in a previous post i stated the repayment calulations. Repayment was based on equiverlet of a loan at 7.9%. So heavy overpaying of the mewed amount, thus bring down the intrest lower.
Borrowing though not essential, well the cars were not. It was the basis for being bebt free with nearly new, economical, reliable cars for the next 5 years +. Also having very low income multiplyer made this a more logical and chaper form of leanding.
No one knows there future circumstances but if you knew of impending redundancy taking a loan of any type would be stupid.

geoffky

HERE ARE A SENSIBLE COUPLE WHO HAVE THEIR HEADS SCREWED ON...http://news.bbc.co.uk/1/hi/england/devon/7565534.stm

Dithering_Dad

geoffky wrote: »

HERE ARE A SENSIBLE COUPLE WHO HAVE THEIR HEADS SCREWED ON...http://news.bbc.co.uk/1/hi/england/devon/7565534.stm

Great link Geoff. We went to a wedding at the weekend where they served bacon baps at the reception. Why people think you need to start your wedding life in debt, I'll never know. Couples have enough things to argue about (and split up over) without adding financial pressures into the mix.