Will Austin Home Prices Continue to Increase? (Howe, Van: rental, refinance)

[JT-3]

So have we come to a concensus that Austin home prices will continue to increase?

Good points/opinions here, I will leave it at that...

[balor123]

Regarding the points earlier about rates of return in stocks vs mortgages, I'd like to add one point of insight which hasn't come up here. When I was looking at mortgages I wasn't so much interested in the spread between stocks and my mortgage but rather between equivalent (risk free) investments. I could have taken out a $417k 30-yr loan at ~3.5% or a 15-yr loan at ~2.9% at the time. Ally was offering ~2.5% on a 5-yr CD if I recall. I (along w/futures) was pretty confident that rates would rise in the near term (and they have) but it has hard to determine how much and how quickly. Keeping the extra downpayment in CDs was definitely a money losing proposition at this point. With a 15-yr loan, however, rates only needed to rise ~.4% to start breaking even, especially since I was writing off the mortgage interest to offset the taxes on the CD income. With the 30-yr loan, however, I needed rates to rise much more. The odds of me earning off the spread were much higher with the 30-yr over that time period however the odds of me actually holding the mortgage that long weren't that good (average is about 7 years) so a 15-yr definitely made sense from that perspective. For that matter, an ARM was the best deal, like Zuckerberg did for his home.

In the end I ended up taking the 30-yr mortgage for the reason given earlier. I simply didn't like the idea of being forced into 15-yr payments. I don't like houses and I like mortgages and other compulsive payments even less. I had a plan to pay it off in a max of ~9 years. Ironically, I ended up hating the house we purchased so I'm making the minimum payments now so I can string it along as long as possible :P

[riaelise]

Originally Posted by verybadgnome

I think having a 15 year note effectively disciplines the borrower from throwing away money elsewhere. In this consumer-oriented society most people will not end up paying down the principle as keeping up with the Jones' and shiny objects hold too much allure. I was also able to dump escrow by refing to a 15 year and go down two percentage points. With a 15 year loan my retirement age will basically align with the time I pay off the mortgage.

I think 30 years is too long. In Canada the standard loan is 25.

I'm retiring at 62 hell or high water. The house would be paid off before then, at 59 or 60. I have a 30 yr mortgage. I intend to have no car notes, house notes, or kid support payments when I retire. At the same time, I don't want to unnecessarily burden myself with a large payment.

The moral of this story is different strokes for different folks.

[RoadWarrior12]

Originally Posted by hts

Your point is well taken. A 15 year note does in fact impose forced discipline and can most certainly be a benefit to those that require it (then again, a 30 year note also imposes discipline).

My point is that most of us don't have unlimited access to capital. In other words, we're all tying to figure out the best balance of how to spend/save/invest with the limited income/resources we have. I am one of those guys that can't save/invest enough. If anyone is not familiar with the Rule of 72, it basically suggests that you can divide 72 by your average rate of return (let's just use 9% for this argument) and determine that it will take (approximately) 8 years for you to DOUBLE your investment (without having added to it).

Think about that for just one second. If you have $100k invested in an asset (index mutual fund for example) and don't touch it (don't add or subtract from it) for 8 years while the market averages (some years it may return more, some years less) then at the end of that 8 year period, you'll have $200k thanks to the power of compound interest.

I'm not a financial planner (although I do have an MBA, class of '97) and realize we're going off tangent here, but I obviously get quite emotional about topics such as these. I hate seeing people make mistakes just because they may be naieve or not fully understand that there may be other options available to them--sorry for my rants.

S&P rate of return since 2000 is 1.17%. Their $100K would be worth about $118K - if they didn't bail out altogether when it was worth about $60K in 2004.

So, naive or not, the person with $100K in equity that is now $150K came out ahead.

Which is why you always do both.

[gpurcell]

Stock market returns depend heavily on the precise years the individual invests in. If you are unlucky and end up retiring during a trough you're basically screwed.

[hts]

Originally Posted by RoadWarrior12

S&P rate of return since 2000 is 1.17%. Their $100K would be worth about $118K - if they didn't bail out altogether when it was worth about $60K in 2004.

So, naive or not, the person with $100K in equity that is now $150K came out ahead.

Which is why you always do both.

Clearly the market goes up and down (sometimes quite dramatically) and we can focus on any certain period of time to get the results we're looking for. My point is that historically, it's reasonable to assume a 9% rate of return, although if the market crashes or if we're only holding for a few years, we may experience much less.


2013 32.42
2012 15.88
2011 2.07
2010 14.87
2009 27.11
2008 -37.22
2007 5.46
2006 15.74
2005 4.79
2004 10.82
2003 28.72
2002 -22.27
2001 -11.98
2000 -9.11
1999 21.11
1998 28.73
1997 33.67
1996 23.06
1995 38.02

Doing both is really hedging one's bets and committing to neither. It may be a sensible solution for some, but again, if one is looking at the long-term (I still have approx 12 years until retirement), I'd suggest going all-in on the market.

[RoadWarrior12]

And my point is that if you had been in this same exact situation 12 years ago (12 yrs until retirement), you would have barely broken even if you went all in on the market.

The actual rate of return is about 6-7% historically, making the market a good bet realistically - but it's just that. A bet. Same as any investment.

I'd much rather have a number of investments, side businesses, etc that provide multiple income and appreciation streams. That's not "naïveté", it's distribution of risk.

That said, I still have a 30 year loan - but that's because I have a 2.65% rate on a 30 year fixed, making my cost of money damn near break even.

[scm53]

Originally Posted by gpurcell

Stock market returns depend heavily on the precise years the individual invests in. If you are unlucky and end up retiring during a trough you're basically screwed.

If you are stupid enough to not reallocate your portfolio as you near retirement, you deserve your cat food dinner.

[RoadWarrior12]

Originally Posted by scm53

If you are stupid enough to not reallocate your portfolio as you near retirement, you deserve your cat food dinner.

I don't know if I'd go that far. It's not like there's anywhere in life that you're guaranteed to get an education in investing or retirement planning. Many people just work their job and contribute to a 401K and have no idea how everything works - that doesn't make them "deserve their cat food".

[hts]

Agreed on both counts.

We do an absolute horrible job in providing a meaningful financial education to most of our citizens. As a result, most folks tend to invest ultra-conservatively (ie., pay down mortgage early for example) rather than take calculated risks.

Similarly, mainstream media has suggested that we invest conservatively as well (100-age = the amount in bonds? C'mon!). When I retire at 60, depending on the market conditions at that time, I expect to probably be at an 80-20 (equity/bonds) mix, and am currently 100/0. I don't think this is a biased or abnormal investment ratio for someone in their late 40's, but that's just me.