April 28, 2006

One more disaster for the list - folks who are basing their retirement on their house "savings"


I've heard so many of these stories, of folks who stopped contributing to their 401ks, or went out and splurged on everything to trips to Tahiti or Hummer H2s, because of the wealth effect of housing.

Why save anymore, when because of your house, you're loaded? Why not buy that Hummer H2 - your house just went up another $100,000!

Well, because just like the dot-com paper gains, they can go away really, really quickly. As the folks in Phoenix (among other cities) are just now finding out.

Here's an article about people basing their retirements on their home. Oh, man, do I have some bad news. So sad. Not only will many not be able to retire "on the house" - they'll even have a tough time staying in the house...

Finance: Your house as a nest egg

Do you think your house is your retirement nest egg? Think again, say some financial advisers.
Many, if not most, homeowners do expect to retire "on the house" according to the Center for Retirement Research at Boston College.

But at the same time they are reducing their own equity by borrowing against their homes for other expenses. They may be counting on inflated home values that could fall by the time they are ready to sell and move. They may be counting on a resource they never really want to sell.
In other words, they may not be being very realistic.

"We all say people will sell their house and that's how they are going to live," says Bev Moore of MainStay Investments, a division of New York Life Investment Management. "But the bubble might be in the process of bursting."

24 comments:

Anonymous said...

Even ‘Methuselah’ Loans Can’t Save This Housing Bubble

Wall Street is becoming skeptical about the housing bubble. “Centex shares headed for the cellar, dropping 9% in midday trading, after the Dallas-based home builder missed quarterly earnings estimates, lowered guidance and announced it was walking away from land deals in some markets. The warning offered clear evidence that rising interest rates are pulling the choke chain on the housing market.”

“Management also slammed the door on robust growth for 2007, slashing earnings forecasts. Orders fell 11% year over year for the March quarter, an important precursor to actual revenue that gets booked three to six months later when home sales close.”

“A $28 million charge stemed primarily from the forfeiture of land option deposits in the Washington, D.C., San Diego and Sacramento, Calif., areas. The land options writedown is a big deal, says analyst Stephen East. ‘I think what’s significant is the signaling effect of it. This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.”

“Pulte Homes Inc. CEO Richard Dugas warned that the company’s second quarter would likely come up short. Hardest hit are markets that experienced huge price increases over the past two years. Dugas said markets such as Sacramento, San Diego and Northern Virginia, appear to be in the midst of a material correction where house prices are falling, cancellations are surging, traffic is slowing and incentives are up.”

“‘Your first quarter came in light and it looks like your second quarter is going to be light relative to our expectations. So, it’s just not clear why you would be re-affirming the guidance,’ said analyst Margaret Whelan, during the conference call. ‘It seems like we’re going to be disappointed later in the year, she said.”

“Beazer Homes also reported double-digit declines in home orders as rising mortgage rates and housing prices pressured buyers. ‘This whole space, I thought it was bottoming out,’ said portfolio manager Keith Gangl. ‘Maybe it will take a little longer.’”

“Orders for homes, which are not reflected in the revenue, fell 19.4 percent to 4,224, and were off 46.3 percent in the West. Sacramento, California, was particularly hard hit, as orders fell and cancellation rates rose.”

And Holden Lewis reports on efforts to keep the bubble going. “The Methuselah of mortgages has arrived: the 50-year home loan. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and ‘quite a few applications,’ says VP Alex Diaz Jr.”

“‘There are two markets for this,’ Diaz says. ‘One is if they’re looking to purchase a home, because of how expensive housing is. And the other is payment-option ARMs, borrowers are making minimum payments and they’re starting to panic a little bit and look for vehicles to get out of these loans.’”

“Bystanders are dubious of the half-century loan’s benefits. ‘If you run the amortization out, it basically is an interest-only loan, in all practical terms,’ says Jason Flurry, a certified financial planner. ‘If a person is considering something like that, they’re probably trying to squeeze into too much house to begin with.’”

“But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.”

Written By: Ben Jones

Anonymous said...

Most people are going to get fooled by this 50yr thing. It does NOT reduce payments as much as you'd think.

Here's the diffrernce in payment on a 30,40, and 50yr loan on a $500K mortgage assuming 6.5%:

30yr - $3,160
40yr - $2,927
50yr - $2,818

That's assuming you can get the 50yr for the same rate as the 30yr. Most lenders increase the rate with the increase in term so there's usually no real benefit to going longer term.

It's bad enough if you're in a 40yr. But, if you need the measely $109/mo savings the 50yr offers then I think you're in WAY over your head.

Anonymous said...

I been seeing alot of ads for these reverse mortgage loans and such. The best course of action for these people is to retire in Latin America or Asia.

moman said...

Anyone have a guess of how long it will take for the trailer parks to be filling up with large SUV's and people living in them? Well that's only until they are repossesed....

Florida is a great state. I had the pleasure of noticing a camper parked beside the highway a couple days ago in a crummy trailer lot. It looked like a 1970s 20' coachmen with a tarp over the roof. Wanna guess what kind of car was parked beside it? DING DING....It was a Ford Expedition with 20" chrome wheels. I'll guarantee those wheels cost more than the camper.

Anonymous said...

The Friday RE flyers in the morning paper had plenty of "reduced" banners on high end houses ($500K-$1M) with most lowering the asking price by 10-15%. Meanwhile the paper keeps publishing shill articles from RE agents telling us everything is A-OK, no bubbles here (western CO).

Mark said...

I received a RE Loan flyer this morning advertising 40 year loans. . .the Mortgage industry is desperate to get new customers. . .I bet the next will be 50 year loans, and the ad will say, "Why not have your Grandchildren pay for your home?". . .the problem is, we may muddle through this bubble because of even more "creative" mortgage options. . .just spread the pain out forever. As Warren Buffet said, we have become a nation of sharecroppers.

Sly said...

Plenty of "twothousandaires" everywhere.

Anonymous said...

I'm waiting for the 100 year loans. Hey, isn't that like renting? Except when you move, you'll be responsible for finding a buyer.

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