There were many great comments on my most recent post “It’s Time to Fight the Fed”. Several opined that some Macro data, specifically housing, has actually improved substantially.
I purchased my home smack in middle of the great recession. I had no idea if in the short-term the home’s value would fall another $100k or rebound $100k. Honestly, I didn’t care. The invention of a 30-year fixed mortgage makes it so that (unless you’re a “flipper”) the actual value of your home should be relatively meaningless. Relative to monthly cash flows that is.
Before I bought my home, I built a spreadsheet with monthly expenses. In one column I calculated the costs if I purchased the home – mortgage payment, taxes, utilities, insurance etc. In the another column I calculated the costs if I continued to rent – rent, utilities etc. Those were the factors that truly mattered.
Of course, if the value of the home doubled, I would be thrilled; and I’m sure I would have been upset if the value of the home continued to decline. However, what mattered most – by a long shot - were the monthly cash flow figures.
The only real factor that would change if the house priced change, was if it rose in price enough for me to take more money out of the house. Similar to how I’ve tweeted multiple times that many corporate boards are insane if they don’t borrow at these interest rates, I think people have to treat their personal finances in a similar way. At these rates, I would want to borrow as much as possible and lock up long term liabilities. When rates rise, these liabilities will “shrink” like all fixed price liabilities. For more on this, read @DavidSchawel’s post: Should You Pay Down Your Mortgage?.
Back to the monthly cash flow spreadsheet. The main variable changing that calculation is the interest rate on the mortgage. I originally got a 5% 30-year fixed rate. Holding all else equal, at a 3.25% rate, (that a close friend of mine just got,) my home’s – reverse calculated – value would be almost 25% higher! Again, this is based on a monthly cash flow analysis – monthly interest on a 30-year $500k mortgage at 5% is about $2685 a month. If your rate was 3.25% – for that same monthly payment you would be able to borrow $617k!
Is it any wonder Bernanke & Co have succeeded in turning around the housing market?