Ben Stein How Not to Ruin Your Life

Herewith a few little notes on home sales, financing, facts, and fantasies.

First, if you read the newspapers and magazines and watch the news shows on TV about finance, you'll see that there's a housing catastrophe out there.

Let's look at the facts, as someone used to say. Yes, real estate has corrected powerfully from its peak in the spring of 2005. Yes, there are a very large number of homes for sale compared with the usual metrics. And, yes, there are many homes in foreclosure by normal standards.

But on a national basis, residential home prices are still up roughly 60 per cent from their levels of 2000. In my home area of Southern California, they're up close to 100 percent above spring 2000 levels. Prices are still falling, but the appreciation even after the recent correction, has been dramatic. By my rough measurement, the gains since 1990 here in Southern California have been by at least a factor of three. That is, homes that were selling for roughly $400,000 in 1990 would be selling for about $1,200,000.

In addition, the owners got the benefits of imputed rent, tax deductions, and no tax at all on the imputed rent, which is really a benefit. (That is, if you owned a bond and got interest checks for it, those would be taxable in most cases. But you if you get free rent, the equivalent of the bond coupon, you are not taxed on it at all.)

Patience Truly is a Virtue

If you look at the long run, gains have varied widely across the nation. Except for the upper Midwest, and especially around Detroit, the increases have been impressive. Residential real estate can not be counted out as a smart investment or maybe even as the smartest one you'll make.

Patience remains the watch word when buying real estate. Even if you buy at the peak, if you wait long enough, you will generally make out well. (Detroit and other cities undergoing serious economic dislocation may require especially extreme patience.) If you expect to turn it over quickly and consistently for a profit, you are taking a risk. On the other hand, the present real estate situation presents a rare and enviable long-term opportunity.

On a selfish and personal basis I can tell you that when I have bought any real estate at all and held it a long time, I have been happy. When I count the holding period in months or a few years, I am often desperate. That is the nature of real estate cycles. Or, to put it another way, if you are patient enough, you will always get by handsomely. If you are in a hurry, you are courting disaster.

Next, kindly correspondents often e-mail me and ask if they should take money out of their savings and pay off their mortgages so that they own their homes free and clear. The answer varies. On the one hand, in today's low interest rate world, the interest rate on the mortgage is almost surely higher than the interest on your savings, so that you will in effect earn higher interest by paying off your indebtedness than by keeping it in a savings account or money market or a CD.

Liquidity and Sound Nights of Sleep

But the issue of liquidity is far more important than the interest rate differential. Unless you have a super high tolerance for risk, you will not want to deprive yourself of liquidity for any reason. If, by great luck, you have so much liquidity in your personal financial system that you can pay off the mortgage and not be stretched thin on liquidity, go for it. If, on the other hand, you are like most people and are not as flush as Warren Buffett, you would do better to just make your full monthly payment of principal and interest, and maintain some reserves of liquidity.

Or, I can put it another way. If you were to lose your job or have a divorce or a health issue, and suddenly needed cash, you would have been glad you conserved cash instead of paying down your mortgage. There is no case that I know of where a household lost its mind from worry because they had a million dollars in cash and still had a mortgage to pay off.

But if that household were broke but had no mortgage, I can guarantee they would face some major sleepless hours. Yes, they probably could refinance, but it is far from instantaneous, unless you have a line of credit, which is a good thing to keep for very rainy days any way (and that's for rainy days only!). It's a nice fantasy and a lovely reality to have no mortgage. But it's far better to have the reality of cash on hand for a dark day. No one ever went to the mental health ward for feeling too liquid.