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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Real Estate Realities

by Ben Stein

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Posted on Friday, June 6, 2008, 12:00AM

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.

 

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  • GRAVITY - Saturday, July 5, 2008, 1:19AM ET  Report Abuse

    • Overall: 2/5

    Home prices will continue to decline dramatically for several years at minimum. Though the present real estate situation does present a rare and enviable opportunity... for sellers.

  • Stephen - Friday, June 27, 2008, 12:05AM ET  Report Abuse

    • Overall: 3/5

    Ben states homes selling in 1990 for roughly $400,000 would sell in 2008 for 1.2 million. Well that's an average annual return of about 6.3%. If instead you invested that same $400,000 in Berkshire Hathaway in 1990 it would be worth about $7,179,777. That said the the same investment in the Vanguard SP500 index fund would be worth $1,273,531. Ben please include rates of return to normalize your numbers. Two, I wish I had bought Berkshire Hathaway a lot earlier than I did.

  • Yahoo! Finance User - Saturday, June 21, 2008, 9:50PM ET  Report Abuse

    • Overall: 1/5

    In August 2007, Stein said that Merrill Lynch was so cheap they should be putting their stock in cereal boxes. Peter Schiff told him that financials were toxic. Ben started yelling he was wrong. If you are laying on train tracks and can't see a train barreling at you at 100 mph on bright sunny day, should I take any of your financial advice? Go to Youtube and search for Peter Schiff and Jim Rogers. If you like Stein, buy Merrill Lynch. Go the cereal aisle in your local grocery store.

  • Hotblack - Friday, June 20, 2008, 2:08AM ET  Report Abuse

    • Overall: 4/5

    Overall a great article. However, when singing the praises of owning vs renting, don't forget property taxes.

  • R A Bottens - Thursday, June 19, 2008, 12:14PM ET  Report Abuse

    • Overall: 3/5

    Real estate ownership is great if you aren't heavily mortgaged. However if you got a hold of one of those rotten deals with little down and an adjustable rate you have a big problem on your hands. I own a few housing units and have a nice positive cash flow from rent income. I reinvest into another property every 5 years or so as this is going to be part of my retirement income when I retire. I do not have any of my real estate mortgaged nor do I want to. I maintain a sizable emergency fund which I have not had to tap. So I pretty much agree with what Ben has to say on R.E. I recently sold off 2 properties and got a very good price out of both of them. Both buyers approached me about selling, I didn't have to use a real estate broker and I came out nicely on both deals. As far as fending off future emergencies I recommend a emergency fund but keep those properties unmortgaged. What you get in interest break on your taxes isn't really enough to write home about. The closer you stay to debt free the easier you will sleep at night.

  • Down with Hollywood - Wednesday, June 18, 2008, 8:50AM ET  Report Abuse

    • Overall: 5/5

    Spot on again Ben!

  • DangerX - Wednesday, June 18, 2008, 4:31AM ET  Report Abuse

    • Overall: 1/5

    This guy is well beyond criticism at this point. He's just lame!

  • JeffP - Tuesday, June 17, 2008, 3:18AM ET  Report Abuse

    • Overall: 5/5

    Life's a Beach. California, by the beach, in LA, is not the same as the rest of the US and so a perspective like B-Sez is correct. If you live somewhere desirable- location, location, location- then real estate is worth holding on to. I guess if you live somewhere thar sucks, you are the first to want to get out but can't. I am democratic but I listen to BStein- he's correct most of the time, Bueller. vote Obama, let's change this machine.

  • Phil B - Monday, June 16, 2008, 12:58AM ET  Report Abuse

    • Overall: 2/5

    I'm just wondering why an asset that will continue to deteriorate (depreciate) without constant upkeep and cash inputs, why would that asset increase in value by 100% or more in less than 10 years? Take the land out of the equation and a house is nothing more than a big depreciating asset (try not putting any money into maintenance besides landscaping and cleaning and see what happens) No mention of inflation or the devaluation of the dollar affecting home prices? No mention of a Fed-induced bubble? No mention of Fannie & Freddie selling bad investment vehicles (a.k.a. bundled mortgages)? No mention of over-speculation? No mention of downsizing by boomers whose kids have left the nest? Why Ben, why?

  • Bryan - Sunday, June 15, 2008, 6:46PM ET  Report Abuse

    • Overall: 5/5

    Benny is right on the mark ,but I don't agree with him everytime. He does know real estate and most of thew time he does know what he is talking about .

  • Yahoo! Finance User - Saturday, June 14, 2008, 9:30AM ET  Report Abuse

    • Overall: 5/5

    As an individual who has made money buying and selling real estate, and a previous financial adviser, now investment educator, I believe Stein is right on. It is curious to me that anyone would think anything else. SMM MyMoneyMD

  • Doreen - Friday, June 13, 2008, 3:11AM ET  Report Abuse

    • Overall: 1/5

    Hopelessly out of touch. In a bad recession like this, no one is going to commit to buying a house. Oh but I forgot, Ben sez there be no recession. More 'don't worry, be happy' from the permabull. It's bull all right.

  • Farm - Thursday, June 12, 2008, 11:46PM ET  Report Abuse

    • Overall: 1/5

    Neil: If you wait long enough, everything will be OK? This is advice? Why do you write this silly column?

  • Nick Name - Thursday, June 12, 2008, 10:28AM ET  Report Abuse

    • Overall: 3/5

    Agree with most of this although its common sense to keep plenty of cash on hand rather than have low reserves and a smaller mortgage balance. A house should be viewed first and foremost as place to live, not an "investment". Too many people think of it as a cash cow and end up never paying it off. Borrowing against it occasionally is ok, but for short periods only. There was one comment here that said the money spent on Iraq would be better spent here at home - most military spending goes to American companies, defense contractors who provide high paying jobs for Americans. Its not like all those billions go into Iraq and stay there. The oil we buy from Ay-rabs is far more significant which is why we should be drilling more of our own oil and converting huge coal reserves into oil (military is already doing it) Its like people who complain about money spent on the space program being better spent on Earth - but they forget that the Apollo missions pioneered technology that we now all take for granted including solar technology first used on space probes and satellites.

  • Mary - Wednesday, June 11, 2008, 9:47PM ET  Report Abuse

    • Overall: 1/5

    My broker says the same thing. You bought at 10 and it went to 20 over 5 years a 100% return. Now in 1 year it only dropped 50%. What B. S. Because that 50% drop brings the price back to 10, what I paid. House prices work the same way.

  • Danny - Wednesday, June 11, 2008, 4:20PM ET  Report Abuse

    • Overall: 3/5

    Facts: 1) Housing will always be a good investment because people MUST have a roof over their head and renting is not for everyone (except those that have no choice). 2) The Bubble WAS created by the formation of a very large Casino. The Banks and the Buyers were gambling that prices would rise forever. They both lost and should now cash in their chips (if any are left) and go home (if they have one). 3) America needs to wake up and realize that we can't buy EVERYTHING on credit and never expect to pay it back. We can't expect to continue to Pollute this planet and deplete its resources and expect to eat and breathe. We need to wake up. 4) We need a GOVERMENT that has a priority to protect AMERICAN (not foreign) interests..The Health, Wealth and Security of all American's should be NUMBER 1. The Billions spent (not to mention lives) on the occupation (NOT WAR) of Iraq could have been used here at home.

  • Yahoo! Finance User - Wednesday, June 11, 2008, 3:50PM ET  Report Abuse

    • Overall: 2/5

    My comments: a) If you own a home, you still pay mortgage interest to the bank, property taxes to the government and maintenance charges to the condo/co-op/townhouse management. And if you default, you lose your right to live there If you rent, you only pay the rent to the owners. If you default you lose your right to stay there. One difference is that the rent goes up every year, whereas with a 30-year fixed mortgage your outgo on your home remains almost fixed until property taxes or condo maintenance expenses are raised from time to time. More significant difference is that you get a tax relief on interest and also on property taxes (provided you are not paying AMT). And of course, as you live in a home for years and its price appreciates, you build home equity – I mean if you sell the home you can make capital gains. That is not the case for renting. Although in the US home-ownership is sold as a part of the American dream, it does not make sense to buy a home all the time. There is an easy calculation to see if it makes sense to buy a home at current prices. If the property prices are not going up and are likely to stay sluggish, check if renting a home costs less than owning the SAME HOME with a conservative 20% down payment. To do the math check if Rent

  • Yahoo! Finance User - Wednesday, June 11, 2008, 2:40PM ET  Report Abuse

    • Overall: 2/5

    Are you KIDDING.... Residential real estate prices will never be at the levels during the peak of this speculative bubble, not in our life time anyway. For those that brought during the past 2 years and the next few years will owe a lot more than their homes are worth.

  • w g - Wednesday, June 11, 2008, 2:25PM ET  Report Abuse

    • Overall: 2/5

    Well, Ben Stein, once again you proove to be a poorly disguised CHEERLEADER for the Real Estate Industry. Residential Real Estate values rose because of unrealistically LOW interest rates and slack (non-existant?) background and credit checking. Combined with once in a lifetime SPECULATION this formed a GIGANTIC BUBBLE that has not fully popped. The other shoe is about to drop caused by high energy costs translating into huge heating bills this winter combined with increased commuting costs. Bubbles do not re-inflate and housing prices will not either. Simply because the conditions that existed from 2000-2005 NO LONGER EXIST. Just like the DOT.COM speculative bomb in 1998, the housing "crisis" will continue to become more and more painful for homeowners and institutions alike. Look for huge additions to unsold inventory this fall, when the first $5.00 per gallon oil bills hit the cold weather areas.

  • Delozier - Wednesday, June 11, 2008, 12:55PM ET  Report Abuse

    • Overall: 4/5

    Once again, Ben Stein is the voice of reason. We all get way too consumed with what the media love to tell us which is doom and gloom. Dont let them interfere with the facts. Long term investments generally pay off... especially in real estate.

  • Crusty_Old_Landlord - Wednesday, June 11, 2008, 11:01AM ET  Report Abuse

    • Overall: 4/5

    One poster wrote: "The APR increase of my home in Federal Way WA over the past 17 years is 2.3%. Any investments over that peroid would have done better than that. Real estate should only be a portion of a very diversified portfolio." Nothing on the west coast (near a big city) has done that poorly, so I questioned the data. Looking on Zillow, 2639 SW 337th St. (same town) is a typical house with three bedrooms and a two-car garage - it sold 10/98 for $154k and 4/08 for $290k. For Federal Way itself, the median closed sales price is $148k in '98 and $300k in '08. Since the poster didn't give us his/her address we cannot look at history, but the quoted appreciation is far, far below the area itself. Considering that people usually leverage from 3:1 up to 8:1 for the purchase of a home, the 7% returns on investment of the median are magnified beyond any stock or bond index for the tested period.

  • Da Big Guy - Wednesday, June 11, 2008, 10:49AM ET  Report Abuse

    • Overall: 2/5

    You've become an RK WANNABE!

  • JamesD - Wednesday, June 11, 2008, 9:42AM ET  Report Abuse

    • Overall: 1/5

    More (intentional?) clueless BS from BS. I'm not surprised by his continual reassurance that everything is fine in spite of the biased media approach, but I am surprised by the number and fervor of the people (i.e. morons) who agree with his warped head in the clouds view. A view, that frankly, I don't even think BS believes what he's writing. BS is as qualified to voice his opinions on Finance as Penelope Trunk was to voice her opinion on climbing the corporate ladder. Yahoo, please wake up, at least Penelope was so bad she was somewhat entertaining and did minor harm. BS seems to be intentionally misleading the public. (A carryover from his Nixon days, I guess.)

  • El - Wednesday, June 11, 2008, 8:55AM ET  Report Abuse

    • Overall: 4/5

    Another calm perspective from Mr Stein amidst a stormy sea of hyperbole, confusion, and fear. This has been a very, very difficult period, but things are reverting to historical norms as he asserts. RE 'investing' has many advantages way beyond simple appreciation of principal. Advantages to a HOMEOWNER are a different and the PURPOSE of being a homeowner is different than those of investing in RE. It takes nerves of steel to invest intelligently right now. Even though better water is ahead, I am getting a little seasick! Try to keep a MINIMUM 5 year perspective on any investment, longer if possible, and you'll probably do all right. Remember history, as Mr Stein is fond of reminding us: the S&L, Internet bubble, Enron storms, these patches of very rough water provided some terrific opportunities for prudent and patient investors. Our current situation will too. "If you can keep your head while all about you others are losing theirs, you'll be a man my son."

  • Yahoo! Finance User - Wednesday, June 11, 2008, 8:01AM ET  Report Abuse

    • Overall: 2/5

    Where is my money for a bail-out? The news reports that some communities are GIVING homeowners who fell "victim" to low-interest loans money to help pay their mortgages. Supposedly, this is to keep them from foreclosing. I'm sick of hearing people whine about how their ARMs and "Interest Only" loans that they took out a few years ago are now unaffordable due to interest rate increases. What, they didn't read over their loan papers? Also, perhaps they should have put down more than the 5% (if not NO money down!)that they did on their homes and not buy something more expensive than they can afford simply because the bank told them that they qualified for more than the house they wanted to purchase. Did they hear "you're approved" and not hear anything else or give any thought to what they were doing? I read my loan papers very carefully and educated myself about the different kind of mortgages before I picked a fixed rate. Sure, an interest only loan would have made for a "lower monthly payment", since it seems like that's what the world is all about rather than the bottom line. Where is MY "bail out money" to reward me for not making an uninformed and greedy choice?

  • Yahoo! Finance User - Wednesday, June 11, 2008, 2:16AM ET  Report Abuse

    • Overall: 1/5

    Ben Stein is a trivia wiz and good at playing the nerd, but his economic forecasts are fanciful and flimsy.

  • Yahoo! Finance User - Tuesday, June 10, 2008, 10:48PM ET  Report Abuse

    • Overall: 2/5

    The APR increase of my home in Federal Way WA over the past 17 years is 2.3%. Any investments over that peroid would have done better than that. Real estate should only be a portion of a very diversified portfolio.

  • C - Tuesday, June 10, 2008, 7:57PM ET  Report Abuse

    • Overall: 1/5

    Ben Stein, Laura R, Robert Kawosaki are all Yahoo finance experts that think it is a good idea to buy Real Estate ( Robert K since 2005). Ben and Laura suggest that prices might still drop 10-20 percent, while Robert K says he's making money on RE because even though housing prices in Phoenix Arizona dropped 50 percent, he is collecting cash flow from renters. ( How many months of rent does it take to make up for losing 300K in principal?) ...........................................................................................................................................................................Here is my free opinion. I remember the days when my 23 year old friends said that RE only goes up, that RE is a long term investment, and that you could buy a place with an ARM and flip it a couple years later for a quick 100K profit and then "chill on the beach". Ohhhhh those days are long over........................................................................................................................ We know that Real Estate historically rises about 5 percent per year, but was rising 4-5 times that rate in many cities! We still have a long way to go. If housing prices went up 100 percent when they should have went up 25-30 percent then we still have some correcting to do. Not only will housing prices revert back to the mean, but there is a chance they could revert too much to the point where they go back to historical low prices as opposed to historical average prices. Even once prices start rising again, they aren't going to shoot up at 10 or 20 percent per year.

  • Shalom - Tuesday, June 10, 2008, 7:24PM ET  Report Abuse

    • Overall: 4/5

    Thank you for teaching people reality!

  • Yahoo! Finance User - Tuesday, June 10, 2008, 5:28PM ET  Report Abuse

    • Overall: 4/5

    Savings account interest is next to zero. Paying down the mortgage makes sense if you have extra cash other than what you need to have on hand for an emergency. You also have to look at after tax cash flow using your combined federal, state, and/or local rate. For us that reduces or interest and prop taxes costs by 35% Real estate prices were driven up by demand caused by the so-called sub-prime loans. I live in no. calif. and I'm sure my home value has gone down by at least 15% but we have no need or desire to move so it's not that big of an issue for us. We thought we were cool in getting a Heloc for flexibilty, then the lender froze the entire amount so it's worthless now. If we close it out we have to pay a penalty in addition to all the fees we paid to open it. The lenders are running the show and crying foul when they made a bunch of bad loans due to greed. I hope the government doesn't bail them out either. The Fed has lowered the rates but the lenders are still charging the higher rates. I agree that 20% down is good to do if you can. I can't criticize those who paid less down though. We bought our first home with the G.I. loan and no down. We couldn't have afforded it otherwise. I would rather see the real estate market adjust on its own without a government attempted fix.

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