The housing crisis may come when people are forced to sell a home they bought at the peak for less than their outstanding mortgage amount. Or they are laid off as the economy slows and can’t make their monthly payment. Effect may not be widespread as 2008-2009 but so many RE markets across the country seem seriously overinflated the last couple of years.
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Siegel’s point is that inflation data lags, not forward looking. He looks at commodity price pointing more forward. Commodity price going down now means inflation has peaked and FED should act accordingly. It is not.
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for those with a subscription to the WSJ, Alan Blinder, economist at Princeton, and former Fed Vice Chair, suggests:
So, there’s a chance? 
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Energy is one of the biggest influences in inflation and oil/gas seem particularly volatile. As we approach winter natural gas and oil usage will increase, even if gasoline demand stays relatively flat. The Thanksgiving and Christmas holidays will increase air and car travel (gasoline and jet fuel) as well. It feels like we are in a usage “trough” as we come off summer but it will be relatively short-lived.
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Of course, as it relates to growth. Inflation, no.
Everybody participated in the free money party. Everybody. That’s why we are where we are.
It may be conservative, but I’ve always kept at least a year’s worth of mortgage payments in a liquid account that nobody knows about, usually more. I’ve advised my kids to do the same. Otherwise, yeah, your situation can get bad very quickly if you’re scrambling to replace income and having to scramble for cash to get through the month’s payment. Never wanted to be there and white knuckling it at work. Gotta have a place to sleep.
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Mortgage underwriting is a lot more stringent now. They require higher LTV, qualification for ARMs and interest only loans are a lot tougher than for fixed rate. There are more safeguards in place now. I doubt it if we will have a similar crisis.
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That was true in 2020 during the height of lockdowns but lenders are returning to less stringent standards.
They are saying it is easier relative to 2020, at the start of pandemic. But compare to earlier mortgage crisis, current underwriting is still a lot tougher. I refinanced my mortgage 3 or 4 times from 2014 to 2019. The amount of documentations they required from me was getting me really annoyed. They appraised my apartment every time. They told me that if they didn’t have all those documentations they wouldn’t be able to sell my loan.
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Awesome, if you can do it. But I’d guess 99.99% of people don’t. We have always had a high income and never had that much saved in cash specifically for losing job and having to pay our mortgage. We do keep an emergency fund.
Add to that, over 30 years the money you would have lost in alternate investments by having this side fund. I don’t know what your bank pays but ours pays something like 2% for accounts over 25K. So you would be losing a ton of money over 10 years, over 30 years it would be ridiculous. Paying down the mortgage with the $$ you have that no one know about and having a Heloc in place in case of an emergency would be a much more savvy financial play.
We’ve ridden out job losses and business losses and never lost our home or had to sell. Another big factor is don’t buy a home with a huge mortgage and a tiny down payment. That is where people run into trouble.
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Fidelity money market FZDXX is paying over 2%.
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Has nothing to do with being savvy. There’s nothing savvy about taking out a line of credit against your house, and anybody who has sat through microeconomics101 understands opportunity cost.
I simply have never liked thinking about my house as an investment, even though it is. I treated it as sacrosanct back when I didn’t have the money to just take out the mortgage and might need to hang on for 12 or 18 mos. Wife at home with the kids, no safety net … it didn’t happen because I always made sure I would be one of the last to go. But it could have happened. Heloc’ing my way through a year of unemployment wasn’t my idea of a back up plan. I’m old school and I like to pay as I go.
We’ve done well in our investments and I have no regrets. When most people were crapping their pants in 2008, I wasn’t because the house wasn’t going anywhere.
It’s been paid off for 10 years at this point, and I still will not use it as a source of leverage. It’s not a portfolio asset; it’s what keeps me out of the rain. I subscribe to your view with anything else, but not my house. Besides, you said you have an emergency fund. That’s all I’m really taking about here. At the time I was exposed, 12 mos of mortgage payments would have been about $35k. Another $10k for property taxes. Not that big a deal.
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Well, actually there is no credit taken unless you use it.
That’s my point exactly. You are putting $$ in a savings/money market with very little interest when the money could be working for you in the market, in bonds, or against the mortgage. Sitting in a low interest account is not making money (here’s your lost opportunity cost) unless you are earning more in interest than inflation. (That hasn’t been the case in decades).
We never needed to sell anything in 2008 either. We lost very little in 2008 but I think the ones that suffered most were the ones who were highly leveraged. We’ve never taken out an excessive mortgage relative to income.
Personal choice. Neither would I. In your example you were talking about having a rainy day fund of a substantial amount in case of a job loss etc so you could pay your mortgage. There are lots of ways to do that. IMO, best is HELOC as it just sits there unless SHTF and you need it. Our emergency fund is pretty small because we have other income streams. 45K sitting in a money market would make me crazy. And if I calculated the opportunity cost lost over decades on 45K, that’s probably a decent used car.
I get it, it’s your personal choice. I was just pointing out the financial aspect. See below:
Opportunity cost is the comparison of one economic choice to the next best one. So your comparison would be 1. Getting interest on your 45K in a simple money market etc or 2. Any alternate investment. 45K invested towards the mortgage ( let’s say at 5% rate over even 20 years is a ton of $). Or you could have invested it in the stock market say an ETF over the last 20 years ( also a ton of money) You then subtract what you earned in interest in your simple account (your actual investment) and compare. That’s your lost opportunity cost here. Naturally you have to put in other factors like your tax rate (since mortgages can reduce taxes). But if you know how to do the math and do it, you’ll find that your choice was costly. It’s a choice and that’s great. But it’s a lost opportunity cost. That’s my point. Econ 101
Problem with using a Heloc as your emergency fund (as many found out in 2008-2009) is that if your property loses value - banks are likely to close heloc just when you probably needed it. The number of stories I read on Bogleheads and elsewhere of people getting a letter from their bank closing their un-used heloc loan, or reducing the amount of Heloc available to the balance owed was staggering. No recourse available.
Same thing with using credit cards as emergency funds. You are depending upon an outside force (banks in both cases) to not ‘re-evaluate’ your economic position negatively during a time period when many people’s positions are deteriorating. Lots of people also saw their credit card limits sharply cut, and some cards just closed down without warning.
Banks reduce risk to their own benefit, and they can reduce or remove your ability to borrow with little to no recourse.
I personally don’t worry about the ‘drag’ on my portfolio from keeping some assets in cash. Yes I guess I could plot out how much more money I could have in investments if I had gone no-cash. By the same token, I could figure out how much I’ve spent on vacations, children’s activities, college tuition, eating out and trips with the family and figure out how much ‘drag’ that spending had on my possible total investment return as well.
But I can’t begin to calculate the stress I would have felt during times of economic pain and uncertainty if I hadn’t had cash/cash equivalents available. Peace of mind is priceless to some of us.
I don’t much see the point of measuring ‘drag’ that way (in cash, in real estate or in general spending), as long as I continue to live below my means and don’t get greedy chasing returns. I’m an indexer, just trying to continually match market returns while spending the least amount of money possible on investment expenses. Not sexy, but it works.
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That’s a very good point.
Honestly, we always bought far below our means and put something like 40% on our first home. 2008 was rough for many, but most we knew who had a difficult time were overextended so that’s always an issue in a downturn. And I think it’s crazy to put your home on the line for any reason.
That seems totally reasonable. But I divorce personal choices from opportunity costs. I totally get the opposite.
My husband has a couple of things like that. We were going to buy a place on Nantucket in 2009. We didn’t because he didn’t want to be in a position where we would HAVE to rent it. Too stressful. We had the deposit and the income but it was a stretch and the economy was sucking wind. Boy, that places would have quintupled in value but the stress would have been tough for about 4 years. Feeling comfortable with financial choices is huge.
To bring it back to inflation, some people have little worry about inflation in retirement as their pensions are tied to inflation. Most others have to factor it in.
To me it’s about balancing the personal choices with the actual choices (like other opportunities).
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Perfectly said.
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I meant that the idea of setting up a HELOC as a means to access cash if the **** hit the fan is not what I’d consider savvy. I’ve been a corporate finance lawyer for many years. I’m not the smartest guy in the room, but I get that strategy. I just never wanted to find myself in a position to have to pay it back. I’d preferred having a moderate stash of cash and know I could keep paying on the house.
To me, knowing I could maintain the house for over a year and stock shelves if necessary to pay the other bills gave me a piece of mind that far >>>> the present value of a decent used car years later. Now, I’ve made and make enough money so that I can say that and mean it. For someone else, the opportunity cost of growing $45,000 over a set number of years may be too great.
One other thing to keep in mind is that the money didn’t sit in MM over decades. I had 30 year money (mortgage) for a couple of years in the beginning, refinanced to a 15 when the break made sense and paid it off rather quickly. At about the half-way mark into the 15, the risk was drastically reduced and, absolutely worst case scenario, I could have re-capitalized back to a 30 for the smaller payments on the reduced principal balance.
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The Dodd-Frank Act controls a lot of mortgage rules. Required PMI for loans with less than 20% down (and no wrap arounds allowed). Other loan to income requirements. Appraisals by licensed appraisers.
I would agree with you on that. I was a loan officer back in 2008. Some of the crazy things people did with HELOCs blew my mind. One dude wanted a $90k HE loan to buy a HUMMER. I told him, if you get laid off and can’t make your payments, you lose your house. He wouldn’t listen, even though we had a perfectly good auto loan department, so I did the loan. It wasn’t actually HELOCS that were the problem. People were taking out credit card debt in droves, and were using the inflated equity to consolidate them. That was reasonable at the time, but when values crashed, hoards of people were upside down on their mortgages. I worry that history is repeating itself.
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