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Wednesday, December 13, 2006
Sturdy Wisdoms: The Worst Habit
Your Curmudgeon is rather older than most wanderers of the World Wide Web, including most of those who hawk their opinions to a general audience. He received a different sort of upbringing from most, too. As his years lengthen, he finds himself ever more frequently revisiting the teachings of his youth and reviewing them for continuing soundness and applicability.
Many of those lessons are still quite serviceable -- infinitely more so than the guff that's displaced them in more recent years. In part, that's due to an underlying shift in premises; half a century ago, no one would have dared to posit that right and wrong are relative, or that there can be no absolute moral standards, or that "good for you" and "bad for you" are anything but matters of opinion. Today one seldom hears anything else. If you don't believe it, either you don't have children or you haven't paid enough attention to what their "teachers" have been telling them.
Accordingly, your Curmudgeon has decided to trot out, one by one, the sturdiest and most useful of the simple wisdoms with which his own parents and teachers equipped him. It is his opinion that their promulgation could do quite a lot to correct the faults of modern American society, and even more to quell the rising tide of dissatisfaction with life that afflicts so many of our teens and young adults.
Of course, opinions will vary. Read on, and judge for yourself.
High among the homiletic primaries is this one: don't allow yourself to form bad habits. From the ordinary meanings of the words, this would seem self-evidently wise. For a "bad habit" is a behavior pattern that does harm to oneself. Of course, there's a heavy murk around that word "bad," whose variable interpretation has been the ingress for a lot of irrationality, but we'll get to that some other time.
There are any number of habits on whose badness Americans would generally agree -- and not by thin majorities, either:
- Avoidance of exercise;
- Routinely bad nutrition and overeating;
- Impropriety of disclosure (i.e., the habit of revealing sensitive facts about oneself or one's family, friends, and acquaintances to persons who ought not to be told);
- Excessive television watching;
- Smoking;
- Drinking to excess;
- The use of recreational drugs.
The above is, of course, a partial list. Other bad habits less dramatic in their effects would draw general concurrence as well. But there has been a sea change in American attitudes so complete, yet so quiet, that the very worst of all habits, by which millions of persons have utterly destroyed themselves and their kin beyond all hope of renewal, is almost never addressed. Indeed, when it's mentioned, most persons either refuse to acknowledge it or turn away to conceal their embarrassment.
The habit of which your Curmudgeon speaks is living beyond your means.
This venerable phrase has almost been effaced from our culture. Yet our nation's habit of living beyond its means is a regular news feature, reported through innumerable channels at least once per month. What else does the federal deficit signify? What else does the American trade deficit signify? What else does it mean when the dollar drops in value against the currencies of other lands? (It's been quite a long time since a physician last clapped your Curmudgeon on the shoulder and told him that he's "sound as a dollar," and not because your Curmudgeon is quick to take umbrage at insult.)
What's bad in the large is just as bad in the small, yet nearly all of us do it, and very few of us will admit to it.
Likely you, Gentle Reader, are nodding, perhaps a bit reluctantly, at the unwisdom of "living beyond your means." But you haven't seen your Curmudgeon's kicker yet:
Yes, that includes home mortgages and car loans.
A century ago, "mortgage" was a dirty word. (Car loans were, of course, unknown.) In fact, the word means "death pledge." It denoted a promise to return the mortgaged property to the legal ownership of the mortgagee -- the lender -- upon the mortgagor's -- the borrower's -- death. Indeed, it still means exactly that.
Mortgages in the Nineteenth Century were almost exclusively the province and the bane of farmers. Private housing in non-farm areas was very seldom mortgaged. The income tax, the rise of the lending industry, and the demographic and financial conditions that prevailed after our two World Wars were the impetus by which Americans were goosed into thinking that living in homes they do not own, that could be ripped out from under them at any moment, was perfectly all right.
It's hard to get reliable statistics on the matter, but according to a financial professional of your Curmudgeon's acquaintance, no fewer than 75% of all private homes are mortgaged. The deeds to those homes are encumbered in such a fashion that the persons who "own" them could be stripped of them at any time. It would not surprise your Curmudgeon too greatly if those provisions were invoked to put force behind a Kelo-esque eminent domain proceeding; financiers and politicians have always traveled in the same circles.
But even apart from the hazards involved in living in mortgaged housing, it's almost always unwise to undertake a mortgage for reasons of simple financial prudence:
- It's a long-term obligation, typically 15 years or more;
- The lender is legally privileged over the borrower -- that is, nearly all the options rest with the lender, nearly none with the borrower;
- The borrower's income, upon which he depends for his debt service, is almost never guaranteed;
- A default on a mortgage is regarded as the worst of financial sins, and in the worst case can ruin an individual's financial standing for the rest of his life;
- In the event of a default, the borrower seldom recovers any significant percentage of his notional equity in the mortgaged property.
If a mortgage, which is secured by real property and carries tax advantages that are attached to no other form of debt, is unwise, then what need one say about chattel loans on cars and other movable property? What need one say about credit-card debt, which carries extremely high interest rates and has ruined millions of families in the past quarter century alone?
Many a reader has been saying to himself "But how could I get the things I need without incurring these debts?" for several paragraphs now. Such questions arise from a perverse sense of "need" far more often than not. Americans are hooked on material self-indulgence; easy credit is the pusher that feeds our habit. Most of what we have, we do not need. We want it, and we certainly enjoy it, but those are far different things.
"Need" is the gateway drug. "Need" is habitually "defined down" over time: from a house, to a car, to better clothes, to a better car, to a really nice house in a "suitable" neighborhood, to designer jeans and sneakers for the kids, to the latest iPods®, to a PlayStation 3 ® and all the "hot" games for it, to a Giant Economy Size bottle of Chivas Regal to dull the pain from having to pay for all that stuff.
Man's needs are food, clothing, shelter, and heat. All else is discretionary. The truly prudent man does not incur debt to pay for discretionary items.
Let it be admitted that most Americans, despite their debt anchors, manage to skirt the shoals of financial disaster. But an appalling number do not, and a significant fraction of those never quite recover from the wreck. Compound interest, which master financier Baron Philippe de Rothschild called "the eighth wonder of the world," is in fact the eighth horror of the world for those habituated to debt. Its ability to drain all the vitality from one's present and hope from one's future is unequalled by anything but cocaine and heroin.
In what might be the supreme irony of ironies, innumerable Americans look for their salvation from their debts...to government. Not only is our government the most egregious abuser of credit in the history of the world, it has an unadmitted interest in encouraging debt to the widest possible extent. Widespread severe debt is the motivator for governmental abuse of the currency: inflation. Inflation in our fiat-currency system gifts Washington with billions of "free" dollars with which it can increase its power over the rest of us. But Americans with substantial savings will not tolerate inflation; Americans deeply mired in debt, seeing the chance to pay down their obligations with "cheap" money, will embrace it eagerly.
If you're a young person who has yet to acquire any debts, don't! Live beneath your means; acquire savings. Only borrow when utterly forced to do so, and only as a capital investment in yourself: that is, for tools or an education. Be ruthless in assuring that every dollar you make arrives in your pocket with no debt-service strings attached.
A young man with a white-collar salary, who restricts his consumption for just ten years and puts his unspent balance into conservative investments (i.e., steady 3% to 5% returns), can usually produce the entire purchase price of a house at the end of that period. He'll have no trouble affording the cash purchase of a used car. Does it mean that he'll live in a less opulent style than that enjoyed by his coevals? Yes. But it also means that the fangs of the debt habit and the shackles of compound interest will have no chance to snag him.
An older man who has lived free from debt can be certain of mobility and security. He will have savings. No occupational reversal will have the power to dispossess him. Neither will misfortunes of nature render him helpless. He will have leverage in all negotiations that a man chained to debt and beholden to creditors would not possess. He will be as free as his individual efforts can possibly make him. When he passes from this world, he will be able to leave his progeny a substantial patrimony. More, he will have already shown them an invaluable example.
A sturdy wisdom indeed.
Comments
oh.. alright, I’ll pay off the Credit Cards.
Posted by on 12/13/2006 at 06:54 PMMy family is living beyond their means and I hate it. I hate paying interest, particularly enormous amounts of interest.
I think the passing wisdom is that buying a home is an investment. I doubt we will get near what we put into it if we were to ever sell it, not once all the interest we will pay is calculated.
Posted by on 12/13/2006 at 08:43 PMExcept that our society as it is set up today, is barely livable for one who does not have a “credit history”.
Additionally the inflationary nature of the interaction between realestate and currency inflation penalizes the person who pays cash for a home severely; as well as depriving them of the opportunity to use that money elsewhere (which is also effected by the inflation interplay).
Essentially, the entire financial system of the modern world (not just america), is completely stacked against someone who wishes to remain out of debt.
The only solution I have found is to maintain slight to moderate debt; and pay it off regularly and rapidly; while maintaining enough cash reserves to ensure against default.
Posted by Chris Byrne on 12/13/2006 at 08:52 PMI don’t know anyone, by your definition, who lives within his means.
Posted by og on 12/13/2006 at 09:51 PMThank you Fran. I thought I was the only one. Now I know there are at least two of us.
ΜΟΛΩΝ ΛΑΒΕPosted by ΛΕΟΝΙΔΑΣ on 12/13/2006 at 10:41 PMOn car loans and credit cards, I most wholeheartedly agree with you.
On the home mortgage, I must respectfully disagree. In many housing markets, the cost of rent for a home and the payment of a mortgage will be roughly the same. It makes excellent economic sense for a recent college grad to take out a mortgage to buy a home, then find some housemates to rent to. The ‘owner’ accrues substantial tax benefit, and builds equity.
By the time they are ready to settle down, the house will be paid for, and they will have an excellent credit history to flaunt when they get into those negotiations...even if they plan on paying cash in the end.
Without that nice credit history, those large cash payments will raise all manner of eyebrows that are better left unraised.
Just my 2 cents…
Posted by on 12/13/2006 at 11:21 PMThe day we signed our mortgage, I began crying when I read the bank reserved for itself the right to inspect ‘the property’, inside and out, whenever it felt like it. It’s been our first and only house.
The real estate attorney was disgusted because I ruined the experience for him; he went into real estate rather than criminal law because he wanted happy clients.
We’ll be paying our 15 year mortgage off shortly and I will never have another.
Posted by on 12/14/2006 at 12:03 AMThe way to owe less is to want less. And that’s the road to personal freedom.
But the pressure to want more more is relentless--how many are trained to resist it?
My father used to say “man needs but little - and that not for long”
How right he was.Posted by Keith on 12/14/2006 at 06:16 AMI have a mortgage on my boat, but it’s a small amount ($40k), and I live on the boat. Still, the term of the mortgage is greater than my life expectancy, and that is irresponsible.
Posted by Alan Sullivan on 12/14/2006 at 07:28 AMA hearty here-here on this one. I hate debt and have lived debt free almost all of my life. I once mentioned to a friend that if you don’t have debt, each day you to go to work you do so as a choice.
Unfortunately, as a professional writer and someone with a bit of wanderlust, I didn’t make a serious white-collar salary until I was 36. For seven years, though, I have acquired considerable equity. I have one debt only—a home mortgage.
I would respectfully disagree on this issue of a home mortgage, though I think you added a lot of food for thought. I rented for years, and finally purchased. My mortgage payment is now a little less than my last year’s rent. Plus, that payment never goes up and isn’t at the whim of the market.
What I did was keep that mortgage payment low. While my peers were paying $200k, $300k, 400k on houses, I bought one for $138k and got a 1,400-square foot chalet on one acre of mountain land. It’s a little off the beaten path, but hey, so my’s blog.
The other key is less is more. I hate clutter and like open spaces and to swing my arms within knocking over something.
I one time explained to a friend that I already had everything I want from a material perspective, and that from here on (especially since Gilette came out with that Mach 3 thing 10 years ago), all I wanted was to perhaps upgrade a few things and replace what breaks. It took him a full year to realize that I actually meant it.If I were to give advice to my nephew, I would tell ‘em to remain as debt free as possible, except for a home purchase and possibly student loans. (But I’d encourage him to think about his education after a thorough analysis of ROI.)
Posted by IB Bill on 12/14/2006 at 10:03 AM"The real estate attorney was disgusted because I ruined the experience for him”
There’s something disturbing about that that I can’t quite put my finger on, but the phrase “because it’s all about him, right?” leaps to mind.
Posted by on 12/14/2006 at 10:05 AMI must also disagree with regards to the home mortgage. As it was previously pointed out, the cost of Renting makes avoiding mortgages useless when it comes to saving money. In many areas, rent actually exceeds typical mortgage payments by a substantial amount.
I do, however, agree with all the other points and would also say just because it doesn’t make sense to rent, doesn’t mean you should go out and buy the most expensive house for which you can afford a payment.
Perhaps 20-30 years ago it would be possible to rent for far less than mortgage payments, but this is no longer the case.
Nonetheless a mortgage is a serious business and should not be considered lightly.
Posted by Xealot on 12/14/2006 at 01:56 PMYou folks who’ve been objecting that home mortgages are a good idea because renting costs the same and doesn’t build equity or gain a tax advantage are all making the same mistake. I’m not going to tell you what it is; you’re all smart enough to figure it out yourselves. But I assure you: you’re wrong, and all of you are wrong in the exact same way.
Time to “think outside the box!”
Posted by Francis W. Porretto on 12/14/2006 at 02:21 PMOh gosh! Do tell! I think it is the interest, that’s just my guess. The interest is killer if you actually think about it. It practically triples the price of your home in the long run.
We bought a cheaper house. Little 1400 sq. foot house at well below the median home price in the area, which I believe is at about 204K. We bought for 158K. Still a hefty sum of money to pay back. We’re happy with it. My only complaint is that we don’t have one of those fancy smancy big ole bathtubs found in newer homes, but I suppose I can live without that.
Posted by on 12/14/2006 at 03:29 PMIf we are all wrong in the exact same way, one can only figure that you are speaking about home price and real estate inflation. If everyone purchases, supply and demand has to rebalance at ever-increasing prices relative to other capital purchases. This is the short version of why the real estate boom occured, and why prices are so high at this point.
Of course if the bottom ever fell out of the market, mortgage holders would be screwed.
In all other respects it is mostly cheaper to buy than to rent in the long run. One MUST live somewhere, and where I live even a cheap 2 bedroom apartment in a ratty part of town costs more than a mortgage payment on a basic house in a semi-decent area. There is, therefore, no incentive to rent for the individual aside from a dubious lack of hassle.
Posted by Xealot on 12/14/2006 at 03:54 PMWell, Fran has a point… Lets look at the bottom Line (correct me if I’m wrong or missed something):
Pros to owning your own home
Property Valuation increase
Tax shelter for mortgage
Alot more Living Area (than an apartment)
Plenty of storage for things
Family FriendlyCons to Owning your own home
Utility bills
Fire & Liability Insurance for Property
Property tax (can be big $’s!!!)
Bad neighbors (its a possiblity)
Neighborhood can go bad
job change to across the city or country (Have to move)Maintenance - snow shoveling, grass cutting, window cleaning, Painting, fixture/hardware wear out,
Major Replacements - (roof ~ 25 years), (water heater ~ 10 years), (Windows ~ 50 years), (Plumbing inhouse ~ 50 years), (Water to Street ~ 50 years), (Stove ~ 25 years), (Furance ~ 30 years), (Air Conditioning - central air ~ 20), (concrete driveway ~ 80 years), (Sewer Line under house ~100 years), (Electrical ~ 75 years) ...
Buying Tools (what to buy what not to buy).
Do I buy good tools or cheap tools
Do I contract it (high dollar cost)
Do I do it myself (High time cost and may not loook nice)Pro To Renting -
“Oh Mr Landlord, your Apartment needs a new” (fill in blank)
Renters credit (in some states)
plenty of time for ... anything…Cons to Renting -
No Equity Build up
No tax shelter from mortgage.Posted by on 12/14/2006 at 05:32 PMHow are children fundamentally different than houses?
A child is similar to an 18year loan in that it obligates certain expenditures over a prolonged period. Granted the costs are not constant and the payment schedule is a little looser but the basic fact s that by having a child a couple obligates themselve to devote a certain amount of capital over 18+ years which they cannot immediatly pay (or set aside) at conception.
Why the free pass? Should a couple marry, both work and save for 10 years so they can have the money set aside for a house and a baby without going into ‘debt’? Or are some debts better than others?
Posted by on 12/14/2006 at 05:38 PMNot to pick nits with Condi bu many of the ‘cons’ placed on owning one’s own home are also present if one were renting.
Assuming the same house, one being rented the other mortgaged:
In order for the property owner to profitably rent the home he has to receive in income enough money to cover his expenses (and, one would think, turn a profit). This means that roof replacement, property taxes, liability insurance, et al. will be priced into the rental cost. The homeoner will encounter all of the normal upkeep costs (tools, landscaping, shoveling, etc.) whether they rent or not. The only real differences in the two situations is the renter has lower transition costs than the owner and is insulated from fluctuations in property values.Posted by on 12/14/2006 at 06:20 PMGood point Ed - if it is a house you are renting and not an apartment.
If it is a house you are renting, then the landlord becomes the Landscaper, plumber, electrical or basically General contractor.
The two variables that are being balanced are: Time and money.
So what is the best alternative? Depends on what you want in life.
Apartment living appears to be the general best bet in regards to time and money conserved.
But as usual, that is open for debate.
Posted by on 12/14/2006 at 07:01 PMIsn’t it obvious?
You don’t need to either rent or buy a house. You can live with your parents without paying anything until you have enough money to buy a house of your own. (Assuming that you have the sort of parents who won’t charge you rent. I’ve never met such parents, but presumably they exist. Most parents who charge rent will typically do so below market levels, though, and you can often con them into free food, at least on occasion.)
Posted by Chris on 12/15/2006 at 03:39 AMI’ve met parents who didn’t charge their adult children rent. But they’re not related to me by blood or marriage, and certainly weren’t my mother. I was paying $500/mo in rent from the moment I got my first job at 14. By the time I left college, what I paid her was fully commensurate with market rates in the area, and there was no reason to stay.
But renting is still a trap.
You say the bank can take your house? Sure...if you don’t pay them on time. See what’ll happen in an apartment under the same terms. Miss a payment to your landlord and a week later all your stuff is sitting in the rain, and you have no recourse. But if (God forbid) I default on my mortgage, the bank still owes me the proceeds of the sale of the house in excess of the loan balance. A $350,000 house seems unlikely to lose $185,000 in value just by being sold in foreclosure, so I’m pretty sure we’d still get something.
My mortgage, of which I decline to be ashamed, is $275/mo less than my rent was on the apartment I lived in before, for a house six times as large, safer almost beyond measure, and far less offensive in the legal and regulatory aspects that tend to come with living in places where real estate is rented rather than sold...and the mortgage balance will be cut in half before the end of 2007, with monthly payments coming out of savings account interest for its remaining duration. (Unless I die before I’m 60, I’d live to pay it off even if I did it the normal way.)
If the value one is receiving exceeds the cost of the debt, it’s good debt. According to most people, education counts. According to everybody, tools for a business count. And except in the most egregious cases of inflated markets and speculative buyers, mortgages on primary residences count.
Posted by Matt on 12/15/2006 at 05:50 AM"See what’ll happen in an apartment under the same terms. Miss a payment to your landlord and a week later all your stuff is sitting in the rain, and you have no recourse.”
Well… its not as easy or desirable for a landlord to do that.
1. you are not considered late in your payment until the 6th of the month.
2. General policy for Landlords is to give a late letter to the tenat on the 6th and start eviction proceedings on the 9th.
3. They can’t throw your things on the curb that soon. If you over stay your months term after eviction, they need a writ from the sheriff and only then can they forcibly remove you from the apartment.
4. It is not profitable to force people out. It costs at least $250 dollars to have an unlawful detainer, untold costs for the lost months rent, ~30 to ~50 dollars to file in small claims court (and recoup all the expenses for the trouble), between 50 and 100 dollars to put an ad in the paper for a new tenant, untold amount lost if the apartment is not rented, untold expenses for cleaning the apartment and readying it for the next tenant, various other legal expenses if you hire a lawyer, and a HUGE amount of time lost doing all this labor.
Then, though the landlord may win in small claims to recoup all this loss, there is the matter of collecting it…
Remember - the law is on the tenants side.
5. Not only is it a business relationship, but they have a vested interest that you pay and are not forced out. They trusted you enough to let you in, most are pretty lenient about late payments - especially if you are dealing with the landlord in person and not a holding company.
And if you a problem with paying on time, you can set up an arrangement to auto pay the landlord with your bank.
Posted by on 12/15/2006 at 08:54 AMI’m waiting to see what Francis’ answer is but I think it relates to interest on mortgage. If you can hold off buying a house til you can pay for it outright, as has been pointed out, you will save something like 2 times the cost of it over a 30 year loan--in general, of course; where I live you could buy a small 1BR for $35K last I looked (about 2 years ago) and with a good job you could cut the loan term drastically, of course, but that’s somewhat of a special case.
Posted by on 12/15/2006 at 11:55 AM*blink*
All of you folk who are talking about renting being more than or equal to a mortgage, I want to know where you’re living. Right now I am in California, ground zero of the housing bubble.
Median price right now is over $500K. Median income is a little over $50K. You do the math.
Aside from the horrors of the coming crash (find out about I/O— interest only— and neg am—negative amortization— loans some time, it’s quite frightening), there are many other reasons to not enter a mortgage in a climate where a standard payment alone can be three to four times the cost of rent. (And yet people still buy, afraid they’ll be “priced out forever.") Taxes can equal or exceed your mortgage payment in some areas, and as he said, maintenance is also a pressing obligation.
But here’s something a lot of people are missing. If credit were not so easy, prices would be more in line with what people could afford without it. A huge influx of cash into the housing market (see I/O and neg am, above, as well as a little doozy called “stated income") sent the prices soaring into the stratosphere, trapping the poor schlub with the job at the supermarket into a $350K house in the bad part of town and a debt which he will never pay off and has to eat ramen to be able to “afford” in the first place.
Think I’m exaggerating? Look for the stories coming out of the Golden State. They’re going to get increasingly desperate as time goes on, and will for several years at least.* The population hemorrhage has already begun.
Gah. I’d like to get a house. Isn’t going to happen anytime soon. I’d like to be able to at least start renting a house soon, though.
*Basically, I’ve spent more than a year regularly reading my financial betters, and their analysis has me convinced that the housing market is in deep trouble. One indicator is that more people “own” their home than ever before… which indicates a near-saturated market.
Posted by B. Durbin on 12/16/2006 at 03:21 AMB. Durbin:
I lived in the Philadelphia area until 2004, when I bought a house up near the Poconos.
The housing market heated up so much that the price of housing doubled (and worse) between 2000 and 20043 in much of suburban Philadelphia. I had a friend who bought a townhouse in Chadds Ford for $125k in 2000 and sold it for $225 four years later. This was no unusual.
But at the same time, the prices fell out of the rental market. Two bedrooms in my King of Prussia apartment complex were going for $1,350 in 2000; by 2003, prices were down to $850. So I guess the situation is similar to California—overpriced housing and underpriced renting.
In 2003-04, I was able to take advantage of this to the point where my apartment was costing me practically nothing (I rented one bedroom for $500 a month.)
BTW, I never considered a negative amortization loan or a zero-interest loans; these are evil, plain and simple. I wouldn’t consider them. They are not financial tools, they are bankruptcy tools and a scam.
As far as my home purchase—I love it. Psychologically, it “centers” me to know that I have a place that’s my own, even if yes, the bank owns 80% of it. If I end up with too much stuff, I don’t have to rent space, as I’ve had to do before. I have a big basement.
Now, if it were only paid for, then I could semi-retire ...
Posted by IB Bill on 12/16/2006 at 12:21 PMRental prices more accurately reflect the state of an area’s financial ability to pay, because renters can move to take advantage of better deals. Technically, they cannot be largely “underpriced” because economics would dictate that more people would try to take advantage of the rental deal. In fact, though, there is a fudge factor due to the emotional climate of an area— rental prices can be underpriced if the ownership market is perceived as great, because there is then a shortage of actual renters.
I expect the rent prices in the area to go wild pretty soon, both up and down as people try to find a sweet spot. We mostly have to wait until that settles lower before looking at house rentals— you don’t want to be in a house that goes into foreclosure under your feet. For one thing, you’d never get your deposit back.
Posted by B. Durbin on 12/16/2006 at 05:00 PMVery long (i.e. “Fran post length") disagreement here.
Posted by TJIC on 01/04/2007 at 10:58 AM
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