The Calculated Risk blog has shared an updated graph of inflation-adjusted housing prices through 2011, based on Prof. Shiller’s data.

Mr. McBride also digs a little deeper and argues that because Shiller changed up the data series he was using in 1987, the true slope of the line should be a little more slightly positive. Using the original data series would result in an overall slope of housing prices increase slightly faster than inflation (1.5% per year) vs. the Shiller line (0.5% per year). His conclusion:

In many areas – if the population is increasing – house prices increase slightly faster than inflation over time, so there is an upward slope for real prices.

This reminded me of this chart via Sober Look that compared the US age distribution in 2000 and 2010 (US Census). The Boomers are getting old, and there is a little gap before the Echo Boomers come in. How will this affect housing prices in the future?

To me, the main takeaway is still that housing prices over the long run don’t rise much faster than inflation. This is not unexpected, as the cost of housing is by definition a big component of inflation. Of course, housing also provides dividends in the form of rent. So if you actually owned a house instead of most people “owning” a house with a big fat mortgage, your overall return on investment would be much better. I can’t wait to really own my house so I can earn that imaginary (imputed) rent.

In reality, what many people seem to do nowadays is hold on and rent out their properties for less than their mortgage payment and hope for price appreciation. This might work I suppose, and one could argue from the graph that prices overall are now close to historical averages. There are now some places where you can buy a house that rents for more than the mortgage payment, but unfortunately not anywhere near me (unless we’re talking huge down payment). As for me, I suppose I’ll just stick with owning low-maintenance REITs and getting my “rental income” that way.

During the housing boom, nobody worried about appraisals. If you put in a bid to purchase a house for $300,000, the appraisal was basically guaranteed to come out at $300,000 or above. Appraisers are hired by lenders, and back then lenders wanted to make the loan happened no matter what. Therefore, if you were an appraiser and you didn’t reliably provide the number that the lender wanted, then your phone might stop ringing. I was told directly that the intended purchase price itself was a “strong indicator of value”. Rather self-fulfilling, no?

Nowadays, banks are much more cautious, and thus so are appraisers. In addition, recent legislation created new Appraiser Independence Requirements for Fannie Mae and Freddie Mac loans. At the same time, mortgage rates are at lows and refinance requests are at highs. Your ability to refinance is often dependent on what the appraiser says your house is worth, as you will need to satisfy a certain loan-to-value ratio. So what can you do to maximize your appraisal?

Feel out the lender first. Appraisers still work for lenders, and a good mortgage broker should be able to give you an idea of your chances for an adequate appraisal given the current environment and your basic home details. Check recent sale prices in your neighborhood on sites such as Zillow.com and Trulia.com to get a realistic sense of what to expect.

Collect supporting documents. If you’ve made any improvements to the house, gather up any blueprints or housing permits to provide to the appraisal. You could also make a list of the best “comps”, or recent sales of comparable homes in the area. If you’ve gotten one recently, dig up your last appraisal, and see if there were any omissions or changes. A busy appraiser might simply copy stuff from the previous appraisal. You may even find that they just bring a copy of the old appraisal and mark off things as they go.

Prepare your house. The appraiser will call you to schedule a time to see the interior of your house. Some people have suggested that you should hire a landscaper and basically stage your house as if you were selling it. I don’t know about spending that much energy on things, but I would definitely keep things neat and tidy. Have the kids and pets playing elsewhere. You want the house to come off as well-maintained and cared for.

Meet the appraiser. You’re dealing with a human, so be nice. Walk the appraiser around your house, answer any questions he or she may have, and point out any changes that you have made to the house. When I met my appraiser he was happy to see our official building permits that showed our legal additions. We also pointed out any remodeled areas and newly-installed hardwood flooring.

I don’t know if all appraisers would be open to debating about exactly what houses make good comps to yours or not, it might rub them the wrong way. But you could probably point out ways that your house is different than other potential comps (bigger yard, pool, view, etc.).

Read the appraisal report and follow-up if needed. Request a copy of the report and review it for any inaccuracies. The workload is high right now, and it could be that they mixed up details with another house or just copied stuff over from other sources. Point out any errors along with supporting evidence and you may be able to get the appraisal re-evaluated. On the extreme end, you might ask for another new appraisal at your cost.

Don’t worry about property taxes. While the local government might consider your house’s sales price history when figuring out your home’s tax assessment, they will not be notified of the value from an independent appraisal. In fact, they probably have a rather rigid formula to figure out your home’s assessed value (they do have to do this on a lot of houses) based on things like number of bedrooms, number of bathrooms, square footage, lot size, etc. If anything, you might volunteer data from the new appraisal to appeal your assessed value – assuming it’s lower of course!

In the end, by taking these steps we felt that we had done our best… and our refinance was a success, so good luck!

Credit Sesame might be best known for offering people a free credit score every month, but they make their money by providing mortgage quotes. That makes sense given how sensitive mortgage interest rates are to credit scores. They just rolled out a new tool called the Mortgage Map that lets you visually compare various mortgage loan options. Here’s an example screenshot:

The vertical axis appears to be savings (refinance) or cost (new loan), and the horizontal axis appears to be interest rates. Different colors denote fixed-rate, variable-rate, and interest only loans. A little house icon appears for refinance quotes to indicate your existing loan. Mortgage rates are still reaching new historic lows, so it’s good to be aware of the options out there.

Of course, I played around with it using my own numbers, even though I already refinanced last year into a new 15-year fixed mortgage. Almost all of the loan options given were worse than my existing loan, which I suppose made me happy. However, a 7/1 ARM or 10/1 ARM would save still save me money if I paid it off during the fixed initial term (makes sense, although these are lesser-known flavors). I noticed that the default setting for refinancing a 30-year mortgage is that you will only keep it for 7 years, my guess is that’s how often the average person changes houses. But you’ll want to remember to change that to better reflect your own situation.

All of the quotes that I wanted to “learn more” about seemed to be offered by First Choice Bank, which I am guessing is a mortgage broker? As a result, I don’t really know how many different lenders are behind this map, and how it would compare to something like LendingTree.

I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.

There is already a good deal of discussion on this topic in my posts Why Paying Down Your Mortgage Early Can Be A Smart Investment and 10 Reasons You Should Never Pay Off Your Mortgage, but I’ve tried to summarize and update all the pertinent points into something more coherent below.

Other Higher Priorities?
I don’t think paying extra towards a mortgage should be the highest priority. If you have no emergency fund, high-interest credit card debt, proper insurance, or don’t have your IRAs/401ks maxed out, then you probably should focus on those things before worry about paying extra towards your mortgage.

What is your tax situation?
Next is the topic of tax-deductibility of mortgage interest. Everyone already gets the standard deduction, which in 2012 is $5,950 for singles, and $11,900 for married filing jointly. Only the amount that your itemized deductions exceed this amount actually saves you money. If you have a $200,000 mortgage at 4%, your interest is only $8,000 the first year (and decreasing in subsequent years). If that’s your only deduction as a married couple, you’re not getting any real tax benefit at all.

However, some people have a big cushion of deductions, like high property taxes, state income taxes, charitable contributions, etc. Some don’t. Some people are in high marginal tax brackets, where saving 35% sounds really nice. Some are in the 15% or lower tax brackets. As for us, we are in a high marginal tax brackets, and pay a good deal of state income tax, so the deductibility is definitely in effect.

Paying 4% mortgage interest fully-deductible would be perfectly counteracted with a bond earning 4% interest fully-taxable.

Comparing with other investment options
One major argument against paying extra towards a mortgage is that you can earn a better return elsewhere. Who cares about saving 4% interest annually when your money could be earning 8% somewhere else? As we’ve seen recently, stock market returns are not guaranteed, and also not without lots of heartburn. Do you really want to invest in stocks using borrowed money? If anything, you should compare your mortgage interest with a high-quality bond or bank account interest.

Liquidity
Another argument against paying extra is that it is hard to access the equity in your house. You may not get a home equity line of credit, or it may be frozen later. However, if your alternative investments are in IRAs or 401k’s, then those aren’t exactly liquid either. Also, if you have an adequate cash cushion (as we do) and proper insurance, then liquidity will become a lesser concern. I don’t need to have access to every penny of my portfolio at all times.

Inflation hedge
A nice thing about mortgage payments is that if you have a fixed mortgage, the payment stays the same each month. Meanwhile, rents will increase with inflation. If inflation starts to rise significantly, you’ll be very happy to have a loan at 4-5%. But we also may stay in an era of prolonged low interest rates.

A possible strategy?
After all that, my idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.

As of 2012, my mortgage rate is now slightly under 4%. I expect to pay off my mortgage in under 10 years, ideally closer to 5-7 years. This means that I’ll effectively be earning 4% a year for 10 years, whereas the Treasury rate for a 10-year bond is only 2%. If rates do rise, then I’ll stop paying extra toward the mortgage. In the meantime, since I already have bonds in my asset allocation, I’d much rather earn 4% by paying down the mortgage than 2% in the market. (Remember, I’m already maxing out both IRAs and 401ks for the year.)

I really don’t like the idea of staying in debt longer just for the possibility of investing for higher return elsewhere, especially as the difference for such a short time is minimal. I have plenty of money in stocks and if they go up 8% a year over the next 5-7 years, then I’ll still be fine.

(Posted originally in 2009, but I have updated the numbers for 2012.)

I can’t stop posting map infographics! They’re just so pretty. 🙂 Richard Florida of The Atlantic shared the map above, which shows the percentage of residents of each state that were born in that state. He then goes one step further and concludes that this map backs up his theory that America is being divided into two economic classes – the stuck and the mobile:

The mobile possess the resources and the inclination to seek out and move to locations where they pursue economic opportunity. Too many Americans are stuck in places with limited resources and opportunities. This geography of the stuck and mobile is a key axis of cleavage in the United States.

If mobility was once considered to be a quintessentially American attribute, it is now one that only an elite sliver of the population can lay claim to. It is both a significant shift and a sobering one. (source)

He cites the fact that fewer Americans are moving now than before, ostensibly because they are stuck in underwater homes. Still, using this particular map as proof of such a class divide seems like a stretch to me. There are many reasons why someone may or may not end up living in the state they were born. This map is the result of decades of complex interactions, not just what happened the last few years.

Just to throw out some examples, perhaps some states simply created significantly more job openings than could be filled by existing residents (DC Metro area, Alaska, Nevada). Some are retirement havens (Arizona, Florida). Also, I can’t tell if this map excludes residents born outside the US. Hundreds of thousands of immigrants came from around the world to settle in America – they were often both poor and mobile. Immigrants also tended to settle in coastal areas, which would affect the results above as they obviously weren’t born in the state they currently reside in.

In the end, I bet this map would have looked very similar even before the housing crash. A quick look at the same US Census data from 1990 confirms that states like Ohio, West Virginia, Kentucky, Pennsylvania, Mississippi, and Louisiana also had “low mobility” over 20 years ago, and states like Alaska, Arizona, Florida, and Washington DC had “high mobility”. I’m afraid I don’t see the evidence that mobility has been limited to an “elite sliver of the population”.

Last week, the average rate for a 30-year fixed-rate mortgage fell below 4% for the first time in recorded history. Why? The Federal Reserve and the US Government.

Check out this chart that breaks down the source of new mortgage originations for each year from 1990 to 2011. Blue is Federal Housing Authority (FHA) or Veteran’s Administration (VA), Red is Government Sponsored Enterprises (GSEs) including Fannie Mae and Freddie Mac, and Green is Other, presumably private sector mortgages held by banks and credit unions.

This is a fascinating and telling chart. In 1990 FHA/VA and GSE loans made up roughly 50 percent of all loan originations. This remained the story for the entire decade. The private sector got incredibly hungry with their toxic loans in 2004, 2005, 2006, and 2007. But look at 2008 up until today. For the last three full years, government backed loans made up over 90 percent of all loan originations.

Credit to Dr. Housing Bubble, found via AFM.