Home mortgages

New York Federal Reserve Bank economists calculate the fraction of families who actually have equity in the house they own. In San Diego, for instance, the home ownership rate had fallen to 55% last year from a peak of 63%. But by late last year, the fraction of households with equity in their homes was between 35% and 39%. In hard-hit Las Vegas, nearly 59% of households own their homes, but only 15% to 19% of households own a home in which they have any equity left.

As a small businessman my business lost money in 2008 and 2009. We have been renting since moving to Phoenix in 2006. Thankfully, we missed the crushing slide in the Phoenix residential real estate market. We've only been hit by the crushing slide in the Phoenix retail sector. However, now that we've weathered the recession and are seeing more light than tunnel, my wife and I have decided to buy a house. What is the value of a house? We've clearly learned in the last three years that it can be a lousy "investment." The value of a house is as shelter and safety and ultimately, to create a "home." We have rented a very nice middle-class home in a nice area in Scottsdale for the last three years. We have paid market rent for this home and our rent expense has dropped about 20% in the time we've been in the house as we've renegotiated with our landlord as the market has dropped. We're currently paying $1800/month.

We identified a real estate agent we wanted to work with and he recommended a mortgage broker to determine how much mortgage we could qualify for. He indicated we could get a mortgage up to the FHA limit in our area. We identified and made an offer on a house about $100,000 less than that maximum. The mortgage payment, PITI, would have been about $1600/month. Imagine our dismay when we were told less than a week before our scheduled close that we couldn't get a mortgage!

We wanted this house! We wanted roots, we wanted to be able to paint the walls and build a place for our grand-children to visit! We know we won't be retiring for a long time, thanks to the great recession, and feel we'll probably live in Phoenix for at least 15 years when my wife qualifies for her pension. But we couldn't get a mortgage! I did a quick tally of assets we could access and found we could pay cash if we liquidated much of our (useless, long-term, invested but losing) retirement savings. I had converted most of our retirement to Roth IRAs in which the contributed amount can be withdrawn at any time and even earnings withdrawn for a home purchase. But was this a good idea? My parents had never paid cash for a house although my father was very conservative and paid off his home much sooner than 30 years. I knew burning the note at the end of a mortgage term sounded fabulous, but not having a note? Mortgage interest rates are low. Mortgage interest is tax deductable. Wasn't I putting our capital into one basket and losing the advantage of leverage on this investment?

Of course I was, but I'd proven that our retirement investments could lose value rather than gain value and was leverage a good idea? What is my return on this house purchase? Interest expense reduced yields 5.5% per year- guaranteed. Certainly better than "secure" investments. No rent- $1800/month=$21,600 yearly reduction in expenses. Value of painting walls and rooting? To quote a credit card commercial- "priceless." I have plenty of tax deductions, so interest deductability is a marginal benefit.

Understand, this isn't a great house, the house of our dreams, a mcmansion. This is a mid-century ranch house- 3 br, 2 baths. Sufficient. And we can pay for it! Hopefully, over the next 15 years of our lives we'll enjoy living in this house and use the savings to rebuild our retirement assets and have some fun. But in the meantime, I don't have to worry about being upside down on a mortgage like so many people are struggling with right now. And I won't have to worry about making next months mortgage payment.