The Get Rich Slowly discussion forums generate a lot of great conversations in which readers do their best to help each other. Alas, I don’t get a chance to stop by as much as I’d like. Fortunately, forum administrator Jericho Hill has agreed to highlight interesting discussions now-and-then. This week, he recommends:
- Amyrobynne has both debt to pay down and a goal to renovate her home. She asks, with those competing goals, how do you budget for a home improvements?
- Jarvis wants to invest in mutual funds but doesn’t quite feel comfortable. His cousins say to invest in real estate. The GRS community chimes in, mostly in favor of index funds for this new investor.
- Shaun wonders what to do when there’s nothing left to talk about. How do you deal with communication trouble with a spouse? How can you communicate with someone who doesn’t have many opinions?
Meanwhile, I’ve enjoyed the following articles from around the web:
Lazy Man recently asked, “Should you put a price on your health?” He does a great job of breaking down the components of this question. What is healthy? How much health is worth how much money? What about the law of diminishing returns? Like Lazy Man, I’ve recently realized that I am willing to spend money on health, but it’s often difficult to know where to draw the line. Improved nutrition is good. But is spending $300 on a heart-rate monitor a justifiable expense?
Bloomberg reports that one-third of U.S. homeowners who bought in the past five years now owe more on their mortgages than their properties are worth. It’s easy to get down on people for getting greedy during the housing bubble, but the truth is many average folks were just shopping for a place to live. Now a large number of these folks find themselves in trouble.
Finally, Flexo at Consumerism Commentary polled his readers: Is finding $6,000 in saved expenses better than a raise? I’d take the $6,000 in savings because that money comes after taxes. As Flexo notes, you’d need a raise of about $10,000 to equal $6,000 in saved expenses. This is why frugality is so powerful. Roughly speaking, every dollar you save in spending is like two dollars you’ve earned. (Or at least $1.50.)
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This article is about Spare Change
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You know, I had no idea there were forums attached to the site.
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JD
I want a big bright flashing FORUMS sign!
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I invest in real estate as well and I always find it difficult to justify why just because the home value has dropped below the the owed mortgage amount, that people would be struggling to make their payments. Especially people who are looking for a home to live in rather than invest in real estate and have been doing fine for a couple years or more. As far as I can tell, while the home value may have gone down (below the loan amount), the loan payments are relatively the same with the usual increase in property tax possibility each year. Unless their income took a nosedive too, the month to month payments are relatively the same, and I’m sure for a lot of people with stable jobs, so is their income. So the question that comes to mind is why are these people struggling. The people who are struggling should be the people who are investing and is unable to sell their properties and the loan officers and real estate agents whose life line depends on houses to sell are adversely affected.
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To go along with Steven, the loan-to-value ratio of a property only matters if it is in default. If the owners are paying their mortgage every month, it really doesn’t matter what that ratio is. Anyone with a fixed-rate mortgage has the same payments now and throughout the life of the loan, and with inflation blowing up, their payments only get easier over time. This is why the negative equity rate is 20%, but the default rate is only 1%.
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I have a hard time buying that the homebuyers in trouble were just average people shopping for a place to live.
As Steven pointed out, if they were in a fixed-rate mortgage that they could truly afford, there wouldn’t be a problem. And we have a right to be irritated by these bad choices because taxpayer money will probably bail them out. The lesson that we learn is that you don’t have to be fiscally responsible because those who act irresponsibly are rewarded with property paid for by the rest of us.
Meanwhile my husband and I are saving to build our own home, well-WITHIN our means. Why is that okay for us, but not for others who just decide to buy more house than they can afford?
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I agree with April. I think most of the people in trouble got into houses beyond their means. It doesn’t matter if you loan is now larger than the value, you are still paying the same mortgage payment and you have to live somewhere. The only way it should matter is if you want to sell, then you may have a problem.
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I’m willing to believe that 33% of home buyers in the last five years tend to make poor financial choices. Heck, of the people who’s financial choices I know a fair amount about, at least half tend to make poor choices. And from the other angle, in certainly well over 33% of markets in the last few years, simply buying a house given the state of the market was a poor financial choice. (Even if only in retrospect)
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I’m not sure that I agree that most of the people in trouble got into houses they couldn’t afford. My theory is that many homeowners in trouble got there because they made very bad financial decisions.
Case in point – my daughter and SIL. They bought a house they could just barely afford, but were OK until they decided to refinance and take some equity out to pay off some of their other debts. One of the bills that they were behind on was their HOA dues. So when they refinanced, part of the proceeds went to pay off a $3,000 lien to the HOA. Then, in order to keep the payments on the re-fi affordable, they opted out of escrow for insurance and taxes, and the next year did not renew their insurance, because they didn’t have the money. The result was a force-placed policy, which costs twice what they had been paying, and which increased their monthly payment by almost $250 / month.
So now they are in the position where they can’t afford the payments, can’t sell the house because homes here aren’t selling, and they can’t find a house or apartment big enough for their family that they can rent because their credit rating has bottomed out.
My SIL’s mother and I are thinking of writing a book titled ‘If Only You Had Listened’.
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Re: 6000 Raise/Expense cut
One thing about frugality that is often overlooked is that it has diminishing returns. I doubt I could save $6000 by finding ways to reduce spending. A lot of the examples in the original article (life insurance, debt, etc) I don’t even have, or need… others would involved reductions of 50% (ie: not available) or more (car insurance 50%, food shopping 50%, phone costs 65%, bank fees 100%). The point being that once you have already cut, or live a fairly tight lifestyle, there isn’t a lot of fat to cut.
On the other hand, I could probably cut $6000 from hobbies, entertainment and so forth. Eating out, skiing, etc. Or from education, another big ticket item right now. But in these cases, you have to give something up. In the above example, the bank fees I do pay are a premium package, but they also cover our credit card yearly fee and a bunch of other items over the three accounts. IOW, cutting fees can also involve reducing the services you get. In my case, I worked out that the package will be around neutral, plus I gain access to conveniences (intangible value).
In that sense, I’d rather make $6000 more. The lesson here isn’t really to embrace frugality, IMO. It just has to do with marginal changes – by not overpaying, you gain more than earning the same amount. Since I hate fat and cut it out of my expenses, the effort of finding any dollar amount to cut is far far greater than what I would get if I put that effort into getting a raise.
Not that most people wouldn’t gain from cutting fat!
Re: Real estate
Anyone who bought real estate at bad fundamentals (33% will probably continue to grow yet) will eventually have negative equity, most likely. This is likely end up as the majority of those that bought over the last little bit, unfortunately.
It doesn’t have to be about responsibility – the figure states only that housing prices have dropped below the down-payment amount (hence mortgage amount). It doesn’t state that they overbought, although it’s safe to assume that the majority so far probably did (bubbles do that). The point is that innocent, but naive, people can be in the same situation (buying a much smaller place, but now having negative equity).
It won’t be the responsible ones that come out ahead… and I don’t believe they ‘deserve’ it any more than the foolish mortals they deride. The only people who ‘deserve’ to come out ahead are those that bought/sold based on fundamentals. It wouldn’t really matter if someone ‘responsible’ saved for many years and put down a downpayment in a hot market, only to have their home reduce >25%. They’d be in the same position.
I contrast the two to make a point – it isn’t about being responsible, it’s about making the ‘right’ choice. I was responsible enough to make the 25% DP; but it wasn’t the responsible part that made me sell and not buy a home, it was the rational part. I could of been completely responsible and yet hit very hard, just as responsible people are being hurt . So, be careful with the holier-than-thou attitude… and if you want to take pride in being responsible, consider transferring it to being proud of making the right choice for you…
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I have a hard time too with people who can’t make it on their house payments. We bought two years ago and I just found out I’m being laid off at the end of the year.
HOPEFULLY (I’ve known for just about 3 weeks now) we wont have to deal with me without a paycheck – but I can tell you that even if I would have been laid off that DAY the first bill that will be paid is the mortgage!
I don’t understand these situations half the time. Have they turned off their cable? Their internet? Sold a car? Had a yard sale? Cut back on food? Entertainment? If your loan payment was SO HIGH that you cant cover it with at least one of your paychecks then you couldn’t have possibly worked out a budget at all before you bought a house.
Maybe I’m wrong – but even with an ARM adding to your loan like another $300 a month – I could cover that by cutting out my cell phone, cable and eating out.
Unless you could only afford your house because you are already doing all those things, then you bought way out of your price range to start with!
And about the down payment –
My husband and I only put down about 5% because we knew the market was crashing here. Why should we have put down 20% when there is a good chance it would just negate any profits when the market price goes down? Unless you are going to stay at your house for the whole 30 years and pay it off – where is the benefit except for a lower payment?
We will probably stay where we are for at least 10 years, but my boss (who is also getting laid off) has to move and since nobody is buying and the price of his house dropped he is losing ALL the 20% he put in and then some.
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@Finn–Maybe if you were trying to sell and your home value went down, it would be a problem, but there’s no reason you shouldn’t be able to make your house payment (outside of extreme situations), even if the value has dropped. As others have said, the payment stays the same.
It’s not like I don’t sympathize, but when we taxpayers have to bail people out, we have a right to be annoyed, and others’ choices do become our business. I’m not holier than anyone, but I also don’t expect for other people to finance my mistakes and pay for my home.
@Peg–Seems like they couldn’t really afford that house, even if they qualified for the loan, since they had those other debts and couldn’t pay the HOA dues or insurance. Hopefully they’ll learn from this and come out better in the end. That’s how I view the credit card debt we paid off. It difficult at first to look at what we owed and cut back on spending to pay it all off, but we’re so much better with saving and handling our money now.
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We bought a house to LIVE in for the next 15-20 years. So what if we currently owe more than the house is “worth” – we made sure that our mortgage payments are reasonable (it will be tough but do-able if we go down to one income, which is a distinct possibility with a baby on the way), and we’re not planning on selling, so why worry about it?
Re: home improvements – even though not all our non-mortgage debt is paid off, we have been putting some money into home improvements. Why? Because on top of things that simply break, there are things in this house that we’d like to change as soon as we can afford it. Most of them are structural/efficiency related (catching minor problems before they become major), but almost all of them also improve the cosmetics of the home. We started with projects that are mostly labor, and we always pay cash. We COULD put that money towards our student loans or towards the mortgage, but once again, we’re in this for the long haul, and would prefer to live in a home that we LIKE living in. The really big projects (for example, redoing the kitchen) are going to wait longer, but even knowing what we PLAN to do makes it easier to live with annoyances now.
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