Lazy Man and Money

We Need a Home Funding 529 Plan

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I’ve subscribed to the Zillow.com email list for 8-10 years. Finally, after hundreds of articles, I found one worth writing about.

Recently, Zillow published More couples turning to wedding registries for help buying their first home. That makes sense because NBC News says, your home-buying dollar goes half as far now.

It seems weird to me to register on The Knot for “home funds.” It’s practical, but the money may get moved to another area of need before the couple has enough for a down payment.

It got me thinking. If you read the title, you know where this is going. If we can save hundreds of dollars in a tax-friendly plan (such as a 529 plan) for education, why can’t we do something similar for shelter?

When a grandparent contributes money to a 529 plan, they know it is going towards education. If it’s used elsewhere, there’s a penalty.

The carrot of a tax break with the punishment of a penalty is a strong motivator. I know many people raid their retirement accounts, but there’s a lot of information explaining why it’s a bad idea. That keeps many, many people using the money how it is intended.

Let me address one obvious criticism…

But Buying a Home Isn’t for Everyone

It’s true. Buying a home isn’t a fit for everyone. Going to college isn’t a fit for everyone, and 529 Plans exist. Many people read “529 plan” and think “college”, but 529 plans are very flexible. They can be used for cooking, golf, and diving school. You have to be sure that they are very specific ones, though. It should go without saying that they apply to trade schools as well.

My proposed housing 529 plan would be just as flexible. It wouldn’t necessarily be for buying a house. It could be used for paying rent as well.

Would some 16-year-olds in high school working after school put money aside for future rent? I don’t expect it would be that many, but I’d love to be able to advise my son to put 10% of his paycheck in a tax-advantaged plan for that purpose.

How do We Fund the Tax Break?

I mentioned that there could be a tax break. If we give a tax benefit, it’s best to make up that revenue somewhere.

I don’t have a specific place where we’ll get the money back. However, I’m expecting that it will reduce homelessness. With reduced homeless, there would be less need for homeless aid. More productive citizens would be working, earning, spending, and paying more taxes. I will stop now because why waste words explaining why homelessness is bad?

Final Thoughts

I think this would be a great experiment. However, I’m sure I am missing some ramifications. What do you think? Does a home funding 529 plan make sense?

Mortgages, Good Credit, Bad Credit, Biden/Politics, and Race

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Mortgages, Good Credit, Bad Credit, Biden/Politics, and Race

If that isn’t the worst title, I’ve ever come up it has to be close.

A couple of weekends ago, I saw some people Tweeting about a mortgage policy change coming through the Federal Housing Finance Agency (FHFA). Don’t feel bad if you’ve never heard of it. It didn’t ring a bell for me either, and I’ve been blogging here for 17 years.

Before I get too far into this, I will say that I’ve read several articles on the topic and will explain it as best I can in layperson’s terms. I may miss a little nuance here or there. However, if you want to read something more polished, I’ve included a link to a Snopes article near the end. The last thing you want to read today is a word soup about mortgages and loan-level matrices, right?

So with that out of the way, the news that was going around this weekend is about mortgages and loan level matrices.

Mortgages: Good Credit vs. Bad Credit

Specifically, the FHFA creates Loan Level Price Adjustments (LLPA) for Fannie Mae and Freddie Mac, who do the majority of new mortgages. These price adjustments change the mortgage rates depending on the borrower’s conditions. If a borrower has good credit and puts more money down, they get a better mortgage rate. If they have bad credit and put less money down, they have to pay a higher mortgage rate.

This isn’t news. The system has worked this way for decades.

The news is that the matrices give less of a benefit to those with good credit scores and less of a penalty to those with bad credit scores. It’s still helpful to have good credit and harmful to have bad credit. It’s just not as beneficial or as harmful as before.

Mortgages: Politics

The news I saw on social media was delivered with headlines like “Biden Raises Costs for Homebuyers With Good Credit to Help Risky Borrowers” (Newsweek’s headline). It’s worth pointing out that Biden doesn’t run the FHFA. The same people who say he’s senile want to claim he’s playing fourth-dimensional chess in reworking the LLPA matrices for the FHFA.

There’s a kernel of truth to it, though. Biden nominated the FHFA Director, Sandra Thompson, and her leadership was confirmed by the U.S. Senate – a group of people who are not named Biden. According to her bio, since 2013, she has been the Deputy Director of the Division of Housing Mission and Goal?s which is very closely related to the FHFA. Before that, she worked at the Federal Deposit Insurance Corporation (FDIC) for 23 years. Many of you are familiar with FDIC as it helps insure bank deposits.

There are two important points there. First, there IS a political aspect to the process. Biden and the Senate majority are Democrats. It seems safe to say that Republicans wouldn’t have nominated and confirmed her. Second, and most important in my mind, there’s no doubt that she’s qualified for the job. If the position weren’t politically nominated, it would be reasonable to presume that she would have been a leader to get the job based on merit and experience.

I quickly noticed that EVERY media organization covering this news usually writes with a heavy Republican slant. Much of the coverage comes from Fox News, The NY Post, or the Wall Street Journal – all owned by Rupert Murdock.

When you pull back the layers and use an unbiased fact-checking source like this Snopes article you find that Biden isn’t really connected:

“Rumors that U.S. President Joe Biden was pushing for, or had introduced, these changes were not supported by evidence. Moreover, the White House rejected that claim. There was no congressional measure or executive order related to the changes, and, based on our research, Biden had not publicly commented on the FHFA’s decision to change the fee structure.”

Mortgages: Race

None of the Republican articles mention race’s role in credit scores.

It’s been extensively documented that credit scores have a racial bias. For example, Investopedia has credit scores by race. The average white person’s score is 734. The average black person’s score is 677. In the previous matrix, that would mean that the average black person paid 2% more on their mortgage (on a loan with an 80% loan-to-value ratio). Now it is a little more than half a percent.

The political articles really focus on Biden and the good credit vs. bad credit. That pushes the narrative that Biden is doing something wrong. It doesn’t explain that Sandra Thompson is a perfect fit for the job and is awesomely qualified.

I went back to look up a little more about Sandra Thompson’s nomination and found this interesting article. It specifically points out that one of the Democrat’s goals is to close the racial homeownership gap. One stunning statistic:

“There was a 30-point gap between white and Black homeownership rates in 2017, compared to 27 points in 1960, according to the Urban Institute.”

That doesn’t seem right or fair, does it? It’s not just chance that black homeownership is so much lower. It’s not chance that the credit scores are lower.

When I look at this news, I think, “If credit scores are so unperfect, maybe it makes sense to deemphasize their role in mortgage rates.” Again, good credit still matters, but it seems the right thing to do to make it matter less.

Final Thoughts

This became a complicated article to write. I like dealing with just credit scores and money, but the politics and race aspects are essential to recognize too. It’s also much easier when I’m just explaining my financial journey.

What do think? Let me know in the comments.

When To Buy and Sell Real Estate

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Quite a few years ago, I wrote an article, How We KNOW Where the Stock Market Will Go. That was a bold claim because everyone says they don’t have a crystal ball. No one knows when some world event (COVID, Russia going after Ukraine) will send markets crazy.

In that article, the key point that I made was that something called the Shiller PE (often also referred to as CAPE) indicates the stock market value. When this number is high, there’s an increased chance of a crash. Any number above 30 nowadays is a warning sign to me. When it reached around 40 last November, I wrote, Is now the time to sell stocks.

That was the top of the market. I don’t believe in jumping in and out of the market, but I did sell some stocks and buy some bonds. The idea is to be fully invested in the market but lower risk a bit. It’s worked out well, and now I’m starting to sell some of those bonds and buy stocks are lower prices.

But what about predicting when to buy real estate?

The Shiller PE number doesn’t work for the real estate markets. Instead, I’ve been using my gut. Prices felt very high when Zillow said our home was worth 25% more in a year. When we bought the house in 2011, prices seemed very low – far below what they were in 2006 and 2007.

I don’t want you emailing me asking how my gut feels about real estate. My gut isn’t going to help you.

I’ve got something better than my gut to share with you. I’ve got a metric like Shiller PE.

It’s called the NAHB/Wells Fargo score. When I heard that this existed, I decided to give it a look to see how useful this tool was in predicting whether the real estate market was high or low. This would be a terrible article if I told you that I couldn’t find much use for it. Fortunately, you are not reading a terrible article (for that reason at least). The NAHB/Wells Fargo index seems to be a great predictor of when real estate markets are high or low.

Here’s a graph:

When to Buy and Sell Real Estate
When to Buy and Sell Real Estate

Do you see how the index got higher throughout 2000 until the crash in 2008? The 3-4 years of that crash were a great time to buy real estate. We purchased our forever house in 2011. It cost half of what it would cost recently. We also purchased an investment property in 2012 for $95,000 that we recently sold for $205,000. We used that money to buy another property, which is now worth around $300,000. In ten years, we turned a $25,000 down payment into over $200,000 in equity.

How do we get the data in the graph? The NAHB/Wells Fargo score methodology is a little complex:

The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”. An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.

Each resulting index is first seasonally adjusted, then weighted to produce the HMI. The weights are .5920 for Present Sales, .1358 for Sales for the Next Six Months, and .2722 for Traffic. The weights were chosen to maximize the correlation with starts through the following six months.

As you can see, right now we’re in the middle. Interest rates have gone up and the high prices have started to come down. If you were looking to buy a home to live in, this is probably a fine time to do that. If you were looking to buy at a low price and sell at a higher price later, I would probably wait a bit. If the index gets to around 25, I’ll be looking to see if I can find real estate bargains.

Think Locally

While I linked to the national numbers (since I write to a national audience), your area of the country may be different. Fortunately, that information is available too. You need to search around the site a bit, but you can find the region for Mansfield, TX is a little cheaper than the rest of the country. Knowing that you can reach out to the number one site for houses for sale Mansfield, TX and try to get a good deal on a home.

Last Edited: 3/2/2023

We Sold a Condo. Here’s the Investment Plan.

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Sometimes I think this blog is too often a reflection of my money journey. I should focus on things that other people can relate to more. However, that will have to wait for another day. Remember a couple of months ago when I wrote We’re Selling a Condo!

Well…

WE SOLD A CONDO

Ever had a day where there are a couple hundred thousand dollars changed hands? That’s what we had last week. I have to write about a big financial move like that, right?

We had sold a condo a couple of years ago, but we did a 1031 exchange and bought a new investment property. A 1031 exchange is a tax code sale where we avoid paying taxes because the money is going to a new property. We had decided to get out of landlording in Massachusetts – it’s easier to be a landlord in Rhode Island.

I initially thought of doing a 1031 exchange again, but my wife changed my mind. She usually doesn’t weigh in on the financial decisions, but I’m so happy she did. We had an opportunity to sell at the market highs. It was rare timing that the tenant’s lease had ended in the window where prices were high, and everyone was trying to buy because they wanted to lock in a low mortgage.

If we wanted to do a 1031 exchange, it meant buying at market highs. That’s not something that makes me comfortable. Why not cash out, pay the taxes, and see where life takes us for a bit? Perhaps there will be a crash like in 2010, and we’ll buy in low. If not, that’s okay too.

For years we’ve lived almost paycheck-to-paycheck. We were saving money but in retirement accounts. A small part of our income went into the investment properties because they had 15-year mortgages, and the rents weren’t covering expenses. All of this was great for our net worth, but at the end of the month, I’d look and see that we had 90% of our money in retirement and real estate accounts – not very liquid. In fact, among other investments, only about 3% of our money was liquid. It can be dangerous not to have enough liquid cash, but my wife’s government job is relatively secure, and all my income streams are diverse enough to withstand a lot.

Suddenly we have a couple of years of expenses in cash. Finally, we have a true emergency fund.

Where Do We Go From Here?

Having that cash is great, but my wife and I are afraid of spending it. After we pay off the taxes, we’ll invest the money. I hope that the investments throw off enough cash to supplement what we make from our jobs. Perhaps we reinvest that money. Perhaps we use it for fun. Perhaps it goes into home improvements or something like that.

I wasn’t sure how to invest this, so I went back through my archives and found my income investing article. There are some good ideas in that article, but this is how I am planning to invest the money:

Income$250,000
InvestmentPercentageYieldTotal
VYM (High Dividend)25%3.04%$1,900.00
VNQ (REIT)25%3.00%$1,875.00
BND (Bonds)25%3.32%$2,075.00
VTI (Total Market Index)25%1.56%$975.00
Annual100%2.73%$6,825.00
Monthly$568.75

These are all Vanguard ETFs. We have enough money to get Admiral shares of the mutual funds, but I’m more comfortable with the ETFs. From what I read, it doesn’t seem like it would make a big difference. If you think otherwise, please let me know in the comments.

The dollar amounts are a reasonable sample. I’m not sure if we’ll have $250,000 exactly, but I found it helpful to put in an estimate. We have to pay some taxes, but we also have some existing money to contribute to this.

We’ve got two goals that we’re working on:

  1. Preserve the Money

    The hope is that these asset classes are diverse enough to do well in a recession. Here’s how they did in the 2009 crash:
    VYM dropped about 50%
    VNQ dropped about 66%
    BND dropped about 10%
    VTI dropped about 40%

    In total, they combined to drop 40%. That’s… not great. That recession hit real estate and banks hard. Banks usually pay good dividends, so it’s understandable why VYM was hurt badly. In some down markets, like the 20% drop in the broad indexes this year, VYM has done well. Bonds haven’t done well in this environment, but they are only down about 12% compared to those broad markets.

    Since the markets are already down, hopefully, we won’t see anything like 2009. If we do, we’ll try not to sell anything until it recovers. We’ll also try to reinvest at those lower prices.

  2. Getting a Check
    Most of these pay dividends every three months, so the “monthly” number in the chart above isn’t accurate. However, it’s an average. We’ll get more money in some months and less money in others. After the first few months, we’ll have cash in there that we can start to use.

    It’s disappointing that we wouldn’t even get $7,000 in cash. However, the ETFs prices have also gone up over time. There’s a lot more value than just the dividends.

I was curious to see how this portfolio of investments would perform over an extended period. However, I didn’t know of a good tool to help me model and backtest it. Fortunately, the awesome Mike Piper had an answer – the just-as-awesome PortfolioVisualizer.com.

Here’s what it looks like:

(Click for larger version in a new tab.)

I could only model this portfolio back to 2008, as not all these ETFs were around before that. Looking at the bottom of the image, it seems this portfolio has returned 7.60% since the start of 2008. So with a $250,000 portfolio, I could expect average returns of $19,000 per year. I’d have to sell a few shares, but that’s the kind of return that I’m happy with, especially while I try to reduce risk.

I’m still exploring this Portfolio Performance tool and coming across some great information. For example, they publish the maximum negative periods so that you can get an idea of the worst-case scenario (historically):

As you can see, the worst it did was that 40% I estimated above. After that, there was a brief period when COVID first started spreading, and there are the last six months where inflation has been high. That’s not too many downturns of 10%, and that’s still very safe. To put it another way, if it had an average year of making 7.6%, we would be in the positive almost always after that first year.

We’re Selling a Condo!

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About a month ago, I wrote how our real estate empire was built. Now, I’m here to say that it’s going to be out of date very soon.

We’re selling the second property that I mentioned. It’s a 2 bed, 2 bath townhouse about a half-hour west of Boston. I had paid $278,000 for it in 2005 only to watch it climb for 18 months… and then fall dramatically to $178,000 (according to Zillow) in the 2009 crash. Now, 17 years later, I’ve accepted an offer of $385,000. There is a big difference between accepting an offer and having the process completed. For this article, let’s assume that everything goes according to plan.

That $100,000 gain turns out to be about 2% appreciation a year. I guess that’s the power of leverage. Refinancing the mortgage to 15-years helped us pay down the loan a lot. The end result is that we’ll have $300,000 after we pay the bank. From that $300,000 we’ll have to pay the realtor, lawyers, taxes, depreciation recapture, butcher, baker, and candlestick maker fees. I can’t do all the math to figure out what we’ll have left, but I think it will be more than $225,000.

Liquidity, Sweet Liquidity

Our net worth would lead most people to think we are rich. For years, I’ve written that we don’t feel like it. It’s the typical, millionaire next door story. For the last 15+ years, we’ve been doing our best to max out our retirement savings. We also have four mortgages at 15-year-fixed rates – three of them being rental properties. As a result, our net worth is 90% real estate and retirement savings – stuff that’s hard to get at. A large portion of the rest is in cars, 529 plans, and private equity – also hard to access. Overall, we have only about 4% of our net worth in cash that we can access. Even that cash is scattered in business accounts such as this blog or the real estate LLC.

In a lot of ways, we live paycheck to paycheck. However, we do so knowing that we can do several things to get some cash if necessary.

In January, I wrote that we were planning our first non-retirement asset allocation. We hadn’t decided on selling this property at the time, but we can use this to guide our investments. It’s almost like starting all over with saving and investing. It will be exciting to have all this cash available. I’m hoping that we can invest it conservatively and make 6% a year. Maybe we’ll be able to count on $15,000. We’ll try to reinvest as much as possible, but my wife is thinking of military retirement soon, so $15,000 in income plus her pension will help cover expenses until the rest of our mortgages are paid off.

The Power of Forced Savings

The most overlooked advantage of real estate investment is forced savings. You have to pay that mortgage every month. Most of the months it went smoothly because we had a tenant in place. Some months haven’t gone as smoothly. We rolled with the punches when there have been condo assessments or when the HOA fee has gone up.

There were certainly times when paying these expenses wasn’t easy. If we had a choice we would have skipped those months. Then we might have said, “Well the world didn’t fall apart, so maybe we can skip another month and use the money for a well-deserved treat.”

It really works great. I recommend that you give it a try if you can.

However, all that’s going away now. As my wife recently said, “We’re going to have to put this money somewhere. I’m afraid I’m going to spend this money on jet skis.” (“Jet skis” is our little code for a large, unnecessary expense that will probably sit around not being used.) I told her that I’m on it and I have a plan (well, at least part of the plan).

We thought about doing a 1031 exchange as we did with another property about 18 months ago. However, it seems to be the wrong time to buy into the market if you don’t have to. It feels like the housing bubble in the mid-2000s when we bought this property. I’d much rather invest in stocks and bonds and wait for another buying opportunity like in 2011. I feel that it will come in the next 3-5 years, but if it doesn’t, that’s fine too.

What are some ways that you’ve forced yourself to save money over the years? I can really use the tips. Leave me a message in the comments.