Lazy Man and Money

How Much are You Spending on Your Home?

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[Editor’s Note: If you were a member of my VIP Email List on Wednesday, you know that I’m giving away $100. If you missed it, perhaps you should join the list as I’ll be doing more giveaways.]

A couple of weeks ago, I wrote, Your Life or Your Home. In it, I explained that people generally work 45 years and housing expenses. It’s estimated that people spend about 1/3 of their money on their homes, which translates to 15 years of work. (It’s not exactly that simple as income typically changes throughout one’s lifetime.)

I got an email from Zillow that reminded me about this. Their press release stated research that Mortgage Payments Require Largest Share of Income Since 2009.

If you think about it, it seems obvious. How could it be any other way with the housing recovery and rising interest rates on mortgages? I suppose income could be growing faster to outpace the recovery, but income (at a nationwide average level) doesn’t usually fluctuate that much.

This is the rare case where the headline didn’t seem to tell the most interesting story. It was almost anti-clickbait.

Zillow looked at the 35 largest housing markets and gave a regional breakdown of “Share of Income Spent On Mortgage” for each. They gave averages for the past and projections for the future, but I was mostly interested in the 2018 number. Maybe I’m just in a “live for now” mood today.

I think it’s worth looking at the national numbers to get some perspective on the average. From 1985-2000 mortgages were around 21% of income. In 2018 it’s only 17%, and that’s despite growing a lot over the last 9 years to reach a high. There are other housing expenses than just mortgages, but it still seems like this is below the 1/3 (33%) estimation that I’ve seen as an average.

I immediately decided to calculate our own number. I bet most people don’t know it off the top of their head. Our income fluctuates quite a bit due blogging, dog sitting, and whatever else we’ve got going on. I picked out a reasonable average and our mortgage came out to 21.6% of income. I’m changing my name from Lazy Man to Mr. National Average (at least in this case.) That may not be a fair number as we have a 15-year mortgage and most people probably have 30-year mortgages. It would likely have been closer to 15% if we didn’t love the idea of not paying the bank for 15 years.

The regional details in the report showed how much this number can fluctuate. If you scroll towards the bottom of the chart, you’ll see two of the extremes, Indianapolis at ~12% and San Jose at over 51% of income. Of course the job situation in Silicon Valley is very different than Indianapolis. It’s no surprise that housing prices were at opposite sides of the spectrum in these two cities. However, this number is a percentage of income, which means it should be normalized for all the high tech salaries in San Jose.

If you had guess without looking at the chart, you’d think that New York City would be like San Jose. We know the housing in New York City is outrageous, right? We’ll it’s 27.7% of income, which is just 6% more than average of the US. That’s not insignificant, but I found it notable that NYC is a lot closer to Indianapolis (15% difference) than San Jose (24% difference.)

When I wrote that aforementioned VIP Email List earlier this week, I asked people for suggestions on how to improve the website. Many of them asked for more practical advice. It’s hard to know what’s practical for a diverse group of people. However, what if we used this chart to figure out if relocation could pay off for us?

I know there are a lot of factors that go into choosing where you live. However, with so much of your income tied up by this decision, it’s probably worth taking a second look and seeing what you are spending on your home and what you could be spending. It’ll make a much bigger difference than that subscription to Netflix.

About our Real Estate “Empire”

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It occurred to me that I while I occasionally write about our real estate holdings, I didn’t have one article that I felt summarized everything. It’s time for that to change.

The title is a little bit of an inside joke. I have a friend who refers our properties as our real estate empire. Compared to most people, I suppose it is accurate, but I can’t think of too many people who built accidental empires.

And if we were to put a label on our “empire”, “accidental” is the first thing that comes to mind. My wife bought a condo in early 2003 before she met me. I bought a condo in 2004, just 4 months into our relationship. We moved to San Francisco due to a great military position she got (and it wasn’t bad for this software engineer either). Oh and we got married in there too (hence why I refer to her as my wife.)

The market dropped. We were left with a choice: sell our properties at a loss or rent them out until there was a recovery. We chose the later. There are people who invest in real estate to make money, and then there’s us. We lose a little money each month on my wife’s property and a bit more on my property. Some empire, right?

I’m a glutton for punishment, so a couple years ago, we bought a vacation/retirement home in Rhode Island. The idea was to capitalize on the low interest rates for mortgages as well as the significant drop-off in the housing market. The combination of the two lead to what I believe is the best buying opportunity since a couple of stock market crashes (2009 comes to mind). We ended up renting the place as the income was just too good to pass up.

In the end, none of the properties are what a real estate investor looks for: a cash-flow positive property. On the bright-side, there are a few advantages to “losing money”… they vary in terms of value:

  • A Tax Write-Off – As the famous quote goes, “I’d rather be paying high taxes… it means I made a lot of money.” It works both ways, if you are going to lose money, might as well get a tax break, right? It’s making the most of a bad situation.
  • A Tenant Pays Your Principal – While I lose a little money each month, in a little less than 15 years, I’ll have an income-earning asset.
  • Forced Savings – Personal finance experts love to say, “Pay yourself first.” Well, I pay the bank first, but this obligation really becomes my savings (see point above about the income-earning asset).

All this has me thinking about expanding the “empire.” If there’s been a time in the last 15-20 years to invest in real estate, I’d say this is it. The housing market is starting to rebound, but when I check the current mortgage rates available in the area that I’m looking to invest, it is hard to resist. However, that’s an article for another day, maybe next week.

Lower the Interest Rate on Your Mortgage Without Refinancing?

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On my trip to Boston a couple of weeks ago, I met up with a couple of my best friends from college. One is probably more into personal finance than me – but he’s just not the blogging type. He can dazzle with Excel and Quicken and probably could tell you exactly how much money he has to the penny with a single click. The other friend is a lawyer specializing in real estate. When I closed on my condo purchase, he was the guy I went to and it was smooth sailing.

Somehow, we got onto topics of the economy. We gabbed about the sub-prime crisis. They thought that the mortgage holders were to blame because it’s their responsibility to know what they can afford and not get sucked in a mortgage lender/salesman. I took a different view and thought it was the mortgage lender, because they are expert trying to explain a topic that most people are unfamiliar with (mortgages) and pushing them into more complex vehicles with escalating interest rates. The answer is that it’s probably a combination of the the two. It’s almost like a homerun in baseball, sometimes the hitter does a tremendous job of hitting a good pitch and sometimes the pitcher does a lousy job of pitching the ball making the hitter’s job easy… and there’s a lot of homeruns that fall in between those extremes.

We also got on the topic of mortgage rates. They are historically extremely low right now. I lamented that I couldn’t take advantage of the low rates. I had lost a lot of the equity on my home and if I tried to refinance I wouldn’t have the 20% down that mortgage lenders like to see – especially in this market. I am also self-employed (with a less than impressive income) which probably doesn’t make them light up with joy. Lastly, since I moved to California and now rent the Boston condo, it’s not owner-occupied – yet another thing that banks would like to see. That’s three pretty decent strikes against me if I’m looking to lower my rate from 5.875% to some of the 4.875% rates available today.

My lawyer/real estate guru friend told me the solution was simple. He asked me if I came up as self-employed or unemployed on credit reports (I admit that I don’t know this). He said that if I showed up as unemployed, it would be very easy to get a lower rate. I could simply call up the lender and tell them that the ecomony is bad and ask if they could lower the rate – no refinance or paperwork necessary. The theory is that lenders would rather give you a lower rate than risk not getting paid and having to deal yet another foreclosure.

What do you think? I think it sounds plausible and my source is rock solid. Still something sounds almost a little too good be true. Is this possible? Has anyone out there been in a similar situation and tried it?

Prosper is Dead

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Just a few hours after I received an e-mail from Lending Club announcing that they were open again, Prosper sent an e-mail saying that they were beginning their quiet period. This is just over 6 months after Lending Club entered it’s quiet period. I believe that Lending Club got out of it’s quiet period quickly due to a partnership with an existing broker member, FolioFn. It doesn’t sound hard to believe that Prosper will go quiet for another 6 months.

The quiet period sounds a lot like Lending Clubs. There’s not much indication how long it will take, but the indication is several months. During this time lenders won’t be able to lend and people won’t be able to sign up as lenders in the meantime.

Regular readers may note that the title to this post is a tongue-in-cheek reference to my previous post Lending Club is Dead. In honesty, I think that Prosper’s huge first mover advantage over other peer-to-peer lending platforms, gives me more confidence that they can weather this storm than Lending Club did. In addition, we’ve seen Lending Club come through and resume business, so there’s hope that Prosper can duplicate those results.

I feel that people should be asking a very important question here. Why is the SEC focusing on Prosper and Lending Club? Is it for consumer protection? Where was this regulation and scrutiny when banks were making mortgages so bad that a 3rd grader could realize the problem? Where were they when these CDOs we being created? While Americans lose more than a trillion dollars (between stock losses and bail out packages), the regulators are focusing on the small amounts of money the Prosper and Lending Club service. In the immortal words of Seth and Amy from Saturday Night Live, “REALLY?!?!”

Finovate Start-up: What Would You Ask Vestopia, SmartHippo and other companies?

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finovatestartup.gifThis Tuesday, I’m heading to Finovate Start-up hosted by Jim Bruene of NetBanker fame. There are a ton of companies presenting there. Some of the highlights that I’m looking forward to are Buxfer, Loanio (are they ever going to launch), Mint, Prosper, SmartyPig, Wesabe, Zecco, Zopa. I’m disappointed that Geezeo isn’t going to be there. Lending Club bowed out, which is reasonable considering their quiet period.

I’d like to single out Vestopia and SmartHippo (not to be confused with SmartyPig or my upcoming start-up SmarterBoar). These companies have contacted me for one-on-one interviews. I’ve been able to secure a time with Vestopia, but I’m still waiting to hear back from SmartHippo. Other companies have tried to set up meetings with me, but since I don’t know what to expect, I’m trying not to over-extend myself.

I could really use your help coming up with questions for Vestopia and SmartHippo. I’m not very familiar with them, other than what I read on their websites, so you can figure out what I can. As best I can tell, Vestopia let’s you follow what Investment Directors are buying and selling – alerting you about the trade right away within 15 seconds of them doing it. There is a whole community aspect to the site as well. SmartHippo seems to be a community reporting mortgage rates from community members. I look forward to finding the value that this community provides, I found that I did extremely well doing a search for mortgages on Bank Rate. Maybe I got a lucky though.

So if you have questions that you want me to ask these companies – or any others, leave a comment or contact me. If there’s a company that you’d like to know more about, let me know and I’ll try to attend their product demo.