Eating real estate cake

Mood of the Market

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Precisely 460 years before the peak inflation of the real estate bubble, in 1546, the phrase "you can’t have your cake and eat it, too" was first recorded in "The Proverbs of John Heywood," according to Gregory Titelman in the "Random House Dictionary of Popular Proverbs and Sayings."

Heywood might as well have been trying to issue a 500-year early warning to his equity-gobbling countrymen when he preserved the phrase meaning that you can’t consume something, or use it up, and still possess it to enjoy.

Unfortunately, we didn’t get the memo. Or maybe we did, but we blew it off. The fact is, behavioral economists have now made the simple but astute observation that humans in general and Americans in particular simply crave to have it both ways — especially when it comes to money matters.

That means we want to be able to use our home equity as a source of funds and still have the home and its equity — irrational as that may be.

We want to be able to experience economic, financial and real estate rewards exceedingly beyond any risk posed by the rewarding venture.

In fact, some have seen their homes not as a place to live, or even as an investment, but rather as a jackpot! Remnants of that thinking remain, even in this post-apocalyptic real estate market. I see it when wannabe buyers who have no business buying a home — no income, no assets, no savings, bad credit — still persist in such thinking.

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But even those real estate market participants who have more rational expectations around their homes can fall into some "cake and eat it, too, please" thinking. Homeowners nationwide are petitioning to slash their homes’ assessed values and pay lower property taxes.

Those who have the equity to do it have and are refinancing their 7 percent mortgages into last year’s 4 percent loans, or today’s, at a smidge under 5 percent — great examples of assertive consumers executing some do-it-yourself responsibility for their personal finances.

But when tax time comes, these folks are shocked, awed and horrified to find that the tax advantages of homeownership they had grown so used to have dissipated dramatically. And there it is — that good (bad?) old desire to have it both ways: paying uber-low interest and taxes on your home and expecting to still have the advantages you accrued by paying them in the first place.

And we all just saw this again in the roller coaster of reactions to the recent Treasury Department proposal to eliminate Fannie Mae and Freddie Mac. The federal government backs 90 percent of the mortgages originated today — which everyone agrees is extreme — and not in a good way.

Getting rid of these mortgage giants to stabilize the market and get government (i.e., taxpayers) mostly out of the mortgage business? Yep! Sounds great … well, but it will also make mortgages more difficult to get and very likely decrease the rate of homeownership in America.

When asked, I hesitate to come out passionately in one direction or the other. The best I can do is see it as a bitter, but probably necessary, pill. In the movie version, Heywood is looking down from above, shaking his head, with "I told you so" on his tongue.

It’s troubling to have our latent desires to have it both ways emerge when we are disappointed because we have done something wise and are now seeing all of the ramifications of it. But it’s worse to go through irrational mental gyrations to make the "have it both ways" thinking make sense in a way that rationalizes unwise decisions.

To wit, the resurgence of interest in fairly short-term adjustable-rate mortgages (ARMs). Here’s the chronology: Rates were high, but money flowed freely, and subprime, interest-only or negatively amortizing ARMs were the name of the game. The market crashed and home values fell, but so did interest rates and the types of loans available.

Rates got to 4 percent on a 30-year fixed loan, but some would-be refinancers held out for lower rates. Now they’re back up to almost 5 percent, and that 4 percent of "yestermonth" has turned into the holy grail for homeowners.

To get there, people are starting to look hard and long at the 5/1 ARMs, on which rates and payments are fixed for five years before turning into an adjustable loan.

Now, it is true that these ARM loans — especially the Federal Housing Administration-insured version — are nowhere near as risky as the subprime variations. Mostly because these are fully amortized, meaning that the payment on them doesn’t skyrocket on adjustment like those that didn’t require any payment toward principal for the introductory period.

Also, the rate is so low to start that their annual adjustment caps and lifetime rate caps are much lower than those taken out in 2006-07. And the current popularity of these loans seems to be heavier in areas where the market hasn’t been completely decimated by foreclosures, places where homeowners are optimistic about where their home values will be in five years.

But I think this is still "have it both ways" thinking. Unless you know you’ll be selling, moving or paying your loan off in the next five years, to forgo the ability to lock in today’s insanely low rates for the life of your loan to try to get the sub-4 percent current rates on a 5/1 ARM — even though you could probably have gotten on a 30-year loan a few months ago if you hadn’t allowed the fixation on even lower rates to cause you to wait too long — seems like the worst kind of cake-eating-and-having fantasy.

Today’s market conditions minimize the possibility of too much damage from taking a 5/1 ARM. On the FHA version, the lifetime cap would be in the high 8 percent range today and it would be 10 years from now before it could get there.

Nevertheless, it behooves us all to watch and ferret out this kind of thinking and prevent it from controlling our real estate decisions. Rates won’t always be low enough to protect us from ourselves.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

  
    
      

    

    

     

      

      

   

  

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