October 4, 2008
Hunkering Down in Bonds and Bagelfuls
Scrolling through the charts this weekend, about 95% of them look like something the cat threw up. (Which reminds me of that old Crumley line, “her idea of a sex kitten looked like something the cat dragged in,” but I digress.)
Anyway, what stands out are the Staples and the Bonds. My recent stock picks are heavy on the Staples (I consider McDonald’s (fries), 3M (sticky notes), and Johnson & Johnson (Q-tips) all Staples even though S&P categorizes them differently. :) ) I prefer Chinese Treasury bonds to US Treasury bonds, but that’s another story for another day.
Anyway, I urge you to follow Prem Watsa’s advice (emphasis mine, h/t controlledgreed.com): “This is going to be long and deep and people want to save money. Be careful about risk. There are unintended consequences in fixing this and all are ahead of us. This will take years to sort out … For individuals, safety is No. 1. Buy real estate for your family, but not as an investment. Don’t borrow for new cars. Keep borrowing at a minimum. Now’s the time to protect your money. Keep your life simple. Be mortgage-free if you can. People must hunker down.”
Related:
Prem Watsa’s Deep Breathing Technique, July 29, 2008
Delegated Decision Disaster, November 27, 2007
October 4th, 2008 at 7:03 pm
pay off your mortgage? as opposed to spending it, or keeping cash around?
we’d be able to take a large chunk out of the rest of our mortgage, but i’m keeping it in cash - even at the lower rates - in case we need to move, or something else similar where we need the cash.
October 4th, 2008 at 9:35 pm
Paying off a fixed-rate mortgage early is the stupidest damn thing a person can do. Note I said “fixed rate” and there will be more specific and personal cases where it might make sense, but let’s look at two economic examples.
Ex. 1, hyperinflation: Make the payments LATER with dollars that are worth LESS. If you need to put the cash into assets, then use it to buy OTHER real estate on money-down, fixed-rate mortgages.
Ex. 2, rapidly falling home prices. You want to pay THAT off early? Having a mortgage means having the cash (more valuable in terms of the real estate it would buy) and the option of defaulting. Paying it off means not having the cash and having a falling asset.
October 5th, 2008 at 5:18 am
I would also like to add if you are liquid and do not need to borrow now is the perfect time to buy a new or slightly used car if you need one. It is a buyers market.
October 5th, 2008 at 12:25 pm
No mortgage here, but where is the opportunity not knowing when RE prices will bottom? Any comments on that?
October 5th, 2008 at 12:54 pm
Lenders such as Amex are decreasing credit lines for those with mortgages in declining real estate markets. This affects credit scoring and the ability to refinance or buy another home. Many will be upside down in their loans before this is over.
October 5th, 2008 at 8:01 pm
Do as not what they tell you but do as what the math tell you. The math my dear; it is all in the math.
There is a saying that people were using their house as an ATM machine, so paying off your mortgage is just a deposit in the ATM machine. Keep it simple, silly.
Cash equilvalent pay 1%, mortgages cost 6%, so 1 minus 6, I think that is a negative number.
October 5th, 2008 at 9:11 pm
When the prices are low enough that you can generate positive cash flow on long-term rental properties … it won’t matter if the price keeps dropping a while after you purchase.
Positive cash flow + tax benefits will allow you to make a profit on the investment regardless of whether the price keeps dropping.
Dropping prices will force more marginal buyers out of their homes and into the rental market, propping up demand.
Hope that helps, Hudson.