Paul Ferraresi

The subprime mortgage market is in chaos, home prices are dropping, many mortgage companies have shut down and some banks are teetering at the edge of bankruptcy. No, the sky is not falling.

These cyclical actions in the world economy have happened many times before. For most people the 1930’s depression, bank failures and a 30% unemployment rate (after the depression) is something you read about. Yet, you have lived through your own chaos with the dot.com (actually dot bomb) meltdown and the tech wreck bubbles of the late 1990’s. Real estate and stock markets go through classic meltdowns every 25 years.

Those that have foresight, strong stomachs and are contrarians make their wealth by buying near the bottom (Hmmm… seems I heard that before… buy low, sell high).

The Missed Fortune Principles of Wealth Building have been written about many times in this blog. I suggest you review these articles found in the Missed Fortune subheading.

Are the ideas of building your wealth by properly using equity management still valid? Can you still profit by “being your own banker”? Answer… yes, yes and yes again. Who better to learn about banking than the Federal Reserve. I encourage you to read this short excerpt of “The Feds” recent white paper abstract report.
Federal Reserve Abstract Report, Dated March 2007:

Many households face the trade-off between paying an extra dollar off the remaining mortgage on their house and saving that extra dollar in tax-deferred accounts (TDAs) used for retirement. We show that, under certain conditions, it becomes a tax arbitrage to reduce mortgage prepayments and to increase TDA contributions because of the tax- deductibility of mortgage interest and tax-exemption of qualified retirement savings. Using data from the Survey of Consumer Finances, we document that a significant number of households that are accelerating their mortgage payments instead of saving in a TDA forgo a profitable tax arbitrage opportunity. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity or other financial constraints. Rather, the observed behavior can be attributed to a certain extent to the reluctance of many households to participate in financial markets as either lenders or borrowers.

So what am I saying? … Stick with the Discipline of professional investing, or, suffer the Regret later in life.

I continue to teach my clients that equity in a home has a zero rate of return. So, why would anyone try to pay off a mortgage quickly?

Simply put…how much interest does your bank pay you on the down payment on your home? (zero, correct). What is the largest down payment anyone could make on an home purchase (100%, or pay cash for it) Therefore, all the money tied up in your home gets a zero rate of return, it is not liquid and it is not safe. Read the rest of this entry »