Time Magazine Article
Ignore the Headlines!Except this one. Sure, housing’s in a hole. But there’s a potent case for buying now, whether it’s real estate or stocks CONCLUSION: If you waited a year to buy, you would have saved nothing and spent a year living someplace you’d rather not beSource:LendingTreeAnd “jumbo” mortgages, those more than $417,000, are likely to remain artificiallyhigh for a few more months while banks work through their credit issues.But let’s say you are emotionally ready to be a homeowner. You have goodcredit, plan to stay put for five years and have been waiting for the perfect entrypoint. It’s time to get serious-before an inevitable rise in interest rates wipesout your advantage. “The thing that will make home prices stop falling is the verysame thing that will push mortgage rates higher,” says Jim Svinth, chief economistat mortgage firm Lending Tree. So anything you gain by a further drop in pricesmight be offset by rising financing costs. Consider a typical home that sellsfor $218,900. You put down 20% and get a 30-year fixed-rate mortgageat today’s rate of 5.5%. Monthly principal and interestcome to $994.31. Let’s say that 12 months from now the same house goes for ro%less, or $197,oro. But by then the recession is history and the Fed is jacking up rates tostem inflation. If mortgage costs rise just half a point, to 6%, your monthly paymentwould be $994.94 and you’d have saved nothing. Meanwhile, home prices mightsteady and sellers might become less willing to negotiate. And you have spent ayear living someplace you’d rather not be. It’s more complicated ifyou must sell before you can buy. But that logjam won’t persist forever-and if it appearsyou’ll be trapped for a few years, try to refinance at today’s lower rates. Risks alwaysseem most acute when the headlines give you ulcers. But that’s exactly when youshould think long term and get off your thumbs. $994.94 $197,010 If prices drop anadditional 10% COST IN 12 MONTHS? 6% Recession ends, and the Fed starts to raise ratesTypical home price Interest rate Monthly payment TODAY last quarter, and there has been plenty ofpanic about a recession. The Federal Reserve is slashing short-term interest ratesat the fastest clip in decades. But if you stick to your steady, diversified plan whileeveryone else is retreating, you will be happy years from now. For one thing, Fedrate cuts always lift the economy eventually, and the stock market typically startsresponding just as headlines get gloomiest. Sure, the market could fall again beforerecovering. But the recession may behalf over already-owed may avoid onealtogether. You just never know. As for housing, certainly some skepticismis in order. Formerly sizzling markets in Florida, Nevada, Arizona and Californiaprobably haven’t seen the worst headlines just yet, though they may well be close.$994.31· 5.5% Current rates after recent declines The Case Against Waiting to BuyFinance costs will rise as the economy recovers, so trying to time real estate might not pay off$218,900 Put 20% down and get a 3D-year fixed-rate mortgageFAMED MONEY MANAGER PETER LYNCH is perhaps best known for his timelesswisdom that you can beat the pros by focusing on stocks of companies where youeither work or shop or have some other edge. But a more relevant Lynchism todayis this gem: Ignore the headlines. That’s no easy thing. How do youtune out all the chatter and ink on recession, housing, subprime woes, the creditcrunch, rogue traders, insolvent bond insurers, oil and nukes in Iran? It’senough to make you sit on your thumbs and wait before making any big moves.But what, exactly, are you waiting for? There has rarely been a moment inhistory when you couldn’t scare yourself into doing nothing. And yet, as Lynch observednearly 20 years ago, “in spite of all the great and minor calamitiesthat have occurred … all the thousands of reasons that the world might be coming toan end-owning stocks has continued to be twice as rewardingas owning bonds.” A top reason to not buy stocks, in Lynch’s view, isif you don’t already own a home-in which case, that should be your firstinvestment, since an owner occupied home is nearly always profitable. ThroughA spokesman, Lynch reaffirmed these views to the housing debacle and all.When prices are falling, few people have the discipline to buy stocks, a house, gold,Art or any other asset. But those who do pull the trigger excel in the long run. As JohnD. Rockefeller famously said, “The way to make money is to buy when blood is running inthe streets.” And the streets are stained crimson. Start with stocks.They have been pummeled this year. GDP braked sharplyTIME Magazine- February 25, 2008 ..
I gave an update on this topic in late November. (see