Slideshow of 100 Abandoned Homes in Detroit

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in 'The Great Recession'.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We'll come back, and the beginning of that long process is underway. I'd love to see these same 100 photos updated in a few years.

Weekly Mortgage Interest Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

Comment by John C. Glynn: A second-guessing of the 'recovery' will put pressure downward on rates, but be careful about the implications of an unwinding Federal Reserve with their asset purchase programs designed to lower rates - they are coming to an end.

Find out what others are saying by clicking here. (hint, looks like I am running with the pack this week...).

Unemployed to US Economy: "Go on without me..."

I am concerned about the recent optimism in the financial markets. Sorry. Not cool to be a pessimist. But I am not - just trying to be a realistic optimist here.

We lost 245k jobs in the month of July. This made markets happy because it was less than expected (325k), and fewer than the prior month. Around January of this year, we were losing ~750k per month. So yeah, improving, but not exactly good.

Is this cause for optimism? How can we distinguish between optimism and an evaporation of pessimism? Are they the same thing?

(Source: Bureau of Labor Statistics)

What bothers me are the following details, below the headlines of the news release:

• the only growth in new jobs is among the 55 and up crowd - baby boomers who, under other circumstances, would no longer be in the job market.
• nearly 5MM people have been out of work for more than HALF OF A YEAR

The second point leads me to wonder, when does fatigue set in? The unemployment rate went down this period (9.4%) but this is expected to be anomalous in retrospect; unemployment is expected to break 10% within the year. Since the survey methodology only considers "unemployed" people to be those A) without work and B) actively looking for work, how many people have given up? How many are tired of sending resumes out multiple times a week, getting no replies, and simply focusing on other things until there are signs that jobs are available?

I love this analogy from Planet Money: The foot is on the pedal, and it's floored (Federal Funds rate @ 0% and other stimulus). The car (our economy) is rolling backward. But the speed at which we are rolling is slowing. And that's enough to get us where we're going? hmm...

I am not yet convinced. What say you?

Weekly Mortgage Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: (V) (V) Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

"Comment by John C. Glynn: Discord among analysts - and thus volatility - continues. There's enough reason to expect rates to remain low, but the sensitivity seems to be to the upside for rates, so bad timing can potentially hurt."

Find out what others are saying by clicking here. (hint, all over the map - still - which reinforces my belief about uncertainty above...).

090706 Less Worse Syndrome and other Brain Dumps

Are we in the midst of recovery? Has the Great Recession hit bottom? The market chatter has definitely shifted. Key changes include:

• "green shoots" instead of "next shoe to drop"
• "inflation" instead of "deflation"
• "recovery" instead of "bottoming"

So.....?

During the last Fed meeting, there were actually conversations that included speculation that the Fed would either raise rates, or begin looking in that direction. They said nothing of the sort. And even though the oddsmakers had the chances of rates changing at that meeting at less than 4%, there was still anticipation along these lines. Since that meeting, SF Fed President (evidently in the running to be the next Fed Chairperson) reiterated her belief that the Federal Funds rate would be at or near the current level of 0.000-0.250% into 2010 or longer. huh.

Paul McCulley says, discussing the eventual hiking of Fed Funds rate:

"And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then kikking, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011." -6/15/09

It's going to be tough to pull out of this with rising unemployment. At 70% of GDP, Consumer Spending is a critical factor in new environment. Consider this from Bridgewater, which I recevied from John Mauldin:

"... as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions."

Less Worse syndrome is dominating the markets right now. For example, in May, the total number of jobs lost came in around 345k, but since April had losses of ~509k, the markets saw this as a positive sign. Job losses are not positive. The month to month changes may indicate a change in the trend, but not just on one report. The June losses were at 465k. So that's 509, then 345, then 465. During the mnth of June, before the June data was released, the markets were optimistic based on an appearance of "less worse". They appear to be reconsidering...

...

The California new home purchase tax credit - 10,000 to anybody buying new construction residential real estate in CA has expired. The program hit it's limit at 100,000 applicants.

There is a 1 page bill in congress to put the hated HVCC (Home Valuation Code of Conduct) policy on hiatus for 18 months. If you are engaged in a financing transaction, you've either encountered this acronym, or are about to. It is causing all kinds of problems, and creating quite a stir. Should be interesting to see where this goes. I'm not too encouraged by the 1-pager, but there's been overwhelming support from the industry...

Fed Watch: What Did Today's Policy Statement Really Say?

"Strikes and gutters, ups and downs..."

I have not seen this much anticipation ahead of a Federal Open Market Committee meeting in I don't know how long. This component of the Federal Reserve meets for a 2 day session every 6 weeks, and makes a formal policy statement at around 11:15 (pacific) on the 2nd day. Generally, there are a lot of eyes on the markets in this moment, as the Fed's statement will contain an update to or reassertion of the Federal Funds rate, a key short term rate with implications for the economy and longer term rate outlook. But there are also a few carefully constructed sentences released to justify their rate-setting decision, and the markets try to read between the lines for hints at what the Fed might be thinking.

When investors buy bonds, the values increase, and rates get lower.

We entered this week's meeting in a state of uncertainty. During the spring months, the bond market had been flat for several months, rates for mortgages remaining relatively calm. Then, a few weeks ago, after a few economic reports indicated a potential recovery beginning to take place in the economy. This caused bond investors to pull some money out of the market in favor of other vehicles - like the stock market. The momentum gained traction until the levee broke, and a lot of the 'safe haven' money that goes into bonds during bad economic times started to flood its way out, causing rates on mortgages to rise - and rise quickly.

Just as quickly, the 'confidence rally' came to a halt, and the markets seemed to be reconsidering the idea that we were about to come out of the woods of The Great Recession. And that's where we were today - caught in the middle, unsure of whether we are going to head into recovery, and bump right into hyper-inflation, or another wave of economic pessimism, causing bonds to regain their appeal.

All eyes were on Ben Bernanke and the Fed's policy statement. The markets wanted to be reassured that inflation was not an imminent threat. They wanted confirmation that the Fed has an 'exit strategy' in place to unwind some if the excess reserves that have been pumped into the economy to fight deflation. Funds which if left unchecked, should lead to inflation again at some point. But there are as many critics of the inflation treat theory as there are proponents. And this causes the market to be uncertain. They wanted something to chew on today...

Here is a link to the policy statement. It was all old news. Nothing new. Just a subtle reference to the idea that they expect inflation to remain low, and that they are committed to their campaign to keep participating in market stabilization efforts.

The bond market made an initial sell-off, but knee-jerk reactions are typical. By the end of the session, the market for Mortgage Bonds (underlying instrument affecting mortgage rates) were dead flat on the day. I'll give credit to Bernanke for playing it cool, and effectively managing the expectations of the market. By not responding directly to the wishes of the market, he reasserts the impression that he is in control. It may not be what the market was asking for, but the market abides.

Weekly Mortgage Rate Survey on mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline significantly; over the next 90 days rates will decline slightly.

"Recent bond market deterioration represents a shift in sentiment, and the high volatility is representative of a lack of conviction. No markets like uncertainty. The shift toward optimism that we are coming out of the Great Recession may be premature."

Find out what others are saying by clicking here. (hint, all over the map, which reinforces my believe about uncertainty above...).

Long Exhale... Brain Dump 06/09/2009

I've been plugging away some long hours over the last few months, but I'm back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I've seen since the last post:

- Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

- John Mauldin on the current crisis: "..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today's world is useful, and may be harmful to your portfolio." >> Word.

- Pimco's Paul McCulley on the current crisis: "There's nothing like a bull market to make geniuses out of levered dunces."

- There's a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I've ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can't continue to make the market with mortgages at 4.5% if all of the 'safe haven' dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn't add up... I said it before, and I'll say it again, we've got a lot of bites left in this sandwich...

- US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

- In much of the recent economic press, there is discourse along the lines of "the worst is behind us". The stock market has had one or two down weeks over the last three months. In other circles, we hear "commercial real estate is the next shoe to drop". Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there's nothing to worry about?

The Case for Not Waiting

One of the more frustrating aspects of today's marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer's market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open...

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you've got a pretty good read on the supply/demand dynamics of your market, you know about the seller's circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn't going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What's a better deal? The answer is: Lower rate, higher price. I'll show my math if you don't believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it's helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that's a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you're sitting on that fence, and you fall asleep, you might end up with a nasty burn...

This American Life & Planet Money Bring You: BAD BANK

NPR's This American Life has done a few great features on the Subprime Crisis, the Banking Crisis, and the Economic Crisis (they evolve with the news!). Recently, along with the Planet Money team (which I believe became a spinoff team of This American Life after the 1st in the series), they released "Bad Bank". It's another great overview of the challenges before us, some details about how we got here, some good soundbites from congress, etc. They are among the best I have seen at breaking down this complex situation into digestable news. Give it a spin.

Earlier releases:
Giant Pool of Money
Another Frightening Show About the Economy

Join the Savings Craze! The Paradox of the Paradox of Thrift

Experiencing a recession is great way to force a reassessment of your financial behavior. The Great Depression is famous for shaping a generation of frugal citizens/consumers. Do you feel like you have not been saving enough money? America Saves Week dot Org has a 12 step program for you. Join the craze!

But wait, popular economic theory of the day warns of 'the Paradox of Thrift'. What may be good for the individual is not good for the collective. Waxing economical takes place here, here, and here. Is there a moral dilemma here? Is this why we've been trained to act as consumers, rather than citizens?

Paul Kasriel has another angle. Debunking the Paradox with some tough love for WSJ contributer Daniel Henninger.

Why I Love Rick Santelli

This is a pretty powerful moment, representing the sentiment behind the counter-argument for Economic Stimulus. This is being called Santelli's 'Chicago Tea Party'. You can see Santelli expand the viewpoint here on the Today Show.

Today's View of Capitalism is a Joke

In traditional capitalism, you have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

In American capitalism you have two cows. You sell one, and force the other to produce the milk of four cows. You are surprised when the cow drops dead.

In French capitalism you have two cows. You go on strike because you want three cows.

In Italian capitalism you have two cows, but you don’t know where they are. You break for lunch.

In Real capitalism you don’t have any cows. The bank will not lend you money to buy cows, because you don’t have any cows to put up as collateral.

In Enron Capitalism you have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. Sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public buys your bull.

In Californian Capitalism you have two cows. They are happy.

In Arkansas capitalism you have two cows. That one on the left is kinda cute.

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year - no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

1. buyers must occupy the home for two years as their principle residence
2. includes a two year recapture provision (if they leave the home in two years they lost the credit)
3. purchases of homes by investors are ineligible
   

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.


Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor's opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don't want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with "fixing" the economy. Specifically, he is looking at the "bad bank" concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the "bad assets".

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

• Let the owner of the real estate place the value on his property.
• The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It's a very thought-provoking piece. 2 pages of your time...

Yeah, rates are lower, but...

It's just not that easy to get your hands on the banks' money these days... Great visual representation, and I can tell you, it fairly depicts the view from the front lines here...

We can still get the deals done, but nothing is as simple as it once was!

Barney Frank on High Balance Conforming Loans

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don't, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling - ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we've talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn't look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the "temporary" permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of "high balance" loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of "I don't understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same" - which is not a quote, but is precisely what he was saying - you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem...

One more complication in today's market. Next to impossible to predict a given bank's pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.

There's no inflation in our economy - unless you wholesale money

What happened to inflation? 5$ gas, 6$ milk, 7$ Pabst Blue Ribbon!!! ???

Today's PPI (Producer Price Index) came in at a negative for the 5th straight month. It measures commodity prices, and other materials that producers of goods and services need to buy in order to produce their good or service. Tomorrow's CPI (Consumer Price Index - which measures the cost of goods that consumers buy) is expected to indicate the same signal - no inflation to speak of.

Meanwhile, much is being said about the efforts by the government to push down mortgage rates. But the underlying fundamentals that determine interest rates are not correlating with the rates being offered to consumers,. Or they are correlating less than is usual, presenting challenges to consumers and brokers trying to execute on their behalf.

Yes, rates are quite a bit lower. But the challenges of our "new landscape" are also new in nature, and no matter where you turn, it just gets more and more interesting. After 6 quarters of downsizing, banks were slammed in recent weeks with record applications for new loans. There was an immediate logjam. Demand is exceeding capacity. Banks do not need to lower costs to attract business. Margins are fat, 'because they can'.

Icing on the cake: Banks offer lower rates to deals on shorter term locks. But it takes twice as long for them to underwrite files today, so what's the point? You have to lock long-term, which means higher rates. Or, you float. And if you float, you get jumped in line at underwriting by all the locked-in deals. These same banks offer 7 day locks at their absolutely lowest rates... but you can never get within 7 days of closing UNLESS YOU LOCK!

If you do lock, and the period does not wind up being adequate, for ANY reason whatsoever, you can pay to extend it. But banks are doubling and tripling their extension fees as their queue grows longer and longer. Oh, and they are charging some brokers additional fees for not delivering on a loan once it is locked - even if they are too busy to underwrite it!

So lets review:
-banks have been taking it on the chin for ~6 quarters, so...

-rates are down, but not as much as they should be given the government intervention, and economic datapoints
-extension fees are skyrocketing
-processing times are skyrocketing
-lock periods are skyrocketing
-penalty for cancelling is skyrocketing

As far as I know, mortgage rate lock extension fees are not included in the PPI or CPI. Yet another area of the economy overlooked by the economic reporting data. Outrageous! Somebody call David Horowitz!

Great perspective to a timely question

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
- you don't keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the "long term" the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don't make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home's equity will grow
all by itself, and it will do so at such a rate that any extra payments
we'd make would be pointless.

Here's an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you'll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason - there are nine others in my DVD on the topic - why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don't believe that, then you shouldn't be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you'd otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That's because, as you've
noted, it's possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you're highly likely to do
fine. Remember that we're comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you're questioning the strategy because of the stock
market's recent performance, but it's precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you'll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership