Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rates
Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rates
With rates so low, I am debating getting a larger and longer loan than I might otherwise make. I had paid off the mortgage on my two prior homes, but am moving to an area that is twice as expensive, so a loan is a must for the new home I am having built for Feb or March move-in. I am retired and 64. I found Buffett's article interesting in this regard, and was wondering other's thoughts.
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Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.
“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
Read More:
http://www.bloomberg.com/news/2014-10-0 ... rates.html
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Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.
“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
Read More:
http://www.bloomberg.com/news/2014-10-0 ... rates.html
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Just another out of touch zillionaire..... maybe it's because people are still losing jobs or facing decreasing salaries and it's tough to commit to a mortgage when there is no job stability. This board is hardly a good indication of what is still happening out there.
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Rob |
Its a dangerous business going out your front door. - J.R.R.Tolkien
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
This is where I ask:
So to save [$0.00 to $0.396]* on my taxes I should spend $1 in interest?
Are you a loan officer in disguise?
Yes, I know mortgages are cheap.
I know living in apartments in *horrible.*
But seriously, please enlighten me. Isn't this more of a lifestyle choice some people like renting, some people like owning?
* I do not wish to state my income, je suis pauvre.
So to save [$0.00 to $0.396]* on my taxes I should spend $1 in interest?
Are you a loan officer in disguise?
Yes, I know mortgages are cheap.
I know living in apartments in *horrible.*
But seriously, please enlighten me. Isn't this more of a lifestyle choice some people like renting, some people like owning?
* I do not wish to state my income, je suis pauvre.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Whether or not it would be good for you, I don't know.runner26 wrote: _________
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.
“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
I do know that Buffett's comments may be directed at stirring up business for Berkshire Hathaway HomeServices as much as anything else.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I'd have to say home construction has not picked up like I would have expected either, at least not in the area I looked.
I bought a home late this summer. Looked at a bunch of places - there was not a single new construction home in my price range to even look at. It was very frustrating as I didn't want a home that needs repair and renovation. Unfortunately, that's what I got.
I bought a home late this summer. Looked at a bunch of places - there was not a single new construction home in my price range to even look at. It was very frustrating as I didn't want a home that needs repair and renovation. Unfortunately, that's what I got.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
No you don't take out a long to save on taxes. You take out a loan so that for 1 you get access to 25x in dollars to invest. The tax savings is just a bonus.newbogleb wrote:This is where I ask:
So to save [$0.00 to $0.396]* on my taxes I should spend $1 in interest?
Are you a loan officer in disguise?
Yes, I know mortgages are cheap.
I know living in apartments in *horrible.*
But seriously, please enlighten me. Isn't this more of a lifestyle choice some people like renting, some people like owning?
* I do not wish to state my income, je suis pauvre.
Renting versus buying is a lifestyle choice. Buying tends to be cheaper in the long term. Depending on your area though the long term can either be like 3 years or 20 years:)
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I am renting now between homes, as I have done before and much prefer to own. The last home I had built, I lived in15 years. After adding up what I paid, and what I put in for maintenance, and adjusting for inflation, and subtracting closing costs, I still netted more than those costs. So basically, those 15 years cost only interest, taxes and insurance minus extra tax deductions and gains. Much less than renting.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
"Don't trust everything you read on the Internet"- Abraham Lincoln
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Warren Buffet always gets a lot of attention, no matter what the subject. Rob may be correct in saying that he is out of touch on this issue. Buffett bought his house in 1958 and I assume he does not have a mortgage (and probably is not looking for one). There are a lot of factors that go into buying a house and interest rates are only one of the factors.
What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience? Adam Smith
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Those who financed/re-financed at the nadir (let's say 3.4% or thereabouts) for thirty years, well, that's a gold-mine. In a few years, fixed-income investments will cross, you'll be able to finance the interest on that thirty with a ten-year CD.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I'm one of those, except my rate is 3.375% fixed (30 yr). I'm paying about $1000 extra per month on a loan that's currently about $385k balance. This will pay it up in about 15 years instead of 30. I really do want that loan to go away eventually before the 30 years are up. IMO the payment needs to go away to solve cash flow issues in early retirement.denovo wrote:Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
There aren't any assets that I know of with guaranteed return of 3.375%, even for a 15yr period.
I don't think trying to pay it off early is that terrible given the composition of my investment portfolio.
I'm still also contributing the max to my 401k and backdoor Roth IRA.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
When does your crystal ball say that will happen ?john94549 wrote:Those who financed/re-financed at the nadir (let's say 3.4% or thereabouts) for thirty years, well, that's a gold-mine. In a few years, fixed-income investments will cross, you'll be able to finance the interest on that thirty with a ten-year CD.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
My take is that for the average working stiff, homes are still too expensive (at least the land is anyways), the median household income is too low, and job stability (perceived or real) is not there.
This would be my take in the city I live in. A fixer upper that hasn't been regularly maintained in the past 30 years is more expensive than a brand new house in many parts of the country.
This would be my take in the city I live in. A fixer upper that hasn't been regularly maintained in the past 30 years is more expensive than a brand new house in many parts of the country.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Buffett is smart, but he isn't giving out investment advice out of the goodness of his heart.
"Buffett, 84, whose Omaha, Nebraska-based company has units that build houses and make carpet, paint and bricks, reiterated today that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades.
Berkshire is the largest shareholder in Wells Fargo & Co. (WFC), the biggest U.S. home lender."
He has several reasons to tell you to borrow money and build a house. Several billion actually.
“It’s an incredibly attractive instrument,” Buffett said. “It’s a 30-minute instrument if you’ve been wrong on interest rates and it’s a 30-year instrument if you’ve been right on interest rates.”
Sure the mortgage may be attractive but it comes with a house! It is a thirty minute instrument (with costs that he neglects to consider here- money in Wells' pocket) if rates drop again. It is thirty years IF you don't need to sell the house. I have never been stuck with a house I could not sell, but I have stopped trying to count the people I know who have been nearly bankrupted by one they couldn't sell.
With the home buying generation already paying student loans and needing flexibility to relocate for better paying jobs, I understand why they are not borrowing more and getting saddled with a house.
Warren Buffett is a smart guy but it gets tiresome to see him quoted on this forum as if Warren says it, it must be so.
As for those paying down a mortgage making a terrible decision?
A mortgage is leverage and leverage is math. Math requires certain assumptions. In the case of leverage it is that the stock market will beat that rate over that time period (yes, most likely- but check out Japan's history) and that you will be able to make the payments over that time period (risk adjust). I know a lot of people whose math didn't work out for them because they miscalculated the risk.
"Buffett, 84, whose Omaha, Nebraska-based company has units that build houses and make carpet, paint and bricks, reiterated today that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades.
Berkshire is the largest shareholder in Wells Fargo & Co. (WFC), the biggest U.S. home lender."
He has several reasons to tell you to borrow money and build a house. Several billion actually.
“It’s an incredibly attractive instrument,” Buffett said. “It’s a 30-minute instrument if you’ve been wrong on interest rates and it’s a 30-year instrument if you’ve been right on interest rates.”
Sure the mortgage may be attractive but it comes with a house! It is a thirty minute instrument (with costs that he neglects to consider here- money in Wells' pocket) if rates drop again. It is thirty years IF you don't need to sell the house. I have never been stuck with a house I could not sell, but I have stopped trying to count the people I know who have been nearly bankrupted by one they couldn't sell.
With the home buying generation already paying student loans and needing flexibility to relocate for better paying jobs, I understand why they are not borrowing more and getting saddled with a house.
Warren Buffett is a smart guy but it gets tiresome to see him quoted on this forum as if Warren says it, it must be so.
As for those paying down a mortgage making a terrible decision?
A mortgage is leverage and leverage is math. Math requires certain assumptions. In the case of leverage it is that the stock market will beat that rate over that time period (yes, most likely- but check out Japan's history) and that you will be able to make the payments over that time period (risk adjust). I know a lot of people whose math didn't work out for them because they miscalculated the risk.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
mortgage lending standards are tougher than pre-2008. People wrecked their credit, are going between jobs, have unsteady cash flow -- this means you can't get a mortgage
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
And even if you can get one, that doesn't mean you should get the biggest mortgage you qualify for.wrysys wrote:mortgage lending standards are tougher than pre-2008. People wrecked their credit, are going between jobs, have unsteady cash flow -- this means you can't get a mortgage
For me, that is far more debt than I would be comfortable with. I sleep much better with < $400k mortgage than with almost $1M mortgage a few years back.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
You could have done this at any time in the past 10 years and you would STILL be waiting for higher CD rates.john94549 wrote:Those who financed/re-financed at the nadir (let's say 3.4% or thereabouts) for thirty years, well, that's a gold-mine. In a few years, fixed-income investments will cross, you'll be able to finance the interest on that thirty with a ten-year CD.
Last edited by Leesbro63 on Fri Oct 10, 2014 6:40 am, edited 1 time in total.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I don't see buffet lining up to buy a new home. I don't see why his advice is any better than any other active non-BH investor. I'm glad he's had a lucky run predicting the future as a stock and company picker. I wish I could be as lucky as him. Instead I will stay the course.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Not sure about this. Last week though seen him interviewed about his new Canadian Burger King shares purchase.Woman said how the law is setup that he would be saving a lot in taxes. He of course giggled and rambled on. Woman said something in effect that bottomline is that"s tax money that will not go into the U.S. Treasury. He diverted the subject and started talking about good old US apple pie or something.Watching financial shows are like watching political shows. They talk a whole lot about....
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Sorry - Buffet's crystal ball is as cloudy as everyone else's.
Best regards, -Op |
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
How is investing in low cost index funds based on historical returns any different than taking out a mortgage and not paying it off early, as an interest rate move, when rates are historically low? I think people get emotional about the idea of a mortgage. $1,000 paid on a mortgage to have it paid off early vs $1,000 invested, well both arguabley would increase cash flow, one reduces expenses, the other increases income. What I prefer about investing is that it gives more of a now cushion and is in line with my expectation that I will see rates rise again in my lifetime. Also, we have enough allocated to real estate, too much really, I don't want to add more.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Indeed!Texas hold em71 wrote:Warren Buffett is a smart guy but it gets tiresome to see him quoted on this forum as if Warren says it, it must be so.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. Getting rich off of "smart people's" behavioral mistakes.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
your kidding, right? If you've got an investment that guarantees more than 3.5% please fill us all in!denovo wrote:Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Can you prove this? It seems to me that the only way to prove this is to have a clear crystal ball. Nobody has such an instrument - not buffet, not you and not I.denovo wrote:Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
Best regards, -Op |
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"In the middle of difficulty lies opportunity." Einstein
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I hope he's right! We just made an offer to a house and traded my equities last month for downpayment.
Rental is getting more expensive in my area then mortgage on the same 3BR apartment (diff of $300-$500) so we took the plunge. I need to buy home insurance but all the utilities are the same. Home Prices and rates are slowly going up but nowhere near the 2006-08 prices.
Taking a loan is another matter though, lender just drags the process and we don't know what's taking them so long to say clear to close even though we've completed all conditions.
Rental is getting more expensive in my area then mortgage on the same 3BR apartment (diff of $300-$500) so we took the plunge. I need to buy home insurance but all the utilities are the same. Home Prices and rates are slowly going up but nowhere near the 2006-08 prices.
Taking a loan is another matter though, lender just drags the process and we don't know what's taking them so long to say clear to close even though we've completed all conditions.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Most people in this country have a big problem of living within their means, and keeping debt low. Encouraging them to arbitrage the interest rate market to use leverage for investing is poor advice.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Did they miscalculate the risk or just happen to end up on the wrong side of it?Texas hold em71 wrote:I know a lot of people whose math didn't work out for them because they miscalculated the risk.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I am a big Buffett fan but he's not always right. I think the quote above is what he doesn't understand. The U.S. population's opinion of real estate and their own job security has been altered by the Great Recession. If not permanently, then I would guess for a long time to come.Cal Aggie wrote:There are a lot of factors that go into buying a house and interest rates are only one of the factors.
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I did read this yesterday. When Warren Buffett speaks, I listen.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
He's right, it is a terrible decision. At least, until it isn't.denovo wrote:Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
I remember back in 2000, many of my friends at work were taking out HELOCs to day trade. I was making extra principal payments. They thought I was stupid. Paid off my house in 5 years. Never regretted it.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Warren Buffet should exchange his primary house deed to get a bigger mortgage on his five-bedroom house in Omaha. The house is worth a lot more than when he originally bought it several decades ago. So he should be able to get a big mortgage. After all, it's a no-brainer.
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"Simplicity is the master key to financial success." John C. Bogle
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I don't always agree with Buffett but in this case I think he is mostly correct.
I refinanced for 15 years at 2.625% a couple of years ago and am not paying the mortgage down any faster than scheduled. This gives me a big short position in the dollar, without any margin call risk.
I refinanced for 15 years at 2.625% a couple of years ago and am not paying the mortgage down any faster than scheduled. This gives me a big short position in the dollar, without any margin call risk.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Well said Tyrobi. For most folks that may work. For Mr. Buffett who is worth $60 BILLION, would it move the needle?Tyrobi wrote:Warren Buffet should exchange his primary house deed to get a bigger mortgage on his five-bedroom house in Omaha. The house is worth a lot more than when he originally bought it several decades ago. So he should be able to get a big mortgage. After all, it's a no-brainer.
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Bingo.in_reality wrote:I do know that Buffett's comments may be directed at stirring up business for Berkshire Hathaway HomeServices as much as anything else.runner26 wrote: _________
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said he was puzzled by the sluggish rebound in U.S. home construction amid near record-low interest rates and a broader recovery in the economy.
“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
I really can't understand in general why Buffett is held out as adviser about Boglehead investing. The guy is a huge success based mainly on ignoring BH principals: picking stocks, non-diverisfying, leveraging*. He's been very successful, good for him. But what reason is there to think he knows what's good for you? And he definitely has a potential, at least, self interest in some of what he says, and/or political angle: he's active in partisan politics, his right like everyone else's, but also a fact to take into account in interpreting his statements. I'm a friendly laid back guy and don't hate politicians from either side of the spectrum, but I take into account their political motives when they are in power and tell me how I should borrow more to pump up the economy, or their motives when they're out of power telling me how terrible things are. That's not me being political, their motives are part of my interpretation of their statements, an *actionable* aspect related to my *investment decisions*.
As as far shorting interest rates, the efficient way to do that is to set up a futures account and short a few ($100k notional size) treasury note futures and roll the position. You'll make money if rates go up faster than the forward curve implies, and you'll see the negative carry loss if the yield curve stays as is. You won't be hiding that from yourself with some mumbo jumbo excuse you might make up for yourself if the same thing is happening via a mortgage, and more important you're not actually borrowing money you don't need to borrow.
*and btw this statement of his contradicts the often quoted one about 'smart people don't need leverage', as his actions also do.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
[quote="newbogleb" So to save [$0.00 to $0.396]* on my taxes I should spend $1 in interest?
But seriously, please enlighten me. [/i][/quote]
Because it's cheap money, that's why. A 3.5% mortgage equates to about 2.8% in the 25% tax bracket. In the long term of 30 years you will likely do much better taking the extra money and investing it in equities rather than putting it towards paying off a mortgage.
IMHO, it's quite likely short-term savings rates will revert back into a historic normal range of 3-5 % within the next 30 years of such a mortgage, which is what Buffet is referring to as "shorting the dollar."
But seriously, please enlighten me. [/i][/quote]
Because it's cheap money, that's why. A 3.5% mortgage equates to about 2.8% in the 25% tax bracket. In the long term of 30 years you will likely do much better taking the extra money and investing it in equities rather than putting it towards paying off a mortgage.
IMHO, it's quite likely short-term savings rates will revert back into a historic normal range of 3-5 % within the next 30 years of such a mortgage, which is what Buffet is referring to as "shorting the dollar."
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Classic Buffett. Love this.It’s a 30-minute instrument if you’ve been wrong on interest rates and it’s a 30-year instrument if you’ve been right on interest rates.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I think that is what he means by "shorting interest rates". "Shorting the dollar" is having a net short position in the dollar, so if its value goes down, you make money.SkierMom wrote:Because it's cheap money, that's why. A 3.5% mortgage equates to about 2.8% in the 25% tax bracket. In the long term of 30 years you will likely do much better taking the extra money and investing it in equities rather than putting it towards paying off a mortgage.newbogleb wrote: So to save [$0.00 to $0.396]* on my taxes I should spend $1 in interest?
But seriously, please enlighten me.
IMHO, it's quite likely short-term savings rates will revert back into a historic normal range of 3-5 % within the next 30 years of such a mortgage, which is what Buffet is referring to as "shorting the dollar."
In theory, theory and practice are identical. In practice, they often differ.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
And a lot of potential home buyers are still trapped in their underwater mortgages. Sorry about that, Warren, maybe you should just suck it in and cope...Texas hold em71 wrote:Buffett is smart, but he isn't giving out investment advice out of the goodness of his heart.
"Buffett, 84, whose Omaha, Nebraska-based company has units that build houses and make carpet, paint and bricks, reiterated today that he expects home building to pick up as the market rebounds from the deepest slump in more than seven decades.
Berkshire is the largest shareholder in Wells Fargo & Co. (WFC), the biggest U.S. home lender."
He has several reasons to tell you to borrow money and build a house. Several billion actually.
“It’s an incredibly attractive instrument,” Buffett said. “It’s a 30-minute instrument if you’ve been wrong on interest rates and it’s a 30-year instrument if you’ve been right on interest rates.”
Sure the mortgage may be attractive but it comes with a house! It is a thirty minute instrument (with costs that he neglects to consider here- money in Wells' pocket) if rates drop again. It is thirty years IF you don't need to sell the house. I have never been stuck with a house I could not sell, but I have stopped trying to count the people I know who have been nearly bankrupted by one they couldn't sell.
With the home buying generation already paying student loans and needing flexibility to relocate for better paying jobs, I understand why they are not borrowing more and getting saddled with a house.
Warren Buffett is a smart guy but it gets tiresome to see him quoted on this forum as if Warren says it, it must be so.
As for those paying down a mortgage making a terrible decision?
A mortgage is leverage and leverage is math. Math requires certain assumptions. In the case of leverage it is that the stock market will beat that rate over that time period (yes, most likely- but check out Japan's history) and that you will be able to make the payments over that time period (risk adjust). I know a lot of people whose math didn't work out for them because they miscalculated the risk.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
I had a hunch that this was taken out of context, and it turned out to be right. The entire interview with Carol Loomis is on YouTube (scroll to about 34:15 for the question). I think when he called it a "no-brainer" he was referring to the interest rate put option that comes with a residential mortgage. which didn't make the sound bite. He called mortgages "a 30 minute investment if you're wrong on interest rates, and a 30-year investment if you're not wrong on interest rates", and pointed out that that's not available anywhere else on the market.runner26 wrote:“You would think that people would be lining up now to get mortgages to buy a home,” Buffett said today at a conference hosted by Fortune magazine in Laguna Niguel, California. “It’s a good way to go short the dollar, short interest rates. It is a no-brainer. But so far home construction pickup has been slower than I had anticipated.”
Read More:
http://www.bloomberg.com/news/2014-10-0 ... rates.html
It's important not to confuse "no-brainer" with "risk free" of course. Either a housing crash or deflation can leave you on the hook like any other leveraged asset that loses value. Buffett pounds on demographics and housing starts as a reason why he thinks that won't happen. He's likely right in some time frame, but that's little comfort if you get caught having to sell into a down market. As often happens in situations like an estate settlement.
Also, generalized market forecasts should be looked at in light of your own situation. Take on a mortgage and you'll need a cash flow to pay it; if that cash flow comes from taxable income and you're collecting Social Security, for example, you might be unpleasantly surprised at the effective tax rate you have to pay on that income once SS benefit taxability figures in. Mortgage interest deduction won't help with that either. You have to do some legwork to make sure your worst case situation will still protect that cash flow. For example, if you are married, make sure survivor benefits will still pay the tab after one of you passes on.
Long story short, I think Buffett has a better read on the economy as a whole than on individual consumers.
Best regards,
Craig B.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Hi Johnno,Johno wrote: Bingo.
I really can't understand in general why Buffett is held out as adviser about Boglehead investing. The guy is a huge success based mainly on ignoring BH principals: picking stocks, non-diverisfying, leveraging*. He's been very successful, good for him. But what reason is there to think he knows what's good for you? And he definitely has a potential, at least, self interest in some of what he says, and/or political angle: he's active in partisan politics, his right like everyone else's, but also a fact to take into account in interpreting his statements. I'm a friendly laid back guy and don't hate politicians from either side of the spectrum, but I take into account their political motives when they are in power and tell me how I should borrow more to pump up the economy, or their motives when they're out of power telling me how terrible things are. That's not me being political, their motives are part of my interpretation of their statements, an *actionable* aspect related to my *investment decisions*.
As as far shorting interest rates, the efficient way to do that is to set up a futures account and short a few ($100k notional size) treasury note futures and roll the position. You'll make money if rates go up faster than the forward curve implies, and you'll see the negative carry loss if the yield curve stays as is. You won't be hiding that from yourself with some mumbo jumbo excuse you might make up for yourself if the same thing is happening via a mortgage, and more important you're not actually borrowing money you don't need to borrow.
*and btw this statement of his contradicts the often quoted one about 'smart people don't need leverage', as his actions also do.
Warren Buffett is held in high regard and is very interesting. I have enjoyed reading many books and articles about him. I also read his annual letter each year for his perspective on the overall global economy and investing. I do not read his annual letter or many interviews looking for specific investing advice of which to act on.
Mr. Buffett has stated many times that the individual investor should own index funds. He even caused quite a news stir this past winter when he stated that his wife's portfolio would be invested in the "Vanguard S&P 500 Index Fund" and Treasury bonds!
Best.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
High regard by some, to each his own. But I still don't understand what it's worth for somebody who made a famous fortune basically ignoring BH advice to then tell you should follow BH'ism. I agree with BH-ism, generally if it isn't taken to extremes. I just don't see what it's worth for Buffett to tell me that rather than figure it out myself, and again considering all the very factual conflicts of interest Buffett has in handing out advice. Do you really think he'd tell you when he thinks it's time for the consumer to pull in their horns, borrow less and slow down the housing market when that hurts his companies, and makes his guy in the White House look bad? All the best to you too, but get real.abuss368 wrote:Warren Buffett is held in high regard and is very interesting. I have enjoyed reading many books and articles about him. I also read his annual letter each year for his perspective on the overall global economy and investing. I do not read his annual letter or many interviews looking for specific investing advice of which to act on.Johno wrote: Bingo.
I really can't understand in general why Buffett is held out as adviser about Boglehead investing.
Mr. Buffett has stated many times that the individual investor should own index funds. He even caused quite a news stir this past winter when he stated that his wife's portfolio would be invested in the "Vanguard S&P 500 Index Fund" and Treasury bonds!
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Kansas City suburbs are absolutely full of new construction... And we're talking 5-bedroom 4000 square-feet mansions with finished basements... I can't believe there are enough people in this town who make enough money to buy all these new expensive homes... But there they are.retiredjg wrote:I'd have to say home construction has not picked up like I would have expected either, at least not in the area I looked.
I bought a home late this summer. Looked at a bunch of places - there was not a single new construction home in my price range to even look at. It was very frustrating as I didn't want a home that needs repair and renovation. Unfortunately, that's what I got.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Do you really think he'd tell you when he thinks it's time for the consumer to pull in their horns, borrow less and slow down the housing market when that hurts his companies, and makes his guy in the White House look bad? All the best to you too, but get real.
Do you really think that this excerpt from the coddling the super-rich op-ed regarding tax rates means that he supports the current administration? The media did, or wanted to, and ignored this part of the editorial, which pointed out Buffetts view of the nature if the financial challenge for the nation.Job one.......is to pare down some future promises that even a rich America can’t fulfill. Big money must be saved here. ........ then turn to the issue of revenues.
In any case, Boglehead philosophy doesn't hold that no one is able to beat the market, does it? I thought it just held that if you think that guy is you, you're likely to be wrong. The fact that a handful of people have been able to do it doesn't make you wrong in realizing that you can't. No need to dump on the ones who have....especially Buffett, who agrees with you that you probably can't.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
If and only if 100% of your mortgage interest is deductible, and above the standard deduction. For most people, this is not true.SkierMom wrote:A 3.5% mortgage equates to about 2.8% in the 25% tax bracket.
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
On top of that, if you buy a house with a N year mortgage,runner26 wrote:I am renting now between homes, as I have done before and much prefer to own. The last home I had built, I lived in15 years. After adding up what I paid, and what I put in for maintenance, and adjusting for inflation, and subtracting closing costs, I still netted more than those costs. So basically, those 15 years cost only interest, taxes and insurance minus extra tax deductions and gains. Much less than renting.
1. the payments are fixed/hedged for N years while rents keep rising, but that's just the icing, because...
2. starting the first day after N years there are no more payments for the remainder of the life - that's the cake
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
And on top of that this is a perfect representation of the naive 'calculations' people make when they don't actually understand the economic decision between renting and buying...Sunny Sarkar wrote:On top of that, if you buy a house with a N year mortgage,runner26 wrote:I am renting now between homes, as I have done before and much prefer to own. The last home I had built, I lived in15 years. After adding up what I paid, and what I put in for maintenance, and adjusting for inflation, and subtracting closing costs, I still netted more than those costs. So basically, those 15 years cost only interest, taxes and insurance minus extra tax deductions and gains. Much less than renting.
1. the payments are fixed/hedged for N years while rents keep rising, but that's just the icing, because...
2. starting the first day after N years there are no more payments for the remainder of the life - that's the cake
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Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Well Sunny left out opportunity cost, but that is well understood. Will you (avalpert) enlighten those of us who make naive economic rent/buy decisions as to the proper method?avalpert wrote:And on top of that this is a perfect representation of the naive 'calculations' people make when they don't actually understand the economic decision between renting and buying...Sunny Sarkar wrote:On top of that, if you buy a house with a N year mortgage,runner26 wrote:I am renting now between homes, as I have done before and much prefer to own. The last home I had built, I lived in15 years. After adding up what I paid, and what I put in for maintenance, and adjusting for inflation, and subtracting closing costs, I still netted more than those costs. So basically, those 15 years cost only interest, taxes and insurance minus extra tax deductions and gains. Much less than renting.
1. the payments are fixed/hedged for N years while rents keep rising, but that's just the icing, because...
2. starting the first day after N years there are no more payments for the remainder of the life - that's the cake
Dale
Volatility is my friend
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
The price of a home implicitly includes an assumption of future rent increases (as with any investment, it’s worth the present value of future cash flows). So a homebuyer pays rent (net of ongoing expenses) with expected inflation up front. What a homebuyer is paying over time is ongoing expenses, which never stop – and which will increase with inflation.
If a homeowner chooses to take out a mortgage (i.e. amortizing the portion of his future net rents, including rent increases, that haven’t been paid by a down payment) – those future rent increases are still being paid for, the portion being amortized has just become a flat payment.
Mortgage payments shouldn’t be considered a homeowner’s “rent”, since the mortgage covers only a portion of the housing costs. Further, since mortgage payments already include rent increases, homeowners don’t magically win when rent goes up. They win if rent goes up more than expected, and lose if rent goes up less than expected (and actually need rent to go up a bit more than expected to cover interest and transaction costs). They’re also exposed to unexpected inflation on the ongoing expenses (and exposed to loss of the home asset itself).
If a homeowner chooses to take out a mortgage (i.e. amortizing the portion of his future net rents, including rent increases, that haven’t been paid by a down payment) – those future rent increases are still being paid for, the portion being amortized has just become a flat payment.
Mortgage payments shouldn’t be considered a homeowner’s “rent”, since the mortgage covers only a portion of the housing costs. Further, since mortgage payments already include rent increases, homeowners don’t magically win when rent goes up. They win if rent goes up more than expected, and lose if rent goes up less than expected (and actually need rent to go up a bit more than expected to cover interest and transaction costs). They’re also exposed to unexpected inflation on the ongoing expenses (and exposed to loss of the home asset itself).
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Wanting not to have mortgage payments in retirement is a very valid argument for prepaying a mortgage IMO - especially considering you aren't sacrificing your retirement savings to do so.madbrain wrote:I'm one of those, except my rate is 3.375% fixed (30 yr). I'm paying about $1000 extra per month on a loan that's currently about $385k balance. This will pay it up in about 15 years instead of 30. I really do want that loan to go away eventually before the 30 years are up. IMO the payment needs to go away to solve cash flow issues in early retirement.denovo wrote:Buffett is right. Relatedly, people making extra payments on their 3.5 percent mortgages are making a terrible decision
There aren't any assets that I know of with guaranteed return of 3.375%, even for a 15yr period.
I don't think trying to pay it off early is that terrible given the composition of my investment portfolio.
I'm still also contributing the max to my 401k and backdoor Roth IRA.
However, the guaranteed return argument - while widely held - is simply NOT valid. It totally ignores the opportunity cost of future returns that CANNOT be known in advance. Once you commit that money to prepay the mortgage, it can't be invested several years later in CD yielding 2% more than your mortgage rate. You don't know that you will have this opportunity, but you also don't know that you won't! There is some probability that interest rates will stay at their current low level and the mortgage prepayment will prove to have been the best decision. But there is also some probability that interest rates will spike to 10% and everyone who prepaid their 3- 4% interest mortgages will kick themselves for not holding onto them. Therefore, you have to make a GUESS as to what will happen to the interest rates in the future. If rates are currently high probability favors that they will go down in the future; if they are low probability favors that they will increase. (NOTE: If you knew the mathematical distribution of interest rates you could actually calculate the best choice based on the probabilities across the entire interest rate spectrum).
Therefore, deciding to pay off a balance on a consumer credit card is a no-brainer. With interest rates in the range of 12 - 20+ %, you can be pretty sure that you aren't EVER going to be able to make more in CDs or other safe instruments. If you have a mortgage with a high interest rate and didn't want to or couldn't refinance (underwater, high closing costs, not planning to stay in the house, close to paying it off, etc.) it would also make financial sense to pay it off early. But to prepay a mortgage that is at historically low interest rates because you can't CURRENTLY get a CD to beat it is crazy. Especially since a lot of people doing it are NOT anywhere close to maxing out their 401ks or Roth IRAs.
Re: Buffett Says ‘No-Brainer’ to Get a Mortgage to Short Rat
Well, Harold covered some of it, you captured some of it with opportunity costs but there are two components to that - one is the opportunity costs of not deploying the capital elsewhere and the other is the opportunity cost of not renting out the asset you own - i.e. no accounting for imputed rent.Dale_G wrote:Well Sunny left out opportunity cost, but that is well understood. Will you (avalpert) enlighten those of us who make naive economic rent/buy decisions as to the proper method?avalpert wrote:And on top of that this is a perfect representation of the naive 'calculations' people make when they don't actually understand the economic decision between renting and buying...Sunny Sarkar wrote:On top of that, if you buy a house with a N year mortgage,runner26 wrote:I am renting now between homes, as I have done before and much prefer to own. The last home I had built, I lived in15 years. After adding up what I paid, and what I put in for maintenance, and adjusting for inflation, and subtracting closing costs, I still netted more than those costs. So basically, those 15 years cost only interest, taxes and insurance minus extra tax deductions and gains. Much less than renting.
1. the payments are fixed/hedged for N years while rents keep rising, but that's just the icing, because...
2. starting the first day after N years there are no more payments for the remainder of the life - that's the cake
Dale
At the base level though the consistent error is the comparison of mortgage to rent - how you finance the purchase is independent from the lease/buy decision (a mortgage can be the sensible approach even if the purchase wasn't and a mortgage can be a poor choice even if the purchase makes sense).