"The empires of the future are empires of the mind."
(Winston Churchill)
"Society is the totality of social relationships among human beings."
"Society can also be defined as an organization or association of
persons engaged in a common profession, activity or interest."
(Dictionary)
Common societal terms used by the financial community are Inflation, Deflation and Stagflation.
Inflation is a function of the many wanting the same service or thing and willing to compete for ownership. Deflation is the many wanting to sale the same service or thing to a small number of buyers unwilling to pay the asking price. Stagflation is when no body wants to buy any service or thing at any price. In all three instances, the sellers and buyers are hoping for some positive result from their joint action or inaction.
Does a home owner lose any value, if there are no plans to sale the home? Course not!
Home owners look to the home's equity over time to provide a comfortable retirement. What's lost in today's societal outlook is the need to work for value and not hope for value. Any value attributed to a home is based on the ability to afford that home. No job and the future is bleak.
In a stagnant economic environment, interest rates play a profound function in the ability to afford a home. As an example, an employed buyer, that has no hope of a raise in income, might afford a 6.0%, 30 year $200,000 amortizing mortgage, but not an 8% rate. As interest rates rise in a stagnant economy, home values will suffer from inactivity. To much uncertainty in a society without good economic leadership causes pain and suffering.
All hope starts with hard work. Hope does not put food on the table, but tilling the soil, planting the seed, hoeing and harvesting the crop will help feed the family. A home with value, is in many cases, a roof over the family. Tilling the shelter is a matter of holding the ground it stands on. Holding that ground is a tenuous proposition. If you are renting, higher rent can force you to move. If you used an "ARM" loan to purchase the home, an increasing index can force the monthly payment beyond your ability to make the payment.
A home free of mortgage debt is a far better financial position to hold, than a home with a mortgage payment, at time of retirement. Property taxes and government exploitation are always an unknown factor when planning for retirement. Inflation can produce equity and a sense of well being, but a home free of debt can produce a sense of security.
In my world, a Free & Clear® home is the 1st step in the retirement planning process. As an average, the american home owner with a mortgage pays approximately 43 to 47% of net income to a mortgage lender. If the home is free of mortgage debt at time of retirement, technically the home owner's net income can be reduced by 43 to 47% with no change in current living standard.
Loan acceleration is misunderstood by most home owners with a mortgage. Every additional dollar added to the required monthly payment reduces the principal and less interest is paid to the lender. A home owner with a 6% mortgage earns an after tax return of 6% on every additional dollar used to pay down the mortgage.
The accounting, legal and lending communities are not interested in mortgage loan acceleration, because the home owner needs no advice from these experts; experts advise the necessity of the home interest deduction. The one important point loss in the mortgage interest deduction debate is the home owner does not recover all interest paid to a lender from the IRS.
The question is where can the home owner safely invest excess monthly income that earns an after tax return equal to the mortgage interest paid to the lender? The math is tricky, but 95% of U.S. home owners are inexperienced in the financial market's daily fluctuations and are better advised to accelerate (pay down) their mortgage for a safe return on investment dollars.
In my world there are two types of equity: 1) Financial 2) Inflation. Financial equity is the original home 's purchase price plus any improvement cost minus loan balance. Inflation equity is the home's value minus purchase price and improvement cost. Both financial and inflation equity serve as a sense of value in a societal environment that equates success with net worth.
The argument against loan acceleration in a deflating or stagnating economy is saving dollars for that rainy day. What happens when it pours and you can't make the mortgage payment and you lose the home? What is the homeowner's psyche in an environment where there is no net worth?
I am concerned with an inflating economy where home values are declining. No good can come from an economic condition that deflates the home owner's net worth.
U.S. voters must come to grips with dealing with a government that is spending the net worth of the nation without regard for the hand that feeds it. Tax payers must demand a reduction in government spending and the elimination of the current tax code. Enough is enough. Politicians take care of politians, while retaining power and their high salaries.
It's time that U.S. citizens take back control of the United States.
Hope has nothing to do with security. Hard work and a limited government role in our daily lives is the 1st step to economic national security. Limit the politians' role and we will be better off.
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