Tag Archives: David Reiss

Millennials and Homeownership

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photo by flickr@tonywebster.com

TheStreet.com quoted me in Millennials Are Accruing Less Debt, Bypassing Homeownership. It reads, in part,

Millennials are accruing less debt than their counterparts did back in 2003 — despite being saddled with large amounts of student loans — because they are putting off buying homes.

The research conducted by Torsten Sløk, a Deutsche Bank international economist, shows that Millennials, ages 25 to 35, attained less debt in 2015 than their counterparts did in 2003. The data demonstrates a 29-year old in 2003 had an average debt amount of $41,761 compared to $36,810 in 2015 or a 33-year old owed $56,859 in 2003 and $52,640 in 2015.

“It is an urban myth that the young generation today is more indebted, it is the older generations that have higher debt levels,” said Sløk in a research note. “The reason is that since 2009, it has been difficult for Millennials to get a loan. As a result, 25 to 35 year olds today have less debt than in 2003.”

Debt has been “harder to obtain” for Gen Y-ers whether they are credit cards or mortgages, said Jim Triggs, a senior vice president of counseling and support of Money Management International, a Sugar Land, Texas-based non-profit debt counseling organization.

“Millennials have not been inundated with easy to obtain credit cards like in past years,” he said. “Creditors are not on college campuses offering credit cards to college students any longer.”

While Millennials are saddled with record levels of student loans because of the skyrocketing costs of college tuition and the ease of obtaining these loans, Millennials “continue to have less credit card and mortgage debt than their parents and grandparents,” Triggs said.

The level of student loan debt is hindering borrowers ages 18 to 35 from paying for necessities such as rent, utilities and even food as 43% expressed this sentiment, according to the National Foundation for Credit Counseling’s 2016 consumer financial literacy survey, said Bruce McClary, a spokesman for the Washington, D.C.-based national non-profit organization.

“There is a staggering amount of student loan debt and it is a burden for many,” he said.

Homeownership Delays

Although Millennials have expressed the desire the own a home in the future, they are keen to keep renting in part because many of them switch jobs frequently, have not amassed a down payment or do not want the financial commitment. The zeal to pursue the “American dream” of owning a home has waned.

*     *     *

The assumption that home values would rise faster than other investments has been challenged since the Great Recession, said David Reiss, a law professor at Brooklyn Law School.

“One big issue is the role that home ownership plays in wealth creation,” he said. “The bottom line is that homeownership can help build a nest egg for retirement, but long-term trends and individual decisions about homeownership will have a big impact as well.”

Tax Refunds Into Mortgage Payments

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photo by 401(K) 2012

TheStreet.com quoted me in Investing Your Tax Refund Instead of Spending It Boosts Retirement Savings. It opens,

Ramping up your emergency cash fund or IRA with your tax refund is a better option than spending it on a new smartphone or vacation.

Three out of four taxpayers received a refund of $3,000 in 2015. Although many consumers look forward to this windfall each year, it is not a “cause for celebration,” said Joe Jennings, a wealth director for PNC, a Pittsburgh-based financial institution.

“If you are receiving a large refund check, it actually means that you have loaned money to the government throughout the year and the next year the government is paying you back without interest,” he said.

Adjusting your withholdings is a good strategy if your refund exceeds $1,000. Changing the number of exemptions on your W-4 means you will net more income from each paycheck.

Bankrate.com, a North Palm Beach, Fla.-based financial content company, found that 31% of Americans who receive a tax refund this year plan to save or invest it. The survey revealed that 28% will use the funds to pay down debt, 27% will spend it on necessities like food/utility bills and 6% will splurge with a shopping spree or vacation.

Some consumers view the refund as a method of forcing them to save money each year or a way to pay down existing debt such as credit card balances with high interest.

Pay Off Existing Debt

Use your refund check to pay off as much as your credit card or student loan debt as possible since the amount of interest you are paying each month adds up quickly, said Jonathan Bochese, director of resolution services for Tax Defense Network, LLC, a Jacksonville, Fla.-based tax resolution company.

“The best use for any tax refund is to use it to pay off high interest revolving debts,” he said.

With the current low interest rate environment in money market funds and CDs, paying down debt is a no-brainer.

“If you can only make 3% on your investment and your debt is at a higher rate, pay off the debt,” said Carl Sera, a portfolio manager with Covestor, the online investing marketplace and managing principal of Sera Capital Management, a registered investment advisor in Annapolis, Md. “Don’t make it a habit to receive a tax refund, because it is money you have lent the taxing authority at a zero interest rate.”

Homeowners who do not have any other debt should pay down their mortgage by making an extra payment or two instead of stashing the refund in a savings account that is only receiving minimal interest, said David Reiss, a law professor at Brooklyn Law School.

“By doing so, you are making the equivalent of a pre-tax return of the interest rate on your mortgage,” he said. “If your mortgage has a 5% interest rate and your savings account has a 0.1% interest rate that is like getting a 4.9% higher rate of interest without taking any risk at all.”

Creative Credit Union Mortgages

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Credit Union

DepositAccounts.com quoted me in Types of Institutions in the U.S. Banking System – Credit Unions. It reads, in part,

What You Need to Know About Credit Unions

For more than 100 years, credit unions have been providing financial services to their members. Forget about what you thought you knew about credit unions. Long gone are the days when credit unions were seemingly only a “bank” for government employees. Today some 100 million Americans are member-owners of 6,900 credit unions and credit unions have more than $1 trillion in assets.

The Credit Union National Association (CUNA) defines a credit union as a non-for-profit, member-owned financial cooperative, democratically managed by its members, and operated for the purpose of promoting thrift, providing credit at competitive rates, and providing other financial services to its members.

Simply put — credits unions are about their members, not profits.

 *     *     *

How are credit unions different from banks?

“They are structured very differently. Credit unions don’t issue stock or pay dividends to outside shareholders, so they are not beholden to outside third party interests,” says Steve Rick, chief economist of CUNA Mutual Group, an insurer and maker of financial productions within credit unions.

Each person who holds an account is a member, and each member has one vote, “rather than the voices of only the powerful few stockholders heard at for-profit banks. And all earnings go straight back to members in the form of favorable interest rates and lower fees that other for-profit institutions can’t beat,” he adds.

Banks are governed by paid shareholders and voting rights depend on the number of shares owned. Earnings go to outside bond and stockholders in the form of dividends.

As cooperatives, credit unions are part of a broader cooperative community that shares philosophies around benefiting their member owners. One of the core missions of the credit union system is to educate its members on financial issues to ensure their financial health.

“It’s worth noting that credit unions can offer creative types of mortgages that should be explored by first-time and experienced homebuyers alike. The PenFed Credit Union, along with some other credit unions, has a 5/5 ARM that adjusts every five years. A product like this combines aspects of a fixed rate mortgage (fewer, but not the fewest) surprises about payment sizes, with aspects of an ARM (lower, but not the lowest) interest rates,” says David Reiss, a Brooklyn Law School professor specializing in real estate.

Buck-A-Home

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abandoned house

The Saint Louis Post-Dispatch quoted me (from an AP story) in Kansas City Presses To Sell Eyesore, Vacant Homes for A Buck. It reads, in part,

Drawn to the idea of buying a house for just a buck, Dorian Blydenburgh paced through the century-old digs in south Kansas City and didn’t mind tree limbs on the living room floor, holes in the ceiling and a funky mold smell.

“This is one everyone is gonna want, and there’s gonna be a fight for this,” said Blydenburgh, 56, a contractor looking at the three-bedroom, 1,500-square-foot house at 4124 Chestnut Avenue as a makeover prospect for a friend, who later applied to buy it. “Some of these places you need a bulldozer to fix, but this is doable. For a dollar, it looks like a go.”

That’s what Kansas City, Mo., officials were hoping to hear. The city and the Land Bank of Kansas City have offered 130 derelict, generally unlivable structures for sale for $1 each to those willing to make them livable again within a year. The buyer’s reward is an eventual $8,500 rebate — the amount it would have cost the city to flatten the houses.

*     *     *

But it’s buyer beware. Applicants must undergo a background check — applicants who are registered sex offenders or have drug-dealing or prostitution convictions are disqualified — and prove through bank statements or unused credit card limits they have at least $8,500 to devote to the rehab.

Ultimately, the program’s backers warn, rehabbing the properties might cost tens of thousands of dollars, perhaps involving installing or repairing roofs, electrical systems, plumbing, heating and air conditioning or foundations. And that’s beyond the cost of tackling troubling unknowns such as lead or asbestos.

“Most of those buildings on the dangerous list are going to have to come down. We know that,” Mayor Sly James said. “But there are other homes on that low level that could be salvaged, and we want people to know they are out there.”

Other cities have tried similar approaches. In Detroit, with the help of tens of millions of dollars from taxpayers, the city has torn down about 7,100 of an estimated 30,000 to 40,000 vacant houses since May 2014, with the mayor planning to have an additional 15,000 homes gone by 2018. More than 1,300 other homes have been auctioned, Detroit Land Bank Authority spokesman Craig Fahle said. Buyers of those properties, many fetching just the opening bid of $1,000, are required to bring the house up to code and have it occupied within six months — nine months if it’s in a historic district.

Chicago and Milwaukee have are unloading vacant lots. Chicago has sold more than 400 vacant parcels since 2014. In Milwaukee, homeowners next to a vacant lot can buy it for $1.

David Reiss, a Brooklyn Law School professor who focuses on real estate issues and community development, urges would-be buyers to understand the expenses beyond the price tag, including property taxes, upkeep and liability insurance.

“A house for a dollar may be an albatross around your neck,” he said. “I would look at it case by case. If it sounds too good, it probably is.”

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Silicon Valley’s Housing Crisis

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photo by Smitha Murthy

Drop in the Bucket?

Realtor.com quoted me in Could There Really Be Relief Ahead for Silicon Valley’s Housing Crisis? It opens,

Finally! A glimmer of hope has appeared in Silicon Valley’s housing crisis. Amid gloomy and downright terrifying stories about astronomical home prices and tighter-than-tight inventories forcing well-paid tech workers to live in vans, pay $2 million for a tear-down shack, or ponder commuting to work from Las Vegas, there seems to be some good news for a change: City Council members in Mountain View, CA, approved plans to build 10,250 new homes in the area.

Given that Mountain View has only about 32,000 homes total, this will increase its housing inventory by a whopping 32%—all purportedly within “walking distance” (possibly a bit of a long walk) of tech giant Google, which has long been lobbying on this front and will no doubt break out the Champagne once developers break ground. Sure, it may be years before these homes become a reality, but even the idea of them may have many locals (or those moving there) daring to dream. Might this new influx of housing cause home prices to drop within reasonable reach?

As logical as this renewed optimism about Silicon Valley’s housing market might seem, experts aren’t so sure home prices will budge all that much.

“This news in itself will not drive down prices much,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “While a 10,000-unit commitment is significant, Silicon Valley as a whole has about 3 million people living there.”

So if you consider the population of the entire area—many of whom would likely kill to move to Mountain View—10,000 new houses would house only 0.3% of these people. For you math-challenged, that’s less than a measly half-percent! 

And even though the number of homes may be edging upward, so are the number of people moving there.

“Silicon Valley remains a booming economy, so it’s likely that the population will continue to grow, further driving up prices,” Reiss continues.

As further evidence that more homes doesn’t necessarily lead to cheaper home prices, Florida Realtor® Cara Ameer points to another historically hot market: New York City.

“In New York, more new buildings has had no impact on housing prices or rents,” she says. If anything, the only change New Yorkers noticed is their neighborhood got a lot more cramped. The same will likely be true for picture-perfect Mountain View.

“The biggest thing people will see is increased congestion,” says Amer, “with many more residents, cars, and the need for schools and additional services.”

In fact, fears of overcrowding might even galvanize current homeowners in the area to show up en force at future City Council meetings to fight the greenlighting of additional developments—that is, unless they’re out-muscled by employee-hungry firms such as Google.

“As key businesses realize that the lack of housing is hurting their ability to recruit and retain good employees, it is possible that Mountain View’s decision is a harbinger for more pro-development decisions throughout Silicon Valley,” Reiss explains. “Current homeowners, called ‘homevoters,’ tend to make their anti-growth views known to local officials, but once the interests of local businesses focus on the lack of workforce housing, it can change the dynamics.

“These are powerful companies. The result is that those decisions can become more pro-growth than is typical for suburban communities.”

Paid off Mortgage in Three Years

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Sean Cooper

Sean Cooper

Realtor.com quoted me in Why the Guy Who Paid Off His Mortgage in 3 Years Isn’t as Smart as You Think.  You’ll want to read about this guy:

You’ve gotta hand it to Sean Cooper: In a mere three years, this Toronto homeowner made epic sacrifices to pay off a $255,000 mortgage on his $425,000 house. His reason: “For a lot of people, their mortgage is like a life sentence,” the 30-year-old explained to the press. “I just wanted to not have a mortgage hanging over my head.”

After his story broke in publications such as the Toronto Star and The Hamilton Spectator, thousands applauded this as a feat of frugality.

But some experts say the opposite—that Cooper made a colossal mistake.

Forget the fact that to pay off his mortgage this pension analyst took on two extra jobs (including in the meat section of a supermarket even though he’s a vegetarian) and worked over 100 hours per week. Let’s also set aside the fact that he stopped using his car and claims Kraft dinners were his “best friend” (because clearly his real friends stopped hanging out with him). No, experts argue that Cooper’s extreme mortgage-paying regimen may have actually damaged his financial health.

     *     *     *

“Having a mortgage is not really such a bad thing,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “When you think about what a mortgage is, it makes sense to pay it off over a long period of time. You use a mortgage to buy something that will last a long time—a home—so you would probably want to spread the payments for that expensive thing over the whole period you’re using it, just as you would with a car. [Cooper’s paying off his mortgage quickly] may work for him, but not for the typical person.”

So if you’re inspired to follow in Cooper’s footsteps, think twice and consider less drastic measures.

“There are less extreme ways of doing this,” Reiss says. “Some people make payments every four weeks instead of every month. This results in one extra payment every year and does not seem so painful. Others will put extra payments into their mortgage—a tax refund, a bonus, money from a consulting gig. This is also less painful because you were probably paying your regular expenses without that money already.”

Bottom line: Don’t beat yourself up for having a mortgage. Embrace the benefits, relax, and live a little. Cooper, for one, is now playing catch-up. Now that he’s debt-free, he’s moved on to his next goal: He’s looking for love. Because let’s face it, most bachelorettes aren’t into eating mac ‘n’ cheese on a date.

Reviewing the Big Short

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Jared

Wax Statue of Ryan Gosling at Madame Tussauds

Realtor.com quoted me in Explaining the Housing Crash With Jenga—Did ‘The Big Short’ Get It Right? The story reads in part,

One of the more hyped movie releases this Oscar season stars the housing crisis itself: “The Big Short,” in which four financial wheelers and dealers (Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt) join forces to figure out what caused the housing bubble of 2003-2005 to burst (and how they could profit from it, of course). It’s based on the best-selling, intensively reported book by journalist Michael Lewis.

Granted, the subprime mortgage meltdown is a complicated subject… but this movie purports to illuminate all with a simple visual aid: a tower of Jenga blocks. As Gosling explains in [this video clip], mortgage bonds at that time were made up of layers called tranches, with the highest-rated and most secure loans stacked on top of the lower-rated “subprime” ones. And once holders of those subprime mortgages defaulted in droves, as they did starting in 2006, the whole structure collapsed. Jenga!

Which seems simple enough. Only is this depiction accurate, or just a Hollywood set piece?

Well, according to David Reiss, Research Director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, this movie’s high-concept depiction of the mortgage crisis is largely on the money.

“There is a lot that is accurate in the clip: the history of mortgage-backed securities, the degradation of mortgage quality during the subprime boom, the loss of value of lower grade tranches,” he says.

*     *     *

Yet there is one thing that the movie did fudge, according to Reiss.

“I would argue that there is one big inaccuracy that exists, I am sure, for dramatic effect,” he says. “I would have put the AAA [tranches] at the bottom of the Jenga stack. In fact, the failure of the Bs and BBs did not cause the failure of AAAs, and many AAAs survived just fine or with modest losses.”

In other words, only the top half of the Jenga tower should have crumbled … but that wouldn’t have looked quite as flashy, would it?

“It would not sound as cool if only the top part of the stack crashed,” Reiss concedes. “But the bigger point, that the failures of the secondary mortgage market led to the crash of the housing market, is spot on.”

And hopefully one that won’t play out again in real life.