Mark Gilroy

Bringing Books to Life!

The Subprimes Crisis Revisited: An Anonymous Response

On March , 2008, I added my longest blog to date — on the subprime crisis. It generated some healthy dialog with Notorious, a responder who questioned whether the Bible gave validity to having any debt whatsoever, while thinking through both sides of the issue.

It also generated some offline dialog with friends and family members who wanted to know how autobiographical certains elements of my original post were. We’ll leave that for another dialog!

I did receive a new response today, this one from Anonymous . Since “he” left me a simple enough clue to know his identity, I thought I’d take the liberty of posting his response as a new blog. I think Anonymous has something to say to people who are discouraged because they don’t feel they make enough money … or are upside down in a house … or are burdened by consumer debt … with a simple message of simplicity, savvy, and faith!

Nice post. I’ve got a few thoughts to add.

First, my story. I was an urban missionary, living hand-to-mouth in the early 1990’s when I bought my first two family in a “soft-second” mortgage program. I had a negative networth from student loans and no prospects for improving my income. Fastforward 15 years.

I own a very nice 4 bedroom home in Connecticut (the wealthiest state in the union) free and clear. How did I do it? Simple but bold moves in an appreciating real estate market. I bought, I sold, I leveraged, I had 18 tenants and property in 3 states then I sold everything, paid an enourmous tax bill, and bought my home with cash in 2004.

From 2004 – 2007 I was a Realtor. You’ve heard of the “Realtor to the Stars”? I was the “Realtor to the Millionarie Next Door.” During that time I was helping smart real estate investors unload their over-priced stuff to folks who didn’t have a clue. I sold millions of dollars in real estate during those years. We all saw this coming. Today the smart money is waiting for the bargains. They’ll be back. The issue here is “understanding the times” (there’s a biblical concept).

Biblical prohibitions about debt are good — but unless we’re going to eliminate a financial instrument that knowledgeable people looking to put capital to work without complete exposure (generally the debt is secured with an asset) then we had better learn to live with debt, and use it wisely.

Sex is dangerous too and monks abstain. Should we become debt-monks?It really has more to do with self-control, courage, and an ability to read a situation dispassionately than anything else.

The millionaries I know don’t drive fancy cars, live in big houses, or vacation in exotic places. They’re usually modest, often religious, and always very savvy.

Thoughts?

March Madness


In Shakespeare’s Julius Caesar, a seer warns Julius to beware the Ides of March. On his way to the Theatre Pompey, Caesar sees the same seer and calls jokingly to him, “see the Ides of March has come.”

“Aye, but not gone,” the seer whispers back to him as Julius strides to his death at the hands of the “Liberators,” a group of senators who stabbed him to death in an act of “tyrannicide.”

The Ides of March has truly come and gone in 2008, but we are in the middle of an annual American ritual where the warning to “beware” is particularly relevant. That’s right, we are at the halfway point of the NCAA men’s basketball tournament, better known as March Madness. This is a time when even marginally interested basketball fans live up to the full expression of the abbreviated nickname “fan” and become … fanatics.

This particular tournament seems to deliver the “madness” each and every year as a David or two slays a Goliath or three. Just this year, San Diego toppled mighty Connecticut; West Virginia dispatched perennial power Duke–after Belmont, still fairly new to this Division I game missed a last second shot that would have knocked the Dukies out in the first round; and Davidson, led by a sophomore guard, Stephen Curry, who looks all of 16 years of age, stunned behemoth Georgetown.

So a note of simple caution to colossal Kansas, unbeatable UCLA, notorious North Carolina, mammoth Memphis, terrifying Texas, and any other “favorites” still playing in the tournament: beware March Madness. It has come. But it has not gone.

Who knows what liberators are out and about with tyrannicide on their minds?

The Subprime Crisis and Your Future

For most, the American dream has included owning ones own home. One of the most important reasons is that it has traditionally been a key component in ones retirement portfolio.

The thinking goes like this: buy a starter house, fix it up, leverage the improvements and appreciation that have increased your equity stake, sell it, and then sew the proceeds into buying a bigger and better house; repeat those same steps with your new house to secure your next upgrade; repeat until sometime in your mid-thirties to late-forties at the oldest, buy your dream house with terms that insure it will be paid off no later than the day you retire, thus eliminating and in essence “fixing” one of the biggest variable expenses at retirement age, when odds are your income will go down or be eroded by cost of living adjustments.

Even as America got mobile and people cris-crossed the country with moves, the above scenario worked because of a persistent and unrelenting appreciation of home values. A transitional lifestyle might create a few lateral side trails, but the assumed destination has been the same: a home owned free and clear to live in — or to sell in order to pay cash for a downsized home (while pocketing the proceeds) or in a more desired retirement location.

Something quietly shifted in the equation that is a direct corollary to the boom in the use of consumer credit as a way of life. Home prices continued to rise well beyond the inflation rate, thus increasing equity, which is another way of saying, “wealth.” But rather than letting the home nest egg grow, we turned this windfall into a new revenue stream for living expenses, usually by refinancing an entire mortgage with debt added in or by taking a second mortgage(s) to pay off credit debt rather than to do home improvements, another traditional way to increase equity.

It’s been said that retirement should not mean no more work — idleness is bad for your health — but rather it should lead to the ability to do whatever work you want, ranging from volunteerism to a second career.

A few of the potential impacts on our future in light of the subprime crisis and ensuing loss of home values include:

* we may have to work more years full or part-time than we planned because part
of our retirement package has been damaged;

* it’s tougher to move — unless a company is guaranteeing the sell of your home (and a lot of companies have been forced to eliminate this program) — and watch your home sit on the market; even if there are great deals where we want to move, most of us can’t afford to buy without first selling;

* with less “wealth” we don’t have as much credit available to spend on those goods and services outside our normal income stream — which will hurt the easy-credit-fueled economy;

* you might not be able to move where you want to at retirement age — not all regions are equally impacted by the subprime crisis in relation to home values; there’s a reason small “ghost towns” in areas of the country that have experienced
population loss for decades are filling back up — cheap mortgages.

Will home values bounce back? I believe the answer is yes. But I think it’s going to take a few years. There seems to be too much inventory with so many people insisting on building new homes. But new house starts are finally going to slow down, which will be one more stressor on an already stressed economy, but which is required to tighten the housing supply and raise prices. How can I be so sure? Simple. If it costs $130 per square foot to build a new home and it costs $90 per square foot to buy an existing home less than 10 years old, home buyers are going to figure ways to freshen up and personalize the existing inventory. The per square foot cost gap is at its highest ever on a national aggregate.

As someone who has benefited tremendously from the appreciation model — and then taken an “equity beating” during a recent move (that included building a new home) — I am realistic but optimistic that owning a home still needs to be a key strategy in securing your best financial future. Obviously, our future, financial and otherwise, is not just up to us, but I’ll throw out a couple modest suggestions:

1. Get on a schedule to pay off your house before retirement. If you aren’t familiar with the simple little secret of making double principal payments, which will allow you to cut your 30-year mortgage in half, visit any reputable financial website to learn how — it’s not nearly as daunting as it sounds. If you’ve elected one of the dreaded interest-only loans, put a principal payment into your monthly automatic payment schedule and start paying down — yesterday.

2. Don’t treat appreciation as a revenue stream but rather a long term investment — retirement. Second mortgages and refinancing as an ongoing strategy to eliminate debt needs to be eliminated.

3. Don’t put your eggs in one basket — your retirement nest egg should be a diversified program with IRAs, 401ks, Social Security, personal savings and investments, company retirement plans, ideas for post-retirement income, AND a home that is paid for!

4. Get bad spending habits under control. Enough said.

5. Outgrow your problems. To have more, you have to become more. Don’t float along in life, make a plan and build disciplines in your life for growing emotionally, socially, mentally, and most of all, spiritually.