For Valentine's Day: There's Money in Your Future

From an article written by Gary Foreman about the time value of money:

“You can't simply take today's prices and expect them to be valid for future purchases, especially if you're looking more than a few years into the future. The basic statement of the time value of money is very simple—a dollar today is worth more than having one tomorrow (or next year).”

A dollar today is worth more than having one tomorrow—something to consider when thinking about possible expenses in the distant future, or when you’re dating and considering marriage.

While dating, take the time to notice, really NOTICE your prospective mate and how he/she behaves with money. Then start thinking about how that might affect you in five or 20 years--that fun guy that’s always buying rounds of drinks won’t seem so fun when he’s using joint money earmarked for paying off debt, or that woman who "appreciates all the finer things" and won’t be so appreciative when you try to save for something you really want or need--all those fine things drain your wallet. Saying the words, “I do” won’t be enough to change bad habits or make them disappear overnight. Why end up a divorce statistic when you don’t have to?

The time spent dating can be used as an opportunity to talk about career plans, finances, and family desires. Sometime before getting engaged, you’d want to cover the issues that will affect your lives for the next 50 to 60 years, especially when it comes to those “tomorrow” dollars you need to start allocating today. Hopefully, you two end up on the same path headed in the same direction.

An important subject that definitely needs to be ironed out on beforehand is home buying, and the reasons for it. Homes aren’t getting any cheaper, and many “tomorrow” dollars will need to be used today while they’re still worth something. Tomorrow’s house could sell for twice the amount of today’s asking price without much difference in the actual house itself. In some areas, the housing markets have risen about 25% a year, making them worth double in four years—with no guarantee of sustainability. This means that tomorrow’s dollars may only buy half the house (in some markets) you see today, or, at the very least, your purchasing power will become more diminished the longer you wait—hence the rush to buy and the current “housing bubble” we’re experiencing. At double-digit rates of appreciation, the real estate market is paying out better than the stock market—with a whole lot less risk. It’ no wonder the housing market has become the “one-armed bandit” of our time!

But risk and hype are for speculators, not for shelter seekers. If you’d rather not take a position in the coming frantic home buyer’s marathon (provided you can even find a mortgage--have you seen the proposed do-away with Fannie and Freddie?), then you need to re-adjust your thinking and truly assess your shelter needs. This is where long conversations on dates become rather useful—the more conservative and realistic your goals in life, the less you’ll need to meet them. Knowing possible future housing needs NOW will help you both plan for how and where to allocate those today dollars for tomorrow’s shelter needs.

While your eyes are on the prize, let me introduce a contrary piece of thinking: real estate market timing. While you and I may THINK we’re priced out of the market right now and for the foreseeable future, there’s another alternative way to think about market happenings. We all know the old mantra of “buy low, sell high” from the stock market, and interest rates lead us to do this (for borrowing purposes) in the real estate market as well. While listening to Alan Greenspan testifying on Capitol Hill about the housing bubble one day, and confirming at The Mortgage Professor, I picked up a very useful tip about the optimal use of adjustable rate mortgages. “It’s common knowledge that adjustable rate mortgages are more beneficial to the consumer than fixed rate mortgages…”--I had to know more, but Greenspan wasn’t telling. I went to online and found the Mortgage Professor site, which explained everything.

I found that adjustable rate mortgages are most useful to us when interest rates are high and falling, because each adjusted mortgage payment means less interest to repay. ARMs are always less than fixed rate loans (giving you an interest rate discount right at the start), and as interest rates keep falling, your mortgage payment will keep shrinking until rates stable out. If you add extra principal payments to this scenario, you could have quite a snowball effect going toward mortgage payoff.

The housing market itself is more useful to us when interest rates are high, because sellers are more likely to discount their asking prices for a faster sale—hence, a “buyers” market. In this situation, you can likely get more home for less money, and combine it with a downward-spiraling adjustable rate mortgage for the equivalent of a real estate double play.

By restricting yourself to what you really need in shelter (after one of those long discussions about future needs), shortening your borrowing time frame, haggling over the sale price, and getting an ARM while rates are high and falling, you’ve made a real estate home run when market conditions appeared at their worst to the average consumer. (Do you see some clever refinancing options in here somewhere? Check with your bank and run the numbers before signing up.)

Just as we’ve been conditioned to buy low and sell high in the stock market and with real estate purchases, now we can “short” the real estate market by buying high and selling low, using real estate market timing. This is contrary thinking, and it goes a long way in beating the competition.

This financial “zigging” when others are “zagging” can help alleviate problems of not having enough of those tomorrow dollars set aside when allocating money to future expenses like housing. When it comes to housing, don’t worry about what valid prices will be for tomorrow—instead, concentrate on the housing market timing and use it to your best advantage. By mastering the upswings and downswings, you may find yourself profiting from both ends of the interest rate spectrum…just like the stock market with supply and demand.

There are people who play the interest rate spectrum game, refinancing at either end of the swing—going to a fixed rate when low and rising, then switching to an ARM when high and falling, then back again. You have to decide if you’d rather just pay off the mortgage once and for all, or if your time’s better spent volleying back and forth with your lender when interest rates change. I suppose it would all depend on the mortgage size—million dollar mansions would definitely be worth a volley or three, especially when your desire to keep the tax deductions flowing is strong.

What do you want? What’s it worth to you? How are you going to get it? Those are the questions you should be discussing when sizing up a potential mate, a potential mortgage, a potential career, anything. What do you do while awaiting favorable “market” conditions for that mate, mortgage, or career? You rent. :)