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Sunday, June 15, 2008

On The House

The biggest personal financial news of this year, in my opinion, is that Ed McMahon's home is facing foreclosure. Born in 1923, he is no spring chicken. Yet it seems that he too has succumbed to the faulty personal finance habits of a younger generation. One has to ask, what in the world is any 85 year old doing with a mortgage, much less a mortgage in the millions that is nearing the value of his home? While Mr. McMahon sights a neck injury as putting him behind in his payments, what put him behind was clearly far too many obligations, combined with too little savings, and age.

It is high time that many of us return to the simple financial principals that guided our grandparents. Some of us might have to go back another generation to our great grandparents to find that simplicity. These principals are guided by common sense. There principals don't involve much more math than what can be done on a four-function calculator, although a computerized spreadsheet will excite the budget managers among us . These principals don't ask you to leverage equity and invest for a higher return. These principals don't require you to compare one plan with another. These principals simply required some focus and discipline.

Our grandparents got married, saved a sizable downpayment, bought a "starter home," and entered into a mortgage with a plan to pay it off. They dreamed of actually their home "free and clear." If they decided they wanted a larger home, they "bought up," rolling the equity from their 1st home into their 2nd home, while still maintaining a solid plan to own their home. They entered into traditional mortgages, not ARMS, variables, or interest only loans.

Their home was a place to live, not an "investment." They did not watch their home values like the stock market, nor chat about their equity, because it really didn't matter that much unless they were ready to "downsize." Things go up and down, and as long as the mortgage was headed south, they felt secure because they could weather a bump or two along the road.

If they wanted to watch their investments, the watched their bank and brokerage accounts. A unrealized gain in the stock market could easily be turned into a realized gain. An unrealized gain in their home was of little use to them unless it was time to "downsize." And they certainly didn't view their home as an ATM and a HELOC was not something tied to their checking accounts.

Now fastforward to the present where we have become more savvy and sophisticated. We have enough loan programs to fill a chinese menu, although that is changing. We theorize about whether we are getting the appropriate return on the money that is being used to pay off our principal. We buy homes banking on the "fact" that our income will increase. We try to evaluate if our money would do better if it wasn't tied up in equity. And we pat ourselves on the back for our sophistication because we are getting a "tax break" when we undertake a mortgage and when we pull equity out of our homes. We are proud that we are home owners. But we don't own much, perhaps we own the kitchen countertop, the stove, and the shower doors.

G-d willing, we will all be healthy until 120. Unfortunately, just like Mr. McMahon. Many grandparents in our community owe a lot on their homes. They have paid tuitions, paid for weddings, and paid for stuff "on the house." Some may owe more on their homes than the price they paid. Years ago, I attended a meeting for lobbying for more public funds for private and parochial schools. After the meeting, I asked some of the older men around the table how they managed to put their children through school and what good advice they could share with the younger people at the meeting. One man told me, "don't worry, you will make it." Then he proceeded to tell me about using Home Equity to pay for schooling, weddings, and what have you.

Families in their mid-60's with little to no savings and sizable mortgages are not "making it." If Hashem grants his good health, they may continue holding on. But, they can't afford a fall, nor because they are mortgaged up the hilt. They don't have a safety net.

I think it is time for many of us to drop the sophistication and return to the old-fashioned principals of minimal and shriking debt and cash on hand that created a real safety net and real, as opposed to unrealized, wealth. Taking a fall in retirement should not send anyone into foreclosure. And, yet, I know of instances in our own communities where a single fall could send not just one family into foreclosure, but could send them and their all too dependent children into foreclosure.

39 comments:

Zach Kessin said...

The problem is that we have convinced ourselves that a lot of things are "necessary" expenses. $40,000 weddings, private school tuition, year in Israel, Kollel and so on. The problem is that most of our community just can't afford this. And until we realize that we are going to continue to dig ourselves into a hole.

ProfK said...

Some of this attitude towards using a house as a "flexible spending account" has to be generational. My generation, or at least most of it, looked and looks at a house as a type of social security. We paid off our mortgage as soon as we could. We know about home equity loans but in our opinion the only reason for broaching the equity in a house is for catastrophic medical expenses that cannot be covered in any other way.

I say most of my generation because there are those few my age who are having to bail out children who are not self-sufficient, nor planning on being so in the foreseeable future. And those children have children. But as Zach said, the expenses are going way beyond putting food on the table. And when these parents can't work any more, who will support them if they have spent the equity in their homes plus more?

JS said...

A few points:

I have had several people point out to me that I should pay off "good" loans (such as student loans, mortgage, etc) as slowly as possible because of the tax benefits the govt provides for the interest paid. I've even had people tell me how savvy they pay next to nothing in taxes. None of these people seem to realize that you're paying more money to the bank for the "privilege" of having the govt return only 20%-30% or so of it back. How does this make any sense? Only when I explain it that way do people say "oh, hmmm, I guess you're right".

In terms of HELOCs, I think a lot of people are faced with large financial obligations such as tuition and this is their only option. It's either take equity out of the house or take the kids out of yeshiva. This attitude then extends (for some) into "I have a wedding to pay for" or "I have to help my kids with down payments". I tried to divide into "need" and "want", but maybe some would argue tuition is not a "need" - I'm not quite sure where I stand, honestly.

The parents that do this are either sure that they'll be able to recover financially, or figure their children will be in a position to support them - maybe they'll sell the house and move in. Whether either of these options are realistic is a mystery.

Mike S said...

The "pay of the good loans slowly" advice is sound in 2 cases:

1) You have more expensive loans and are using the money to pay those of ass fast as possible. of course you pay off the more expensive debt first.

or

2) You are investing the money in some investment that offers a high enough rate of return to justify the interest. For example, I could pay off my mortgage faster if is stopped contributing to my 401K, but I'd be an idiot to do so, given my employer's match and my tax bracket.


On the other hand, delaying repaying 'good debt" to take a more expensive vacation or the like isn't good advice.

Larry Lennhoff said...

Off topic: I never got last week's Yated via email - did you? And could you please email me a PO Box or other address to send the CD of the tuition speech to?

Ariella said...

On that note, see the actual email I saw on someone with neither credit nor money trying to get a handout of both in order to buy a house at
http://kallahmagazine.blogspot.com/2008/06/i-am-not-making-this-up.html
Look, I am sympathetic toward those who want to buy a home, but buying what you really can't afford will only add to debt and credit liability. We didn't buy a house until we had more than the required by the down payment, for there are always additional expenses that crop up.

qsman said...

Does anyone know of any Jewish organization (besides Mesila which is not in the IS yet) that either provides a curriculum or provides financial counseling?

If not, does anyone know any resources where I can obtain appropriate materials?

Miriam said...

So true. This need to "keep up with the Joneses" is getting out of hand everywhere. I see it (and live it) first hand here, in Los Angeles.

tdr said...

People do not know what it means to be able to "afford to buy a house". The banks will tell you you can "afford" something. And in the not too distant past assumed that "surely the bank will not lend you money they *know* you can't afford to pay back!" and buy a house up to the amount they "qualified" for.

I like Dave Ramsey's rules of thumb regarding home buying. You can afford a house when 1) you can afford to pay 20% down AND 2) the payments on a 15-year fixed mortgage is no more than 25% of your monthly take home pay. Moreover, you should not buy a house unless you have 3 to 6 months of expenses set aside in an emergency fund.

This would price many many people out of the market I realize. But if this were the norm, perhaps that would help curb housing prices as well.

JS said...

mike s,

I agree with you in principle, but I think the point SL was making (and one I agree with) is that people are altogether trying to be too savvy. People fashion themselves stockmarket and financial gurus who know better than everyone else. They have an inside tip, a trick to gain a few more percentage points.

I once did the calculations necessary to determine whether I should pay off tens of thousands in student loans immediately or put that money towards investments with a higher rate of return. While the math dictated not paying off the loans right away (and enjoying "tax benefits"), I still maintain the "smart money" would say to pay off the loans (which is what I ended up doing).

Markets are volatile, rates of return are not guaranteed - although the rate you pay on a loan or your mortgage is!! Also, you can't live in a 401(k). In fact, you can't even get your money out early without penalties. I would pay off my house faster over feeding a 401(k) anyday. Part of the math no one bothers to work out is that you can always feed the 401(k) later! The charts that show compounded interest are always over 20-30 years, you can catch up a few years later with minimal "penalty" and in exchange you have something permanent - a major burden is lifted off your shoulders.

Lastly, imagine you invested before the latest downturn instead of putting the money in your house. You'd have lost about 10% of that money (unrealized), your mortgage would be high, your house value would be low, and you could even lose your job - then where are you? You own less of a house that's worth less and you can't access your money without penalties.

I don't see the wisdom in trying to outsmart everyone.

Mike S. said...

JS: If I put money into paying down my mortgage I get a guaranteed return of 6%/year,3.7% net after taxes. If I put it into my 401K, my employer offers a 1-1 match, equivalent to an after tax immediate return of 250%. That is, I cannot possibly save enough on the mortgage to justify giving up the match. Even if some catastrophe strikes between now and my 59.5 birthday, and I have to take the money out of the 401K and pay the tax and penalties I will still be better off, even if I have no investment income on the 401K.

Anonymous said...

I really resent your patronizing.

As a BT, I really am beginning to think I made a giant mistake by going down the road of religious living and day school. It is flat out just too expensive. It is not my spending or overspending habits. It is not my credit card. IT IS TUITION AND THE COST OF BEING RELIGIOUS... You want to vent at the kosher butcher who charges 14.99 lb for steak go right ahead but don't tell me I am irresponsible since I don't eat cat food.

As for Ed McMahon - what on earth does that have to do with the average Jew?

Anonymous said...

to the BT brother who wrote in - yeshiva tuition is a major major test from Hashem. The jews have suffered discrimantory taxes for over 2000 years

Hashem will help


That said

its not the kosher meat prices - its the tuition

The cliche "its the economy stupid"

for religious jews should read "its the yeshiva tuition stupid"

I am FFB and I am very very concerned

just got the bill

price for elementary school is $14,500

highschool depending where you go can be $16,000 to $25,000

What will tuition be in 20 years ?

The very rich pay it - the poor get scholarships

the vast amount of people (just plain rich, upper middle class, middle class) must pay down their assets - just look at financial aid form - they even ask what is in the 401-k plan ?

unemployment doesn't guarentee you a scholarship - maybe you have assets that can be paid down - why would an unemployed father pay down his assets when they are trying to hold on to their house and buy food !!!

The root cause of the problem is the lack of government funding for yeshivas (not even the general studies portion - like they pay in the UK)

Many secular assimilationist jews have fought against government funding for yeshivas

the only solution is government funding like in the UK and France and Israel

Zach Kessin said...

the only solution is government funding like in the UK and France and Israel

Then there is a problem, as thus far the government has shown no desire to do this. For the last 40 years everyone has said "Vouchers" at every turn, but there are no vouchers and when ever they have come to a vote they have lost. As most middle class tax payers look at this and realize that it will increase their tax bills. After all the money for the vouchers has to come from somewhere.

Anonymous said...

As a BT, I really am beginning to think I made a giant mistake by going down the road of religious living and day school.

I could easily have written this. Given our current precarious financial situation I think about this quite frequently. For this I gave up my family? So I could be financially ruined?

alm said...

We need to discuss the Ben Gamla charter school and the "Two Building Solution" a guest poster blogged about here a while ago. If done correctly, this could elevate some of the money-crunch felt by middle class frum families.

The local newspaper had an editoral about this a few weeks ago, but it never goes any where. No one wants to touch it. Its too political. No, its not an answer for everyone, but, again, if done right, could be right for a lot of families.

Anonymous said...

I understand that the previous contributors are all living in the US. Here in Israel too, some of us pay high tuition (relative to our income)for yeshiva high schools, girls' ulpanot and even elementary schools and we just received notice of an increase for next year. We pay about 15,000 IS a year for each high school boy (not a dormitory yeshiva - I assume those cost more) 8500 IS for the girls hs and 7000 IS for elementary school. For an Israeli family living off 2 average salaries it can be quite a chunk of income. I wonder if there are American olim for whom the lower cost of schools here compared to the US was a factor in their Aliya decision, when considering all issues, especially if they come with some financial backing which seems to go a longer way here than there. And will the US real estate crisis will have an impact on aliya from the US?

Larry Lennhoff said...

I wonder if there are American olim for whom the lower cost of schools here compared to the US was a factor in their Aliya decision
Absolutely. I personally know at least 3 different families who cited tuition as one their major reasons for making aliyah.

Anonymous said...

Duh !

Every year many families make aloya from bergen county and become what is known as "tuition refugees" There is much tuition driven aliya among the modern orthodox - especially if they have more than 2 or 3 children

SephardiLady said...

As for Ed McMahon - what on earth does that have to do with the average Jew?


Simply, the traps Ed McMahon fell into (too high of a mortgage for his age combined with spending more than he should in his youth is a pattern that we see all over the US and in the frum community and this is where these habits lead. I gave other examples of such.

I agree with you tuition is the #1 financial issue in the frum community. But, we do make it worse and that is what this blog looks at. Sorry if your find that "patronizing." If you haven't seen tuition threads, check them out. We have acknowledged the big white elephant on this blog.

aml said...

anonymous: even if the Israeli tuition is high relative to your incomes, the difference is that university is extremely inexpensive and your healthcare and retirement is pretty much taken care of. In the States, you have to fund all of these on your own (I'm saying this, just guessing that those of us in our late 20s/early 30s will have no social security to speak of- not that you could reasonabily live off that now, given the cost of healthcare). So I imagine for many families it is a nice solution.

Anonymous said...

"Absolutely. I personally know at least 3 different families who cited tuition as one their major reasons for making aliyah."

This may be what they said, but it isn't really phrased correctly. It isn't the tuition that caused them to make aliyah, but rather the desire for a Jewish education! The tuition problem (itself) is easily solved by sending the kids to the free public school :-)

"As a BT, I really am beginning to think I made a giant mistake by going down the road of religious living and day school."

Are you kidding, as a FFB, with 5 children, I am thinking the same thing.

We have 3 kids in school right now, the twins who are almost 3 years old will stay home as long as possible. For our 4'th grader and 2'nd grader, they just raised tuition to $13,900 each, and our kindergartener is going to a less expensive school for one more year at about $8,000 or something like that (I still don't have the paperwork). That's $35,800 before any additional school expenses, and there are plenty of those. That's also 3 times the mortgage! Oy Vey.

Mark

Dave said...

the only solution is government funding like in the UK and France and Israel

Why is it that the answer is always "someone else should pay"?

Whether it is the grandparents, the unmarried siblings, or as in this case, the taxpayers, the solution to the tuition crisis that keeps being brought up is "someone else should pay".

Leaving aside what are to me the questionable ethics of "I want, so you should pay for me", it isn't going to happen.

Local communities are heading into a big budget crunch right now, and certainly aren't going to be signing up for new obligations.

Taxpayers are facing financial pain right now, and aren't going to be signing up for higher taxes.

So the solution needs to be something else. I suspect that it is going to be "public schools and afternoon religious schooling", largely because I don't see another financially viable option.

Anonymous said...

Re financial life in Israel:
I currently pay 500 shekel a year for elementary school mamlachti date + books (maybe another 400 shekel)

For an 8th grade yeshiva tichonit I paid 560 shekel a month this year.

For the mamlachti date torani elementary it's about 300 shekel a month.

For the commentator who said retirement is covered in Israel, I believe you are mistaken. Bituach Leumi (Israeli social security) is extremely low, certainly not enough to live on.

Health care is the big bonus. We do pay for a supplemental plan but it's reasonable.

Foreclosure said...

Hey!

Thanks for sharing this information.

Anonymous said...

Why has yeshiva tuition risen so steeply - in no relation to cost of living or inflation?

Major factors:

- Mismanagement - including lots of nepotism

- Cliquey, exclusive mentality that limits parents' options, and creates enormous redundancy and inefficiency.

Additional factors:

- Supply and demand - thank G-d more kids than ever are being pointed towards Jewish education. But most adults don't want to work in chinuch.

- Beefed up secular studies - in response to demand by parents. My yeshiva high school did not have gym or lab facilities like what I see in the brochures nowadays.

So: there are valid reasons for higher tuition, but also a lot of waste.

How can parents engage and improve the situation?

- Get involved. Join the bodies that oversee and govern educational institutions - and if there aren't any, set them up!

- Challenge community tunnel-vision and self-imposed restriction of options. Which leads to:

- Help build community-wide solutions that serve larger groups of students more efficiently.

Anonymous said...

To Dave - your quote is so offbase - it really does not deserve a reply - but I will anyway - this is your quote

"Why is it that the answer is always "someone else should pay"?"

"the taxpayers"

YESHIVA PARENTS ARE THE TAXPAYERS !!!!!

WE ARE ONLY ASKING THAT Government mandated general studies be provided for our children the same way it is provided for non-jewish children and the same way it is provided for jewish children in the UK

No one other than the top 5% of income earners can afford private school tuition !!!

Dave said...

Yeshiva parents are *some* of the Taxpayers.

Government mandated general studies are provided for frum children the same way they are provided for all children -- in public schools.

tdr said...

I am very curious about this idea of masses of frum children suddenly migrating into public schools. Not that I think it's going to happen, but it's kind of interesting to think about possible consequences of this.

Keep in mind I live in Baltimore where the public schools are notoriously horrible though there are a few bright spots.

For instance:
1) This would almost certainly result in a large migration of frum Jews out of Baltimore City proper. Baltimore City has a very large frum presence. How would this be effected? I live in B. City and I would probably move before sending my kids to the local elementary school. Though maybe I would feel differently if I knew the school was suddenly going to become 25% Jewish.

2) Could public schools accomodate the shear numbers of new students coming in? How would this work exactly from the school's point of view? Would they find themselves in July suddengly faced with impending enrollment increase of, say, 25%?

3) How would public schools change by having a large influx of students who come from relatively cohesive, 2-parent, families who are likely to be very involved in their kids' education?

4) Given the effect of kids' Jewish education on the spiritual lives of the parents (a friend of mine did her PhD on this in the non-frum Jewish world), how would this affect people's frumkeit overall?

Someone told me recently that she heard that there are about 100 frum kids enrolled in public school here. I wonder how many of these are NOT special ed.

I also wonder how that is working out for the kids and parents. I was driving by a local elementary school a few months ago and could have sworn I saw a kid with a kippah on wearing the school uniform and hanging with a group of other kids from the school.

Anonymous said...

Dave - ridiculous !!!

everyone is "some of the tax payers"

and in return for their fair share of taxes - they receive police protection, sanitation pick-up and a general studies education for their children

[we are not asking the government to fund torah studies]

the government can not say - you live in an orthodox neighborhhood - so you will not receive police protection - you must live in a non-jewish neighborhhod to receive it
general studies should be provided in any school - as is dine in the UK and FRANCE and Israel


dave - your comments concerning orthodox jewish children going to public school reveals that you are not an orthodox jew so let me explain some things to you

in order for orthodox children to remain so - they must go to a yeshiva -in fact in many cases they will intermarry and not even remain jewish if they go to public school

Anonymous said...

"dave - your comments concerning orthodox jewish children going to public school reveals that you are not an orthodox jew"

How chutzpadik! How dare you say that! What yeshiva did you learn that in?

Dave said...

Everyone gets Police Protection. The *same* Police Protection. The city doesn't fund provide funding for the private security in a gated community because they want their own police.

Everyone can send their children to public school, free of charge. The same schools.

If you want private schools, you pay for it. If you want private security, you pay for it. Trash pickup, well, where I live, that's private anyway, so I pay for it.

Are there options other than public schools for the Orthodox in America?

Sure, but I think all of them are less likely.

The number of children per family could drop, which would lower the tuition impact.

Property in high-value areas (like, say, Brooklyn, or really, anywhere in the Tri-State area) could be sold, and the communities relocate to parts of the country (say the very rural Midwest) where the cost of living is low enough to allow the profits from New York real estate to fund entire communities. This is, as I understand it, what the Amish do when land becomes too expensive for the next generation.

As I said, I consider those possibilities far more remote than a combination of public schools and then private religious education in the afternoons.

Dave said...

In fairness, he's right. I'm not an Orthodox Jew, nor do I intend to become one.

Zach Kessin said...

the government can not say - you live in an orthodox neighborhhood - so you will not receive police protection - you must live in a non-jewish neighborhhod to receive it
general studies should be provided in any school - as is dine in the UK and FRANCE and Israel


Why? you have provided no arguments as to why the government should pay for this besides you wish it too be so. If you want the government to pay for your kids schooling send them to public schools. If you choose to send your kid to a *PRIVATE* school don't complain that it has to be paid for privately.

Property in high-value areas (like, say, Brooklyn, or really, anywhere in the Tri-State area) could be sold, and the communities relocate to parts of the country (say the very rural Midwest) where the cost of living is low enough to allow the profits from New York real estate to fund entire communities. This is, as I understand it, what the Amish do when land becomes too expensive for the next generation.

This only will work if everyone is not mortgaged up to their eyeballs, which they are.

aml said...

I am curious about the "Two Building Solution" of having a similar Ben Gamla-type charter school for secular studies and even Hebrew language and then a comprehensive (much better and beyond anything the other denominations do) yeshiva-type program that runs outside of the charter school day. I think we really need to think outside the box about this. Vouchers won't work- we know that already.

I realize there are some parents who wouldn't even consider this, but I know many who would be willing to try this if say, there were a really robust Jewish education program- perhaps a before-school program AND an after-school program. Maybe a program that includes Shabbat morning like many of they ultra-frum schools in Israel...

We have to be more creative (and courageous) about this.

baruch said...

Dave - thank you for your honesty - we are talking two diffrent languages here - if I did not care if my children observed the torah or remained jewish - offcourse public school is the cheaper better option

to zach kessin

here is the problem - private school is not affordable for 95% of the orthodox community - it is a product that only the very rich can afford in the general non-jewish community - therefore we wish our tax dollars be used to educate our children in an environment where they can remain jews -

(the following is if your children attend PS)

just as your tax dollars are used to educate your children in the secular humanist and somewhat hedonistic education you have chosen for your children - we want our tax dollars to educate our children in a moral torah environment - you have choice - we want choice - DO NOT ASK ME TO SPEND MY TAX DOLLARS TO EDUCATE YOUR CHILDREN WHEN YOUR TAX DOLLARS WILL NOT EDUCATE MINE

I suspect that you are either non-orthodox or extremely wealthy and therefore do not share the same concerns of the readers of this orthodox economic blog - This blog deals with orthodox jews trying to remain orthodox and not economically bankrupt - of what possible interest could that be to you

Zach - If your children indeed attend public school - I wish you well - It is likely that your grandchildren have a 50% chance of intermarrying and 0% chance of being observant

Dave said...

DO NOT ASK ME TO SPEND MY TAX DOLLARS TO EDUCATE YOUR CHILDREN WHEN YOUR TAX DOLLARS WILL NOT EDUCATE MINE

That's not how taxes work.

People without children pay school taxes. People whose children are long since grown pay school taxes. People who choose to home school pay school taxes.

People who don't live in flood zones pay for Federal rescue efforts.

People who don't live in cities pay for the Federal funds that go towards mass transit.

If you only pay for what you use, that's a fee, not a tax.

I'm aware that you don't want to take advantage of the public schools. It is only when your desire translates into "so everyone else should pay" that I have a problem with it.

If your children were prevented from going to Public Schools, you'd have a case. But you aren't, you just choose not to send them.

Zach Kessin said...

Baruch.

1) I am orthodox, and I don't appreciate the insults thank you very much.

2)I went to public schools at least for some of my childhood, and Jewish schools for none of it.

3) You have a choice, you choose not to send your children to public schools, if you do then tax dollars will pay for their education, you made the choice of your own free will to do otherwise.

I very much share the concerns of the readers of this blog which is why chasing phantoms bothers me. The Orthodox community has been pushing vouchers and the like for more than 40 years ad in that time has gotten exactly no where. Its time we admit that it is not going to happen and come up with Plan "B".

When It comes down to it this will not be decided be you or me but by the various state legislatures. You can try talking to them but I expect that the tax hike that would be required to fund Jewish, Catholic and other religious schools would be a non starter. Instead of insulting each other maybe we should talk about methods of solving this before the community goes broke? This is not about what we what we can or can not do. State funding of Yeshivot in the USA is in the "Can not" Column.

Bankruptcy will not do wonders for our children's state of mind. If nothing else chapter 13 bankruptcy rules limit a family to $1500/year of school tuition (per family not child) or at least that is my understanding.

It is my understanding that the Bostoner Rebbe went to Boston Latin school as there was no Jewish school in Boston at that time.

tdr said...

re: the Bostoner Rebbe

Perhaps his experience in Boston Latin is what motivated him to start Torah Academy in Brookline.