The answer to the first question looks something like what the president and his top money and housing men offered Thursday. The government's new "teaser freezer" plan would extend for five years the artificially low introductory rates on mortgages made to some buyers with spotty credit between January 2005 and this past July, a period that contained the real-estate market's bubbliest months. A typical such mortgage carries a teaser rate of 7% to 9% for the first two years, and an ordinary rate of 9% to 11% thereafter. Without government intervention, monthly mortgage payments on these loans will increase as much as 30% over the next two and a half years, forcing vulnerable borrowers to fall behind on their payments and lose their houses. The president's plan will keep some of these people in their homes, no question.

But it will also make them poorer. That's because if two percentage points on a mortgage rate decides whether someone can afford to keep their house or not, then they can't afford to keep their house. They're paying too much. By continuing to pay too much, they'll divert their would-be savings to an asset that's likely twice as expensive as it should be right now, and even if it's not, tends to produce poor returns over long time periods.

In April I argued that house prices have swelled since World War II to the point where renting, for most people, now makes far more financial sense than buying. The ratio of house prices to rents has more than doubled during that period, as has the ratio of house prices to incomes. That's because the government has worked in earnest during that time to make houses more affordable by subsidizing down payments. In doing so, it has increased demand, and with it, prices. Ironically, affordability efforts have made houses more expensive than ever before. And we're still pushing them. The Federal Housing Administration still talks about owning a house as a key part of the American Dream, while the less-math-inclined members of my profession still talk about renting as "throwing money down the drain."

I throw money down the drain. I live in a modest apartment in a working-class neighborhood of New York City, despite having enough money to afford a splashy apartment or a house. I do that because I want to keep my monthly housing expense below 10% of my gross income. And I do that because I want to have plenty of money left over each month to buy shares of businesses. The ownership structure of the box I live in has nothing to do with my American Dream, but growing rich does. As I explained back in April, stocks tend to return 7% a year after inflation over long time periods, while houses tend to return zero. So at today's prices, I'm keen on renting the latter while owning the former.

Once upon a time in America, before the FHA, we didn't need the government to intervene in the decision about whether we should buy, or continue to own, houses. Amazingly, most Americans who bought houses at that time didn't need mortgages to do so. That's because prices were much more reasonable. Buyers who did borrow typically put 40% down and borrowed for five years. Those terms are unaffordable for most today, because while things like clothing, cars and food have grown more affordable since World War II, houses have become a bad deal.

But prices are on their way down, and I see that trend continuing for a decade. That's not to say that house prices will fall for a decade straight. In fact, they rarely fall from one year to the next. But I think they'll stay flat for most of the next decade, thereby giving rents and incomes a chance to catch up to historic ratios.

If I'm right, the government isn't doing any favors for recent house buyers who are struggling to afford their payments by guaranteeing that those payments will keep coming at their current pace for five years. It's merely forcing those same homeowners to divert too large a percentage of their income to a no-growth asset, while leaving little or nothing to invest in a fast-growth asset. The government isn't doing that because it's mean. It's doing that because it honestly believes it knows better than its citizens how they should allocate their money. What's particularly sad about that is that the government has overspent its own checking account by $1.6 trillion since 2002, thereby increasing the national debt by as much. On Thursday, struggling homeowners got misguided financial advice from a source that can't even pay its own bills.

Published by Smart Money  Magazine Oct 2008

If you have not owned a home in three years, you qualify as a first time home buyer. If you buy a home after April 9, 2008 and before July 1, 2009, you qualify for this credit. Call your friends who just bought a home since April 9th and tell them they may take $7,500 off their tax bill if they qualify. It has to be your principal residence, so rentals do not count.

The tax credit is 10% of the cost of the home, up to a maximum of $7,500. This is not an additional deduction that lowers the amount of income to be taxed, it is a tax credit. In other words, you take $7,500 off your tax bill. But there is a catch; the credit you receive now is actually an interest-free loan that must be repaid.

The loan has no interest, and will be paid back over 15 years. You get the credit on your 2008 taxes, but you start paying it back on your 2010 taxes that are due in 2011, so you get at least two years without a payment. You pay back 6.67% of the credit each year, so for a $7,500 credit the payment is $502.50 per year. If you stay put for 15 years, you pay it off with no interest.

What happens if you sell the house? You pay the balance back at the closing. So, you get $7,500 now, and pay the rest of it back if you make money on the sale of your house. What happens if you do not make enough money when you sell your house? They forgive the rest of the debt.

Other restrictions stipulate that you have to buy your first house in three years before July 1, 2009, not have super high income, not use bond financing and buy anywhere in the US.

If you'd like to learn more about this program, please call me!  You can also get further information from my website.  Go to For Buyers under Suggested Reading and I have an article with more details.

Home prices are one factor in determining your cost of ownership, but so are interest rates and financing availability. Even though interest rates have gone up in the last six months, they are still near historic lows. Since your monthly mortgage payment is a combination of paying down your principal and paying the interest owed, if home prices come down a little further but interest rates go up, it could cost you even more to service a mortgage on an identical home!

While a home is a major investment, it is also the center of your personal life. It's important to live in a home that reflects your taste and values, yet is within your financial "comfort zone." To that end, it may be more important to lock in today's relatively low interest rates and low home prices, rather than to hope for a further break in prices in the future.

Please give me a call if I can be of any assistance in determining how much home you can afford in today's market.