The real estate and mortgage industries are trying hard to convince us that NOW is a good time to buy a home. They use low mortgage interest rates and the soon to expire First-time Homebuyer Tax Credit program (which I qualify for since I’ve purposely been a renter for the last 6 years) as their rationale.

Don’t expect unbiased advice from salespeople! What most won’t fess up to is that if I (or you) buy a home now, we’ll likely be throwing our precious money away because home prices are still under great pressure. I’ll wait until the knife stops falling, thank you very much.

We are done with subprime resets but… pay attention… there is a second wave of mortgage resets to endure. What is a mortgage reset? It’s when the homeowner, who bought a house with a low “teaser rate” and planned to refinance when the house price went up, gets a new payment that is far higher (not always, but usually). Many homeowners can’t afford these resets, especially with unemployment and underemployment rates at these levels. Lenders are cautious and tightening their underwriting guidelines so refinancing may not even be possible for many borrowers.

The first wave of resets was subprime. The subprime wave is over. Whew! That hurt! But Alt-A and Option ARM resets aren’t over and combined, they represent a much larger category of mortgages than subprime. Most of these mortgages are already underwater: the home has negative equity; the home is worth less than the mortgage owed. The combination of resets plus the underwater status will likely add fuel to defaults and foreclosures, putting yet more downward pressure on home prices.

Some argue that the problem with adjustable rate mortgages resetting to higher payments isn’t as important now because many of those loans defaulted early. Even so, we still face the major problem of shadow inventory: distressed mortgages facing foreclosure and bank-repossessed properties that have not yet reached the market. At the current rate of sales, it could take almost 9 YEARS to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years (according to LPS Applied Analytics).

Another knife that has the potential of slashing home prices further is the increasing prevalence of walkaways (strategic defaults): the decision by the borrower to stop making payments on a mortgage despite having the financial ability to make the payments. Walkaways happen after a substantial drop in the house’s price. The borrower is underwater so she decides to free herself from the burden of mortgage debt. Once free of the mortgage, she is free to use her income for other expenditures. The borrower, after deciding to not make payments any more, can live free of the costs of mortgage payments until the lender forecloses — which may take the lender from several months to years!

A study in September 2009 from the credit reporting agency Experian and consulting outfit Oliver Wyman estimated that close to a fifth of troubled mortgages in the U.S. involved borrowers who were strategically defaulting. While I haven’t looked for a more recent statistic, I can only guess that this number will climb as more homeowners get mad at Wall Street and as walkaways become less morally and ethically charged.

I’ve been told by countless Realtors that I should buy a home NOW because having been a renter for the past 6 years, I qualify for the First-Time Homebuyer’s Tax Credit. But what do you think will happen to house prices once the tax credit incentive expires? I’d say houses will not sell as well as they have lately (with the credit artificially propping the market up) which will increase the supply of homes on the market… and push down on prices.

I’ve also been told by Realtors that I should buy a home NOW because mortgage interest rates are so low. But I don’t worry about rates because I have the cash to purchase our next home outright if the interest rates move up. Even if I did need a loan it wouldn’t change my mind because as Patrick Killelea astutely points out,

It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

• Your property taxes will be lower with a low purchase price.
• A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life.
• As interest rates fall from high to low, house prices increase.
• Paying a high price now may trap you “under water”, meaning you’ll have a mortgage larger than the value of the house. Then you will not be able to refinance because there you’ll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.

Additionally, if interest rates rise, the number of borrowers who can qualify for a higher mortgage payment will drop. Less qualified buyers in the market means… you got it… more downward pressure on home prices.

In summary, I see no rational or compelling reason to buy a home right now. 2012 or after? We’ll see!

Note: This post was featured in the most creative Carnival of Personal Finance I’ve ever read — check it out! The Origin of the Piggy Bank by Well-Heeled Blog

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Don't miss anything: Subscribe to receive free email or RSS notifications every time I publish a new blog post. (No spam, no risk, and it is easy to unsubscribe should you ever change your mind.) Follow me on Twitter (@MillionMommyND) where I share interesting articles, opinions, quotes, tips and other bite-sized tidbits relevant to success, happiness and financial freedom almost daily.

Related posts:

1. When Should I Buy a Home? Have We Reached Bottom Yet? What Is The Right Price?
2. Can’t Sell Your Home In Today’s Market? Here Are Some Suggestions.
3. Realtors Might Not Have Your Best Interests At Heart

Wow. Thanks for all the curious/concerned emails lately asking, Where are you? All okay? It feels awesome to be missed :>) I’m fine; just took a blogging break. Actually, I’ve been writing a quite a bit lately, just not here… forums, media inquiry replies and interviews, a book proposal and outline, coaching followups, storybooks with my kiddo… Frankly, my backside couldn’t bear another minute sitting in front of the keyboard! It hasn’t been all writing though — I’ve been having tons of fun too: several house guests, Chinese New Year parties, homeschooling with my voracious little learner, raising and training ten baby parakeets (my hubby calls it our 4-H-in-the-condo project). But I have missed my blogging friends! So without further ado, I will pull some interesting questions from my inbox and respond to them here. Identifying details have been changed or removed. Feel free to add your suggestions in the comments as I’m sure these folks would appreciate alternate viewpoints.

Q: Carolyn asks, “For the past two years I have enjoyed your emails. My savings has grown from an average $1,500 to $35,000. I have committed to saving a set amount but also some unexpected money has come my way which I have saved all of it. I think changing your mindset along with action and education has contributed to my money growth. My next step is to pay my mortgage off early. Any suggestions?”

A: Awesome progress, Carolyn. Congratulations! While I don’t know all of the pertinent details about your financial situation, I feel compelled to share this: In my opinion, paying a mortgage off early is one of the very last steps most should take in their financial life. Why? Because there are many other money matters that take a higher priority. As a general rule of thumb, here’s the order of financial steps I typically recommend:

First: Pay off “toxic debt”: start with credit cards and loans that charge the highest interest rates (because you’ll save money), and those with account balances that hover closest to maximum credit limits (because it’ll improve your credit score). Raise quick cash immediately by selling stuff you no longer need, want or use.

Second: After you’ve paid off all debt balances with interest rates over 8-10%, start saving at least 15% of every dollar earned to build an emergency fund equal to 6-12 months of take-home income.

Third: Once your emergency fund is complete, start investing AT LEAST 10% of your monthly gross income in a diversified portfolio of no-load mutual funds, ETF’s, stocks, bonds. Start with your tax-advantaged retirement account(s).

Fourth: Get cracking on any remaining lower-interest rate (below 8-10%) debt balances.

Finally: Paying off the mortgage would be the last financial task on my list, especially if the mortgage rate is reasonable. Better yet, if I had a home with a mortgage and I was seriously in debt, I’d sell my home to pay off my debt with the equity. Besides, renting is often cheaper than buying!

Q: These days, simply being a (one) millionaire is not enough to be financially free, depending on ones age. Unless universal healthcare is achieved and unless I learn to cut back on expenditures, I think I would need 2.5 million to be financially free. At least. I don’t see that happening unless 1) we inherit a bunch of money or 2) my husband works another 15 years (minimum) AND the stock market behaves. He has a good job, we have a nice, recently remodeled home plus a small vacation cabin, and we have an emergency cash stash. I don’t want to have to buy a new car for a few years because we pay cash for cars and I don’t want to see the emergency fund take a nosedive. Good thing I love my 10 yr. old minivan! Anyway, how much do you think it takes to be financially free? ~K

A: You’re concerned about how many digits sit in front of your six $0′s and how the stock market behaves. Your husband is employed, you have two homes, a car and an emergency fund in place. In many people’s eyes, you already have financial freedom!

There is no one-fits-all magic financial freedom number. To some $50,000 sounds like a dream come true and to others 50 million wouldn’t be enough. To lots of people I’ve come across, simply breaking free from their paycheck to paycheck existence, or the shackles of debt repayment, or sleeping well at night because they have an emergency fund and a contingency plan in place is enough to make them feel financially free. Personal finance is called personal because it is so, well, personal.

Traditionally, many define financial freedom as having enough passive income that you no longer need to work; your passive income covers your living expenses. Funny thing with this definition is that there are so many variables contained within: What do you consider passive? Is it investing in CD’s, stocks, or a business? How about getting paid for “work” that you love so much that you would do it even if you didn’t get paid? What are your living expenses? Can they be reduced substantially? Can some be eliminated entirely? What if you sold your home(s), invested the equity, and moved to Mexico or Thailand or somewhere else where living expenses are dramatically less than in the US? Again, so much of this is personally defined.

My husband and I consider ourselves financially free because our family hasn’t set an alarm clock in years. Whether it be work, parenting or play, we wake with the sun, eager to spend each new day doing whatever we choose. This definition affords us the flexibility we value, therefore, regardless of the exact numbers on our net worth statement, we have “enough”.

Q: CarA writes, “I love your entire story! You’ve made some great moves throughout your life. I’m curious, how hard (or was it all hard) to talk your husband into selling your home? Did he just have complete faith in you? Or was it a joint effort? Just curious because you said so many around you were skeptical of selling your home to rent.”

A: Ha! It was INCREDIBLY difficult for my husband to jump on board with my plan. I’d crunch the numbers, craft reams of brilliant spreadsheets and grinning from ear to ear, I’d enthusiastically share my financial freedom plan. He’d remark (skeptically), “If it’s really that easy, why isn’t EVERYONE doing it, Jen?” I think the biggest obstacle for him was getting over what everyone else would think about our choice to rent. We sold when the market was hot and everyone thought real estate was THE best place to invest. Remember the days when the mantra was “real estate prices may flatten but they never go down”? Our friends and family questioned my logic. Fortunately I’m not easily deterred and my husband trusts me. But it took a lot of effort on my part to show him the numbers in such a way that he got it, too. And he had to get over his concern about what others thought about it. I gave him the time and space to deal with those issues and I reminded him that renting didn’t need to be a permanent choice.

Today he recommends renting to all his friends. I think he loves looking so smart for getting out before the market crashed :>)

Q: I follow your blog and love all the insight you share with us. Lately, there has been a lot of talk about inflation and hyperinflation heading our way in 2010. Can you offer us some insight, tips to prepare for this? Angeli

A: I wrote about this topic in June 2009 here: Hyperinflation or Prolonged Deflation? Coping and Investing Strategies For Either Scenario. The market is being so manipulated that it’s anyone’s guess what will happen, but I still think that inflation is a ways off; deflation is our first concern. Also, check my Resources page for links to web sites that focus on the economy. I follow many of these debates and only one thing is clear to me — no one really knows how to get us out of this mess. My primary goal at this point is my personal capital preservation.

Q: This spring, I will be a new college graduate. Like thousands of others, I’ll be facing a brutal job market. Any tips? Lisa

A: Get your foot in the door, Lisa. Work to get noticed rather than to get paid. Ideally you do this while pursuing your degree — if not, start now:

• Shadow those who are doing what you want to do so that you see first hand what is involved in your chosen field.
• Hook up with a mentor who can show you the ropes and introduce you to others who can hook you up with a job.
• Get noticed by those in your field: volunteer
• Negotiate an unpaid apprenticeship: offer your services in exchange for hands-on learning experiences. This is how I learned how to train dogs, teach classes, and became a professional dog training instructor and business owner.
• Get creative: find a problem, see it as an opportunity, and present the solution. Create your own job or business!
• Take the time to brainstorm, journal, and bounce ideas off of supportive “can-do” people.
• Take an honest look at your lifestyle and eliminate or cut back on anything that is superfluous. Create some financial breathing room.

Readers, I welcome your viewpoints and advice in the comments. Please send me your questions, too, and I’ll respond to more. Thanks!

~Jen

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There is a common misconception that most people are either right-brained (creative, intuitive) OR left-brained (logical, analytical). But this isn’t true. We are born with two brain hemispheres. It’s just that our society tends to place a higher value on left-brain skills such as language, logic and math. Unfortunately, this left-brained focus can squash our creative, right-brained attributes and limit our success in life.

Experiments show that most children are highly creative (a right brain function) before entering school. But only ten percent of these same children rank highly creative by age seven. By the time we are adults, high creativity remains in only two percent of the population.

What a shame.

We require BOTH brain functions to optimally succeed. It’s not an either/or thing. Take Albert Einstein for example: most would assume that Einstein was genius because of his left-brained reasoning. However, an examination of his notebooks finds that he credited his greatest scientific insights not to left-brained logic, but to his right-brained creative daydreaming instead.

How can we innovate enough new products or services and create enough new startups to achieve economic expansion if our society, our schools, continue to curb our imagination and punish our daydreaming? Creativity is the fuel that the left-brain needs to power the necessary actions. The right brain gives us the “why” and the left brain gives us the “how.”

Those who cease to daydream can’t see opportunities even when they’re right in front of their nose. You’ve heard me say this before and I’ll repeat it again: Big changes start with a thought, not an action.

Take a look at the following list of brain functions. Can you see how success is limited when only 50% of our brain gets regular exercise?

Do you dislike your job? Are you feeling stuck in a rut and powerless to do anything about it? Perhaps you know what you want to do but your big but problem gets in your way. Is your logical left side telling you “this will never work”? If so, remember that analysis and judgment (left brain functions) can get in the way of creativity, insight and imagination. That’s why when you brainstorm, it’s crucial that you suspend judgment while generating ideas.

I urge you to join me and re-ignite your imagination. Here are a few ways to give your oft-neglected right hemisphere a little love:

• Take a few minutes and do this fun, enlightening and magical exercise: Find Your Zingers
• Get inspired by listening to an audio interview with Sir Ken Robinson, witty author and advocate for increasing creativity in education and the workplace (interviewed by The Kathleen Show – check out her other interview content too, it’s terrific)
• If you like what you hear from Sir Ken Robinson, his books should inspire you further: The Element: How Finding Your Passion Changes Everything and Out of Our Minds: Learning to be Creative

A toast! To our right brains!

Cheers,
Jen

Don’t miss anything: Subscribe to receive free email or RSS notifications every time I publish something new. (No spam, ever!)

Don't miss anything: Subscribe to receive free email or RSS notifications every time I publish a new blog post. (No spam, no risk, and it is easy to unsubscribe should you ever change your mind.) Follow me on Twitter (@MillionMommyND) where I share interesting articles, opinions, quotes, tips and other bite-sized tidbits relevant to success, happiness and financial freedom almost daily.

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1. 3 Essential Components to Financial Success
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