The problem is this solution may be far worse down the line.

If the problem is falling home prices, leading to the mortgage securities falling in value (and being unattractive to the $3 trillion in private equity on the sidelines) then we need to either prop up prices or allow this deleveraging/price discovery process continue.

The only way I can see housing prices propping up is if Americans are permitted to invest a percentage (25%, 50%, 100%?) of their 401(k)s, tax-free, into their homes. You could tap those assets for use in down payments, tax-free which would stabilize the housing market and get private equity off the sidelines. The banks would start lending again and away we go.

I can also see this picking up a populist twist..."Why give Wall Street all you retirement money to put in stockjs and bonds when you could put it into your home."

Now, I'm not advocating for this plan, I think it brings inflation, a second housing/credit bubble and long term liquidity problems for individuals asthey try to tap the resources in their homes for retirement. But it could work...at least short term.

That's as creative a reasonable solution as I've heard.

I wouldn't do it. My interest rate is so low that the mortgage is practically free and I have more confidence (maybe misplaced) that the market will go up faster than my home value. That's based on historical values of real estate, which barely beat inflation.

The "tax-free" angle is inviting but I still wouldn't do it.

Uh, that's what helped get us here in the first place.....

But would people want to invest into a falling market? Also, you'd be taking your investment out of higher return equities into lower return real estate at a time when equity dropped 30% YoY.

I think that private equity will start pouring into financials shortly.

Agreed 100%. I'm sure some people would jump at the chance though.

Again, depends on your horizon. For my 401(k), and my son's 529, we're just buying stocks on sale. But the horizon is 15+ years.

If you planned to buy a home and live in it for 10+ years, yeah, go for it. Otherwise, it may not be worth it.

Personally, I'd do it, if I could get close to my purchase price on my current place. This would be to accomodate my expanding family (and have room for Mom). Live there 15 or so years until I could swing the Bud Foxian place in the city I always wanted.

If the '89-91 NY real estate crash is any guide, you'll have your Bud Fox East River view much sooner than that.

Most 401k's can already be tapped without penalty for this purpose, up to a certain amount anyway, but it has to be repaid. I see the point of "investing in yourself" and it's an interesting thought. However knowing people, if they had the money in their 401k and realized they could get at it without penalty, it wouldn't be long before people would start flipping houses ... almost "laddering them"....ending up with huge mortgages and no 401k. Kind of like where we are now.

It's really a cultural thing to contend with on the human side, and on the lenders' part they have to realize that lending to greedy people who can't afford it is bad for their bottom line. Unfortunately the precedent set last week gives them 700 billion reasons to think otherwise....

What's $10k going to get you and it's only for a first time home purchase?

Why would you want to sink part of your retirement money into an illiquid asset? It may be fine when you're younger but how is it going to generate income (which is the sole purpose of your retirement accounts) when you're retired if it's in your home? Am I missing a step in your plan bills_fan?

Chef, its not exactly "my plan" and I admit it has a lot of holes. Also, I don't necessarily think its a good idea. You raise a good point that I raise in my original post, regarding lack of liquidity later on.

But as far as solutions to the current problem, this one is as good as any I've heard recently. It brings with it many other problems, but it does address the root cause of the current problem...falling housing prices.

Sorry, but I have a tendancy to respond to posts too quickly before I read the whole thing.

The root cause of the current problem is overinflated housing prices. F**k "propping up" the housing prices for a short-term fix because it will only make it all the worse when it's time to pay the piper.

We Americans (primarily the scumbags in government and the executives in big business, but we consumers have to share the blame too) have created this mess because of short-term thinking. I'm sick of it and scared to death what it's going to mean to our children's future. It's time to stop acting like children with no patience, swallow the bitter pill, and put our financial house and economy back on solid ground.

It's a good thought experiment. I don't think that it would cure the problem if done because many wouldn't tap it (like me). But it would probably infuse some money into the mortgage market and make some difference.

None of the solutions: suspending mtm, bailout, strengthening the dollar, this idea--none will fix all the problem. Combined, many of them will right the ship.

The biggest difference between the current fiasco and certain earlier ones is how proactive the government and private sector is being in clearing the hurdle. Certain cooler heads are trying hard to take care of the problems so this doesn't last long. I heard several European commentators on Bloomberg today saying that what the US is doing puts the Eu countries to shame, and the EU countries are going to be much harder hit by this crisis, for many reasons, but not the least of which is that they have been slow to react.

My econ background is The Wall Street Journal daily and Forbes weekly but the above makes sense to me.

The EU doesn't have a central bank ...

Right and worse, they share a common currency, which creates a ton of problems when managing this mess.

I guess the European Central Bank should change its name to avoid any confusion then...

You're right, as it's a central bank in name only, it should remove its name to avoid any confusion.

How about that Euro as a reserve currency?

Problem is that no one, absent extreme circumstances, will sell a house if they lose their entire down payment and have to dig into their pockets at closing to pay off a mortgage. You will continue to have a frozen market, expecially for anyone who bought a house (prime, 30 year-fixed included) after 2003.

Right now, if I sold my house (which has a 30 year fixed mortgage, with 21% down payment), I'd lose most of my down payment, and if I had to pay a broker to sell, would have to dig into my pocket at closing. So, you can forget selling and then buying another house. And this is not in California/Florida/Nevada, but NY, a more stable market.

A home being one's largest asset (in most cases), until you stabilize housing prices, you will not see a healthy market of buyers and sellers. Sellers won't sell and take that kind of personal loss (which incidentally cannot even be written off your taxes, as a primary residence is excluded from long term capital loss calculations).

File under 'Tough Schit'.

When you say 'stabilize' you mean 'prop up'. Housing must correct to help fix this mess. If people overpaid and risk losing down payments when they want to sell, oh well. People bet wrong on stocks and lose money all the time, why is housing different? There were many people that recognized the housing bubble and put off buying a house at inflated prices and rented instead. Why should they be penalized for doing the sensible thing?

Who are you going to convince to buy your 'stabilized' house with the funny money sub-prime mortgages gone and lenders tightening standards even for those with good credit? If we relax tapping 401ks for home purchases as you propose, do you really think the average schmo is going to feel confident in doing that to buy a house/asset that could still fall in value as much if not more than the 401k itself?

Your best case scenario- Congress tells the people "treat your 401k like a normal savings account, empty the whole thing now if you want with no penalty to buy a house." The people respond and do just that and pump all that money back into the housing market. How long does that last until the 401k money slows to a trickle and people realize that, once again, housing has become overinflated? Aren't we now back where we started? Aren't more problems created because while people were pumping money into buying their house their 401ks were nearly empty and didn't realize the benefit from the market turnaround the once again inflated housing market helped create? Now housing values are falling again, the stock market is falling again, and people are getting doubly screwed because the value of their 'asset' is falling and the 401k account isn't anywhere near it should be for comfortable retirement.

I still say it's time for long-term thinking and solutions. Short-term/instant gratification is what has gotten us into this mess, but I'm just a caveman, your world frightens and confuses me.

Uh, it wasn't my plan. And, who said $10k? Back in the 1990's my 401K allowed up to $45k loan or more for a primary residence...in WNY where real estate is cheap.

And I wasn't endorsing it. I just didn't shoot it down. It's an interesting concept but I personally wouldn't consider it in my circumstances. Unlike you though I don't feel the need to decree that it's bad idea just because it doesn't work for me.

First sentence was a response to your comment about taking money out of a 401k for a home and the second comment was to bills_fan not you. But you are correct you can take more than $10k from your 401k, $10k is from an IRA, my mistake. However if you do take that loan from your 401k and then you leave your job or are let go before you pay it back it becomes a distribution and the amount left is taxed and penalized 10%. But here's the kicker on taking money from your 401k. You pay it back with after tax dollars and then that money is taxed again when you withdraw at retirement. Being taxed once is bad enough but taxed twice is worse. I've always felt that 401k loans should not be allowed.

And the reason I decreed it a bad idea wasn't because it doesn't work for me, it doesn't work for anyone. Once you've put your 401k money in your home, how do you get it out to generate income at retirement? You can't sell a bedroom to finance your vacation at retirement.

Just out of curiosity, what are your clients percentages of profits YTD? 3 years? 5 Years?

Why couldn't they adjust the taxation rates if people followed this plan, as surely taking money out of the government's hands is a good idea.

FWIW I really don't know enough to say whether this is a good or bad idea. It does seem a bad idea as it gives people money to spend, when if perhaps they saved, they wouldn't need to touch their retirement.

My clients percentage of profits? Well it's 100%....let taxes of course. If you mean ROR it varies depending on the client. I have no idea what you're talking about with regard to the rest of your post.

I'm a bit curious here, and if you don't mind expanding, let me ask a question:

The only person I've ever really heard any info about 401ks and loaning money from it was my father, who seemed to indicate it was a pretty good deal. His thinking was that you pay yourself back the interest, rather than pay it to a bank. Is there a reason why that line of thinking is faulty?

That is completely offset by the fact that you pay taxes (which will probably be higher than the interest you paid) twice on your loan payments. They never talk about the double taxation of the loan payments. And don't forget, you lose your job or get laid off before the payments are made that loan is now a distribution which is taxed and penalized.

Ahh... I knew you had said the double taxation thing in the last post, but the key was that rate would be higher than the interest rate you'd get for the loan (that was the part that wasn't clear for me).

Interesting, I'll have to look into it. Thanks.

But....and there's always a but, you will be compounding off your interest you paid so how long that money is going to be growing has to figure into the equation.

So don't sell your house. A generation ago most people lived in the same house for 30 years.

And when the supply dries up, the inevitable increase in demand will start to push prices again.

I suppose that's effected by the time you have left. It might be more beneficial to take out the loan earlier in your life, so you have a long time to build wealth on it, versus taking it out closer to retirement.

But most Americans change jobs quite often so they run the risk of leaving the job with the loan intact. Uncle Sam will want maybe 40% (taxes and penalties) unless you can pay the loan back within 60 days.

Jesus..... 40%?! No wonder you're a Republican.

Speaking of which, why is turnover so high? Do not enough companies provide ample room for advancement, or is it more of a case of people being idiots?

I guess I'm about to find out, starting in the private sector in a week and a half....

It depends on the industry. When I worked in the kitchen I had probably 20 jobs in 20 years. It's the best way to learn the ropes and burnout is very high. I left the kitchen and worked for a company as a manager for contract food service for five years and have been at my current job for nearly eight and plan on retiring there. So 20 jobs is the first 20 years and 2 in the last 13.

We do lots of recruiting and I'm amazed at how short people stay at their jobs, I thought is was just me. I think the reason turnover is so high is because there are a lot of dead end jobs and lots of managers have no idea how to motivate and keep people interested in what they do.

Oh and BTW I'm not a Republican.

Interesting, I thoguht one of the reputations of the private sector versus the public sector (outside of the stereotypical middle management job) was the ability for advancement. At UT, there wasn't any, one of the reasons why I'm better off with the new job.



I had a feeling you were going to say that.

I hate to disappoint.

I'm really not planning to at this point, just used it as an example. Although with the ever expanding family/possible Mom moving in, a little more room would not be a bad thing.

It is, but that usually involves moving to a new company. No matter where you work, chances are the person above you has Peter Principled out. Thus, since there more jobs in the private sector, you have more chances to advance beyond the Peter above you.

I'm opening a region for my company up in San Francisco first quarter of 2009. I have to sell my house and I'd rather not but if I held on to it and rented it out I probably would be a bit negative. That move up north will reduce my income a bit so I'm not sure if I will be able to afford to go a bit negative. I'll probably sell, go to cash for a year or so and see where the market takes me.

Interesting. One of the benefits of Rackspace seems to be how much they spend on educating and moving their people up through the ranks. Is it only such a rosy picture because of their recent growth, and it'll stop soon?

Life's a bit different in a young company and as long as it survives, it will offer room for advancement. But like death and taxes, unless you own your own shop you will hit the Peter ceiling.

Fixed.

Appreciate the info.

Perhaps I phrased that poorly. What is your average rate of return for your clients. Say ytd, 3 year and 5 year. You really can't look up those figures? The rest of the post was directed to someone else.

No I can't look up those figures. I manage millions of dollars in various portfolios in all asset classes from 100% bonds to 100% equities, fixed and equity indexed annuities, REITS and everything in between. Sorry, I don't manage with a cookie cutter. I'm sorry but what are you getting at with your question?

Odd, I thought you were in managing individual accounts that I would have assumed normally included ror (since you insist on being pedantic) in any sort of advertisement for your services. I was simply curious as to how well your expert management had performed. I wanted to know how your overall services did. Since you evidently are far past that point, one can only assume that those beneath you knew even less. So what is the name of your company so I can avoid it in the future?

What the hell are you talking about advertising rates of return. You show me any advertisement where an adviser lists his ROR for particular clients. ROR of particular investments yes but you didn't ask for particular investments. You asked what ROR my clients had. I can't give you that because they're all different. Please do avoid our company, that's fine by me.

You mean your company doesn't break it down further than what they give the actual investor? If you advertise 10% on this particular mutual fund, 12% on this slightly more risky one, 6% (or whatever) on T Bills, and then you break it up 33/33/34 for a particularly simple example, what is the frigging rate of return? A spreadsheet can do this math.

Fine and fair enough, has anyone made a profit over the last 3 years? If so, what were they in? Have any of your clients made a profit? 5 years?

One more time, I don't create the same portfolio for all my clients. They're all different. They all have different goals and time frames. Some are saving for a home in 5 years and some are saving for retirement in 25 years some have been retired for 20 years. Some are saving your their kids college in 8 years. Is that too hard for you to understand that I can't quote you exact rates of return for clients. I can quote exact rates of returns for specific investments but that wasn't your question. My frigging rate of return depends on the frigging particular investment and I've got dozens of allocations out there.

Has anyone had positive returns the last 3 and 5 years. Of course. Not the greatest but yes they've been positive.

I am pretty sure my retirement stock fund return the year of the war and after (2003 and 2004) was pretty high... In the 20% range... No? I forget.

Not sure, it was the opposite the years after 911 (2001 and 2002).

Again... I forget.

Yes, 2003-2004 equity portfolios were in the high teens low twenties.

I understand there are different portfolios for different clients. But...

Well, if you have dozens of allocations (say 100 for simplicities sake) you could plug them into a spreadsheet easily enough. Might take you a bit, not sure if it would take you as long as you spent talking to me as you could simply pick representative investments and see where they ended up in a 3 year period, guesstimate from there.

My guess is you are scared. You know the actual figures and you know how bad they are. You seem to be dodging the issue.

In any case, I am sorry I gave you a hard time. Sorta nervous myself to be honest.

I can totally get you the annual rates of return for each fund in my TSP (fed) retirment fund since the inception back 20 years ago... Of course through the years new funds were added... I can get you all raw data... But, not now... I am on a slow dial up connection at home.

Actually... It is all public... Go to:

TSP (Federal Empoloyees Retirement)

Again... all very public... Just click on rates of return...