Competitiveness and Mortgages: The WSJ Chimes In

The Wall Street Journal's columnists have clearly reading the same things that I have been over the past few days. Alan Murray today picks up on the report showing that New York is still globally competitive, while Jonathan Clements looks at the advisability of having mortgage debt and investments at the same time.

Murray buys the findings that things in New York aren't as bad as some (cough)Paulson(cough) might think:

Wall Street moguls made much of the statistic that only one of the 20 largest IPOs in 2005 occurred in the U.S. But that oft-cited statistic provided a pretty narrow and misleading window on Wall Street's overall health. Moreover, it was distorted by the fact that some of the largest IPOs were former state-owned enterprises in China and Russia that listed elsewhere for nationalist reasons, and that might have had a hard time meeting U.S. listing standards anyway.
Last week, [Treasury undersecretary Robert] Steel himself cited a compelling set of numbers showing that the U.S. financial markets remain "second to none."

Clements is a bit more contentious:

Suppose you have $300,000 in stocks and you want to buy a $300,000 home. You could sell your stocks and pay cash for the house. But you will likely fare better by putting, say, $100,000 of your stock money toward the house and funding the rest with a $200,000 mortgage.
Result: You control $500,000 of stocks and real estate, 40% of which was bought with borrowed money. As long as your assets generate higher returns than your mortgage rate, the leverage is working in your favor.

I can't concur, not in a broad-brush kind of way. I daresay that there are individuals for whom this kind of leverage does make sense -- mainly people with a greater than average risk appetite. But I would say that most people buying $300,000 homes don't fall into that category.

The key here is Clements's throwaway clause, "as long as your assets generate higher returns than your mortgage rate". Which basically means "so long as the trade is profitable, the trade is profitable". The problem, of course, is that asset prices in general are at all-time highs, and great oceans of global liquidity are chasing ever-lower returns. If you have $300,000 in stocks, it's entirely conceivable that those stocks will return more than your mortgage rate. On the other hand, it's also entirely conceivable that those stocks will go down. If you assume that your bank is smarter than you are, and that they know what they're doing when they're lending you money rather than investing it in the stock market, then you're better off just buying the house outright.

Just think what would have happened if you'd made Clements's trade seven or eight years ago, before the dot-com crash. Unless you could cope with a large chunk of your investments being wiped out -- even as the house you could have bought outright retains its enormous mortgage -- you're better off playing safe and just buying the property.