Mortgage Payoff and Earthquake, Inflation

Discussion in 'Financial Planning' started by Rapid Robert, Jul 25, 2011.

  1. Rapid Robert

    Rapid Robert Guest

    What happens to residential real estate in earthquake disaster areas?
    Like Kobe (1995) or recent quakes in New Zealand or Japan (again)? Is
    it worse than what has happened with the US housing bubble? Foreclosures
    rampant in damaged areas, that sort of thing?

    I ask because I'm struggling mentally with the question of paying off
    all or most of our mortgage. It's the question of staying liquid or
    sinking more cash into a risky, illiquid asset.

    A few things are bugging me: one, our house is in the SF Bay Area and
    might be damaged, a little or a lot, in the next big quake (could happen
    this afternoon, could happen in 30 years). If the house is a total loss
    and the land loses value, recent events show that simply walking away
    from an underwater mortgage might be a financially wise thing to do.
    Earthquake insurance has never seemed like a good deal (too high a
    deductible), so we don't have any.

    Two, I keep on thinking inflation is going to kick in big time, and that
    means paying back the loan with cheaper dollars and getting higher
    return on cash savings.

    Three, we are in our mid-late fifties, working full & part-time, kids in
    their twenties and still boomeranging, and one of us wants to downsize
    out of this house in the next few years (sell or turn it into a rental),
    while the other does not currently share this desire.

    The mortgage is a $200K loan balance with 14 years left at 4.875%, so
    monthly interest is a little less than $800. This is not all tax
    deductible since our itemized deduction is not much more than standard
    these days. We have about 55% equity in the house at current market
    (which may still go down another 5-10%), and an unused $40K equity
    credit line which is currently at something like 3.5%.

    There is some inheritance money and other cash savings which could be
    used to pay off the mortgage in full, or to pay off $160K and pay off
    the remainder with the equity line (which requires a balloon payment in
    a few years, unless the bank agrees to extend it). We also have about
    $400K pre-tax retirement money all in the stock market, and enough extra
    cash and Roth money to allow for a generous emergency fund. Of course,
    this same money could be thrown into the stock market instead, right now
    it's earning very little interest.

    My mental struggle makes me think I'm maybe being irrational about the
    benefit of staying liquid as a hedge against earthquakes, inflation, and
    the other factors above. Any way to boil this down to a more objective
    calculation? Thank you, and sorry for the long story.
     
    Rapid Robert, Jul 25, 2011
    #1
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  2. Rapid Robert

    Avrum Lapin Guest

    In article <j0hfnc$2if$>,
    Rapid Robert <> wrote:

    > What happens to residential real estate in earthquake disaster areas?
    > Like Kobe (1995) or recent quakes in New Zealand or Japan (again)? Is
    > it worse than what has happened with the US housing bubble? Foreclosures
    > rampant in damaged areas, that sort of thing?
    >


    The rest snipped

    It depends.

    Using the Northridge earthquake (1994) which was centered in suburban
    Los Angeles as an example.

    If a residence was red-tagged (uninhabitable) and the owner had
    earthquake insurance the house was repaired if not it was abandoned and
    usually demolished. If too many homes in a neighborhood were abandoned
    the non red tagged homes suffered loss in property values. Many condo's
    became underwater because of needed repairs. - New Orleans after Katrina
    is another similar example. On the other hand if repairs are reasonable
    people just carry on

    Until the Northridge earthquake, earthquake insurance was readily
    available in SoCAl with reasonable deductibles. Today earthquake
    insurance has a 15% of the face value deductible and premiums are
    several times what home owners insurance premiums are.

    I live about 30 miles west of the San Andreas fault. From the time I
    bought my home in 1971 until the mid 1980's I did not have earthquake
    insurance (I always felt that I was renting my house from the mortgage
    lender). Then when I had equity I bought insurance until 1994 when my
    insurer nearly went under and stopped issuing home owners insurance.
    After I sold that house and remarried and moved into my current wife's
    craftsman style home (with a substantial mortgage) I had the house
    bolted to the foundation.

    A conversation with a local fire chief revealed that most damage in the
    Northridge earthquake was well under the 15% current deductible.
     
    Avrum Lapin, Jul 25, 2011
    #2
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  3. Rapid Robert

    bo peep Guest

    Not really addressing your question, but: since you have significant
    funds available, and you will always need some place to live, perhaps
    you could use some cash to do a seismic retrofit to the house to make
    it more earthquake resistant? If there were to be a catastrophic 1906
    type earthquake, your mortgage will not be your biggest problem.

    There are several companies in the bay area that do this type of work
    - for example
    http://www.bayarearetrofit.com
     
    bo peep, Jul 25, 2011
    #3
  4. On Sun, 24 Jul 2011 23:23:08 CST, Rapid Robert <>
    wrote:

    >My mental struggle makes me think I'm maybe being irrational about the
    >benefit of staying liquid as a hedge against earthquakes, inflation, and
    >the other factors above. Any way to boil this down to a more objective
    >calculation? Thank you, and sorry for the long story.


    IMO one of the best hedges against life's nasties is to be debt-free.
     
    HW \Skip\ Weldon, Jul 26, 2011
    #4
  5. Rapid Robert

    Ron Peterson Guest

    On Jul 24, 10:23 pm, Rapid Robert <> wrote:
    > What happens to residential real estate in earthquake disaster areas?


    Real estate can drop, but it usually won't drop much below replacement
    costs ($100 / sq ft).

    > I ask because I'm struggling mentally with the question of paying off
    > all or most of our mortgage.  It's the question of staying liquid or
    > sinking more cash into a risky, illiquid asset.


    You're better off being more liquid.

    > Two, I keep on thinking inflation is going to kick in big time, and that
    > means paying back the loan with cheaper dollars and getting higher
    > return on cash savings.


    Wages and house values may go up with inflation, but investments may
    not.

    > Three, we are in our mid-late fifties, working full & part-time, kids in
    > their twenties and still boomeranging, and one of us wants to downsize
    > out of this house in the next few years (sell or turn it into a rental),
    > while the other does not currently share this desire.


    My spouse and I sold our home and downsized to move to a milder
    climate (San Francisco would have been better in terms of climate). We
    tried to pick a low tax state with reasonable home prices. We ended up
    with a larger home because competition for smaller homes made them
    less reasonable in price.

    Downsizing is hard because open floor plans in modern houses don't
    allow personal spaces such as offices and hobby rooms. If you're not
    moving far, don't bother to downsize.

    If you are moving far, renting your current home could have problems.

    --
    Ron
     
    Ron Peterson, Jul 27, 2011
    #5
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