The Deadman Night Rider

A forum for evening students of the SMU Dedman School of Law and other outlaws..

Thursday, June 30, 2005

I don’t know who the blogger for Dispatches from the Frozen North is, but I’d like to buy him a beer sometime. Check out this entry regarding an earlier post on the Volokh Conspiracy concerning the increase in interest-only mortgages.

On the Volokh site, Todd Zywicki makes the case I’ve heard a lot of financial planners put forward – that paying down mortgage principal is a dead use of cash that could go toward other investments that generate return. This short, elegant post from Dispatches points out the flaw of focusing too tightly on rate of return and ignoring its context in the full scope of life – we don’t live in a spreadsheet.

Dispatches is correct that most people don’t think of their house as a purely financial asset, but I think that it goes even further than that: most people don’t think about residential real estate in anything resembling a rational way. Sentimentality is the driving force with finances playing the role of limiting factor – as a friend of mine quotes his real-estate agent cousin “Always buy as much house as you can afford”. The recent history of prices has allowed this attitude to masquerade as good fiscal sense, and interest-only mortgages are simply the fullest extension of the concept. And that’s the danger – people aren’t using them in the detached, analytical way Zywicki describes to diversify their assets, they’re using them to load up on house – as Dispatches notes, classic bubble behavior.

If anyone still thinks we’re not due for a correction, count how many of your friends and family are real estate agents…


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