Paid-Off House as Piggy Bank
To the already long list of unintended consequences of zero percent interest rates (“ZIRP”) — squeezed savers, flush investment banks (and bankers), volatile commodity prices, etc., etc. — add one more: lack of (home) Seller motivation, especially amongst long-time owners with little or no debt.
Why the lack of motivation?
Because they don’t have any good investment options for their sales proceeds — a phenomenon economists refer to as “lack of opportunity cost.”
Bleak Investing Landscape
According to Barron’s, “the average money fund these days pays just two basis points, or 0.02%. A third of them pay nothing at all.” (see, “Broken Forever?”; 1/7/2012).
After taking investors on a terrifying roller coaster ride last year, the stock market ended almost exactly where it started — a phenomenon I call “risk without return.”
Investors who can’t stomach such risk can turn to 10 year U.S. bonds paying less than 2% — an almost certain loser if the economy experiences any inflation at all over that period.
Against that backdrop, the house you know and love — and have paid for! — suddenly doesn’t seem like such a bad investment option, after all.
Or non-investment option.
Risks and Costs
To be sure, there are risks — and costs — associated with such a strategy.
I can think of two in particular:
One. Housing prices will drop more.
While no one can rule that out, after an almost 35% drop nationally since the 2006 peak, it certainly appears that the biggest drops are behind the housing market, not ahead of it.
The latest numbers from NAR, Case-Shiller, etc. seem to confirm a market that’s bumping along the bottom.
Two. Carrying Costs.
If you’ve paid off your mortgage, that leaves just property taxes, and maintenance and repairs.
The Ultimate Mattress
Depending on how big your home is, its condition, and which municipality you live in (like Minneapolis!), those costs can be considerable.
But remember, we’re talking about older, more affluent homeowners who can shoulder those costs.
Add the wear-and-tear of selling, and the stress of finding a new home after years (or decades) in place, and suddenly, lots of older would-be Sellers who have the option of staying put . . . are.
Or, aren’t showing much willingness to price realistically (which is effectively the same thing as deciding to stay put).
Bottom line: (at least some) Sellers’ inertia has never been higher.
No wonder housing inventory in the Twin Cities and many other markets is at a six-year low.
And not a few serious Buyers are having a hard time finding what they’re looking for at the moment.