Getting financial advice from financial charlatans
Here we find "financial guru" David Ramsey telling his guru-ees: "T]he 30 year mortgage robs your future. […] It simply enabled borrowers to buy more house than they could afford by spreading the payments out over a longer term. On top of that, those homeowners paid tens—even hundreds of thousands of dollars more in interest."
Sigh. First of all, why is this "more house than they can afford"?! They can afford, it, since they spread the payments out! And if Ramsey's argument works, why doesn't it work equally well against his preferred 15-year mortgage?! Don't all mortgages enable borrowers to buy "more house than they could afford" if they had to pay cash?
And doesn't "financial guru" Ramsey have any idea about discounting cash flows? Doesn't he know that the duration on a 30-year bond paying 5% interest is about 16 years, while that of a 100-year bond is only about 20 years? In other words, extending the bond by 70 years barely makes a difference in when the weighted average dollar is paid back?
And let's say inflation is about to kick in big-time, say, rising to 7 or 8%: in that case, you'd prefer to have a mortgage as large and long as possible, since you make money off of it every year.
Yes, in some cases, a shorter mortgage might be better. But Ramsey shows no signs of acknowledging the trade-offs involved.
Sigh. First of all, why is this "more house than they can afford"?! They can afford, it, since they spread the payments out! And if Ramsey's argument works, why doesn't it work equally well against his preferred 15-year mortgage?! Don't all mortgages enable borrowers to buy "more house than they could afford" if they had to pay cash?
And doesn't "financial guru" Ramsey have any idea about discounting cash flows? Doesn't he know that the duration on a 30-year bond paying 5% interest is about 16 years, while that of a 100-year bond is only about 20 years? In other words, extending the bond by 70 years barely makes a difference in when the weighted average dollar is paid back?
And let's say inflation is about to kick in big-time, say, rising to 7 or 8%: in that case, you'd prefer to have a mortgage as large and long as possible, since you make money off of it every year.
Yes, in some cases, a shorter mortgage might be better. But Ramsey shows no signs of acknowledging the trade-offs involved.
Ramsey may be a charlatan, but he is successful because he provides heuristics for people that, apparently, work. Quickly paying off a mortgage or buying a small house is a way for people to save, and it is in a manner that makes sure transaction costs for withdrawal are high.
ReplyDeleteRamsay is some variety of evangelical christian and generally teaches that Christians should avoid debt, based on the bible and probably Shakespeare. He makes a grudging exception for home-mortgages because of the near universal desire for home-ownership in this country. I suppose if pressed, he would have to acknowledge your point about 15 year mortgages.
ReplyDeleteHis basic advice is:
Avoid debt.
Save money over time by making do with less.
Pay cash so that you get a visceral feeling every time you hand over a wad of it.
Rent-a-Center is a bad deal.
Put pre-tax dollars in your 401k in a variety of mutual funds.
His target audience is working people who are financially unsophisticated and generally live paycheck to paycheck and rely on talk radio for financial advice. For example, step one of his plan is to put together $1000 for emergencies. These people shoud not be doing net present value calculations or speculating about future rates of inflation.
They could do a lot worse than Dave Ramsey. For example, they could listen to Peter Schiff.
OK, I forgive him.
DeleteBut for many years, the route to financial prosperity was "Buy the most house you can, and hold on while inflation ups its price and lowers your (real) debt."
The fact it hasn't worked lately doesn't mean it won't work again soon.
Even when real interest rates are positive, they might be less than the rent you'd have to pay by not owning a house. You don't even need to do present value calculations, just give people two expense outgo projections to compare.
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