Advanced Personal Finance

As I pondered the latest dismal housing market news, a funny thought popped into my head.  There’s an old saying that goes, “Never borrow to buy a depreciating asset.”  Usually that means something like a car.  With the current climate, though, it could apply equally well to a house purchase.  That’s a bummer.

We’re buying a new house (from the builder).  When we made our counter-counter-offer, we got the price we asked for…if we closed within 30 days.  We couldn’t do that, so they wanted us to pay the carrying (interest) cost for the extra month.  I’ve had the thought since that we probably could have waited a month and gotten an even better deal than what we offered.  Oh, well.

Anyway, it’s pretty clear that we’re violating that personal finance maxim to avoid paying for a depreciating asset (at least near-term) with borrowed money.

Balancing this thought is my strong belief that inflation will accelerate in 2008.  In a time of high inflation, you should get rid of your dollars as fast as possible.  So if I’m right and we are headed for high inflation, we’ll be paying the mortgage with cheaper dollars each month.  I guess it’ll be a race to see if inflation outpaces the drop in home prices.  That’s a curious situation.

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I’m learning all kinds of marginally-useful stuff since we’re selling one house, buying another in a different state, and moving all of our stuff there.  It’s that last one I’m going to write about in this post.  Specifically, I’m going to tell you what you need to know about making sure your possessions are properly insured during a move.

Insurance during our move was one among the 1,237 things to think about during a move that I didn’t think about.  Besides the fact that insurance in general is about as exciting as watching geriatric water ballet, it’s often byzantine in its details.  So here’s what I’ve learned.

Your possessions are most likely not covered during transit by your homeowners insurance.  This makes sense if you think about it.  You aren’t insuring your old place any more.  The stuff isn’t actually located in either house.  For a short period of time, it’s quite possible you don’t actually own a house at all if you haven’t closed on the new house prior to closing on the old.

The mover is only responsible for certain situations and only up to a point.  The standard amount a mover is on the hook for is $0.60 per pound (it’s called ‘valuation’).  Except for your angelfood cake collection, nothing you own can be replaced at sixty cents on the pound.  Besides that, the liability of the mover is limited to certain situations.  For example, if the truck is broken into, you may not be covered at all.

In many cases, you need to buy third-party moving insurance.  Often the mover will offer this through a third party, but pay attention to cost and exclusions.  Your homeowners insurance company may very well offer to sell you an inexpensive policy to cover the gap between house coverages.  Make sure you get replacement cost coverage if at all possible.

So before a move, do some homework and find out if your insurance covers your stuff during a move and, if so, how well.  It might make the difference between a minor inconvenience and an unmitigated disaster.

Additional resources:

Bankrate article on moving insurance

Explanation of types of moving insurance

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Surely by now you’ve heard about the foreclosure moratorium instituted voluntarily by six major banks.  Loan holders of these banks who are facing imminent foreclosure have a 30 day breather to try to find a fix.

• Bank of America
• Countrywide
• JPMorgan Chase
• Citigroup
• Wells Fargo
• Washington Mutual

At the risk of adding to the already substantial din of commentary about the current credit situation in the US, I had a couple of quick thoughts on this particular development.

First, this is hardly a magnanimous move on the part of these banks.  It was only a matter of time until Congress decided this was a great opportunity to grandstand and moved to do something similar.  Big company executives aren’t dumb and they’d rather call the shots and write their own regulations than be dictated to. 

Beyond that, 30 days is not going to help a great many people in danger of foreclosure.  Nothing says the banks have to work with the homeowners during that time, just that they’re giving the time to them.  From what I know of pre-foreclosure proceedings, if you’re behind on your payments, you have to come up with the whole arrears, not just start making payments again.  Big difference.  How likely is it for someone who can’t make one month’s payment to come up with several all at once?

Second, when I heard about the plan, my initial instinct was to get frustrated.  I play by the rules, pay my bills, get car insurance, pay my taxes.  We took out a prudent loan on a modest house.  It’s galling to me when people who don’t follow good, basic personal finance practices get a pass.  That’s what this feels like to me to some degree.

Though I’m loath to admit it, I have to agree with the banks on one thing about this.  Bail-outs and assistance subvert the market process.  It makes borrowing more expensive for everyone.  Where I diverge from the banks is that they’re all for bail-outs if they are the ones who benefit.  Cutting the discount rate feels like bank assistance to me.

Anyone have thoughts pro or con about this moratorium?

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Homeowners insurance policies specifically exclude flood.  All of them.  Yours, too.  That’s something a lot of people don’t know and find out the hard way.  You don’t have to live on the coast to be the victim of a flood, either.  My wife has a pretty tragic story from her childhood about flooding.  It’s served as something of a lesson for us as we buy the new house.

When my wife was little, her family lived somewhat near (within a mile) a river.  Thing is, to look at the river, you’d never even consider the possibility of it overflowing its banks.  The water is way down a drop-off - probably 15-20 feet below the level of the town.  Her parents actually inquired about flood insurance, but were told that the area was in a hundred year flood plain and they couldn’t buy flood insurance.

I guess it was the hundredth year because the unthinkable happened and after a particularly heavy rain storm, the river rose and didn’t stop until half the town was underwater.  My wife’s childhood home was ruined.  When the water receeded, the first floor was buried in mud.

Her parents’ homeowners insurance, of course, did not cover the damage.  Homeowners insurance policies - all of them - specifically exclude flood.  Yours, too.

Her family got through the ordeal through a combination of very hard work, luck, and generosity, but it was a lesson my wife never forgot. 

Flash-forward to our recent home-buying. 

Our new house is within several hundred feet of an intermittent stream.  Right now the area’s in a drought, so there’s nothing there.  But it doesn’t take a lot of imagination to picture that ‘little stream’ growing into a rapidly-expanding lake.  In fact, the area is peppered with lakes of various sizes.  Not only that, but being on the eastern part of the country, we’re within reach of hurricanes.

Flood insurance basics

Here’s what I learned when I inquired about getting flood insurance for the new house.

• Flood insurance is federally regulated.  That means the government sets the rates - everybody charges the same thing for the same level of coverage.  Here’s the FEMA website for flood insurance.
• Your home has a 26% chance of being damaged in a flood over the course of a 30 year mortgage compared with a 9% chance of damage by fire.
• One third of claims paid last year were in ‘low risk’ areas.
• There are three categories of risk -  low to moderate, high, and high-coastal.
• There is no place that can’t be insured against flood.
• The maximum insurance you can buy through FEMA is $250,000 dwelling and $100,000 possessions.  If you want more, you go to independent insurers for what’s called “excess coverage.”
• There’s a 30 day waiting period for coverage to begin.  It can be waived if you haven’t closed on your house yet.
• Homeowners and renters both can buy coverage.

We got the maximum coverage and it was pretty reasonably priced - $352/year - since we’re in a low/moderate risk area.  The same coverage for a coastal dwelling is a whopping $5,358.  There’s a great reason to reconsider that beachfront property, huh?

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The search is over and we’ve bought the house. We found out a couple of days ago that the seller accepted the offer, so it looks like it’s full steam ahead. Thank goodness, too, because my wife and I were not enjoying our search.

It’s funny how it seems the more you spend on something, the less you enjoy the search for it. I know this has been true for us both times we’ve looked for a house and every time we’ve bought a car that I can think of. I guess it’s because there’s so much at stake. In the case of a house, and to a lesser extent when buying a car, you know you’re stuck with whatever your decision since transaction fees are so high. In other words, the costs of screwing up are extremely high.

Speaking of extremely high, despite the ‘buyer’s market’ we did end up spending more for the house than we’d initially planned. Reality has a way of colliding spectacularly with plans, though. We just couldn’t buy the house we wanted for the amount we wanted to spend. So we went up a little bit - about 15% higher than we’d planned.

Even so, we’re really pleased and excited about the house. It’s a new house (as in, new construction), something novel for us as a family. It’s bigger than our current house by about 35% to accommodate not one, but two home offices (I haven’t written about it, but I took a new job recently and it’s work-at-home). It has a nice, big, flat yard for playing. Oh, yeah, and it has granite counter tops. For some reason you have to have that today. Don’t ask me why.

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