Competitiveness and Mortgages: The WSJ Chimes In

The Wall Street Journal’s columnists have clearly reading the same things that

I have been over the past few days. Alan

Murray today picks up on the report

showing that New York is still globally competitive, while Jonathan

Clements looks at the advisability of having mortgage debt and investments


the same time.

Murray buys the findings that things in New York aren’t as bad as some (cough)Paulson(cough)

might think:

Wall Street moguls made much of the statistic that only one of the 20 largest

IPOs in 2005 occurred in the U.S. But that oft-cited statistic provided a

pretty narrow and misleading window on Wall Street’s overall health. Moreover,

it was distorted by the fact that some of the largest IPOs were former state-owned

enterprises in China and Russia that listed elsewhere for nationalist reasons,

and that might have had a hard time meeting U.S. listing standards anyway.

Last week, [Treasury undersecretary Robert] Steel himself cited a compelling

set of numbers showing that the U.S. financial markets remain "second

to none."

Clements is a bit more contentious:

Suppose you have $300,000 in stocks and you want to buy a $300,000 home.

You could sell your stocks and pay cash for the house. But you will likely

fare better by putting, say, $100,000 of your stock money toward the house

and funding the rest with a $200,000 mortgage.

Result: You control $500,000 of stocks and real estate, 40% of which was bought

with borrowed money. As long as your assets generate higher returns than your

mortgage rate, the leverage is working in your favor.

I can’t concur, not in a broad-brush kind of way. I daresay that there are

individuals for whom this kind of leverage does make sense — mainly people

with a greater than average risk appetite. But I would say that most people

buying $300,000 homes don’t fall into that category.

The key here is Clements’s throwaway clause, "as long as your assets generate

higher returns than your mortgage rate". Which basically means "so

long as the trade is profitable, the trade is profitable". The problem,

of course, is that asset prices in general are at all-time highs, and great

oceans of global liquidity are chasing ever-lower returns. If you have $300,000

in stocks, it’s entirely conceivable that those stocks will return more than

your mortgage rate. On the other hand, it’s also entirely conceivable that those

stocks will go down. If you assume that your bank is smarter than you are, and

that they know what they’re doing when they’re lending you money rather than

investing it in the stock market, then you’re better off just buying the house


Just think what would have happened if you’d made Clements’s trade seven or

eight years ago, before the dot-com crash. Unless you could cope with a large

chunk of your investments being wiped out — even as the house you could have

bought outright retains its enormous mortgage — you’re better off playing safe

and just buying the property.

This entry was posted in housing, personal finance, stocks. Bookmark the permalink.