Wednesday, June 10, 2009

Should I Cash Out My 401(k) and Buy a House Now?

Uh ... no.

[Patricia] Hynes bought her three-bedroom home in Lancaster brand-new for $119,000 in 1989 ... Her home is an island in a sea of repos. Houses on both sides have fallen into foreclosure; one is priced $10,000 less than the amount she paid 20 years ago.

Nearby, a four-bedroom, 2,100-square-foot home sold in May for $89,000 ...

Another tsunami of foreclosures is threatening to swamp an already saturated market. In Palmdale and Lancaster, 903 homes were sold in April, but according to ForeclosureRadar, more than 7,500 are in some stage of foreclosure.

Some buyers who thought they were getting bargains didn't ...

I bring this up here (and now) because I've TAG had members call to ask if now is a good time to liquidate retirement funds to purchase a new abode.

I've told them: "Not yet. We're not at the bottom of this fustercluck, so why cash out of funds that have probably lost a bit of money so you can buy some real estate that will lose money faster?"

There will be a time to buy the new house or condo, but I don't think we're there yet. Give it another year. Maybe two.*

* For those of you unfamiliar with So Cal, Lancaster and Palmdale are out in the Antelope Valley, in the desert. There is lots of empty land out there, and whenever we go into a recession, the area's property values always tank.


Anonymous said...

You should never consider cashing out your 401(k) to buy a house, regardless of the state of the economy. Taxes and penalties ensue when you do, and your retirement account will never recover from the funds being withdrawn.

Borrow against it for your down, maybe, but cash out? Never.

Anonymous said...

Considering this country is insolvent due to the last fifty years of financial irresponsibility and Federal Reserve raping of the dollar for the last one hundred, I would be highly suspect of any 401K that is remotely tied to the US. Real estate is no more a gamble today than any tax-deferred retirement program that 'small government' sold to the guinea pig public. Not saying that real estate is a viable option, save for perhaps paying cash. We simply can't policy our way out of this any more. One is going to have to work very hard to avoid relying upon what they are used to knowing because we are now living in bizarro world, and bizarro world is not going to reveal to you exactly how you are going to dependably keep your savings far enough ahead of the inflation curve to stay out of the poor house when you are ninety.

Anonymous said...

"we are now living in bizarro world"

No buddy, as your post reaveals, its you that is living in a bizarro world.

Josh Taback said...

I agree with not taking money out of a retirement fund, but I was told the other day that if it for real estate it won't be taxed or penalized. Not 100% sure about that though.

Anonymous said...

All bets are off with the government leadership. I would definitely like to put it into something tangible because at the rate they are printing cash that paper may not be worth much.

Anonymous said...

-No buddy, as your post reaveals, its you that is living in a bizarro world.

Just in case you haven't been following the trends in the domestic and global markets recently, let me be the first to tell you that we have just experienced a financial calamity, the climax of one hundred years of an artificially inflated standard of living. That tiny little happy place of measurable income, employment, and investment that has up to today fed your comfortable state of denial has been erased. Good luck navigating your new future.

On a side note, the founder of Vanguard, John Bogle, our newest addition to our 401K plan, and a great addition at that, has stated on record that he would not invest in stocks OR bonds today. It is that bad.

Steve Hulett said...

John Bogle, our newest addition to our 401K plan, and a great addition at that, has stated on record that he would not invest in stocks OR bonds today. It is that bad.

Small correction here. Yes, Bogle said he wouldn't buy stocks or bonds ... but he was referring to both as individual shares or bonds.

He still touts index funds as the way to diversify. Here's the link to his quotes:

Steve Hulett said...

You're quite right.

Cashing out a 401(k) prior to age 59 1/2 means big tax penalties. Which is, of course, another reason not to do it.

Even taking a loan out is a problem, as you're pulling out pre-tax dollars and replacing them with after tax dollars when you repay the loan.

Anonymous said...

First, have a look at this.

Then watch every single one of these.

(No, I'm not an advocate for the site, but the education is spot on.)

Then, watch it all happening before your own eyes in real time.

It's a whole lot uglier out there than you think. They can't write tax exemptions big enough to cover these losses. Upside-down world is here.

Anonymous said...

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Anonymous said...

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position.

When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers.

Anonymous said...

Could you please just post the link to Eliot Spitzer's year old articles rather than cutting and pasting them? I'm sure he would appreciate the credit.

Just don't take out any loans. You end up undercutting your own ability to save and your ability to hedge yourself against inflation. It's a house, not a f'ing dream. There are no American dreams. Rent it and let someone work for the rest of their life for the banks.

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