Home sweet equity

People have been crawling out of the woodwork lately offering me hot deals on land leases. Not only in Saipan, either; some leasing schemes in Tinian have been offered, too. Why me? I don’t know. I don’t have deep pockets. And I would never, ever put a home up on leased land.

Meanwhile, a pal of mine asked if I would help unload some land he leased a couple of years ago. He recently moved off island, and found that he’d rather have money in his pocket rather than tied up in a few thousand acres of dirt and jungle. Now he’s up against the total illiquidity of the asset. Will I help him?
No way, Jose–I advised him against the scheme when he first encountered it but he was too star struck with paradise fever to listen to any sense. Land lust, like other kinds of lust, can lead to decisions you regret down the road. Now everyone avoids this guy when he calls since he’s beginning to act desperate and, frankly, he has only himself to blame.

Another pal of mine–one blessed with a good dose of common sense–just bought a house. He got a downright steal on it, a reflection of declining values in the region. And so he packed up his family, most of his business interests, and everything else, and moved from Saipan to his new home in Guam.

It doesn’t take a lot of money now to afford a home in Guam, where ownership rights are freely transferable. Let’s consider an “average” person (or household, or whatever, take your pick) shelling out $850 month in rent in Saipan for a mediocre home. That same amount of monthly money would land a $113,674 home if you bought it. (Related financial assumptions: interest rate of 8.2 percent a year, term of 30 years).

If that home was to go up just one percent a year in value–what we call “real” value, over and above inflation–you’d have landed $39,541 in increased value by the time your mortgage term was up. Depending on your situation, you might be able to cash that out tax free, too, upon the home sale.

With inflation low right now, and inflationary expectations low, too, home ownership makes a lot of sense. It is a great hedge against inflation (which is more likely to go up than down), since, as long as you’ve got the sense to have a fixed rate mortgage, your payments won’t go up even if inflation heats up. Those poor suckers renting their homes will have to pony up more and more cash to keep up with inflation.

On the other hand, if inflationary expectations move down (very unlikely) and drag interest rates down with them, you can always refinance.

So, owning a home, you win either way when up against inflation and interest rate movements. You’ve locked into a set of terms and it’s the lender, not the borrower, who faces the risks.

As far as Guam goes, there are certainly some distinct socio-economic risks on the horizon.
Still, a sufficiently analyzed purchase under the right conditions would be far better than flushing your money down the leasing or rental drain. I don’t like Guam nearly as much as I like Saipan, but when I see the smart players looking around down there, I have to give it some thought. None of us are getting any younger, and the best financial move anyone can make is to own home sweet home.