Saving Without A Budget

I.O.U.S.A. Movie Review

I just got back from seeing I.O.U.S.A. - and it was certainly a very eye opening experience. Done in the same vein as documentaries like An Inconvenient Truth and Who Killed the Electric Car?, I.O.U.S.A. takes a hard look at United States’ current Federal deficit and spending problems, discusses how we got into this mess in the first place and what will likely happen if we don’t wake up and start to tackle the problem before it gets too late.

Aside from the fact that the film is relatively terrifying, I really enjoyed it. I’m also a nerd, and love numbers, finances and (most importantly) my money, so I’m probably predisposed to like this sort of thing. However, even if numbers don’t get your heart racing, because you are a tax payer and will continue to be profoundly impacted by our ballooning Federal deficit, it’s worth your time and money to go out and see this film.

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Posted in Entertainment, Miscellaneous | No Comments »

The Recession - Short Term Pain, Long Term Gain?

Here’s the bad news: this recession - yes, we are in a recession - is going to last a long time and will likely lead to a great deal of pain in the short-term. But, there is some good news: the long term changes and gains brought about by this recession are going to be phenomenal.

First things first - let’s talk about how we got here and why is it going to be so bad. The answer, in one word, is debt.

Much of the economic expansion of the last twenty years has been driven by debt - namely, people living beyond their means, spending money they don’t have to buy things they don’t need. Americans have gradually moved away from their financial roots — which are based in saving money — and in 2005 and 2006, Americans actually spent more money than what they earned.

Take a look at the following chart, which is courtesy of the United States Department of Commerce, and shows the dramatic decrease in the rate at which Americans have been saving their money:

This recession is going to change all of that, which is both good and bad news.

Nearly three-quarters of the American Gross Domestic Product (GDP) is comprised of consumer spending. Therefore, any drawback in spending will cause a sizable dent in our economic growth. For example, for every 1.33 percent pull back in consumer spending, there should be a 1 percent decrease in GDP. (Keep in mind GDP could still go up or down based on other non-consumption factors such as manufacturing.)

So, if consumers cut spending by 7% to return to the average savings level between 1960 and 1980, we can expect a roughly 5.25% decrease in the GDP over the coming quarters. That’s a pretty significant fall especially considering this past quarter the GDP grew at 1.9% on an annualized basis yet the unemployment rate jumped to 5.7%, the highest level in nearly four years.

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Posted in News | 1 Comment »

If You Need to Refinance, The Sooner You Do It, The Better

Many Americans who have adjustable rate mortgages (ARMs) are facing the harsh reality that when their mortgage rate resets, they will have a higher monthly payment on a property that will likely be valued less than what it is today.

Unfortunately, some of these home owners with ARMs are too far upside down in the loan (meaning the value of the mortgage debt is greater than the value of the mortgaged property) to even begin the process of trying to refinance into a fixed rate mortgage. I know many people in this situation, and it’s really tough to come up with the best solution for this. I fear that the home loans in this situation will ultimately be a much larger drag on the real estate market than the current subprime fiasco. However, I’ll save that for another article.

For those of you who are currently in an adjustable rate mortgage and are fortunate enough to still have some equity in your property, I have this to say: IF YOU THINK THERE’S A CHANCE YOU MIGHT NOT BE ABLE TO AFFORD THE PAYMENT WHEN THE RATE RESETS, YOU NEED TO EXPLORE YOUR REFINANCING OPPORTUNITIES RIGHT NOW.

There are several reasons behind why I feel so strongly about this. Here they are in no particular order;

1) The housing market is likely to continue its slide through 2008 and probably well into 2009. That means the equity you have in your house is only going to last so long before you’re in the same boat as many “upside down” borrowers. Once the loan to value ratio gets too high (meaning you have less equity in your property) you may not be able to refinance your property.

2) There’s no point in trying to hold out for lower interest rates. This morning, the average rate on a 30 year fixed mortgage was roughly 5.5%. Historically, that is an absolutely incredible rate. Besides, what would holding out for 5.25% really save you? In the end, probably not a whole lot. Currently, I think there’s much more risk in waiting for rates to fall than there is in locking in now and being done with it.

3) If banks have to continue to have massive debt related write offs, the lending standards are going to become more and more strict. What you might be able to qualify for now (i.e. 95% financing) might be completely dried up in the coming months. That means you’re either going to have to pay a much higher interest rate, have a ton of equity, or put down loads of cash in order to secure financing. None of those three scenarios seem very appealing and/or likely.

Truth be told, I am in a very Chicken Little state of mind when it comes to real estate. I fully believe the sky is falling and it is going to take a very long time for this real estate depression (it’s well past a correction at this point) to work itself out. If you look at the many historical ratios regarding rent vs. mortgage payments and general affordability, we probably have another 15% or more until we hit a reasonable bottom in prices.

So, if you need to look into refinancing your existing mortgage into something fixed, there really is no time like the present. Even if you’re not sure, at the very least, explore your options and see what is currently available to you.

Posted in Around The House | 5 Comments »

Higher Food Prices May End Up Being A Blessing In Disguise

Have you noticed that your grocery bill has gotten more and more expensive over the last couple of months? Turns out you’re not alone.

I think that while in the short term this is going to hurt a lot of people financially (last time I checked, we do have to eat, so we’re probably going to continue to spend money on food despite the higher prices) in the long term higher food prices may be exactly what the United States needs.

The reason being, when prices increase above what you’re normally used to paying (especially if the jump is both unexpected and dramatic) on some level there is a correlating reduction in demand/consumption of that product. For example, let’s say gas prices jump to $4 - invariably more people will think twice about hopping in their car and going for a drive and will simply drive only if they have to.

Now, let’s translate this idea to food.

What’s the country’s most pressing health related issue? If you said obesity, you’d be correct. Obesity obviously has been linked to increased risk for a myriad of chronic health problems, from heart disease to cancer to erectile dysfunction.

What’s one of the largest growing costs for the average American family? Aside from energy, health care has the highest year over year out of pocket expense increase. Much of the reason health care has become so expensive is because the health care system has had to treat more and more of these very expensive chronic diseases.

On top of all of that, there is the brewing Medicare/Medicaid problem for the U.S. government. With health care costs expected to continue to skyrocket, the United States government won’t be able to continue the current health care plans without selling its fiscal soul to China (if it already hasn’t).

So, back to the price of food - if it continues to jump, people are going to have to be more selective about what they eat and, more than likely, do a better job of eating less and rationing their food. Last time I checked, it’s pretty tough to become morbidly obese when your caloric intake is slashed by 10 to 20 percent.

So, with people having to actually adjust to eating less and not being so gluttonous, there should be a decline in the obesity rates throughout the country. In turn, over time this should lead to a corresponding decline in chronic diseases which more than likely will lead to a decline in health care costs for everyone.

Granted, this is a very rough theory, but in the end, I think it’s easy to see how an increase in the cost of food would likely bring about a less fat society, which in turn would hopefully bring lower health care costs for everyone.

Posted in Food / Drinks, Health / Beauty | 24 Comments »

When Do You Think Housing Will Rebound?

With the United States is stuck in the worst housing slump since the Great Depression, it’s easy to see why most of the national media and many of us have bought into the “Chicken Little” (aka “the sky is falling”) mentality.

Prices of new and existing homes continue to fall, the inventory of unsold homes continues to climb higher and to top it all off, would be buyers are having a tougher time getting financing. (And by financing, I mean they’re actually required to have good credit and put money down. What a concept!) What’s not to love?!?

But, I mean, there is a light at the end of the tunnel, right?

There may be, but according to a recent poll on Saving Without A Budget, it looks like a vast majority of us believe the housing market has a long way to go before it finally bottoms out and finishes its correction.

Below is the breakdown of responses I received when I asked the question, “when do you think the housing market will rebound?” Needless to say, the answers weren’t pretty:

• 12% of respondents stated during the 4th quarter of 2007
• 7% of respondents stated during the first half of 2008
• 21% of respondents stated during the second half of 2008
• 29% of respondents stated during 2009
• 31% of respondents stated during 2010 or later

Now, I realize that real estate is local and in fact each of the answers given above could be correct, depending on the location throughout the country. That being said, if you think the national housing picture is going to begin to look hunky dory within the next couple of months, I’ve got a bridge I’d like to sell you.

I personally think it’s going to take a decade or longer before we see housing prices anywhere near the peak prices of 2005 and 2006. Here’s why:

Cheap financing is done. The days of ass-backwards mortgages (yes, that’s the technical term), massive sub-prime lending and no documentation loans are over. People are actually going to have to be able to afford the monthly payments for the home that they want to buy.

On top of that, with a booming global economy and rising rising food and energy costs, the days of low interest rates are coming to an end. With that, the days of 6.25% fixed rate mortgages are also coming to an end.

As you’re probably well aware, the higher the interest rate goes, the higher the monthly payment goes, and the less likely you’ll be able to afford your dream home. If nobody can buy your house, the price will have to continue to fall.

People are actually going to have to put down money when they buy their home. 100% financing has gone the way of the dinosaurs. It’s dead and nothing’s going to be able to bring it back. In order for people to get quasi-decent loans, banks are going to require potential home owners to pony up a large sum of cash (hey, remember the good old days when this wasn’t a problem?!?). In turn, this is going to keep people who want to buy on the sidelines until they are able to scrap together enough money to put down a proper down payment.

Flippers and speculators are finished. Remember those late night informercials, the ones that promised to teach you how to buy a property and flip it two months later for an $90,000 profit? Yeah, those people are gone now, too. And since they’re gone, the money they used to drive up property prices to absurd and unsustainable levels is gone too.

Housing prices have to fall back in line with incomes. If salaries can’t justify home prices, then there is a big problem. Magically, this was the underlying problem behind the most recent housing boom, as prices were shooting up (seemingly) exponentially, while salaries continued to slowly creep along. Again, this all goes back to affordability; housing prices can only go as high as people can realistically pay.

During this past boom, housing prices became so skewed that they have a long way (25 to 50 percent in some parts of the country) to fall back in like with salaries.

Unfortunately, before it’s all said and done, I think it’s going to get really ugly before it gets any better.

That being said, I’m very bullish on housing in the long term. I think that once builders get their inventory under control and slow the growth of new home development, we will see a price bottom. From there, with the continued economic prosperity of the country, couple with the continued population growth, I think we will see demand for housing begin to slowly rise, and most parts of the country will resume their typical five to eight percent annual price growth.

Unfortunately, it’s just going to take us a decade to sort this mess out to get to the turn around.

Posted in Around The House, Investing, News | 8 Comments »