Saving Without A Budget

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 | 3 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 | 7 Comments »

The Case For an Economic Depression

The more I think of it, the more I can’t help but believe that we’re on the verge of an economic collapse on par with The Great Depression.

The American economy is built on a house of cards. Consumer spending makes up two-thirds of our GDP, which means we’re not a productive country, like how we were in the years following World War II, but that we’ve become a country of consumption and, most importantly, debt.

Most people are living beyond their means, buying things they not only don’t need, but can’t afford. For the last two years, and probably this year as well, the country’s net saving has been negative, meaning people have been spending more money than they’ve been earning.

On top of that, you’ve got seedy lending practices that helped perpetuate the housing and credit bubbles. These exotic loans were fine when the value of the house behind the loan was increasing 15% a year, but this growth certainly wasn’t expected to last forever. There’s a reason the saying “what goes up must come down” has been around for so long - namely because it’s true. Now we’ve got hundreds of thousands, if not millions, of people who owe more on their house than what the house would fetch out on the market.

Couple this with the fact that they’re facing higher mortgage payments on a house that’s losing value and you’ve got yourself a housing epidemic of unimaginable proportions.

That’s not to say that this is all the lender’s fault. Nobody held a gun to the borrower’s head and told them to take out loans that they couldn’t afford, or use creative financing to get into a house that was much bigger than what they needed. Many borrowers knew better, took a risk and got burned.

Regardless, falling housing prices will be catastrophic for the American economy.  We’ve been pulling out our imagined wealth in the form of home equity and using the money to fund our purchases.  What’s going to happen when this money is no longer available?

Finally, we have a global economy that is built on the belief that energy (specifically oil) will continue to be inexpensive as long as we need it. Our world runs on oil. Slowly but surely, demand has overtaken supply and since there’s no foreseeable drop in the demand for oil and there’s no foreseeable increase in supply, the cost of continuing the world’s growth oriented style is going to increase exponentially.

In two or three years, $80 for a barrel of oil (which recently happened for the first time) will appear amazingly cheap. Unfortunately, the only things that could prevent an energy crisis would be 1) vast economic slowdown throughout the world and/or 2) a decrease in the world’s population. If you get a chance, check out Soylent Green, a 1970’s Charlton Heston disaster flick, because it may very well be a glimpse of the future.

Don’t get me wrong, I understand that markets and businesses go through up and down cycles. My concern is that we’ve been in an up cycle since essentially 1991 (with the exception of a few months following the dot-com bust and 9/11) so I can’t help but think that we’re overdue for an equally strong downturn. And because of the things that I’ve pointed out, I’m afraid that this downturn is going to be more of an economic depression than a recession.

Posted in Investing, News | 7 Comments »

Helicopter Ben Shocks the Markets and Proves Me Wrong

So much for the Federal Reserve holding steady and keeping the federal funds rate at 5.25% for another month.

As I’m sure you’re well aware by now, Ben Bernanke and the Federal Open Market Committee today announced that they had lowered the federal funds rate by 50 basis points (most economists expected a 25 basis point drop) to 4.75%. They also lowered the discount rate by 50 basis points to 5.25%.

This development more or less shows that fears of an economic slow down in the midst of the worst housing downturn since the Great Depression has replaced inflation as the Fed’s number one concern.

I suppose that when you look at the most recently released data, which shows that foreclosures are continuing to jump month over month, home builder “confidence” has fallen to 16 year lows, and the fact that inflationary pressures (for the time being) appear to be easing, it’s really not that shocking that the Fed made such a drastic move - and made it rather apparent that additional cuts would come if needed.

There are several things that concern me regarding the rate cut (see my previous article), but if this ultimately ends up working out, it was well worth the risk. If it doesn’t, then I’d like you to go to Wikipedia and learn about hyper inflation.

Posted in Investing, News | No Comments »