Saving Without A Budget

Home Sales Fall to Five Year Low - When Will it End?

As a recent home buyer, it pains me to no end to write the article. At the same time, it pains me ever more to hear people say, “don’t worry, the home prices will bounce back soon,” when speaking about the currently woeful housing market.

I hate to be the bearer of bad news, but it’s just not going to happen any time soon. And by any time soon, I’m talking about the next three years.

While I’m sure plenty of you are going to shoot down what I’m about to say as an “apples and oranges” argument, I’d at least like you to hear me out first.

I liken this housing bubble to the most recent boom and bust we experienced in the stock market (specifically tech stocks) back in the early 2000s. I just see too many parallels between the two, which, unfortunately, makes me believe that we still have a ways to go before we see home prices stabilize.

The main reason why I see parallels between the two bubbles is because neither bubble was built on solid fundamentals. Investors jumped in not because they knew what they were doing or what they were buying into, rather because they were looking to make a quick buck in a market that made everything seem like it was sure to go up.

Because of these speculators’/investors’ actions, prices in both bubbles were artificially inflated and drive up to absurd and, most importantly, unsustainable levels. There’s no way that prices could ever remain that high, whether it was due to the fact that there wasn’t anything there to substantiate the high prices (i.e. no revenue), salaries weren’t keeping up, or banks were giving out money that people couldn’t afford to repay.

Anyway, I think it’s fairly obvious the the housing market is in the middle of its downturn. According to a recent press release by the National Associate of Realtors, home sales were down in 41 states and, for the most part, prices have yet to stabilize across the country. Not exactly great news.

In order to finish the parallel, I think housing prices will follow much the same path as many of the tech boom leaders: obviously, at some point the slide will end, prices will stabilize, but will then take years (possibly decades) to return to their peak values.

I’m sure you’re now screaming at your monitor that a piece of paper (a stock) is completely different from a house. You’re right it is. For those of us who bought our house as a long-term investment, and so that we could have a place to live and raise a family, none of this will really matter (assuming you can afford your payments).

However, the fact that both bubbles were fueled by uninformed speculative investors trying to make a quick buck is completely undeniable, and that’s really the point that I’m trying to make. These are the people that are responsible for the last two boom/bust investment cycles in our country and it’s unfortunate that many millions of “little guys” got caught in the wake.

I certainly hope that I’m wrong, but I really don’t think I am.

Posted in Around The House, Investing | No Comments »

Thanks Mr. Greenspan!

Let me preface everything I’m about to write by reminding you that despite having a degree in business/finance, I am nothing more than an arm-chair economist. I find economic theory to be completely fascinating, but at the same time, I’m not exactly well versed in it.

That being said, I don’t think it takes a PhD in economics to realize that both the United States and the world’s economies are in a very, very tight spot right now. Credit markets are seizing up, world indices are swinging wildly each and every day and there appears to be a lack of credible and feasible solutions to the problems.

In short, I think we are on the verge of a very significant international recession. While I don’t think we’re going to see anything like the Great Depression, I fear that many of us - throughout the world, not just in the U.S. - are on the verge of financial ruin.

While it’s tough to place the blame on just one country or group of countries, especially considering how interconnected the world has become, I think it’s safe to say that one person (yes, a single individual) should be held accountable for a large portion of the problems we’re facing right now.

That person’s name is Alan Greenspan.

You see, Mr. Greenspan was the champion of cheap money. Under his watch, we saw the Federal Reserve, the group entrusted with controlling our country’s money supply, drop federal funds rate 1% - an absurdly low amount.

While this helped to stimulate growth in what had become a stagnant economy (especially after the September 11 attacks) it brought a lot of cheap money into the economy. What I mean by cheap money is due to the historically low interest rates there wasn’t much cost associated with borrowing money.

This of course ended up being the major cause behind this country’s real estate boom and subsequent bust.

We have always been brought up to believe in the “American dream,” part of which includes owning your very own home. Since most of us don’t have between $200,000 and $500,000 spare cash lying around, the most common way for people to realize this dream is to borrow money from a lending institution. However, because these institutions aren’t charities, they expect to be paid extra (the interest that you pay) in order to compensate for the large amount of money they give to you so that you may buy your home.

When the Fed continued to lower interest rates, it became easier for people to afford to own a home because essentially their payments would be lower due to the decreased interest expense. However, because more people could afford houses, the demand for houses began to increase, and as we all know from basic economics, as demand increases, prices tend to increase as well.

Additionally, for those of us who already owned a home and had realized a gain in equity (due to the increased values) we were able to borrow against our homes (usually with a home equity credit line) at a cheap rate and with the possibility of that money being tax deductible. Essentially, our homes became ATM machines.

So far we’ve covered regular first time home buyers as well as people who already owned homes and borrowed money against their house’s escalating value. Two down, two to go.

Now, we’ve got home builders. Because they see that there is now a huge demand for houses because of absurdly cheap money, they jump in and just start building left and right. Condos, townhouses, regular sized homes, McMansions, you name it, they built it. And people were buying left and right.

Finally, we come back to Mr. Greenspan and his desire for alternative mortgages.

Not too long ago, pretty much the only way that you could buy a house would be to qualify for a fixed rate mortgage, typically a 30 year loan, and at closing put down 20% of the value of the house you were buying. Example - you’re buying a $100,000 house; at closing you would hand over $20,000 and you would assume a 30 year, fixed rate mortgage for $80,000.

Because it’s asking a lot for someone to be able to pony up tens of thousands of dollars when buying a home, many people previously had to sit on the sidelines, rent, and hope to be able to save up enough money over time. Unfortunately, this wasn’t good enough for Mr. Greenspan, who encouraged lenders to become more creative in their lending products.

This, in turn, led to items like the ARM mortgage, the interest only mortgage, and mortgages that offered teaser rates only to balloon after a short period of time or actually tack the “unpaid” interest onto the back of the balance of the loan.

Essentially, this allowed people who had no business buying a home to not only buy a home, but probably a much bigger home than they could ever realistically expect to afford.

Aside from people who actually wanted to live in the house that they purchased, these low rates and wacky mortgages brought out many people who were looking to make a quick buck in the market. I’m sure you’ve seen the commercials for real estate flipping programs, where someone buys a property using an alternative mortgage, waits for the property to appreciate and then quickly flips it for a profit.

It was these investors that artificially drove up the prices of homes throughout the country. They had no intent on living in the property, but because they were buying something that other people wanted, they were essentially driving up the prices of every house around theirs (including their own property).

Anyway, so Mr. Greenspan set all of this up by dropping interest rates to 1%. Then, he flipped the tables by raising interest rates 17 consecutive times to the current rate of 5.25%. Essentially, he got most people in the country to buy into the 1% teaser rate, knowing that it couldn’t stay that long forever, and then raised the price on everyone and everything.

Granted, he HAD to raise the rates, otherwise inflation would have crippled the country; but he pretty much set up a no win situation. Either he had to keep the rates low and let lots of cheap money slosh around in the economy or he had to raise the rates and watch as people who bought using these creative mortgages suffer to make their higher payments.

This uncertainty in the housing sector (as well as the credit sector in general) has caused both the U.S. and world stock markets to fall sharply during the last three weeks, and, unfortunately, there doesn’t appear to be a rosy resolution in sight.

I believe that Ben Bernanke is doing the right thing by keeping interest rates where they are and not caving in to pressure to lower interest rates to soothe the credit market. I don’t believe that it is his (or the Fed’s) job to bail out these mortgage companies by lowering rates to revive a dying housing market. And, even though it’s sad to say, it’s not his job to bail out people who bought homes that they couldn’t reasonably afford.

It looks like the only way this problem is going to be solved is by tough love from the Fed. Keep interest rates the same (or even raise them slightly), stabilize the dollar, and let the housing market correct itself.

By doing this, we may end up in a mild recession throughout the country as the housing ATM dries up and people spend less money, but, like always, we will recover and ultimately resume our upward trend.

No thanks to Mr. Greenspan though.

Posted in Investing, Miscellaneous | 3 Comments »

3 Ways to Save Money and Energy

One of the things that I’ve been trying to read more about is simple ways that I can reduce the amount of energy that I use around my house. With all the talk of trying to become more environmentally aware, I wanted to make sure that I was “doing my part” in an effort to reduce my energy consumption.

Aside from the whole environmental aspect, I’ve also been noticing my energy bills start to get more and more expensive, so in addition to doing my good deed for the earth, I figured I’d also like to reduce my energy consumption in order to save some of my hard-earned money.

On that note, I’ve put together a quick list of three things that I’ve started doing that cost me next to nothing to implement, but have started to save a lot of energy and money:

1. Use a clothes line instead of your clothes dryer. This is something that I just recently started doing on a “larger scale” in an attempt to try and save some money on my electric bill. Obviously, you’re not going to want to do this on a day when it might rain, or in an area where birds frequent (if you catch my drift), but if you can air dry your clothes on a nice sunny day, you should see a pretty nice drop in your electric bill.
2. Bump up the thermostat by one degree in the summer and down one degree in the winter. Don’t get me wrong, I’m all for feeling comfortable in my own home, so I don’t think it’s reasonable to expect people to set their thermostat to 80 degrees in the summer and 58 degrees in the winter. That being said, you’re probably not going to notice much of a difference if you adjust the temperature by a degree or two. If you have a programmable thermostat, this probably isn’t going to make too much of a difference, however, if you leave your thermostat set at a constant temperature 24 hours a day, adjusting by even just one degree will make a difference in the amount of energy you consume and the amount of money you spend.
3. Take advantage of natural lighting. How many times have you been sitting in your home reading the paper or working on the computer with your window shades drawn and your desk lamp on, even though it was perfectly sunny? Instead of sitting there with your artificial (and energy-using) lights, why not take advantage of the free light provided by Mother Nature? In the debate between incandescent and CFL bulbs, I think sunlight will win every time!

While there are literally hundreds of ways that you can reduce your energy consumption, these three ways cost me less than $4 to implement (all the money went to a clothes line and clothes pins) and have probably saved me at least three or four times that in the couple of weeks that I’ve implemented them.

That’s not a bad return on investment, especially considering that while I’m saving money, I’m doing my part to save the environment!

Posted in Around The House, Utilities | 1 Comment »

Alan Greenspan’s New Book

It looks like Alan Greenspan is about to cash in in a pretty big way.

Greenspan is due to collect $8.5 million for an upcoming memoir entitled The Age of Turbulence: Adventures in a New World, which to me sounds more like a science fiction novel as opposed to something by a former Chairman of The Federal Reserve.

In the book Greenspan will reportedly talk about how he withheld some information while testifying in front of Congress in order to keep the markets from overreacting; what it was like serving under Presidents Regan, Bush, Clinton and Bush; and that much of the book was written while laying in the bathtub - something that could test your gag reflex.

While all of this is fine and dandy, there’s one key element that Greenspan will probably have left out of his book: the fact that he will be remembered as the single largest contributor to this country’s financial downfall.

Don’t get me wrong, the American economy certainly saw some periods of tremendous growth under Greenspan’s watch, but I’m afraid that much of his policy during the later years of his reign will hurt this country for years to come.

For example, because Greenspan continued to drop interest rates after the market dump of 2000 - 2002, money became too easily available. What I mean by that is there was too much money floating around in the economy and because interest rates were so low, a lot of people were able to grab their slice of the pie, even if they really couldn’t afford it.

The two major examples of this are the boom (and subsequent bust) of the sub-prime housing market, something Greenspan championed, as well as the fact that during the last two years the American savings rate has gone negative - meaning we spend more than what we earn.

Let’s look at these two items individually, starting with sub-prime mortages. When interest rates were at their lowest, these mortgages may have made sense as people who otherwise might not have been able to afford a home were now able to do so. Unfortunately, it seems many of us weren’t looking long term and figuring if these same people would be able to afford their homes once the inevitable happened and interest rates began rising again.

What’s now happening now that housing market has cooled is more and more people are facing foreclosure because they can’t afford their current payments AND are unable to sell their home for a profit. In turn, this is causing the market to continue to stay cool and drive housing prices down even further.

The second item - a negative savings rate - can be attributed to cheap credit, both regular credit cards as well as home equity lines of credit. Because this money was so cheap to borrow, many people made rather large and sometimes unwise purchase (think of that huge, gas guzzling SUV sitting in your driveway), that they will be paying for for years to come.

And as interest rates jumped, the payment for these items jumped as well, and in many cases cause people to borrow even more money in order to cover their basic needs.

While I may be a bit harsh in laying all of this at the feet of Greenspan (after all, he just made the policy; he didn’t promote irrational spending), in the end I think we will look back and realize that many of his financial policies were completely ridiculous and at the root of our country’s financial collapse.

Posted in Investing, Miscellaneous | 1 Comment »

Examine Your Last Credit Card Bill

This post is about as close as I’ll ever get to advocating that you start a monthly budget, but it is something that I’ve done over the past couple of months that has really helped me reduce the amount of money that I’ve spent on useless “want” items.

If you’re anything like me, you probably pay most of your bills online each month, not only to save the 41 cents on a stamp but because it’s pretty quick and easy.

One of the bills that I pay online each month is my credit card bill; I think subconsciously I liked doing this because it allowed me the opportunity to not really examine what I was spending my money on each month. As long as my monthly bill remained pretty consistent each month, I never really felt the need to run down the itemized list and examine my purchases.

While it was kind of nice to just set it and forget it, I slowly but surely started to realize that I was probably wasting a lot of money each month buying items that I didn’t really need.

So, I took the most recent monthly statement, opened it up and examined what exactly I had spent my money on during the past month. Because I charge everything (and pay it off each month) I figured this would be a pretty simple way to take a good look at how I was getting rid of my hard-earned money.

In order to determine where my money was going, I wrote down six categories - food/health, clothes, home, entertainment, car, and miscellaneous - and placed each item in my credit card statement into one of the categories. From there, I broke each category into two sub-categories - needs and wants.

Items like groceries, gasoline, utilities, etc., fell into the needs sub-category and items like DVDs, golf balls, video games fell into the wants sub-category.

In looking at the balance of where my purchases were going, most of them fell into the needs sub-category, however, I noticed that there were a lot of unnecessary purchases in the wants sub-category. I figured that if I could eliminate 50% of those purchases I would be able to save several thousand dollars each year.

Don’t get me wrong, I’m not say that you shouldn’t have any fun and should never purchase something that isn’t a need; there’s nothing wrong with splurging on yourself from time to time. That being said, if you start breaking down your credit card bill each month and notice more wants than needs (especially if you don’t pay off the bill each month) it might be time to reassess your purchasing decisions.

Posted in Miscellaneous | 1 Comment »