Category Archives for "Mortgage Meltdown"

Financial Calamity To End December 31, 2009

That’s my “bold” prediction. The basis for this? The increased FDIC insurance on bank deposits of $250,000 laspes on that date, as if everything will be fine by then.

Don’t count on it! There’s a lot more downside to this economy, I’m afraid. But now might be a great time to get your ducks in a row and be ready for the upturn. It will happen just as things look their worst.

Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.

Did We Ever Fully Recover from the 2001 Recession?

With all the talk about the souring economy, job losses, bank failures, and the like, the recession of 2009 is on the minds of everyone.

But I’d like to posit that we never fully recovered from the recession that officially spanned 2001-2002. And that, my friends, puts us into a possible discussion of Great Depression proportions!

Now, before you run off and withdraw all your money from the bank and bury it in your back yard, hear me out!

Great Depression?

Typically, after a recession, jobs, sales, and revenues (as well as profits) rise, most often quite rapidly.

Didn’t happen last time.

Here’s a picture to illustrate what I’m trying to describe. The red arrows represent the year of the respective recession. See how unemployment rises after a recession, then drops until the next one, from 1991 to 2001? And see how the unemployment rate dropped below the rate during the year of the previous recession? That is the typical behavior of the labor market. But look at what happened from 2001 on.

Now, I’m not saying we’re in another depression. But we’re approaching Great Depression longevity, if not to the same depths. The Great Depression started in 1929, the economy made a few attempts at reviving itself, and then WWII came along. America wasn’t fully involved in war preparations until 1941. So we’re talking 12 years, at the most.

For this last round of economic downturns, the duration has been 9 years. We’re getting there.

Of course, we’ve yet to see 25 percent unemployment. But also remember that we fudge the numbers nowadays, and there’s a different sort of mindset for what constitutes “employment.” In the 30s, if you didn’t have a full-time job, you were unemployed.

Now, if you’re no longer looking for work, you’re not even counted. Perhaps you’ve been out of a job for 3 years, got fed up, and started selling all your worldly possessions on eBay. You’re no longer “unemployed.” This set of circumstances didn’t exist in the ’30s.

So, I’d say that whatever level of unemployment you see today, raise it by 30 to 50 percent. Yeah, I think it’s that bad. But even at an official 8 percent, we’re no higher than 12 percent. Not that that’s a good thing. But it’s not 25 percent, either.

However, for some pockets of America, where there’s 12 or 13 percent unemployment (take San Joaquin County, California, for example, where home foreclosures are at all-time highs), that figure could easily be over 18 percent. I submit to you that those folks feel like they’re living in a depression! If you don’t believe me, ask them!!!

One last thing: If we hadn’t spent $1 trillion on a war (or something else, for that matter), the economic picture during the 2000s would be even bleaker.

I said all that to say this: We got out of the last depression and we’ll get out of this one (whether you believe it’s a recession or depression).

But our way of life may have to change and that in itself may be the most uncomfortable part of it all.

Jobs you would have never considered before…you may now consider. Wages you hadn’t thought about since high school…you may now reconsider. Hours you thought were only for hookers and security guards…they may be under consideration!

Things “I cannot live without” – you may have to live without them (like computers, cell phones, video games, cable, the list is endless).

All of this will break up some families and ruin lives of countless people. But the silver lining is that dire situations may bring us closer, may give us thought for conserving what he have, and give us a greater appreciation for all those things “I cannot live without” once we get some of them back.

It’s a bitter pill to swallow. But swallow it we must.

One last thought: There may never be a better time to go out on your own. Consider starting your own business. The Internet being what it is, with low overhead costs, fast deployment capabilities, and only your own mental limitations (“I can’t do it,” “I don’t have time,” “I am not that smart” among thousand of other excuses), the sky literally is the limit to your income potential.

It may not come fast, but it will come. And in the end, you’ll have more time, more money, and less stress. Get some ideas here. No pressure, no strings.

Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.

More Signs of the Times – Microsoft Seeking Money from Laid Off Workers

This is classic! Microsoft apparently “gave too much” in severance to some (all?) of the employees it recently laid off. Of course, this was the first mass layoff MS ever did, so they didn’t have any practice!

Not sure how I feel about this from the employees’ perspective…it would seem the ethical thing to do to give it back. But sheesh, MS, can’t you make your internal software work right?

Microsoft seeks money from laid-off workers – U.S. business-

How to Cope with the Declining Value of Your Home

As the Mortgage Meltdown spills over into the Credit Crunch and recession, most of us who own homes (or at least live in homes where we pay a mortgage) have seen the value of our home decline precipitously. Where prices rose the highest and the fastest, they’ve come down the farthest and the fastest. In some areas, real estate values have dropped by over 50 percent.

Side note: If you can get a loan, start thinking now about buying a home if you don’t already own one. Prices may drop further, but not by much — if, that is, the economy doesn’t go into free fall. If it does, all bets are off.

In trying to cope with falling values, I suggest you look at your house purchase as a two-part purchase, the first being the intrinsic value of the utility a home provides (shelter), the second being the investment value.

I submit to you that in years past (prior to the run-up in house prices), the investment value of your real estate purchase was trivial, whereas the past few years it held the majority component of your purchase.

Let’s use an example. The discussion below assumes you paid cash, for simplicity. Nobody does this anymore, so the leverage is much higher, and your return on investment is considerably higher than this cash method suggests. Keep that in mind.

Say you bought your house in 1990 for $100,000. Back then, in a “normal market” you could expect the value of your house to rise by 2-5 percent (depending on where you lived). I’d estimate, then, that 95% or so of your mortgage was the intrinsic value of the shelter you purchased, and 5% was the investment component. So, if your $5,000 “investment” rose in value to $105,000, you made 100% on your investment.

Not bad. In fact, excellent!

But how much did your “shelter” component rise? Let’s say rents rose by 2% in a year. In a market where rents and mortgages were in line (we’ll call it equilibrium), the value of your shelter, by definition, rose 2%. That is to say, if you could rent out your house, you could rent it out for 2% more this year than last.

So, in fact, the gain on your $105,000 house was $3,000 investment and $2,000 intrinsic value.

Still, a 60% gain on your “investment.” Not bad at all.

Fast forward to 2005.

Your $100,000 house is now $500,000. If you bought it in 2005, I’d estimate that your investment component was around $390,000! In other words, at 2% per year growth in rents, your shelter component is only worth about $110,000!

That leaves a lot of room for investment losses!!!

In fact, if house prices fall by 50%, it is my contention that your shelter component barely moves. If anything, it has risen, simply because rents should be increasing as everyone moves out of “too expensive” homes to apartments — the demand for rentals has risen dramatically through this mortgage debacle.

So, if your house declined in value by 50%, down to $250,000, I am suggesting that all of it was comprised of the investment component.

But, the intrinsic value of your house has risen.

I know, money is money. And you’ve lost a lot. But if you felt that your house was worth $500,000 in 2005, what makes you value it any less today?

Your loss is only on paper. If you truly believed that your home was worth the half a million dollars you paid for it, then it truly has gone up in value since then.

Of course, you cannot realize that gain right now. Or for quite some time for that matter.

Think of your house for a moment as you would the purchase of a stock. There’s the future cash flow (dividends) and the capital appreciation. If the stock does not rise in price, but keeps paying out the same dividends, it’s still worth what it was when you bought it.

It may be worth more to somebody else right now, or it may be worth less (this is all based on price). But to you, it is worth just the same.

If the price falls on the stock, yet the dividend remains the same, then isn’t the stock intrinsically worth more?

That’s what I’m saying about your home.

On paper, you may be suffering a “wealth effect.”

But in real life, your home is providing the same utility today as it did when you bought it. In fact, it may be providing more. Rents have not fallen, they’ve only gone up in the real estate “collapse.” Therefore, the shelter component of your purchase is worth more today than yesterday.

It is only the investment portion of your purchase that has taken a beating. Try to set that aside for a while. In time, you will recoup your investment, and then some.

Especially with the rapid inflation the Fed is building into the system. Don’t be surprised, if in 5-10 years, your investment will be reaping positive returns!

Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.
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