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Economy

The National Debt: The mortgage meltdown x 10?

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Good grief! Did you hear the Diane Rehm Show on PBS this morning? She talked about the $53 trillion national debt our government has run up. She had the former U.S. Comptroller General, a Wall Street Journal poobah and former member of a Presidential council on economic growth, and a think tank researcher, all of whom agreed that the gigantic national debt, which represents about $440,000 worth of debt for EVERY AMERICAN HOUSEHOLD, poses a huge threat to the economy.

The scariest part I heard while I was jockeying my car through 40 minutes of rush-hour traffic was a comparison between some of the elements that have led to the current fiasco and the similar short-sighted behaviors that led to the mortgage crisis. These guys say the crisis likely to come out of the mess created by an untenable national debt will be many tens of timesworse than the mortgage industry meltdown. We are looking at the potential meltdown of the U.S. economy during the next twenty years.

At the very least, government services, including Social Security, Medicare, and many programs that support businesses, agriculture, and the middle class will have to be severely curtailed or even eliminated. “Promises” made by the government to its citizens, said the guests,cannot be fulfilled.

The cause of this fiasco has been lack of competent leadership for the past decade or more, and the misguided policy of cutting taxes while failing to cut spending. Solution offered by at least one of the gentlemen: “grow the economy as fast as we can.” Uh huh. Grow the economy? While we’re in a recession that some of our leaders will not even acknowledge as recession? Gimme a break.

On an individual level, I don’t know what any of us can do about it, except to throw the rascals out of Washington…a dollar late and a day short. The corruption has to stop and the woo-woo “thinking” has to go. It will take one heck of a lot longer than eight years to get this country out of the mess the present leadership has created. It will be amazing if the next presidential administration manages to do anything other than hang onto the helm as the ship runs aground.

What is my plan?

  • Keep my job until I drop in the traces.
  • “Grow” my own economy by fostering a side business.
  • Pay off all debt and don’t run up any new debt.
  • Once the debt is paid, squirrel away every penny I can.
  • Build an emergency plan designed to survive a breakdown of the infrastructure, to include stocks of food,water, and propane.
  • Try to preserve capital in such a way that it can be handed down to the next generation, who will need it.

That’s all I can think of to do. And you? Got any ideas?

Foreclosure update from the deep Southwest: News is mixed

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In June, more than 40% of the 7,840 home sales in the Phoenix area were purchases of foreclosures, says Arizona State University’s Morrison School of Management. Median price of the foreclosed properties was $169,890, compared to a median price of $218,000.

A year ago, the median price on foreclosures was $225,900; for traditionally marketed houses it was $265,000. Interestingly, foreclosed homes on average are significantly smaller than traditionally marketed houses: 1,665 square feet for foreclosures, vs. 1,865 for the others.

Signs of Activity

These drops in value are stimulating interest among investors and people who want to buy homes to live in them, especially in the downscale part of the market. According to the researchers, buyers expect that prices will rise over the next few years. Although the slump in home values is not good for many homeowners’ pocketbooks-especially in the outlying suburbs hardest hit by the decline-if the government’s efforts to rescue defaulting homeowners take hold, we may see the market start to turn around as demand for now relatively low-priced properties increases.

Here in the Micromarket

In my neighborhood, which as you know is not the greatest but is centrally located, values are holding fairly high despite several foreclosures. Around the corner, there’s a house that was purchased and cherried out magnificently by a speculator during the Late, Great Bubble. The place was very handsome, with new everything, an emerald-green lawn, and an elegant fountain in front. The investor asked something over $400,000 when he sold at the height of the boom.

I don’t know whether the house was in foreclosure when it went back on the market, but it certainly looks like a foreclosure: the lawn is dead, the fountain was ripped out, its raw concrete pad left among the weeds, and the whole atmosphere suggests abandonment.

That house just sold for $340,000, a good price for a place in this aging neighborhood, a block away from a huge, noisy, dirty construction project just getting under way, which will rip out an entire row of homes along the main drag, bring endless chaos, and drag on for at least four years. It’s $108,000 more than I paid for my house, also cherried out and a reasonably safe distance from the pending railroad project.

Houses that are not in foreclosure are, predictably, doing even better: a recent sale on my street brought $395,000. Remember: this is a neighborhood adjoining two menacing slums, where you don’t put your kids in the public school unless they know how to use a knife or a club and you don’t care whether they ever learn to read.

And as for the Investment House…

Down at the M’hijito’s, a place a few doors away just sold for $35,000 more than we paid for our investment scheme. The houses there are all essentially identical, his being one of the area’s first true cookie-cutter neighborhoods.

Location, Location, Location

Evidently how a house’s value fares has to do with where the house stands, especially given the flap over gas prices. Even in less than upscale central-city areas, prices are holding fairly well, relative to what is happening in other parts of the Valley.

If you’re buying, stick to centrally located middle-class or gang-free working-class neighborhoods. Those areas will again boom when the real estate market recovers, especially if gas stays high and cities are forced to build decent public transport systems.

Personal finance nerds 1, spendthrifts 0

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So, who’s “funny about money”* now? In the face of a recession that could deepen to the point of (dare we say it?) depression, frugality is suddenly a trend. Such a trend, we might add, that think-tank scholars are climbing aboard for the ride.

David Brooks, writing in today’s New York Times, reports on a paper from the Institute for American Values titled For a New Thrift: Confronting the Debt Culture. To make 19 column inches short, the gist of this document, to which 62 scholars have signed their names, is “get out of debt, stay out of debt, and live within your means.”

Brooks puts an interesting moral spin on the issue, suggesting that fundamental American values have been corrupted by an evil confluence of forces: credit-card debt, the growing financial polarization between the haves and the have-nots, lotteries, pay-day lenders, and even Wall Street with its obscene executive compensation.

Uh huh.

“The Devil tempted me and I did eat.”

Brooks offers a few half-baked attempts at solutions to this metaproblem, none of which are worth much. But he does point out something that probably is correct:

Benjamin Franklin spread a practical gospel that emphasized hard work, temperance, and frugality. . . . For centuries [the United States] remained industrious, ambitious, and frugal. . . .

There are dozens of things that could be done. But the most important is to shift values. Franklin made it prestigious to embrace certain bourgeois virtues. Now it’s socially acceptable to undermine those virtues. It’s considered normal to play the debt game and imagine that decisions made today will have no consequences for the future.

Lordie! Let’s hope we reform our evil ways before we’re all tossed out of Eden!

*Funny about Money’s title came from a (former) friend who, imagining no one was listening, remarked on another friend’s voicemail that I was “a little funny about money.” She’s in her mid-70s now, working three jobs to pay off the huge debts her million-dollar appetite racked up. Observers tell me she looks very tired.

Are we movin’ on up? Or not?

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Can I Get Rich on a Salary has an interesting post on the question of whether American society offers real opportunity to provide each of us a believable chance at improving our financial situations. He discusses a lot of research and commentary that is pretty enlightening and reaches the conclusion that we do have a reasonable shot at moving up the ladder economically, but that it happens not by chance but through intelligent saving strategies. He asks readers if we think we’ve moved up, compared to our parents.

It’s something I’ve thought about occasionally: am I really better off economically than my parents were?

Typically, back in the Cretaceous, the only wage-earner in a family was the husband, and my parents were typical. My father went to sea. As a deck officer in the merchant marine racking up many an hour of overtime simply by being awake and on the bridge, he earned a pretty good living. My guess is he made around $10,000 a year at a time when $12,000 a year was the equivalent of today’s six-figure income.

He hated, loathed, and detested working. He set as a goal to retire at the earliest possible moment, and he decided that moment would arrive when he had $100,000 in savings.

He chose that figure because it was the amount his grandfather had left to his mother at the start of the 20th century. During the 1800s, his grandfather had a freighting business hauling buffalo hides out of Oklahoma into Texas. He made a ton of money. In those days, $100,000 was the equivalent of well over a million dollars today. Well over it, indeed. It would have been the equivalent of around a million dollars in the 1950s, when my father conceived his retirement plan.

When the old man died, this fund of cash went to his daughter, my father’s mother. My father was a change-of-life baby who came along 20 years after his youngest brother. When my father was born, his father abandoned the wife and new baby and disappeared. As the two older brothers went on about the business of making their livings and raising their own families, their mother slid into the influence of various con artists: spiritualists, a church (yes, a mainstream church) that persuaded her to donate large amounts, and a building contractor who took her money by talking her in to making repeated additions to her home. She sold two business properties and a second home. My father was ten years old when the grown brothers discovered she was flat broke and her primary home was being forfeited to the State of Texas for tax delinquency. She lost her entire estate to predators of the sanctimonious, the otherworldly, and the commercial varieties.

So my father determined to earn back that whole amount-$100,000-and when he did, he would quit working.

Through hard work, relentless frugality (some would say “miserliness”), and constant saving and investment, he attained that goal in 1962. By then he had $130,000, enough (he figured) for him and my mother to buy a house, retire modestly, and send me to college. At the age of 53, he quit his job and moved himself and my mother to Sun City, stashing me at the University of Arizona.

They lived comfortably enough in a manner that suited their tastes. The house was no larger than the apartments they’d lived in, but it was a house, not an apartment. For the first time in her life, my mother had a dishwasher. The development was quiet and safe, the cost of living extremely low, and in those days there was plenty of hunting and fishing within driving distance. What more could a man ask for?

Well, a crystal ball, maybe.

He didn’t anticipate the inflation of the 1970s, and as a result the hundred grand did not suffice. He had to go back to work until his health failed.

I now have almost $600,000 in savings, which I think is about equivalent to my father’s $100,000 around 1965. After having seen his experience, my guess is that in real buying power my economic status is not a lot different from his. I live a little better—have a bigger house with a pool, and I live in town, not in a retirement community out in the sticks. But I’m still working. I support that “better” lifestyle with a salary.

Certainly, if I moved to Sun City, which no longer stands in the middle of onion and cotton fields but is now surrounded by a sea of houses, I could collect a little cash on the trade from my house to the cheaper housing out there. I would save hugely on the cost of living, since auto and home insurance are half of what they are in town, property tax is a third of what I’m paying, and utilities on a smaller house are much cheaper. (The green stuff on the ground in the photo is gravel. That notwithstanding, ’tis a far, far better house than you can buy in town for $250,000.)

The fly in that ointment: I don’t want to live in a ghetto for the elderly embedded in a zillion square miles of ‘burbs!

But for me to feel the amount I’ve saved has more capacity to support me for the rest of my life than did the amount my father saved for his retirement, I would have to live exactly the way my parents lived. In other words: no, I haven’t moved up, really.