A Ledgie wants to know: Economy Edition

[HejiraNYC]

Oil is at record highs, gold is at record highs, the U.S. dollar is at record lows against the Euro, inflation is out of control yet incomes are flat, unemployment is spiking upward, housing values are tanking, the U.S. banking system is on the verge of collapse, house foreclosures are way up, the national debt is nearing 9 trillion dollars, jobs are being exported, there is an unending war costing U.S. taxpayers $12,000,000,000 per month, etc.

How is everyone weathering this economic *****storm? Business as usual? Cutting back? Better than ever? On the edge of financial ruin? A Ledgie wants to know!

[strandinthewind]

Fortunately, my job is mostly immune from economic changes - knock on wood.

I got rid of my house a year or so ago and I have no car anymore (I use zip car) because I am trying, as you know, to move to Manhattan. So, I think the economic downturn could actually help me there in that rents could be lowered or effectively lowered as a result.

I have, however, lost a bundle in my 401(k) and such. But, history demonstrates that a diversified portfolio, over the long run, is fairly safe - and I am not retiring anytime soon, much to my regret.

Of course, like Vera Charles - I spend way more than I make. I need to marry well (again )

How are you?

[SuzeQuze]

I'm buying a foreclosure (condo) so I'm benefitting from the downturn. Which I hope does not continue downward. I bought a Miata in Nov which is not as good on gas as my Toyota was but that is the only con of that car. It is awesome and I love it. It gets decent gas mileage, the Toyota's mileage was just extraordinary. But I drove that baby into the ground after 211k miles. To buy the condo I liquidated my 401k. It's been flat anyway and I figured this calculated risk would pay off. We shall see. The appraiser thought the condo, at its price, was a no brainer to buy. Exactly what I think. So it's all good.

As far as employment we are also mostly immune to a downturn. I just got a raise actually. In '01 I was laid off so I know what it's like to be negatively impacted during an economic slump. It sucks and I feel for any of you suffering this way.

[JazmenFlowers]

Originally Posted by HejiraNYC

Oil is at record highs, gold is at record highs, the U.S. dollar is at record lows against the Euro, inflation is out of control yet incomes are flat, unemployment is spiking upward, housing values are tanking, the U.S. banking system is on the verge of collapse, house foreclosures are way up, the national debt is nearing 9 trillion dollars, jobs are being exported, there is an unending war costing U.S. taxpayers $12,000,000,000 per month, etc.

How is everyone weathering this economic *****storm? Business as usual? Cutting back? Better than ever? On the edge of financial ruin? A Ledgie wants to know!

I've really been paying attention to everything you mention. this morning they talked about one investment firm dropping like 93% this morning. it's all rather scary. luckily, I'm doing well. I hate my job so the fact that the job market is in the toilet isn't fun, but at least my job is stable and I'm pretty secure. I make good money, have a nice home and a nice car and I'm able to pay my bills. I just paid off my HUGE credit card so that's even better. I still have a few small cards that I really should pay off. like everyone else though, I spend way too much on trips and clothes and crap.

[HejiraNYC]

Originally Posted by strandinthewind

Fortunately, my job is mostly immune from economic changes - knock on wood.

I got rid of my house a year or so ago and I have no car anymore (I use zip car) because I am trying, as you know, to move to Manhattan. So, I think the economic downturn could actually help me there in that rents could be lowered or effectively lowered as a result.

I have, however, lost a bundle in my 401(k) and such. But, history demonstrates that a diversified portfolio, over the long run, is fairly safe - and I am not retiring anytime soon, much to my regret.

Of course, like Vera Charles - I spend way more than I make. I need to marry well (again )

How are you?

I *think* my job is also mostly immune from the whims of the economy; however, I never take it for granted. I recently switched to a new position, but it's located in NJ . Between gas and the $8 Holland Tunnel toll, my commuting expenses are astronomical. However, now I don't need to pay for a parking garage space since I am in my car almost every day. That should save $315 per month. Plus I get to shop more frequently in NJ, where the prices and sales tax are lower.

I don't even look at my 401(k) statements anymore . However, despite the online insistence that I increase the percentage invested in stock annuities, I have fortunately diversified into foreign market funds and bond-backed funds.

Food is a bit more expensive, but it's all relative. Between Trader Joes and Chinatown (and not eating meat), I actually spend much less than most people.

I hate to admit it, but I find the bloodbath on Wall Street to be well-deserved and a long time coming. Schadenfreude is my middle name. They have been so careless and irresponsible with other people's money, and they have paid themselves obscene amounts of money. Moral hazard? What's that? They will make a killing if the market is up, and the government is going to bail them out (as they are right now) if the market is down. It's all-win for them. And when you have so many people making such obscene amounts of money concentrated in a single area, you get the Manhattan real estate market, which is pretty much untouchable by the middle-middle class. When all of these arrogant douchebags on Wall St. finally get laid off, fined or imprisoned, only then will Manhattan return to being an interesting place full of artists, regular families and, heaven forbid, diversity. As of late Manhattan has been all about black Town Cars, banks, Starbucks, suits and $15 cocktails. The revolution is finally here, thank Buddah!

As for spending... I'm still working on my house. That's where all my money goes. This spring I have to get down to landscaping, decking and maybe even a pool...

[strandinthewind]

I think the fall of Wall Street can be nothing but a bad thing in that if that happens, the US and world will suffer. As for the large salaries, I am not opposed to them becuase that is what the market is paying. Now, if they break the law, that is another thing.

As for the housing market tanking - housing prices overall in the US have fallen, but not by huge amounts. That will change though if a few things happen.

The first is no matter how much you owe on your house or how much the value of your house has fallen, it is all academic until you have to sell the house. In other words, as long as you make the payment, you likely will ride out any decline in value that likely will go up again.

The second is right now, only seven or so percent of houses are in forclosure. That is a relatively high number but it is no staggering enough to drive housing prices down but a few percentage points overall - though some areas will be effected more. If, however, that foreclosure number gets to, say 15-20 percent, then I think housing prices and values will spiral to over 50% or so. This is because the market will be flooded with product and not enough qualified buyers. In layman's terms, it will be a fire sale. I do not see the Feds letting that happen though. In reality, the bankruptcy laws likely will prevent that as well. If you cannot make your house note right now because it along with the average credit card debt is too much, the smart thing to so likely is to declare bankruptcy. A Chapter 7 will wipe out all unsecured debt like credit cards and you can keep your house and possibly renegotiate the terms of the mortgage, though that is very hard to do now, but likely will be easier as this crisis moves on. A Chatper 13 plan will not wipe out your debt, but it will exclude your house from the plan and you pay anything remaining to the creditors, which can be as little as 25% - over a five year period. Yes, bankruptcy is a harsh option and your credit is ruined for awhile (but certainly not forever, esp. if you make a good salary) - but, it is no worse than losing your house in a foreclosure and defaulting on the credit cards as well.

In the end, during the last part of the 90's the tech bubble caused havoc and many of the largest companies in the US imploded, causing massive layoffs and investors to lose trillions. The economy bounced back (ironically, mostly though housing) then and it will again.

So, in the end, pay cash for your stuff and make your mortgage and you will be fine.

[strandinthewind]

Originally Posted by HejiraNYC

. . . As for spending... I'm still working on my house. That's where all my money goes. This spring I have to get down to landscaping, decking and maybe even a pool...

You do realize that the mere though that you are builing a cool new house with a pool is as repugnant to some (arguably the very poor) as the Wall Street excess are respugnant to you So, in the end, I say as long as someone is not breaking the law, I do not begrudge them for making millions, or, in our case, a good salarythat affords some luxuries.

[rubytuesday]

I'm not in the Us but there has been a wave of economic stability. People in there 30s are expecting and a lot are getting what their parents generation had to work their lives for. I just think that there has to be a market crash in the near future. These things don't keep going up or maintaining that level forever. It seems like a matter of when and then all these people whose jobs supposedly aren't affected, those enjoying the good wave will suddenly find their vacation cut short.

[SuzeQuze]

Strand I think he was just speaking to the vapid greed that many stockbrokers and other business people have been justifying for years. People should be well-paid in a lucrative business. But they have to have some ethics. It's just a law of the universe, lack of humility will be corrected.

As far as why my job is sort of immune to downturn, we sell textbooks largely to universities and high schools. It would take extreme circumstances for those markets to dry up, which I hope we don't see.

[strandinthewind]

Originally Posted by rubytuesday

I'm not in the Us but there has been a wave of economic stability. People in there 30s are expecting and a lot are getting what their parents generation had to work their lives for . . . .

I think you hit on the main issue. Society in general and I suggest not just in the US (though perhaps more so here who knows) wants everything now. I think many of these people bought houses they knew they could not afford even before their payments went up with interest rates. I know many people who bought too expensive a house when others that were less expensive were available and then they pay $40,000 a year for their two kids to go to private schools and they have $40,000 in credit card debt because they cannot do without or make due. I think we all have some of this drama in our lives, but others seem to go further.

Note - there are many hard working conservative people who are losing their houses through no real fault of their own. I am not talking about them.

[strandinthewind]

Originally Posted by SuzeQuze

Strand I think he was just speaking to the vapid greed that many stockbrokers and other business people have been justifying for years. People should be well-paid in a lucrative business. But they have to have some ethics. It's just a law of the universe, lack of humility will be corrected . . . .

But, if someone is making that money legally, then how is that any different then what we do every day to make that money. Yes, we certainly do not make that much money, but what we make and how we spend it would seem just as awful and immoral to someone living in a box under a bridge Moreover, many argue school books should be free and certainly no profit should be made off of them. I am not saying this personally. I am just saying that if you judge others, then you cannot be pissed when someone judges you

[SuzeQuze]

Originally Posted by strandinthewind

But, if someone is making that money legally, then how is that any different then what we do every day to make that money. Yes, we certainly do not make that much money, but what we make and how we spend it would seem just as awful and immoral to someone living in a box under a bridge

I don't know that that is true. I haven't spoken to anyone under a bridge lately. I just mean that if financiers are doing shady things to inflate stocks and fleecing the little guys it's just bullsh*t.

[strandinthewind]

Originally Posted by SuzeQuze

I don't know that that is true. I haven't spoken to anyone under a bridge lately. I just mean that if financiers are doing shady things to inflate stocks and fleecing the little guys it's just bullsh*t.

I agree, if they are doing something illegal, they should be in jail.

[HejiraNYC]

Originally Posted by strandinthewind

I think the fall of Wall Street can be nothing but a bad thing in that if that happens, the US and world will suffer.

I think Wall Street, if not the U.S. economy as a whole, has been like the emperor's new clothes. The U.S. dollar (which has not been backed by the gold standard for a long time), combined with the lack of a manufacturing base, has really been held aloft by speculation and the notion that it is the de facto exchange currency due to its relative stability. That notion is drawing to a close as investors become wary of the true value of the dollar, combined with the emerging super-economies in Asia and the lack of confidence due to what I believe are some hasty, irresponsible interest rate cuts. In a nutshell, why would you have faith in a monetary policy that insists that you simply crank up the printing presses every time there is a tightness in credit.

As for the large salaries, I am not opposed to them becuase that is what the market is paying. Now, if they break the law, that is another thing.

There is the law, there are ethics, and then there is common decency. None of these are regulating the behaviors on Wall Street. How can you break the law when there aren't that many laws to break in the first place? Wall Street created this mess by borrowing money recklessly and lending money to anyone who can fog a mirror (which in turn caused the housing buble). They packaged these liar loans into securities that they deceptivelyresold as "AAA" rating at premium prices, paid themselves handsomely, and basically did nothing except pay themselves even more when it all came out in the wash. These securities ended up not being worth the paper they were printed on. But instead of taking responsibility for their own reckless, irresponsible behavior, they called on the U.S. government, i.e., the U.S. taxpayers to bail them out. And the bailout is now just beginning to the tune of hundreds of billions of dollars. We are left holding the bag while these amoral criminals are riding off into the sunset with their golden parachutes. I don't know how anyone can find this anything less than outrageous.

As for the housing market tanking - housing prices overall in the US have fallen, but not by huge amounts. That will change though if a few things happen.

Some markets like Las Vegas, Phoenix, San Diego and Miami are already down by as much as 25%. And we are just getting started. Unfortunately New York has been able to fend off the housing crash so far, but I don't see how much longer the party can last here.

The first is no matter how much you owe on your house or how much the value of your house has fallen, it is all academic until you have to sell the house.

Agreed, aka, "mark-to-market."

In other words, as long as you make the payment, you likely will ride out any decline in value that likely will go up again.

On an inflation-adjusted basis, it will be decades, if ever, before prices reach this level again.

The second is right now, only seven or so percent of houses are in forclosure. That is a relatively high number but it is no staggering enough to drive housing prices down but a few percentage points overall - though some areas will be effected more.

That is actually an incredibly high percentage; the areas that had the highest subprime loans and/or speculation will be pummeled.

If, however, that foreclosure number gets to, say 15-20 percent, then I think housing prices and values will spiral to over 50% or so. This is because the market will be flooded with product and not enough qualified buyers. In layman's terms, it will be a fire sale. I do not see the Feds letting that happen though.

But what can the Fed do besides cutting interest rates (which do not necessarily correspond to mortgage interest rates)? They're running out of wiggle room before cutting all the way down to 0%.

In reality, the bankruptcy laws likely will prevent that as well. If you cannot make your house note right now because it along with the average credit card debt is too much, the smart thing to so likely is to declare bankruptcy. A Chapter 7 will wipe out all unsecured debt like credit cards and you can keep your house and possibly renegotiate the terms of the mortgage, though that is very hard to do now, but likely will be easier as this crisis moves on. A Chatper 13 plan will not wipe out your debt, but it will exclude your house from the plan and you pay anything remaining to the creditors, which can be as little as 25% - over a five year period. Yes, bankruptcy is a harsh option and your credit is ruined for awhile (but certainly not forever, esp. if you make a good salary) - but, it is no worse than losing your house in a foreclosure and defaulting on the credit cards as well.

I think the tendency is for people who are underwater on their mortgages, i.e., they owe more than the house is worth, is simply to mail in the keys and walk away, credit score be damned. Although truly ethical people would choose to stay and pay down a loan commitment, regardless of the value of the property, a shocking number of people don't care about values and responsibility. If the value of the property goes up, great. If it goes down, it ain't my problem so I'm turning in the keys.

In the end, during the last part of the 90's the tech bubble caused havoc and many of the largest companies in the US imploded, causing massive layoffs and investors to lose trillions. The economy bounced back (ironically, mostly though housing) then and it will again.

The most recent run-up post 9/11 is unprecedented in U.S. history. It was clearly unsustainable. It really is time to pay the Piper.

So, in the end, pay cash for your stuff and make your mortgage and you will be fine.

But that's not the American way! We've been in a negative savings rate for the past couple of years...

[strandinthewind]

Originally Posted by HejiraNYC

. . . There is the law, there are ethics, and then there is common decency. None of these are regulating the behaviors on Wall Street. How can you break the law when there aren't that many laws to break in the first place? Wall Street created this mess by borrowing money recklessly and lending money to anyone who can fog a mirror (which in turn caused the housing buble). They packaged these liar loans into securities that they deceptivelyresold as "AAA" rating at premium prices, paid themselves handsomely, and basically did nothing except pay themselves even more when it all came out in the wash. These securities ended up not being worth the paper they were printed on. But instead of taking responsibility for their own reckless, irresponsible behavior, they called on the U.S. government, i.e., the U.S. taxpayers to bail them out. And the bailout is now just beginning to the tune of hundreds of billions of dollars. We are left holding the bag while these amoral criminals are riding off into the sunset with their golden parachutes. I don't know how anyone can find this anything less than outrageous . . . .

All of what you say is illegal Interestingly, so is taking a mortage you know you cannot pay

Here is a cool article fromwww. nytimes.com:

February 12, 2008
Mortgage Crisis Spreads Past Subprime Loans
By VIKAS BAJAJ and LOUISE STORY
The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.

“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”

The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.

Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.

And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s Economy.com and Equifax, the credit bureau.

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.

But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

“I’m not behind in my payments, but I’m trying to prevent getting behind,” Ms. Harris said. “I don’t want to ruin my credit.”

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home. At the time, she asked for a loan that could be refinanced after one year without penalty. She said her broker had told her a week before the closing that the penalty would extend until May 2009 and that she reluctantly agreed because she had already started moving.

A nonprofit community group, Acorn Housing, is trying to broker a modification of Ms. Harris’s loan. In a statement Friday, Countrywide said the company had been in touch with Ms. Harris and would work with her.

Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.

Others disregarded warnings about complex loans because they wanted to be a part of the housing boom, which like the technology stock bubble lured people in with seemingly instant and risk-free profits, said Mory Brenner, vice president of Financial Firebird Corporation, a company based in Pittsfield, Mass., that publishes consumer debt information and refers borrowers to credit counselors.

“I’d say, Let me tell you something, this is crazy,” Mr. Brenner said. “You cannot afford this house, even if nothing happens and rates stay as low as they are today. And the response would be: I don’t care.”

Lenders extended credit to people without verifying their incomes and allowing them to make little or no down payments.

But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances — housing prices collapsed and lending standards tightened just as they needed to sell or refinance.

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”