Some questions about the economy

[Rubia Warren]

Will someone please break this down for me? I'd appreciate it.
Since we have moved into being a service oriented country, and we are so hot on global trade now, I have questions putting everything together (I think I am going to just ask one question for this thread, actually):

1. BUsh keeps claiming that homeownership is on the rise. I don't dispute that. However, does anyone know if there is a correlation between the rise in homeownership and the really crappy mortgages that are offered to people such as those who have bad credit? I have noticed lately that many people I know personally who have terrible credit are getting mortgages with really bad ARM's, they are getting/have gotten the maximum allowed for a home, and then after the 1-5 year grace period thing that the ARM gives you in the beginning, they end up not being able to afford that home anymore because either the payment spikes incredibly, or they have lost their job and cannot afford any type of raise on their interest. Not saying that ALL ARM's are bad for everyone, but depending on the contract you sign, there can be some really hairy deals out there.

[Ryokan]

Will someone please break this down for me? I'd appreciate it.
Since we have moved into being a service oriented country, and we are so hot on global trade now, I have questions putting everything together (I think I am going to just ask one question for this thread, actually):

1. BUsh keeps claiming that homeownership is on the rise. I don't dispute that. However, does anyone know if there is a correlation between the rise in homeownership and the really crappy mortgages that are offered to people such as those who have bad credit? I have noticed lately that many people I know personally who have terrible credit are getting mortgages with really bad ARM's, they are getting/have gotten the maximum allowed for a home, and then after the 1-5 year grace period thing that the ARM gives you in the beginning, they end up not being able to afford that home anymore because either the payment spikes incredibly, or they have lost their job and cannot afford any type of raise on their interest. Not saying that ALL ARM's are bad for everyone, but depending on the contract you sign, there can be some really hairy deals out there. Well, the reason that these mortages are out there is the Federal reserve is making it really cheap for banks to borrow money from them, which lowers interest rates. But in a more practical sense, it means banks can take risks on loans they normally would otherwise, because they have such a large supply of money. So, lower interests rates and banks more comfortable with risk means, ouila, more people choose to buy houses. And if you don't have job security, or significant savings (roughly three months of income, at least) then you should save up before you buy a house, or you will get ripped off.

[Rubia Warren]

But since there has been a trend lately in credit offered to people with bad credit, which many of those types of loans are not good ideas to get into, doesn't make the statements of the defenders of the economy with regards to homeownership being up, a little fuzzy? Doesn't it seem like when Bush says "The economy is great. Hey-- just look at homeownership- it up like never before!" painting homeownership a little bit more rosey than it actually may be? I am not saying the economy is bad- I really don't think it is. I also don't think that all homeownership and new homeowners are in bad deals....... but a growing number of poor and bad credit people are jumping off the deep end into those bad deals. SO what my point is, that I am speculating that homeownership being on the rise might actually prove to be not as great a thing as what it seems. Could that be true?

You know I am from an industrial area..... in the 90's we were just booming, and in the beginnings of this decade, I am pretty sure that statewide, we were either the highest or one of the highest in rates of foreclosure (bankruptcy, too). This was attributed to work slowing down and people losing their jobs (which I do agree with to a certain extent- we've lost a ton), but I have to be realistic about that, too...... the foreclosures were also due to a foolishness on the parts of those workers/homebuyers. I mean, when the bank tells you you are preapproved for a $200,000 home, that doesn't mean that it is always wise for you to go for the max. As has been proven, jobs can be gone, the economy can settle down or even take a bad turn.... or even worse: you could wake up tomorrow with a brain tumor and not be able to work. So it was stupid, really, for people to not be thinking of tomorrow, and buying more modest homes that would be more easily afforded in case tomorrow you get hit by a big truck and can't work for a year and a half and your wife only makes 9 bucks an hour and you've got nothing in savings cuz your whole paycheck went to pay for a supernice house -you really could have done without the pool and the financed living room furniture. Know what I am sayin'? So I am not going to blame only businesses moving away for the foreclosures and bankruptcies in my state. Workin' blue collar jobs back then, we were not ignorant to the fact that even though things looked good, we very well could be next on the chopping block. It was hardly a secret. :ahem: You would think it was though, as each factory shut it's doors and gasps and cries were heard from miles away. :duh:

BUt in a way, the same kind of foolishness is happening with the shady mortgage deals people are taking now. So that is why I was wondering about it- what could come of that, and if that makes a difference in the great rates of homeownership going on in the US right now.
Also, does irresponsibility of consumers have any effect on our economy? Certainly, as you stated (I think in one of the other threads), buying with credit so much means that later on things slow down as people have to pay back their debts, but is there anything else? What effect can it have on the mortgage industry for a chunk of people to take out junky mortgages and get foreclosed on 3-5 years later?

[Ryokan]

But since there has been a trend lately in credit offered to people with bad credit, which many of those types of loans are not good ideas to get into, doesn't make the statements of the defenders of the economy with regards to homeownership being up, a little fuzzy? Doesn't it seem like when Bush says "The economy is great. Hey-- just look at homeownership- it up like never before!" painting homeownership a little bit more rosey than it actually may be? I am not saying the economy is bad- I really don't think it is. I also don't think that all homeownership and new homeowners are in bad deals....... but a growing number of poor and bad credit people are jumping off the deep end into those bad deals. SO what my point is, that I am speculating that homeownership being on the rise might actually prove to be not as great a thing as what it seems. Could that be true? I think the problem is, credit is so cheap right now, because of the low interest rates, that people who have never been taught to have a house can now afford credit. T

You know I am from an industrial area..... in the 90's we were just booming, and in the beginnings of this decade, I am pretty sure that statewide, we were either the highest or one of the highest in rates of foreclosure (bankruptcy, too). This was attributed to work slowing down and people losing their jobs (which I do agree with to a certain extent- we've lost a ton), but I have to be realistic about that, too...... the foreclosures were also due to a foolishness on the parts of those workers/homebuyers. I mean, when the bank tells you you are preapproved for a $200,000 home, that doesn't mean that it is always wise for you to go for the max. As has been proven, jobs can be gone, the economy can settle down or even take a bad turn.... or even worse: you could wake up tomorrow with a brain tumor and not be able to work. So it was stupid, really, for people to not be thinking of tomorrow, and buying more modest homes that would be more easily afforded in case tomorrow you get hit by a big truck and can't work for a year and a half and your wife only makes 9 bucks an hour and you've got nothing in savings cuz your whole paycheck went to pay for a supernice house -you really could have done without the pool and the financed living room furniture. Know what I am sayin'? So I am not going to blame only businesses moving away for the foreclosures and bankruptcies in my state. Workin' blue collar jobs back then, we were not ignorant to the fact that even though things looked good, we very well could be next on the chopping block. It was hardly a secret. :ahem: You would think it was though, as each factory shut it's doors and gasps and cries were heard from miles away. :duh: I remember. After September 11, my father, who worked in a commercial airline engine plant, got laid off. And he had $150,000 house. It sucks. But the reality is that there isn't alot of job security anymore. So its important, once you lose your job, to go looking for a new one immediately. And have savings, which alot of people don't.

BUt in a way, the same kind of foolishness is happening with the shady mortgage deals people are taking now. So that is why I was wondering about it- what could come of that, and if that makes a difference in the great rates of homeownership going on in the US right now.
Also, does irresponsibility of consumers have any effect on our economy? Certainly, as you stated (I think in one of the other threads), buying with credit so much means that later on things slow down as people have to pay back their debts, but is there anything else? What effect can it have on the mortgage industry for a chunk of people to take out junky mortgages and get foreclosed on 3-5 years later? It's not shady, its just that there is a huge supply of loans right now. The bankis can afford to give out risky loans, because the Fed is just loaning them money for practically nothing. The mortage industry will be alright, cuz they expect alot of people who take the loans won't pay back. Its just that enough of them will to make it profitable because the money is cheap.

[Ben Franklin]

It's not shady, its just that there is a huge supply of loans right now. The bankis can afford to give out risky loans, because the Fed is just loaning them money for practically nothing. The mortage industry will be alright, cuz they expect alot of people who take the loans won't pay back. Its just that enough of them will to make it profitable because the money is cheap.

Agreed. However, loaning out money/credit/etc. too cheaply is bound to increase the amount of speculative investments (anyone read about the Great Depression...?), so I would lay some responsibility on banks which willing allow the riskier investments. Perhaps these banks assume the government will bail them out (FDIC, etc.) when bad loans default...?

Let's learn from the mistakes of Japan's banking industry debacle: the repercussions drug their national economy into a malaise in which the Japanese have yet to recover, it seems. Let's avoid the same errors.

[eudyptes]

Agreed. However, loaning out money/credit/etc. too cheaply is bound to increase the amount of speculative investments (anyone read about the Great Depression...?), so I would lay some responsibility on banks which willing allow the riskier investments. Perhaps these banks assume the government will bail them out (FDIC, etc.) when bad loans default...?

Let's learn from the mistakes of Japan's banking industry debacle: the repercussions drug their national economy into a malaise in which the Japanese have yet to recover, it seems. Let's avoid the same errors.


While the banks share a portion of the blame on an over abundance of "shaky" credit -- I think it's the mortgage companies and credit card companies that are even bigger culprits. With the Fed rates low, and over all cost of money to lend low...everyone is offering credit to anyone.

Many finacial institutions are granting credit to those who have proven credit unworthy in the past, they are paying a premium in interest due to the risk, but with this "extra" credit for everything (not just houses) we've become a credit driven economy far beyond what has existed in the past (I read somewhere, but can't remember the source that credit card debt has increased over 40,000% since the late 60's). As our consumer debt levels increase the economy is being placed "on the brink" for a major correction.

The type of correction would see a large increase in unpaid debt, write-offs, legal action, and even with the new reforms - more bankruptcy. The cost of money would then become so high that most people would not be able to afford credit of any kind...and many wouldn't qualify for it.

But the overall thought seems to be - for the financial industry: make the money now, worry about consequences later (or don't worry at all); and for the consumer: get it all now, if we can't pay later we'll figure a way out.
That kind of think will lead to serious economical issues down the road somewhere.

[Arnold]

There is a new attitude toward home ownership as well. A large segment of the investment advisor's community are pushing the idea that just owning a house as an investment is a waste of investment potential. In other words, it is not about paying off a mortgage any more. It is about making your mortgage work for you. People are encouraged to consolidate their debts to decrease their interest payment and increase their credit line. This credit line is then directed towards more purchses and further investment. So one makes one's mortgage more valuable than just owning your house with no mortgage. This works if the investment portion is bringing in a rate of return higher than the consolidated debt's interest rate, and as long as one is disciplined enough to not touch the investment portion, thus letting it work for you. Throughout this system of investment is the idea that to have a paid off asset like a house just sitting there earning nothing but the market value increase is a waste of potential investment income. Often this additional investment is in an additional piece of property, thus what would have been a single home owner five years ago is now an owner of two or three homes, also pushing up the home ownership numbers.

For myself I have my doubts about such a system, but I am not a risktaker. I prefer the old method of paying one's debts and investing on top of those payments. But for the younger family that has the discipline to not overextend themselves it can produce a significant nestegg in the long run. A good investment advisor is necessary however, someone who is on board with this way of thinking and keeps one up to date on the overall performance of the debt and the investment assets.

[Ben Franklin]

A good investment advisor is necessary however, someone who is on board with this way of thinking and keeps one up to date on the overall performance of the debt and the investment assets.

And if I may add to that, be sure you hire an advisor on a fee-basis...! Watch out for those who are working on commission, right...!? :thumb:

[Sheepdog]

we also have a bubble forming in real estate due to trends in buying second homes, etc. All over the country, homes are more expensive than they should be (if the economist i read on the subject is correct), ranging from 10% to 60% over value.

in other words, their is an unusual demand in home ownership. i'm waiting until the bubble bursts (well, hoping it does) before i buy a home.

[Arnold]

we also have a bubble forming in real estate due to trends in buying second homes, etc. All over the country, homes are more expensive than they should be (if the economist i read on the subject is correct), ranging from 10% to 60% over value.

in other words, their is an unusual demand in home ownership. i'm waiting until the bubble bursts (well, hoping it does) before i buy a home.You could be waiting a while. It's been called a bubble for over a year. I hear a lot of "experts" make predictions (I watch CNBC every day while trading) and they are all over the map. Some agree with your expert, some say there is no bubble and that while there may be some local bubbles that may burst the overall market is simply in a uptrend. Unless you are in a hot spot of the market you are unlikely to see prices come down much in the near future unless something local happens to affect your particular market (like a large manufacturer closing).

[Duder]

There is a new attitude toward home ownership as well. A large segment of the investment advisor's community are pushing the idea that just owning a house as an investment is a waste of investment potential. In other words, it is not about paying off a mortgage any more. It is about making your mortgage work for you. People are encouraged to consolidate their debts to decrease their interest payment and increase their credit line. This credit line is then directed towards more purchses and further investment. So one makes one's mortgage more valuable than just owning your house with no mortgage. This works if the investment portion is bringing in a rate of return higher than the consolidated debt's interest rate, and as long as one is disciplined enough to not touch the investment portion, thus letting it work for you. Throughout this system of investment is the idea that to have a paid off asset like a house just sitting there earning nothing but the market value increase is a waste of potential investment income. Often this additional investment is in an additional piece of property, thus what would have been a single home owner five years ago is now an owner of two or three homes, also pushing up the home ownership numbers.

For myself I have my doubts about such a system, but I am not a risktaker. I prefer the old method of paying one's debts and investing on top of those payments. But for the younger family that has the discipline to not overextend themselves it can produce a significant nestegg in the long run. A good investment advisor is necessary however, someone who is on board with this way of thinking and keeps one up to date on the overall performance of the debt and the investment assets.

For once, I agree with you!
:yipee: :yipee: :yipee: :yipee: :yipee:

"Playing the market" - borrowing money cheaply and then loaning it out at a higher rate producues absolutely nothing. It's like that Dire Straights song:

That ain't working,
That's the way you do it!
You get your money for nothing and your chicks for free...

[Sheepdog]

actually, an economist wouldn't say it produces nothing. one could say that what you are doing is taking money that is otherwise sunk into property and putting it into the economy. these kinds of investments do spur the economy, if ever so slightly.

but in principle i agree, it seems too risky for my tastes. essentially you'd be putting your house on black and giving the roullette wheel a whirl.

[Arnold]

This invest your mortgage strategy is sometimes a part of a debt consolidation plan as a last resort to bankrupsy. It usually includes a universal life insurance plan as well. In these instances if one is disciplined enough to stop living beyond one's means, it can be a saving grace. But the danger is that one becomes complacent and thinks one's finances are under control so one can go back to charging up the credit cards again. Then it's game over...

[eudyptes]

This invest your mortgage strategy is sometimes a part of a debt consolidation plan as a last resort to bankrupsy. It usually includes a universal life insurance plan as well. In these instances if one is disciplined enough to stop living beyond one's means, it can be a saving grace. But the danger is that one becomes complacent and thinks one's finances are under control so one can go back to charging up the credit cards again. Then it's game over...

Another danger is that the people that this is supposed to help are usually the type that have proven an inability to control their spending beyond their means. (Thus the "last resort to bankruptcy".)

In my experience most people who consolidate to "save their credit" end up a few years later streched further and deeper in debt. What they need is credit counseling first...then work a plan. (Most communities - at least in the US - have free credit counseling...and make sure it's really FREE.)

[Arnold]

Another danger is that the people that this is supposed to help are usually the type that have proven an inability to control their spending beyond their means. (Thus the "last resort to bankruptcy".)

In my experience most people who consolidate to "save their credit" end up a few years later streched further and deeper in debt. What they need is credit counseling first...then work a plan. (Most communities - at least in the US - have free credit counseling...and make sure it's really FREE.)Yeah it should be free - it should be taught in high school. Handling one's finances and understanding taxes, investment, credit, etc. should be a mandatory must-pass subject for all students...

[Teallaura]

Yeah it should be free - it should be taught in high school. Handling one's finances and understanding taxes, investment, credit, etc. should be a mandatory must-pass subject for all students...
:yes: What he said!

[eudyptes]

Yeah it should be free - it should be taught in high school. Handling one's finances and understanding taxes, investment, credit, etc. should be a mandatory must-pass subject for all students...

I agree...even something as simple as balancing a checkbook would be nice. You'd be surprised (maybe) at how many people are walking around with no clue as to how to even balance their own checkbook...and don't worry about it. (Including some people in "professional" positions.)