By Emma Johnson, MSN Money
Some dread it. Some embrace it. Some use the big 3-O as an excuse to do that one last, precious keg stand. Others become an eternal 29 overnight.
Whatever your attitude about turning 30, experts say it's a good time to assess your personal financial situation.
For many of us, real life is well under way by the start of our third decade. Usually 30-year-olds have completed most of their education and have a few years of work experience. The Census Bureau tells us about half of us marry before 30 and that most Americans (56%) have children by then. The National Association of Realtors says the median age for first-time homebuyers in the United States is 32.
And while we all enter our 30s with unique backgrounds and varying goals, experts agree there are some fundamental rules that that can help every young adult participating in a market economy (yes, that means you).
1. Scale back the credit cards. "So many people are credit-carding it up," says Sarah Young Fisher, 53, president of financial-planning firm Kuntz Lesher Capital in Lancaster, Pa., and the author of "The Complete Idiot's Guide to Personal Finance in your 20s and 30s." "I'm an old lady. When I started out, you couldn't get a credit card without a job. Now they just mail it to you and people don't understand how long it takes to pay it off at 20% interest."
The average credit card debt among 25- to 34-year-olds was $5,200 in 2004, according to credit card research firm CardWeb.com. That is on top of the average $19,200 in student-loan debt carried by recent undergraduates.
Young Fisher says a 30-year-old needs to be "living on your paycheck" -- getting by without taking on credit card debt -- and saving at least 10% of total salary for the future. "If not," she says, "you're not going be able to retire."
She recommends investing in Microsoft Money or Quicken -- user-friendly software programs that track income, expenses and investments and can be programmed to help with taxes and goal-setting.
2. Own a home -- or have a plan. Young Fisher says that homeownership should be a top priority for those who rent. "Start saving for a down payment," she says. "If you find something you love, or a change of life comes along (like a baby or a relocation) and you don't have any money, you're going to borrow or get an interest-only mortgage -- which is ridiculous."
When you do buy, she says, "buy what you can afford, not what you love." And don't forget the new expenses that come with a house -- like a lawn mower, furnace repairs and snow shovel.
3. Have skills. Even for those who do not consider themselves entrepreneurs, most workers should expect multiple changes in employers and job titles throughout their careers. "By time you're 30, you should develop a set of marketable skills," says Gregg Fisher, 35, founder of Gerstein Fisher, a New York financial-planning firm. "Try to bring something new to the table."
The model of working for the same company for 30 years and retiring with a gold watch is now two generations out of date, says Fisher, who founded his firm -- which serves mostly clients under age 45 -- at age 21. Today's workers must differentiate themselves in order to survive and thrive, Fisher says. "Everyone's really self-employed. If you work for a company, you just have one client," he says. "If they fire you, you're out of business."
4. Give money away. No, not to the credit card companies, in the form of 24.99% interest-rate payments. Instead, establish a regular charitable giving plan, says Scott Hanson, founder of financial-planning firm Hanson McClain and the author of the recently published "Money Matters: Essential Tips & Tools for Building Financial Peace of Mind."
"I think it's financially healthy to give," says Hanson, who also co-hosts a financial call-in show out of Sacramento, Calif. In talking to clients and callers, he's come to believe that we are an emotionally deprived nation that spends to feel good. When we feel down, we head to the mall.
Hanson believes that the good vibes one feels from giving to a cause can also create that feel-good factor -- one with more significance than a new CD or an 80% discounted cashmere sweater. "Giving your money away puts it in perspective," he says.
5. Know thyself. Introspection is not just for middle-aged guys with ponytails living on a cliff in Japan. Having a firm grasp on your priorities and values is one critical component of a healthy financial life.
For example: Is impressing your friends and strangers one of your core values? No? Then why is that expensive leased SUV sitting in your driveway? "Start to know yourself and build parameters so your life and money line up with those parameters," Hanson says.
"People get so caught up that their goal becomes having another zero before they go. Once we have a roof over our head and food on the table, none of that other stuff is really going to bring that much pleasure," Hanson says. "Money is not the most important thing. You'll never have any fun with it if it is."
6. Know smart people. It is important to have strong advisers in your life, Young Fisher says. Knowing a good tax preparer, financial adviser, attorney and insurance agent can save you untold amounts of money and stress. "When you do need someone, get someone good," she says.
Monday, December 22, 2008
Thursday, December 18, 2008
Young People watch less tv
Study: Young people watch less TV
The older you get, the more you watch, report says
By Paul Bond
Dec 17, 2008, 08:44 PM ET
Young Americans just aren't watching TV like they used to.Put another way, the older you get, the more you watch, according to a report due out today from Deloitte indicating that "Millennials," the generation of 14- to 25-year-olds, watches just 10.5 hours of TV a week.That compares to 15.1 hours for those belonging to Generation X (ages 26-42), 19.2 hours for Baby Boomers (33-61) and 21.5 hours for Matures (62-75).Lest one assume Millennials are shunning broadcast and cable in favor of watching DVDs on their TV screens -- they're not. They spend less time watching DVDs of movies and TV shows on television sets, 4.8 hours a week, than do Gen Xers.They are, though, spending more time watching DVDs on a computer -- 1.9 hours a week -- than any other age group.But while Millennials are watching the least amount of TV, they are spending the most time with media in general, making that up with video games, music and the Internet.Just don't expect them to spend too much time worrying about such things as news and current events, according to the Deloitte study dubbed "The State of the Media Democracy."TV does remain the most influential advertising medium going, followed by magazines, the Internet, newspapers, radio and billboards.Social networking sites are considered separate from the rest of the Internet, and they are the seventh-most influential place to advertise, followed by in-theater ads, DVDs, blogs (again, distinct from the Internet), video games, mobile phones and virtual worlds.Other nuggets from the study are that Gen Xers are driving DVR usage and to a lesser degree video game usage, as that medium, once frowned on by parents, is more recently being used for "family time."And the older you get, the less time you spend in movie theaters. Millennials spend an average of 1.8 hours a week at the movies, while it's just one hour for Gen Xers, 0.9 hours for Boomers and 0.7 hours for Matures.
The older you get, the more you watch, report says
By Paul Bond
Dec 17, 2008, 08:44 PM ET
Young Americans just aren't watching TV like they used to.Put another way, the older you get, the more you watch, according to a report due out today from Deloitte indicating that "Millennials," the generation of 14- to 25-year-olds, watches just 10.5 hours of TV a week.That compares to 15.1 hours for those belonging to Generation X (ages 26-42), 19.2 hours for Baby Boomers (33-61) and 21.5 hours for Matures (62-75).Lest one assume Millennials are shunning broadcast and cable in favor of watching DVDs on their TV screens -- they're not. They spend less time watching DVDs of movies and TV shows on television sets, 4.8 hours a week, than do Gen Xers.They are, though, spending more time watching DVDs on a computer -- 1.9 hours a week -- than any other age group.But while Millennials are watching the least amount of TV, they are spending the most time with media in general, making that up with video games, music and the Internet.Just don't expect them to spend too much time worrying about such things as news and current events, according to the Deloitte study dubbed "The State of the Media Democracy."TV does remain the most influential advertising medium going, followed by magazines, the Internet, newspapers, radio and billboards.Social networking sites are considered separate from the rest of the Internet, and they are the seventh-most influential place to advertise, followed by in-theater ads, DVDs, blogs (again, distinct from the Internet), video games, mobile phones and virtual worlds.Other nuggets from the study are that Gen Xers are driving DVR usage and to a lesser degree video game usage, as that medium, once frowned on by parents, is more recently being used for "family time."And the older you get, the less time you spend in movie theaters. Millennials spend an average of 1.8 hours a week at the movies, while it's just one hour for Gen Xers, 0.9 hours for Boomers and 0.7 hours for Matures.
Who isn't a Madoff Victim?
Who isn't a Madoff victim? The list is telling.
Although many smart people seem to have been taken in, one expert argues that anyone who really did their homework would have seen the warning signs.
By Nicholas Varchaver
Last Updated: December 17, 2008: 10:14 AM ET
NEW YORK (Fortune) -- As the number of victims of Bernard Madoff, the criminally charged founder of the investment firm that bears his name, seems to multiply with the speed and force of a hurricane, certain types of investors seem to be absent -- so far, anyway -- from the casualty list.
That's no accident, argues James Hedges IV of LJH Global Investments, a boutique firm that invests in hedge funds and private equity for high-net-worth families. In other words, score one for the big institutions that stick to standard rules rather than allowing their managers to invest on personal connections or hunches.
"There's no Duke Endowment [among the list of Madoff investors]," Hedges says. "There's no Harvard management, there's no Yale, there's no Penn, there's no Weyerhauser, no State of Texas or Virginia Retirement system."
The reason is simple, in Hedges' view. Letting Madoff manage your money "wouldn't pass an institutional-quality due diligence process," he says. "Because when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said 'I'm out of here.' "
In short, in Hedges' opinion, any sophisticated entity that actually did its homework would have seen the warning signs.
Hedges got the chance to see those signs up close: In 1997, when he was advising the Bessemer Trust, the giant wealth manager, he visited Bernard Madoff to discuss investing with Madoff's firm.
"I found him stylistically like a lot of traders: fast-talking, distractable, not remarkable," Hedges says of Madoff. But during their two-hour meeting, Hedges says, "there was one red flag after another."
For starters, he couldn't grasp Madoff's investing strategy. "I kept saying, 'you've got to explain it to me like I'm in first grade,' " he says. To no avail.
Then there was the fact that Madoff was charging no fees other than trading commissions: "The notion that something is fee-less -- which is what they largely proferred -- is too good to be true."
The fact that Madoff's operation was audited by a microscopic accounting firm also worried him. "He was also so secretive about his asset base -- that was another red flag."
In the end, Hedges was uncomfortable and Bessemer decided not to let Madoff manage any of its money.
In Hedges' view, those that went with Madoff chose faith over evidence. "You've got people who were disintermediated [i.e., didn't have a professional representative], or unsophisticated, or went in through a personal relationship. That's what a con man is -- a confidence man is somebody that engenders a relationship and then subsequently lures somebody into doing something that they shouldn't do." (According to the federal criminal complaint against him, Madoff has confessed that he ran a "giant Ponzi scheme." His lawyer, Ira Sorkin, declined to comment.)
Certainly many of the institutions that turned to Madoff will challenge Hedges' views, as many will face litigation from their own clients. So far, two of the large fund-of-funds with the largest sums under Madoff's control, Tremont and Fairfield Greenwich, have already asserted that they conducted extensive due diligence before investing. Many others will take the same position.
Should Hedges' opinion be borne out and corporate and state pension funds remain absent from the roster of Madoff victims -- of course, there will be many more names added to the list -- it will only heighten the Madoff tragedy. Because, in the end, it would show that this was one investing disaster that could easily have been avoided.
Although many smart people seem to have been taken in, one expert argues that anyone who really did their homework would have seen the warning signs.
By Nicholas Varchaver
Last Updated: December 17, 2008: 10:14 AM ET
NEW YORK (Fortune) -- As the number of victims of Bernard Madoff, the criminally charged founder of the investment firm that bears his name, seems to multiply with the speed and force of a hurricane, certain types of investors seem to be absent -- so far, anyway -- from the casualty list.
That's no accident, argues James Hedges IV of LJH Global Investments, a boutique firm that invests in hedge funds and private equity for high-net-worth families. In other words, score one for the big institutions that stick to standard rules rather than allowing their managers to invest on personal connections or hunches.
"There's no Duke Endowment [among the list of Madoff investors]," Hedges says. "There's no Harvard management, there's no Yale, there's no Penn, there's no Weyerhauser, no State of Texas or Virginia Retirement system."
The reason is simple, in Hedges' view. Letting Madoff manage your money "wouldn't pass an institutional-quality due diligence process," he says. "Because when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said 'I'm out of here.' "
In short, in Hedges' opinion, any sophisticated entity that actually did its homework would have seen the warning signs.
Hedges got the chance to see those signs up close: In 1997, when he was advising the Bessemer Trust, the giant wealth manager, he visited Bernard Madoff to discuss investing with Madoff's firm.
"I found him stylistically like a lot of traders: fast-talking, distractable, not remarkable," Hedges says of Madoff. But during their two-hour meeting, Hedges says, "there was one red flag after another."
For starters, he couldn't grasp Madoff's investing strategy. "I kept saying, 'you've got to explain it to me like I'm in first grade,' " he says. To no avail.
Then there was the fact that Madoff was charging no fees other than trading commissions: "The notion that something is fee-less -- which is what they largely proferred -- is too good to be true."
The fact that Madoff's operation was audited by a microscopic accounting firm also worried him. "He was also so secretive about his asset base -- that was another red flag."
In the end, Hedges was uncomfortable and Bessemer decided not to let Madoff manage any of its money.
In Hedges' view, those that went with Madoff chose faith over evidence. "You've got people who were disintermediated [i.e., didn't have a professional representative], or unsophisticated, or went in through a personal relationship. That's what a con man is -- a confidence man is somebody that engenders a relationship and then subsequently lures somebody into doing something that they shouldn't do." (According to the federal criminal complaint against him, Madoff has confessed that he ran a "giant Ponzi scheme." His lawyer, Ira Sorkin, declined to comment.)
Certainly many of the institutions that turned to Madoff will challenge Hedges' views, as many will face litigation from their own clients. So far, two of the large fund-of-funds with the largest sums under Madoff's control, Tremont and Fairfield Greenwich, have already asserted that they conducted extensive due diligence before investing. Many others will take the same position.
Should Hedges' opinion be borne out and corporate and state pension funds remain absent from the roster of Madoff victims -- of course, there will be many more names added to the list -- it will only heighten the Madoff tragedy. Because, in the end, it would show that this was one investing disaster that could easily have been avoided.
Friday, December 12, 2008
What makes a car American?
By Ashley FantzCNN
(CNN) -- With the top U.S. automakers in economic survival mode, the mantra, "Buy American," is a frequent cry among those trying to save jobs at home.
Georgia trucker Douglas Sullivan says he's concerned more about quality than the origin of a vehicle's parts.
But buying a car to benefit the U.S. economy has become an ambiguous, complicated challenge.
"How you define an American car is one of the great conundrums of this world," said Dutch Mandel, the editor and associate publisher of AutoWeek.
Fewer than half of the parts on some Big Three vehicles are made in the U.S.
Looking at a Ford Fusion? It is assembled in Mexico. The Chrysler 300C is assembled in Canada, but its transmission is from Indiana; the brand's V-8 engine is made in Mexico. Engines in the Chevrolet Equinox sport utility vehicle are from China.
On the other hand, Toyota's Camry is comprised 80 percent of parts made in the United States, and 56 percent of Toyota's vehicles sold in the U.S. also are made here, according to Toyota spokeswoman Sona Iliffe-Moon.
The Toyota Sienna and Tundra also have 80 percent of their parts manufactured in the U.S.
"When you have manufacturers from around the world building cars in the U.S. with 85 percent domestic content -- engine, transmission, assembly -- is that an American car?" Mandel asked. Or, he asks, is it considered foreign because the profits go back to a foreign country?
"It's truly a global industry," said Thomas Klier, a Chicago, Illinois, economist who co-authored "Who Really Made Your Car?" an encyclopedic analysis of the auto industry melting pot. "When you think of buying American, you should focus on three points -- its engine, transmission and where it was assembled," Klier said.
To get that information, read a vehicle's window sticker. U.S. automakers are legally required to detail the origin of a car's parts and its final assembly point.
"Unfortunately, there are few people who know about the sticker or even bother to look at it," said Bernard Swiecki, a senior project manager at the nonprofit Center for Automotive Research in Michigan, which follows trends in the industry.
The sticker's details were news to Douglas Sullivan, 43, a truck driver from Snellville, Georgia. Though he prefers foreign brands, believing them to be of higher quality, he said he used to favor U.S. brands because he wanted to support American workers.
"I wanted to keep the jobs right here," Sullivan said.
Swiecki said many people think about image of a brand, rather than the way that brand has evolved over decades as the market has grown more diverse and competitive.
"They will think, 'I'm buying a GM, I'm getting an American car,' " Swiecki said.
Foreign car manufacturers generate billions of dollars in jobs and community infrastructure in the U.S., but there is a difference between Detroit's economic footprint and that of its foreign rivals.
The Center for Automotive Research says Detroit's Big Three employed almost 240,000 people in the U.S. at the end of 2007. Foreign makers had about 113,00 U.S. employees at the time.
The key difference in how the Big Three and foreign brands support jobs in the U.S. comes outside the factories, according to a 2006 study by the Level Field Institute, a group formed by Big Three retirees in Washington.
"What's driving the difference in jobs ... is investment in research, design, engineering and management," Level Field President Jim Doyle said in a statement on the 2006 study.
The Center for Automotive Research said the Big Three had 24,000 engineers on U.S. payrolls in 2007. The Japan Automobile Manufacturers Association said its member companies had 3,500 U.S. research and development employees in 2007.
Level Field found that every 1,000 vehicles sold by Detroit's Big Three in the U.S. support more than twice as many jobs as 1,000 vehicles sold by foreign nameplates.
Most Americans consumers understand that the industry is global, Swiecki said, and they are more savvy than ever in purchasing vehicles.
"For the most part, gone are the days of people going to a car lot and paying a buck to take a swing of a hammer at a foreign-made car," Swiecki said.
But there are exceptions.
A Savannah, Georgia, Ford dealer sold 15 cars last weekend after he ran a radio ad blaming Japan for Detroit's financial funk.
While 15 was substantially better than weekends before the ad, dealer O.C. Welch said, it was still about half of the business he did a year ago.
"All you people that buy all your Toyotas and send that money to Japan, you know, when you don't have a job to make your Toyota car payment, don't come crying to me," Welch says in the ad. "All those cars are rice ready. They're not road ready."
Sullivan, who was at an Atlanta, Georgia, dealership Thursday to pick up his American brand minivan from the service department, said he has had a different experience.
He said the vehicle has given him trouble, and whenever he replaces it, he'll probably go with a foreign brand, regardless of whether any of the parts were made in the United States.
"What I look for is good gas mileage, and when I pay it off in four or five years, it's still running," said Sullivan, who has owned several American and foreign brands. "It seems I get better quality with a foreign car."
(CNN) -- With the top U.S. automakers in economic survival mode, the mantra, "Buy American," is a frequent cry among those trying to save jobs at home.
Georgia trucker Douglas Sullivan says he's concerned more about quality than the origin of a vehicle's parts.
But buying a car to benefit the U.S. economy has become an ambiguous, complicated challenge.
"How you define an American car is one of the great conundrums of this world," said Dutch Mandel, the editor and associate publisher of AutoWeek.
Fewer than half of the parts on some Big Three vehicles are made in the U.S.
Looking at a Ford Fusion? It is assembled in Mexico. The Chrysler 300C is assembled in Canada, but its transmission is from Indiana; the brand's V-8 engine is made in Mexico. Engines in the Chevrolet Equinox sport utility vehicle are from China.
On the other hand, Toyota's Camry is comprised 80 percent of parts made in the United States, and 56 percent of Toyota's vehicles sold in the U.S. also are made here, according to Toyota spokeswoman Sona Iliffe-Moon.
The Toyota Sienna and Tundra also have 80 percent of their parts manufactured in the U.S.
"When you have manufacturers from around the world building cars in the U.S. with 85 percent domestic content -- engine, transmission, assembly -- is that an American car?" Mandel asked. Or, he asks, is it considered foreign because the profits go back to a foreign country?
"It's truly a global industry," said Thomas Klier, a Chicago, Illinois, economist who co-authored "Who Really Made Your Car?" an encyclopedic analysis of the auto industry melting pot. "When you think of buying American, you should focus on three points -- its engine, transmission and where it was assembled," Klier said.
To get that information, read a vehicle's window sticker. U.S. automakers are legally required to detail the origin of a car's parts and its final assembly point.
"Unfortunately, there are few people who know about the sticker or even bother to look at it," said Bernard Swiecki, a senior project manager at the nonprofit Center for Automotive Research in Michigan, which follows trends in the industry.
The sticker's details were news to Douglas Sullivan, 43, a truck driver from Snellville, Georgia. Though he prefers foreign brands, believing them to be of higher quality, he said he used to favor U.S. brands because he wanted to support American workers.
"I wanted to keep the jobs right here," Sullivan said.
Swiecki said many people think about image of a brand, rather than the way that brand has evolved over decades as the market has grown more diverse and competitive.
"They will think, 'I'm buying a GM, I'm getting an American car,' " Swiecki said.
Foreign car manufacturers generate billions of dollars in jobs and community infrastructure in the U.S., but there is a difference between Detroit's economic footprint and that of its foreign rivals.
The Center for Automotive Research says Detroit's Big Three employed almost 240,000 people in the U.S. at the end of 2007. Foreign makers had about 113,00 U.S. employees at the time.
The key difference in how the Big Three and foreign brands support jobs in the U.S. comes outside the factories, according to a 2006 study by the Level Field Institute, a group formed by Big Three retirees in Washington.
"What's driving the difference in jobs ... is investment in research, design, engineering and management," Level Field President Jim Doyle said in a statement on the 2006 study.
The Center for Automotive Research said the Big Three had 24,000 engineers on U.S. payrolls in 2007. The Japan Automobile Manufacturers Association said its member companies had 3,500 U.S. research and development employees in 2007.
Level Field found that every 1,000 vehicles sold by Detroit's Big Three in the U.S. support more than twice as many jobs as 1,000 vehicles sold by foreign nameplates.
Most Americans consumers understand that the industry is global, Swiecki said, and they are more savvy than ever in purchasing vehicles.
"For the most part, gone are the days of people going to a car lot and paying a buck to take a swing of a hammer at a foreign-made car," Swiecki said.
But there are exceptions.
A Savannah, Georgia, Ford dealer sold 15 cars last weekend after he ran a radio ad blaming Japan for Detroit's financial funk.
While 15 was substantially better than weekends before the ad, dealer O.C. Welch said, it was still about half of the business he did a year ago.
"All you people that buy all your Toyotas and send that money to Japan, you know, when you don't have a job to make your Toyota car payment, don't come crying to me," Welch says in the ad. "All those cars are rice ready. They're not road ready."
Sullivan, who was at an Atlanta, Georgia, dealership Thursday to pick up his American brand minivan from the service department, said he has had a different experience.
He said the vehicle has given him trouble, and whenever he replaces it, he'll probably go with a foreign brand, regardless of whether any of the parts were made in the United States.
"What I look for is good gas mileage, and when I pay it off in four or five years, it's still running," said Sullivan, who has owned several American and foreign brands. "It seems I get better quality with a foreign car."
Why home values may take decades to recover
Why home values may take decades to recover
Some see 2006 as 'lifetime' peak in prices
By Dennis CauchonUSA TODAY
More room to fall?
For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.
"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.
His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.
As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.
"Homes are different than other goods and services," she says. "The fragility of our banking system is tied to the value of homes."
Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation's broad economic troubles, not just an effect.
"If we have another 20% decline in prices, we'll need another bailout of banks similar to what we just did," Wachter says.
Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover.
"The one saving grace is the population is growing by 3 million people a year," he says. "They need to live somewhere. That means more roofs."
Until recently, homes were stable, unspectacular investments, not get-rich-quick schemes.
Nationally, the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.
Newly built homes generally were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes overall. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were conspicuous exceptions to the rule.
Despite only modest increases in value, homes were smart investments. Owners lived in a house, then got their money back when they sold. That's a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.
From 2002 to 2006, houses went from being a tortoise to a hare in the investment world. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-rate mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.
When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:
•Income — Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.
•Rent — Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.
•Appreciation — Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.
He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian hostage crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to match its value in 1980.
"That's the nature of bubbles," Schiff says. "The price never comes back."
An extreme relaxation of lending standards inflated the housing bubble.
"Shoddy underwriting on mortgages" is the primary cause of the housing crisis, says York, the Wachovia economist. "People got caught off-guard by how bad it was."
Millions of home buyers — poor, rich and middle class — were approved to buy homes at prices that had been out-of-reach just a few years earlier. Lenders offered low introductory "teaser" rates on adjustable rate mortgages and approved borrowers based on artificially low mortgage payments, not the higher ones that took effect later.
What else changed:
•Optional payments on principal — In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.
• No verification of income — Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.
•Tiny down payments — In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.
Low down payments and ARMs gave homeowners enormous financial leverage to pay high home prices. Leverage boosts buying power through debt, the same way a 100-pound woman uses a lever to jack up a 3,000-pound car.
Consider a couple with $20,000 cash. In 2006, they easily could get a 5% down mortgage to buy a $400,000 house. Today, a 10% down payment would limit the couple to a $200,000 house.
"Leverage matters a lot when you buy a house," says University of Wisconsin economist Morris Davis, an expert on housing prices and rents. "We're not going to go back to the days of only 20% (down payment) mortgages, but the days of putting nothing down are long gone."
Easy access to borrowed money reset all housing prices, even those paid by cautious borrowers. People of all income classes moved up a notch, Census Bureau housing data show.
The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families.
The failed titans of home lending — Countrywide Financial, IndyMac Bank and Washington Mutual — specialized in high-risk, highly leveraged loans.
"The price correction has been severe, rapid and probably permanent because lending standards have changed," says mortgage credit analyst Suzanne Mistretta, a senior director at Fitch Ratings, a bond rating company. "We are not going to see 2006 peak levels for a very, very long time."
The Great Depression of the 1930s was preceded by a real estate bubble, also fueled by loose lending standards and shrinking down payment requirements. Those real estate problems — and solutions — echo today's.
Florida real estate was the epicenter of speculation in the mid-1920s. Developers ran up prices by selling to borrowers who put as little as 10% down. Those were shockingly risky loans at a time when the standard mortgage lasted five years and required a 50% down payment.
The risky loans went bad first, but it was the spread of credit problems to the supposedly safe loans — five years and 50% down — that caused the housing market to collapse.
The five-year loans required no payments to reduce principal. Homeowners expected to refinance mortgages when the loans expired, usually with the same lender. The stock market crash led to a "liquidity crisis" — no money to borrow — that dried up mortgage refinancing.
Millions of families lost their homes to foreclosure. Falling prices on nearly everything — homes, farm crops, wages — made consumers reluctant to buy and banks afraid to lend.
As part of the New Deal, the government took control of millions of loans and restructured them into something new: the modern mortgage, with 20% down and principal that is repaid over the life of the loan. The government extended the mortgages to 15 years, then 25 and finally 30.
When World War II ended in 1945 and the Baby Boom began the following year, the 30-year, fixed-rate mortgage became a cornerstone of society and led to unprecedented levels of homeownership.
This resilient home finance system should recover in a few years, some analysts say.
National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.
He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. "People who bought at the peak in those states will need time for prices to recover, even up to five years," he says. Yun says people who buy now "have much less risk of price declines and a great possibility of price gains."
The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines.
During the housing boom, buyers expected prices to rise, so they were quick to buy, borrow and pay a premium. As prices drop, home buyers wait for better deals. says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.
Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can't buy other houses. "Price declines can be a self-reinforcing mechanism," Wachter says.
An out-of-control price collapse would have dire consequences, Baker says. Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.
If housing prices don't stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages, Baker says. "The waves of bad debt will just keep coming," he says.
Baker and Wachter want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.
Rick Wallick is an example of how even cautious borrowers can be hurt by a price collapse. He made a 35% down payment on his house and got a 15-year, fixed-rate mortgage at 5.75%.
Arizona's real estate mess wiped him out anyway. Now that he's in Oregon, he's renting out his Arizona house at a loss and can't afford to keep two homes.
Wallick's Arizona house is surrounded by countless foreclosed homes and empty lots. He told his mortgage company that his December payment will be his last. "It may ruin my credit rating, but I can still buy food," he says.
Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house's assessed value briefly rose to $225,000.
Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They'd settle for $160,000.
Shelley McComb, 30, who manages a doggie day care center, says, "I wish we'd rented."
Some see 2006 as 'lifetime' peak in prices
By Dennis CauchonUSA TODAY
More room to fall?
For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.
The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.
"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.
His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.
As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.
"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."
The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.
So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.
The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.
"Homes are different than other goods and services," she says. "The fragility of our banking system is tied to the value of homes."
Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation's broad economic troubles, not just an effect.
"If we have another 20% decline in prices, we'll need another bailout of banks similar to what we just did," Wachter says.
Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover.
"The one saving grace is the population is growing by 3 million people a year," he says. "They need to live somewhere. That means more roofs."
Until recently, homes were stable, unspectacular investments, not get-rich-quick schemes.
Nationally, the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.
Newly built homes generally were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes overall. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were conspicuous exceptions to the rule.
Despite only modest increases in value, homes were smart investments. Owners lived in a house, then got their money back when they sold. That's a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.
From 2002 to 2006, houses went from being a tortoise to a hare in the investment world. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-rate mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.
When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:
•Income — Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.
•Rent — Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.
•Appreciation — Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.
He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian hostage crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to match its value in 1980.
"That's the nature of bubbles," Schiff says. "The price never comes back."
An extreme relaxation of lending standards inflated the housing bubble.
"Shoddy underwriting on mortgages" is the primary cause of the housing crisis, says York, the Wachovia economist. "People got caught off-guard by how bad it was."
Millions of home buyers — poor, rich and middle class — were approved to buy homes at prices that had been out-of-reach just a few years earlier. Lenders offered low introductory "teaser" rates on adjustable rate mortgages and approved borrowers based on artificially low mortgage payments, not the higher ones that took effect later.
What else changed:
•Optional payments on principal — In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.
• No verification of income — Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.
•Tiny down payments — In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.
Low down payments and ARMs gave homeowners enormous financial leverage to pay high home prices. Leverage boosts buying power through debt, the same way a 100-pound woman uses a lever to jack up a 3,000-pound car.
Consider a couple with $20,000 cash. In 2006, they easily could get a 5% down mortgage to buy a $400,000 house. Today, a 10% down payment would limit the couple to a $200,000 house.
"Leverage matters a lot when you buy a house," says University of Wisconsin economist Morris Davis, an expert on housing prices and rents. "We're not going to go back to the days of only 20% (down payment) mortgages, but the days of putting nothing down are long gone."
Easy access to borrowed money reset all housing prices, even those paid by cautious borrowers. People of all income classes moved up a notch, Census Bureau housing data show.
The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families.
The failed titans of home lending — Countrywide Financial, IndyMac Bank and Washington Mutual — specialized in high-risk, highly leveraged loans.
"The price correction has been severe, rapid and probably permanent because lending standards have changed," says mortgage credit analyst Suzanne Mistretta, a senior director at Fitch Ratings, a bond rating company. "We are not going to see 2006 peak levels for a very, very long time."
The Great Depression of the 1930s was preceded by a real estate bubble, also fueled by loose lending standards and shrinking down payment requirements. Those real estate problems — and solutions — echo today's.
Florida real estate was the epicenter of speculation in the mid-1920s. Developers ran up prices by selling to borrowers who put as little as 10% down. Those were shockingly risky loans at a time when the standard mortgage lasted five years and required a 50% down payment.
The risky loans went bad first, but it was the spread of credit problems to the supposedly safe loans — five years and 50% down — that caused the housing market to collapse.
The five-year loans required no payments to reduce principal. Homeowners expected to refinance mortgages when the loans expired, usually with the same lender. The stock market crash led to a "liquidity crisis" — no money to borrow — that dried up mortgage refinancing.
Millions of families lost their homes to foreclosure. Falling prices on nearly everything — homes, farm crops, wages — made consumers reluctant to buy and banks afraid to lend.
As part of the New Deal, the government took control of millions of loans and restructured them into something new: the modern mortgage, with 20% down and principal that is repaid over the life of the loan. The government extended the mortgages to 15 years, then 25 and finally 30.
When World War II ended in 1945 and the Baby Boom began the following year, the 30-year, fixed-rate mortgage became a cornerstone of society and led to unprecedented levels of homeownership.
This resilient home finance system should recover in a few years, some analysts say.
National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.
He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. "People who bought at the peak in those states will need time for prices to recover, even up to five years," he says. Yun says people who buy now "have much less risk of price declines and a great possibility of price gains."
The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines.
During the housing boom, buyers expected prices to rise, so they were quick to buy, borrow and pay a premium. As prices drop, home buyers wait for better deals. says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.
Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can't buy other houses. "Price declines can be a self-reinforcing mechanism," Wachter says.
An out-of-control price collapse would have dire consequences, Baker says. Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.
If housing prices don't stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages, Baker says. "The waves of bad debt will just keep coming," he says.
Baker and Wachter want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.
Rick Wallick is an example of how even cautious borrowers can be hurt by a price collapse. He made a 35% down payment on his house and got a 15-year, fixed-rate mortgage at 5.75%.
Arizona's real estate mess wiped him out anyway. Now that he's in Oregon, he's renting out his Arizona house at a loss and can't afford to keep two homes.
Wallick's Arizona house is surrounded by countless foreclosed homes and empty lots. He told his mortgage company that his December payment will be his last. "It may ruin my credit rating, but I can still buy food," he says.
Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house's assessed value briefly rose to $225,000.
Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They'd settle for $160,000.
Shelley McComb, 30, who manages a doggie day care center, says, "I wish we'd rented."
Subscribe to:
Posts (Atom)