Friday, February 03, 2006

"uh, I got a big mortgage..."


I was watching the 11 o'clock news tonight and there it was...the big 'news story' that people aren't saving any money. I know that isn't news to anybody here, but I'll say it again....the media is a lagging indicator!

Anyway, they have Mr. Reporter go out on the street and ask people is they save money.

"Excuse me sir, do you save money every month?" ...no
-next person-
"I was wondering if you have money in savings?" ...no
-next person-
"How much money do you have left over each month?" ...not much if any

So you get the point. The reporter asks a bunch of people if they have money in savings, or if they are saving any money. As you can imagine, most of the responses were 'no' and 'not very much'.

They they asked one guy why he has no savings and why he isn't saving any money....

"uh, I got a big mortgage..." "...I have to get a house now before it's impossible"

Then the news story transitioned into how the cost of housing here was causing people not to save any money. The story mentioned the fact that the savings rate hasn't been this low since the depression.

What I don't get is why so many people will neglect savings, health insurance, retirement savings, etc. just so they can get some crazy mortgage and 'own' a house?!?!?

Believe me, I REALLY understand wanting to own a house, but at what cost? Maybe it's just me, but the peace of mind knowing that I don't have a $4000-$5000 mortgage...or better yet, a $2000 mortgage that I know is GOING to be a $4000 mortgage, hanging over my head is worth more to me than 'owning' a place I can't afford.

How can I say most of these people can't afford it?? How long have you been reading here?? Even the latest stats from the California Association of Realtors show that only 8% of the people in San Diego can afford the median priced home. That median priced home won't even get you much 'house' in Southern California.

The story then goes to talk some financial advisor who said that people should try to save 'something' every week. They should put money away and plan for the future.

Let's get back to that famous line "...I have to get a house now before it's impossible". That is the mentality I have been talking about on this blog so many times. People want it, so they will do whatever to have it NOW! They don't do the math, they don't think about the future...other than what their property will be worth in it, they don't think about back-up plans, they don't think about retirement, they get emotionally set on something, and nothing is going to stop them...certainly not a little thing like income or savings.

Maybe it's just me, but it is just amazing that people will just 'assume' that property will go up forever. It is that logic alone that they use to justify the option ARM, the interest only, the 2/28 ARM, the 100% financing, the NINA, the stated income. After all, who cares if you are buying no money down, when the place goes up, you will make money. Most Southern Californian's think that real estate is impervious to any sort of decline now days.

The combination of negative savings, the price to income disconnect, and creative financing is the recipe for disaster. Do you wonder why all of the big lenders are headquartered in Southern California? It is the same reason tech was central to the Bay area, or why government contractors congregate around DC. That is where the action is. We saw what happened to the Bay Area when the 'action' returned to normal? What is going to happen to SoCal, when the RE/mortgage market returns to 'normal'? Like many people have said before, we don't need a huge dip to hurt lots of people. Even a flattening or small decline gets the first 'houses of cards' to start falling.

Per the news article tonight, we know that people aren't saving any money. So if they aren't saving, what are they going to fall back on when the ARMs adjust, and they can't refi? Or they can't afford the new 'adjusting' payment? What happens when people NEED to refi, but the 'flat' market means they need to pay for the costs out of pocket, instead of just 'rolling' the costs into the new loan?

Sounds like I'm beating a dead horse sometime...but I think most of you get the point.

That said, don't forget to check out the Forum page. There are lots of readers with many areas of expertise. I think it can be an informative and entertaining place....let's see what we can make out of it!

Thanks for stopping by, and I look forward to the comments on this post as well as the site changes!

SoCalMtgGuy

19 Comments:

Blogger David said...

For regular readers on this site you are beating a dead horse. Nevertheless, there are first time vistitors to this site who may not have not heard this stuff. Keep up the very solid work.

2/03/2006 5:22 AM  
Blogger Metroplexual said...

Even more scary. What happens to those people that bought at peak, when prices go down and the banks ask for the difference. FB's all the way.

2/03/2006 5:51 AM  
Blogger AZgolfer said...

SoCal

I just read your info on your consulting service. I was actually thinking this would be a great service you could provide and I am glad to see you do it.

I wish I could have had someone look at the mortgage I have now, but I don't think I did too bad.

You will definitely get my buisness when I do buy another house here in Phoenix. Could be another 18 months or so. $75 to $150 dollars on a 300-400K mortgage is peanuts!

Keep up the good work!

2/03/2006 6:39 AM  
Blogger odograph said...

Maybe this will seem like a tangent to you guys, or maybe (seeing this consumer behavior) you'll get it before other people.

In another forum we were talking about the State of the Union and the energy sections.

I said that we as a society had no guts, here we have this huge gov debt, and we are granting credits to people like me who buy a prius. (I antagonized them a bit by saying I didn't really need the credit - but thanks for the cash guys, be sure to thank your grandchildren too).

So anyway, the way I see this tying in to this forum is that we are getting exactly the same kind of government that these "no I don't save, I borrow" folks deserve.

The federal government, and the F@cked Borrower, are on the same plan.

2/03/2006 7:37 AM  
Blogger Jim A said...

metroplexual: The SCARY thing is when the banks GIVE UP on trying to get their money.

2/03/2006 9:23 AM  
Blogger drwende said...

As a regular reader, I kind of enjoy seeing the dead horse beaten, as long as morbid equine flagellation doesn't drive out other, newer content. I need my daily reassurance that several hundred thousand home "investors" CAN be wrong.

2/03/2006 9:51 AM  
Blogger mtnrunner2 said...

When we moved to San Diego from Phoenix in 1999, we almost couldn't afford a home either. We stretched to get a 30-yr mortgage, buying one of the cheapest houses in Poway.

At that time, PITI was 30% of gross income, and I think that was pretty high. Basically, after the 401K contribution and taxes taken from the paycheck, the first payment of the month covered the mortgage and groceries for 2 weeks. That left the other paycheck to cover the other 2 weeks of groceries, gas ($300/month), kids' activities ($700- $900) , a car payment, life insurance, car repairs, home maintenance, clothing, etc. Needless to say, every time the car broke down, it went on the credit card. Every time the annual property tax bill came due, it went on credit.

And forget about vacations - we just couldn't afford them. We did not use credit to spend on vacations, a new car. We bought used cars, and had one paid off.

And remember, we were only spending 30% of our income on a mortgage.

What about the people spending even more than that, the ones having to go no doc just to qualify? How are they paying for it?

It is popularly reported that US consumers don't save because they are spending their home equity, so they don't need to save. True. BUT: the bigger reason they don't save is the HIGH mortgage payment. They can't afford to save.

And when an unexpected expense arises, take it out of your house. You need to tap your equity just to pay the bills these days!

And to those of you who post with your stories of how much you save, how you never buy anything on credit, I ask you this: 1. Do you have any kids, and if so, do you offer them opportunities for piano lessons, gymnastics, soccer, tutoring? Not all of those, of course, but at least one or 2 activities per kid. 2. Do you live in a high-rent or cheap-rent part of the country? Is it possible for you to pay less than $2K/month to rent?

If you are a good parent and provide after-school activities, plus care about their education and therefore move to a part of town w/ a good school (which costs more), plus you live in a high-cost-of-living area in the country, AND you are debt free, then I am impressed. If you are debt free because you don't have kids to raise, or you live in Wyoming (where you can rent a house for $800/month), then you don't have bragging rights.

I am sharing this personal information only to show how a typical American middle-income family, w/ young children, has had to struggle financially, even though we bought a house 6 years ago, before the bubble was so big. No one in our situation could be expected to save much. Those who bought after we did, are much worse off. My husband makes money in the top 10%, and it hasn't been easy for us. How much harder is it for people with less income, who bought in the last few years?

I would love to hear more stories from people who are honest as I was, who can say "I was in over my head too because of these high housing prices".

2/03/2006 10:24 AM  
Blogger loonofficer said...

mtnrunner2-

Thank you for your honesty. You have now scared me sufficiently to abandon the thought of
1) Buying a house.
2) having kids.

I know that was not your intent but I, too, make decent money. The thought of not taking a vacation scares the living fill-in-the-blank out of me as it is (unfortunately) an occasional pleasure I have come to cherish.
I know that the fulfilment you must feel from seeing your kids grow must compensate somewhat but, whoa! Must be tough not to be able to get out of Cali. I love it here but every now and then I just HAVE to get away!

2/03/2006 10:53 AM  
Blogger Out at the peak said...

Sometimes I wish I had TV still to actually see and hear these people interviewed on the street. Did they edit out the exceptions though? Or possibly, statistically, they didn't run into any that do save. If they started asking my questions, I would have started preaching about how bad of shape our economy state is now.

All of my friends and family members who are older than me have some incredible savings.

But all my younger friends are near broke. If they have a car problem or something of that magnitude, they are going to be hurting. Their problem is that even though they got through college, their wages are half of what us 'lucky' ones get.

2/03/2006 11:33 AM  
Blogger SoCalMtgGuy said...

mtnrunner2

Thank you for the excellent post!!!

I think it would be a good one for the 'forums' to stimulate some discussion over there.

SoCalMtgGuy

2/03/2006 12:27 PM  
Blogger Metroplexual said...

Jim a,

I have been reading those articles too about loan forgiveness. Ben's Blog has one today. However, they pick those loans most likely to right themselves. Besides, eventually shareholders are to be answered as well as MBS holders.

MTNrunner2,

These are hard times. But I think we spend alot on luxuries we don't really need. Cellphones for one. I don't have one (i don't need one)my wife does and that is for my peace of mind. Going out to eat often, going out oto the movies, new clothes all the time, Starbucks, going out to lunch etc.

I live in the New York Metro area. Where I live I would say I make above the median.
It is not as expensive as SD but it is up there. We rent for $1800 for a three Bdrm house. We have saved over $100k in the last 5 years. My priority at this juncture is to have between $150 and $200 K by the time this thing hits bottom in two years or so. And then we will buy.

I have two kids 5 and 10 and we go on vacation at least 3 times a year. Although it often involves visiting relatives (lucky for us it is in interesting places, Jersey Shore, Tucson, and Billings MT). My wife works for an airline so airfare is free.

I payed my cars off in two years with a zero interest loan (one I bought outright used).

As for activities I keep it simple, Piano lessons $18/week. Mostly free intramural sports. Art activities, bike riding with my kids, hiking etc. Summertime we go to the beach where my parents live. We splurge on a ski trip one week a year in Vermont. I do most of my travel cheaply. I use betterbidding.com to get good inexpensive hotels on priceline and we clip coupons etc.

Much of our clothes are supplemented from Church thrift shops (you can get some nice stuff if you go to ones near wealthy areas, that is where they get their donations).

We carry no balance on credit cards. Ever! That is taboo.

I know it is rough for many people and I am not trying to sound superior but you should live within your means and whatever you do avoid borrowing on credit cards. They are evil.

2/03/2006 1:39 PM  
Blogger SoCalMtgGuy said...

metroplexual

Check out the forum site...your reply would be perfect over there!

SoCalMtgGuy

Another F@CKED Borrower - Forum

2/03/2006 1:54 PM  
Blogger need 2 leave CA said...

Living within your means is much better for peace of mind. Moving from Looney Land (SF Bay) to much quieter place (Albuquerque NM). Our mortgage for a 2700 sq ft home (at $1800/mo) would be equal to just what the taxes and insurance will be in the Bay area for the same house.

Too many FBs will be here.

2/03/2006 2:55 PM  
Blogger mtnrunner2 said...

Metroplexual - although perhaps you make as much as my husband, I don't work. Since my kids were born I quit my sofware manager job, and stayed home so I could raise my own kids. I am not a spoiled housewife: I do aerobics at home, run mountain trails, clean my own house, and rarely go out to eat or to movies. I have a cell phone, but my husband's is paid for by his work. We have no cable channels. I don't go to Starbucks, but don't clip coupons either. My only weakness: I love to look good, so I buy expensive clothes, and could cut back there.

So I'm different from you in that we don't have that second income, plus we are all well dressed.

We save a lot in our retirement fund, and if we didn't do that, could take vacations. I'd rather buy clothes, though.

Also, CA doesn't fund public schools too much. Sometimes the middle school offers an intramural activity, but it goes only for 6 weeks, and there are only a few sessions every year. So if you like a certain sport, you pretty much have to sign up somewhere. Competitive soccer was $1100/yr, times two. Piano is $250/month, since my kids play original Chopin and Scott Joplin, etc. and need a PhD level teacher. Add dance, violin, Montessori school (that's over now), and you get up to $900/month easily.

My brother-in-law is a tighwad, and he manages to save money in SD, but his kids rarely get to participate in any activities, and he would never buy a piano, so they are not getting any music lessons. So he's saving money at the expense of raising his children well.

We lived in an outlying area, so gas was $300 - $500/month easily.

I liked your post, metroplexual, because it made me think about how I could cut back. But I couldn't relate to any of your budget busters, so for now, I remain, another big spender :)

2/03/2006 5:18 PM  
Blogger mtnrunner2 said...

Metroplexual - I wonder if for $1800/month rent, you are able to provide your children with a good school district. Here, you could, but it would be one of the lower ranked schools in our good school district, with a large base of apartments and lower income housing, both of which lower the test scores. That was my point also: to provide properly for a family, it takes too much money now a days.

But I really do admire your ability to save so much. This shows your dedication to your family and an ability to delay gratification, both assets more people could use.

2/03/2006 5:28 PM  
Anonymous Anonymous said...

Everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

2/03/2006 7:14 PM  
Anonymous skooch said...

The federal government, and the F@cked Borrower, are on the same plan.


The difference is, when the govt needs more money, they just stick a big gun in your back and take it. A distinct advantage over the F'd Borrower.

2/03/2006 8:45 PM  
Blogger Metroplexual said...

mtnrunner2

Thank you for the compliments. I did not realize that prop 13 cut everything in CA to the bone that is a shame. I could see how that would cost a family quite a bit.

In NJ we have home rule with local property taxes, that is how schools are funded. When most of the locals have kids the schools programs tend to be excellent. But that is another issue, local property taxes are onerous. My parents pay $14K a YR, and they are retired. An example of programs that are available for enrichment is found in the town I grew up in. It has constitutional law studies as an after school program. For the last 10 yrs they have competed in Washington DC and last year they won.

Sports programs are almost universally funded. Which is probably why NJ is overrepresented in the NFL and the college football.

As for my wife she works part time. Mostly just weekends. She has a 401k and I work in Gubment so I have a pension. I also consult on the side.

2/04/2006 8:10 AM  
Blogger Chuen said...

mtnrunner, you're not alone if you find it hard to save money. I don't have kids, but am married, and still rent, and still find it hard to save. It's amazing, your parents tell you that if you get an education and work hard, that you'll be able to buy a house and have room and money to raise a family. I'm trying not to gripe, but it's harder than it seems. When I got married six years ago, I told my wife that we'll rent for a few years and save up, and then buy a house. I worked as a school teacher then, so I was making 35K a year. Needless to say, I didn't save much of anything, after 800 dollars for a one bedroom apt. in L.A., a car payment, student loans, and credit card bills that I had racked up during college. I went back to get a graduate degree, and am now working in a different field making 55K a year. I personally think that's a decent salary, but other young guys my age always have me beat, especially anyone involved in real estate. Given 30% piti, we could probably do a $1400 mortgage payment - but given taxes and insurance, we're probably more comfortable with $1200 a month. Tell me where in California I can buy for $1200 a month (with a traditional fixed rate mortgage)? There's just so little hope for young couples out there. My wife and I want to start a family, so I don't want to be in a situation where both us have to work and have our kids be raised by others. For now, we've moved to a more affordable community, and living in a modest apartment, while trying to maintain good spending and saving habits. It's about all we can do now.

2/05/2006 1:28 PM  

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