THE ECONOMY WANTS YOUR HOUSE

BROKE. NO CREDIT? JUST REFINANCE YOUR HOUSE AND WE CAN GET YOU THAT MICROWAVE OVEN OF YOUR DREAMS!
CHANGE YOUR CASH FLOW, CHANGE YOUR LIFE!

Many economists and business analysts have advised that consumer spending since 2001 has been propped up by massive mortgage equity withdrawals[i]. They argue that growth in GDP is more a result of spending occasioned by cashing out equity than money earned and recirculated from growing productive activity. Low interest rates, combined with fast-rising home prices, have created a pool of cash that homeowners have tapped to keep the spending splurge going.

HAPPY DAYS ARE PAID FOR WITH THE HAPPY HOME

The investment newsletter from John Mauldin on December 16th, “Do Trade Deficits Matter?”[ii], includes a bar chart entitled, “GDP Growth: With and Without Mortgage Equity Withdrawal”. The chart is set out below this post. The chart was prepared by a blog called “Calculated Risk”[iii]. The Author of the Calculated Risk blog uses an estimate that 2/3 of Mortgage Equity Withdrawal (MEW) flows through to personal consumer spending. But the Author also notes that some of the estimates are that 50% of MEW spending flow through. Mauldin makes the point that even if the graph is off a point or two, much of the recent GDP growth is fired not by general economic activity but by equity cash outs. Without these non-recurring events, the US economy would have contracted in 2001 and 2002, and grown at a rate far below the 3.5% average annual rate of GDP growth in every year since.

YOUR ARM (Adjustable-Rate Mortgage) MAY COST YOU A LEG

The 10-year treasury yield is 4.44% as of December 19, 2005. That is 19 basis points (.19 percent. A basis point is one-hundredth of one percent) above the 4.25% Fed Funds Rate. The Fed Funds Rate was recently raised to 4.25 % and most observers predict that the Fed will raise the rate to 4.5% at the next meeting of the Federal Reserve Board. This increase could finally invert the yield curve, raising the short-term rates above the 10-year yield.[iv]

From the consumer perspective, and why some consumers will wish they could cut off their signing hand to spite their ARM, increasing short rates will increase their mortgage payments. ARM rates rise or fall based upon short-term interest rate movements. That ARM from 2003 with 3% interest will now move to 6% interest or more. That could create a substantial cash-flow problem for many borrowers.

WHY ARE WE HERE? ARE WE ON EARTH JUST TO PAY BILLS AND THE MORTGAGE?

A subject of many posts is the profligate spending and nonexistent saving habits of many Americans. Most of the examination is directed to the economic and retirement risks engendered by this conduct. These are the questions relevant to the economist and the investment advisor. But there are other questions…

There was an article in the New York Times Magazine on Sunday, December 18th, that starkly presented the “cost-shifting” by suburban workers in their quest to have “all the right things”. The article was about a Texas exurb called Astoria, north of Dallas. It is also about the tread milling people who moved there to “get more house”, find better schools, and/or let one spouse stay-at-home with the children. The names of these exploding exurbs are interchangeable. Astoria, Texas, Burnsville, Minnesota, Fishers, Indiana, Rio Rancho, New Mexico. People move in, out, around and amongst them for a $3,000 raise, a job that has one more person reporting to them, or to save ten minutes on the commute. And as one exurb fills up, another is building just 15 minutes further out on the interstate.

SUPERSIZE YOUR HOUSE. SUPERSIZE YOUR HEADACHES.

The price of the exurb “upsized-house, downsized-life” is an interminably longer commute, exploding congestion in the exurb, and near-parental abandonment by the one-working parent. Kids that spend half of their young lives in minivans or in fenced-in yards. Kids with days scheduled as tightly as corporate CEOs or heart surgeons.

And those are just the human costs. The environmental cost is “sprawl”, and all that entails. More greenhouse gas, less green space. Less wildlife, more roadkill.

But the larger question, the greater question, is why? Why move to the exurb with the “best schools” but shortchange your children by commuting 3 hours a day to a ten-hour per day job? Why pay for dance classes, hockey, and traveling league baseball with money that could go to a college fund? Why force your kids to borrow the money for college when you could have saved for them?

THE MUSLIM, THE CHRISTIAN, THE JEW AND THE ATHEIST SHOULD ALL BE ABLE TO ANSWER THIS QUESTION?

If you will wake up Christmas morning and look at a pile of presents that will take until April to pay off (just in time to charge your tax bill), or are already dreading that long commute tomorrow, then next weekend should be easier for you. You need to make only one New Year’s Resolution. Ask the question “why”? You won’t get the answer the next day or probably within the next week. But ask the question again and again, and whenever fifty bucks goes into your gas tank or you wait in the drive-through lane for 15 minutes for tasteless food you will eat in your car.

In the merchant world it is often said that “well-bought is half-sold”. In the personal world, perhaps “well-asked is half-answered.” Give yourself the Christmas or Chanukah present you really need at the deepest level of your soul, your spirit, your consciousness. Ask “WHY”. The answer to the question “how to simplify your finances, simplify the life of your family, and find the next off ramp,” will come.

QUESTION “WHY”. ALWAYS ASK “WHY” IN THE DESERT OF THE REAL! IN FACT, WE WILL BE OFFENDED IF YOU DO NOT ASK WHY IN THE DESERT OF THE REAL!

[i]There is one valid reason to convert consumer debt to mortgage equity debt. The US Tax code allows taxpayers to deduct interest payments for a good amount of home-equity debt. However, this conversion must be done carefully and not in amounts that the taxpayer may find difficult to repay. By converting consumer debt that may be dischargeable as “unsecured debt” in bankruptcy to mortgage debt, the consumer risks foreclosure over meals charged last year at Appleby’s

[ii] http://www.frontlinethoughts.com
/article.asp?id=mwo121605
[iii] http://calculatedrisk.blogspot.com/
2005_12_01_calculatedrisk_archive.html
[iv] An Inverted Yield Curve is a situation where short-term interest rates are actually higher than long-term interest rates. It is called an inverted curve because when one charts the interest rates on a graph the curve slopes down as you move further along the times axis. Normally, the curve would slope upwards, as under normal conditions long-term rates would be higher than short-term rates. Inverted yield curves usually portend recessions, as the monetary authority is raising short-term interest rates to cool off an economy and head off or slow inflation.

Many commentators that the Author follows see a recession in the second-half of 2006. The Author agrees that such a recession is likely. If you are holding off refinancing your house (to lower the payment, not to pull out equity;) ), this recession will provide lower rates. Also, it could send stock traders to the doors and start the big-second-leg of the Secular Bear Market.