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alstry (35.92)

A simple BIG BIG Problem

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February 09, 2008 – Comments (10)

In 2000, the income of the average American family was somewhere around $50-60K.

Today, the income of the average American family is somewhere between $50-60K.

Between 2000 and today, costs for the average American family has skyrocketed in the following areas:  Debt Service Expenses, Health Insurance, Homeowners Insurance, Property Taxes, Food and Fuel.

If the above wasn't bad enough, here is where the BIG BIG Problem comes in:

Home prices skyrocketed between 2000 and 2006.  Prices increased by 100% or more in a very short period of time while incomes remained about the same and non housing expenses skyrocketed.  Based on income versus expenses, consumers can likely afford even less home today than they could in 2000. 

It appears approximately $6 Trillion dollars worth of mortgages and over $2 Trillion dollars worth of home equity loans were taken out against the inflated values of homes.With now declining home values, we may be staring at over $8 trillion dollars mortgages and home equity loans not fully secured by the current value of the home. 

With rapidly rising prices, the consumer is facing increasing burdens to meet monthly obligations.  Now with a slowing economy and pink slips on the rise, the delta between ability to pay and obligations is likely to gap further apart.  This ability to pay affects our entire economy, especially counterparty obligations such as debt and rent.

Why is highlighting counterparty obligations important, because failure by one necessarily affects another potentially causing a chain reaction of defaults.

The above trillions in mortgages were sliced, diced, and repackaged and sold for billions in profits and generated billions in taxes.  Now that the billions in profits are evaporating, billions in taxes are being refunded likely to lead to enormous deficits.  Not only are billions in profits evaporating, billions in losses are being reported, some by banks that didn't even report losses in The Great Depression.  With banks losing billions, the ability to lend will likely be impaired.  Also, shrinking tax revenues deminishes government's ability to spend.  With less lending and less spending, further contraction will result leading to who knows what end.

So next time someone tells you the current problem we face is like the S&L crisis, or only a few hundred billion dollar issue, just laugh because you know the problem is really very simple and very very BIG.

Captain, did we just bump into something?

10 Comments – Post Your Own

#1) On February 09, 2008 at 5:35 PM, stockcommander (99.04) wrote:

You can’t be born in America – you’re not supposed to understand things like this. You’re supposed to vote for the AMERICAN party – the GOP – also known as the Republican Party. Anything else is strictly un-American – the poor is poor strictly trough the faults of their own, and even attempting to utter that equality has something going for it is blasphemy – it says so right here in the good book.

If even 10% of what is being spent on the war in Iraq and Afghanistan was used to rebuild the infrastructure, schools and other services those two countries need – those two wars would be over several years ago. It’s one thing to carry a big stick – but you also need to show them the carrot.

After World War II the US lent European countries an enormous amount of money – and one of the requirements was that a huge part of that money should be used to buy American products. This was a huge success – American businesses flourished, Europe got back on its feet and repaid that debt with interest. This has never been tried since – probably since something that actually worked once can’t possibly work twice.

We also have to consider that it might be ungodly – after reading the good book carefully it might be possible to at least find some sentences that indicate that helping other people is against the will of God. Never mind that mind that the New Testament mostly states that the opposite is probably true.

To get the American economy back on its feet you at least need two things: Products and customers, and I don’t mean American customers. How firing a couple of hundred thousand employees are going to help the economy is beyond my ability to understand. You know that and I know that, and you can just bet your a** that the corporate leaders firing those people know that – and invests their money accordingly in ETFs like QID – that moves twice the inverse of the Nasdaq 100 index.

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#2) On February 09, 2008 at 5:52 PM, alstry (35.92) wrote:

Rebuild the country?

 Are you nuts!!!!!!!!!!!!!!Why should we do that?  Simply write a check for $100K for each of the 14 million men, women and children.  The cost $1.4 Trillion Dollars-about the current estimated cost for the war.

The average 5 person family would get about $500K.  Then tell them they must come to America, buy a foreclosed house, and start a business that can employ at least one American.

 Although Haliburton might be a little pissed, our soldiers would love us, the Iraqis would love us, and the economy would love us.

 Alstry is all for love.

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#3) On February 09, 2008 at 6:59 PM, dwot (50.86) wrote:

When you look at the gross level of increased debt, by my calculations on average Americans need to reduce spending by about 1/3rd of what they were spending... 

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#4) On February 09, 2008 at 7:19 PM, mickeyc21 (29.57) wrote:

Nice post. Its good to see other people that live in reality. It's actually quite a nice neighborhood despite its reputation.

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#5) On February 09, 2008 at 8:14 PM, GS751 (27.49) wrote:

"because failure by one necessarily affects another potentially causing a chain reaction of defaults." - welcome to the derivatives market.

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#6) On February 09, 2008 at 8:30 PM, Triplicane (97.21) wrote:

Based on income versus expenses, consumers can likely afford even less home today than they could in 2000. 

Amen to that.

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#7) On February 09, 2008 at 11:36 PM, floridabuilder2 (99.35) wrote:

hmmmm, I thought this blog was going to be about something positive?

homes are getting smaller, finished lots are selling below cost, mortgage rates are down, private builders are going under, new housing permits should hit multi decade lows... positives for affordability and well capitalized publics

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#8) On February 10, 2008 at 12:30 AM, DemonDoug (64.80) wrote:

florida, we have a long way to go before we get to true affordability.

TRUE affordability is a home that is 2x annual income or less.  3x annual income is supposed to be a MAX.  That would mean that the 2 and 2 detached homes near me would sell for 180-270; a 2 and 2 in my zip would likely go for about 800 right now.

The cost to homebuilders is irrelevant to a buyer.  If I buy a share of CSCO, I don't care if someone's cost on that share was over 40.

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#9) On February 10, 2008 at 7:18 AM, floridabuilder2 (99.35) wrote:

demondoug.......... the reason why things arent affordable really does have something to do with size of the house and land costs..........  compare the old stock house of a city to the new stock of the ex-urbs........  I grew up in Livonia MI a suburb of Detroit and most homes built in the 40-60s around the city of Detroit were 1,000 sq ft to 1,500 sq ft...... in the 70s it went to the 1,500 to 2,000 range in the 90s it went to the 2,000 plus range............... why?  be because builders kept wanting to maximize the margins on a finished lot and because there were loan products out there to allow them to sell those bigger homes....

affordability has a lot to do with size

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#10) On February 10, 2008 at 8:10 AM, alstry (35.92) wrote:

I think many are missing a key point.

Under old affordibility standards, 2-2.5X was the loan to income ratio, but today the number is probably much much less.

Since 2000, health insurance costs have skyrocketed for many people. Families are paying $3-15K per year when not too far back they were paying practically nothing.  Homeowners insurance has doubled for many, especially in places like Florida.  Then, there is doubling of gasoline costing many an extra $2K per year.  Food has also skyrocketed since 2000 costing an extra $3-5K per year.  If you live in the North, heating/utilities costs an extra $2K per year.  Finally property taxes has risen for many conservatively $1 K per year.

Since 2000, many families are spending an extra $10K per year but incomes have NOT risen to meet the rising costs.  Very different than any time in the past.....EVER.  One can appreciate why elderly people are leaving FL even when their homes are paid off due to affordibility issues.

Up to this point, we havn't even addressed DEBT.  Credit Cards, Mortgages, and HomeEquity loans, and Auto loans.  This is where things really get way out of hand.  Many have bigger homes, bigger cars, extra HELOCs.

Prior to this boom, relatively few had HELOCs, and normal lending standards limited borrowing ability.  It was the lax standards that permitted the world to borrow amounts so high there was little chance the loans would ever perform.  Well here we are, and defaults just starting and growing rapidly.  Just wait until many drain out their retirement accounts just to meet monthly expenses.

Factoring the above EXTRA monthly expenses, homes likely have to drop between 60%-70% off peak simply to match affordiblity of prior times.

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