Why is America in the economic crapper? Here's one of the reasons... (from SF Chronicle)

[El Pinko]

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/07/MNJ612JCT8.DTL&feed=rss.news



It's a hard time to get new credit

Sam Zuckerman, Chronicle Staff Writer

Monday, September 8, 2008

(09-07) 17:48 PDT -- Credit - the grease that lubricates the economy - is in short supply now and apparently getting even shorter. For ordinary Americans, it's gotten to the point where even people with money in the bank, steady paychecks, good credit ratings and long histories of paying bills on time are getting turned down for loans or asked to pay punitive interest rates. The same is happening to businesses looking to expand.

.....

-- Nancy Levine, 48, an executive recruiter from North Berkeley, had her home equity credit line cut back from $100,000 to the low $80,000 range a few months ago. She owes about $220,000 on her two-bedroom, one-bath house and thought she had a big equity cushion.

"It feels like a real loss of wealth," she said. "You read about things like this, but never think it can happen to you."

-- Ross Turner, 47, an Oakland graphic designer, was turned down for a credit card earlier this summer by Redwood Credit Union, where he had been a customer for 14 years. Redwood told him he had too much debt for his income, even though he had no outstanding loan balances and earned about $86,000 last year. He said he was finally accepted after he trimmed his request for a $25,000 line to $5,000 and explained that he had a partner who shared rent on their apartment.




People, when you start thinking of "equity" (theoretical wealth) in a house, or a line of credit, as actual wealth, that is when you start down the primrose path to destruction.

When you agree to buy a house, you are not buying an "investment" that you can expect to go up in value by 5, 10 or 15% per year. With the exception of a handful of years, home prices actually appreciated at a rate LOWER than inflation for most of the last 100 years. The period of the mid-90s to the mid-2000s was NOT the norm.

When you agree to buy a house, what you can expect for your money is... A HOUSE. If it costs more than you can afford, don't agree to buy it.

People who buy a house they can't well afford (mortgage pmt. less than 30% of monthly income) with the expectation of selling it at a tidy profit a couple of years later are nuts.

[RaleighNCDUer]

1. Well put.

kick

[Union Thug]

2. "Grease?" The point that is always missed is that the credit system itself is

in part responsible for destroying the economy. It is part and parcel to failed economic models which redistribute wealth upwards, slashes wages and benefits and swipes economic power from the hands of the vast majority of the citizenry who suddenly find themselves slaves to their debt (and which forces them the accept further cuts to their wages for fear of the falling into the jaws of the credit vampires).

It's credit card capitalism, and it's not grease, it's a noose.

[Tandalayo_Scheisskopf]

4. And you can see the bitter fruits of its essential philosophy...

In the way that the health care industry does what it does. It is structured to draw the people at the bottom, those without insurance because they cannot afford it, those who, through necessity, carry the least debt, into a feedback loop of grinding debt with arcane and impenetrable interest rates. Once they have you, they do not let you go, either. They go on their merry way, piling more and more debt on your shoulders, without end. The collection agencies in this sector(NCO, I am looking straight at you) are little more than criminal organizations with the rap sheets and tactics to prove it. Their tactics would bring a tear to the eye of a mafia loan shark. Our nursing home industry is built upon the model of seizing every last asset of those in their care, and then once they are tapped out, casting them into sub-standard and horrible facilities that are little more than terminal stops for the newly-poor elderly person, where they are heavily drugged, for tractibility, and expected to do the "right thing" and die. I saw it with my mother. After she died, GE Finance even refused to release her trust to the estate.

This whole economy has been about breaking the vastest amount of American citizens on the wheel of debt. About eroding economic standing and destroying opportunity. About stealing every last dime and creating destitution.

If this is not addressed, if this is not changed, if something is not done, people will once again see taking up of arms as a viable solution to their situation. That is a lesson of history that cannot be ignored.

[Dreamer Tatum]

3. There are teensy signs of deflation every day

and this is one of them.

I fear deflation far more than inflation.

[dmallind]

5. And people who rent have no chance at all

.....of gaining anything. Ever, in any market.

I move around a lot.

If I sell a house and break even, I've lived in a house for the cost of mortgage payments, which except in a few overblown markets like SF and San Diego, are always lower than rent (if I end up living in such a market I'd probably rent too - but they are the tiny minority). I'm renting out my last house right now for $700 a month more than the mortgage payment rather than sell in this market - didn't even have to advertise.

If I gain on selling, the payback is obvious.

If I "lose" on selling, it depends on how much in how long a time as to whether the difference makes up for the delta between rent and mortgage BUT then I'm also going to find it easier to get a bargain when I buy the next house (realtors who breathlessly caution me from buying in lesser school districts when I have no kids in school never seem to get that point either - "problems" with "lower resale" work for me as a buyer as much as they do against me as a seller). Rents have not decreased as much as prices have. I bought my current house, at about the same size and quality as my last (renting it out) house for $90K less.

In the mean time, most of my mortgage payments are interest and tax deductible, as are my property taxes. You may depending on state get some portion of rent deductible for paying your landlord's property taxes (I did when I was forced to rent in Missouri due to not having enough $$ for a downpayment) but you're SOL on the portion of it paying your landlord's interest.

It also gives me a chance at low interest home equity credit if I need it and have a good enough FICO score. I have an (unused) $90K line of credit for emergency and short term needs. You have no chance at all.

Meanwhile if I lose my job and exhaust my savings (built up in significant part by gains on previous homes), eviction and foreclosure is slower than it is for renters, and I can at least take a nominal loss on equity but sell at a firesale price to pay off the mortgage and get a cash infusion. You can never, ever, realize any cash at all from your renatl whether you have paid it for forty years or forty days, and in a good market or a bad one.

Yes people who make $65K a year and used silly balloon/interest only ARMs to buy gaudy $600K houses are suffering for their poor decisions, but that's not the majority of homeowners. The vast majority of us owe less than the house is worth even in this market or heck even if it keeps getting worse for many years to come. The secret is simple - get a decent down payment together and don't go nuts. You'll always beat rentals then.

We've got to that point by paying less than we would renting, getting better tax breaks because of it, and building up savings and equity as we've gone aslong.

Your constant schadenfreude may be a small comfort to you, but it doesn't alter the fact that like most homeowners I continue to live in a better house for less money, with better tax treatment and better financial payoff than any renter could ever get.

[El Pinko]

6. Those "overblown markets" were not so few in 2005...

Almost the entire state of California, most of Washington, much of Oregon, South Florida, Vegas, Phoenix, Chicago, NY, Boston, ALL of them were through the roof in the mid-2000s.

You act like nobody lives in these places, but bubble (and now post-bubble) markets represent areas where something like 40% of the US population lives.


You're wrong about schadenfreude. And you're way wrong if you think I'm against home ownership.

I'm only against buying a house in a speculative market when prices are clearly way above what they have been historically against local income, or spending way more of your paycheck than you can afford to.


If you got a great deal on a roomy house in flyover country, and are enjoying the tax benefits and sense of security, MORE POWER TO YOU.



As for SF - most people there are loaded and can afford their pricey homes. It's the inland Bay Area burbs and Sacramento area where over 75% of the people who bought homes in the last 5 years are underwater. And most of them were not fancy McMansions, they were ticky-tacky little bits of stucco, an hour or more away from anything.

[Warpy]

7. Loss of paper profit only means loss of ability to leverage debt

and leveraging debt should be the last thing on anyone's mind right now.

Thinking of housing as an investment is distorted thinking. Yes, if you buy that house in your 30s and stay put for a lifetime, you will build equity, possibly enough to retire on if you're not particular. However, buying it and thinking it's going to generate quick profit is a loser's game if the PITI vastly exceeds both local rents and 30% of the local median wage.

It's only an investment if that house can be rented out for a profit.