Archives for 2010

Number Of Underwater Homes Declines, But Foreclosures Are Up

A while back we wrote several posts about how millions of homeowners (more than 11 million of them) were finding themselves in a situation where the values of their homes had dropped, and they found themselves underwater in their homes – with negative equity. In other words, their homes were now worth less than they paid for them. We asked if it was morally ok to stop paying the mortgage on an underwater home, in addition to exploring the tax implications of defaulting on your underwater home.

My wife and I unfortunately bought at the height of the market as well – back in 2006 – and if we hadn't put down 20% on our new home, we'd be underwater now as well. We've lost over $40,000 of equity in our home. While that stinks, at least we weren't buying our home as an investment, and we weren't banking on it going up. We were simply buying our home as a place to live.

Since I wrote those posts, what has been going on in the market? Have the number of underwater homes improved?

Number Of Underwater Homes Declines

The 3rd quarter of 2010 saw the number of homeowners were were underwater in their mortgages fall. But what was the reason?

The number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, according to trade-industry data released Monday.

The total of so-called underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5% of U.S. homeowners with a mortgage.

So the number of underwater mortgages fell from11.3 million earlier this year to 10.8 million – or 22.5% of homeowners. But the reason wasn't necessarily a good one. Home values have not gone up. Instead, it's because the banks have become more aggressive in moving forward on foreclosures.

Foreclosures Are Increasing

It's amazing to me that this many people have gotten themselves into these types of situations where they end up getting foreclosed on. If you were able to afford the house when you bought it, shouldn't you still be able to afford it now that the value has gone down?

Or is the problem more of one where people ended up buying homes they couldn't afford at inflated prices – because the prices were being artificially propped up by the homebuyer tax credit?

The drop in underwater mortgages hardly reflects a rebound in the housing sector because home prices didn't rise in the third quarter. Rather, the number of underwater homes declined as banks took back those homes and wiped out the debt through foreclosure.

Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year. Home values could drop by an estimated $1.7 trillion this year, a 40% increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.

The figures underscore how fragile the housing market remains. As home prices fall, more borrowers will sink underwater. Another 5% decline in prices would leave an additional 2.4 million homeowners underwater, according to CoreLogic.

The Real Estate Market Is In Trouble

So it really seems like our housing market is on the verge of catastrophe. Things are pretty bad.

The underwater problem could also weigh on housing markets because homeowners without equity are less likely to act like traditional homeowners and spend money on their homes. While the homeownership rate during the third quarter fell to 66.9%, according to U.S. Census Bureau data, the effective homeownership rate, which excludes underwater homeowners, is just 56.6%, according to CoreLogic.

That problem is particularly acute in boom-to-bust markets such as Las Vegas. The official homeownership rate stood at 58.6%, but after excluding borrowers with negative equity, the rate fell to just 14.7% in August 2009, according to the New York Fed study.

While the homeownership rate has fallen back to 1999 levels, homeowners' equity as a share of household real estate is lower by one third and is below 40% for the first time since World War II.

Some markets, like Las Vegas, are a lot worse than other markets, particularly because they had such huge housing booms a few years back, with people buying homes, getting sub-prime financing or no down payment loans. Now that they're finding themselves underwater, a lot of those folks are deciding that staying in those homes just isn't worth it.

What do you think of the crisis that we're having in real estate? Do you think it will continue getting worse over the next couple of years, and that we'll see a return of stricter bank lending standards? Will more and more people begin defaulting and being foreclosed on? What are you thoughts?

One Casualty Of The Recession: Charities

By Contributor 3 Comments

Tim Chen is founder and CEO of NerdWallet.com, a website that helps consumers to compare low apr credit card offers. Tim also educates consumers about credit cards and personal finance at the Christian Science Monitor, Forbes Moneybuilder Blog, and the Huffington Post.

At the same time that Americans remain as generous as they can be, public charities and private foundations continue to take a beating from the economy's slide as donations continue their downward spiral.

Non-profit research firm GuideStar reported donations are way down as charitable organizations have been hit hard by the weak economy. The study revealed about 40 percent have seen declines in contributions in the first five months of 2010 at the same time that a majority, 63 percent, saw an increase in demand for their services. According to the study, “even organizations that have stopped the bleeding are concerned.”

Everybody Is Giving Less

More than 60 percent of participants who reported decreased contributions attributed the drop to a decline in both the number of individual donors and the size of their donations, both functions of the downturn.

GuideStar pointed out that the pain was pretty well spread among different types of organizations, although those involved in mental health and crisis intervention were more likely to report a decline in contributions (51 percent).

In addition to the number and size of individual donations, other issues responsible for decreased contributions included smaller corporate gifts; smaller private foundation grants; and discontinued private grants and government grants. As a result, 17 percent of the charities said they had to cut services while 11 percent were forced to lay off employees.

Other Estimates Corroborate The Dropoff

Meanwhile in its annual report, the Giving USA Foundation stated donations fell 3.6 percent in 2009, the largest drop in 26 years. Individual giving dropped by 0.4 percent while grants from foundations were down almost 9 percent. Americans gave $303 billion to various religious, health, cultural and environmental causes in 2009. And according to the Association of Fundraising Professionals 2009 State of Fundraising Survey, nearly half of charities in the United States raised less money in 2009 than in 2008.

What's more, researchers at Boston College's Center on Wealth and Philanthropy, which estimates how the most recent changes in financial resources affect the aggregate level of household giving, estimates US household giving for calendar year 2009 totaled between $216-$218 billion dollars, representing a decline of between 4.8 percent and 5.7 percent from the 2008 total of $229 billion.

Preliminary projections for 2010 are all over the place, as the researcher predicts that total household charitable giving could return to the pre-recession (2007) level of approximately $234 billion in the best case scenario, or on the low end, decline an additional 3.9 percent to a total of $212 billion by the end of 2010. Still the researchers pointed out the 2010 estimates would be lower if unemployment remains high throughout 2010 and higher if the recovery is stronger than expected.

A Final Warning To Fundraisers

If you’re going to be doing any fundraising in the downturn, you’re going to have to be smart about it. Peppering potential donors with constant reminders turns out to not be the best approach. When individuals were asked about why they stopped giving, the No. 1 response was being petitioned for money too frequently by a particular charity, and solicited an inappropriate amount. It makes sense when you think about it – what do you do with all of those “0% APR balance transfer” offers you get in your mail every day? That’s what I thought.

President Obama And GOP Reach Deal On Extending Bush Tax Cuts. Will Congressional Democrats Go Along?

By Mr. Money 3 Comments

We've been talking for months now about whether or not Congress and President Obama would be renewing the Bush tax cuts of 2001 and 2003. We've looked at what the 2011 tax rates would be if they weren't extended, and talked about what some of the problems of not extending the Bush tax cuts would be. In the end I wasn't sure that the Democrats and Republicans could find enough common ground on the issue to actually come up with a compromise solution. But last night President Obama and Congressional Republicans agreed in principle to a deal to extend the Bush tax cuts for all taxpayers, including high income earners. Not all Democrats are happy about the deal, so it still remains to be seen what they will do. Here is Obama announcing the deal.

In exchange for allowing an extension of the tax cuts, President Obama was able to get some concessions which are detailed below.

Deal On Extending The Bush Tax Cuts

Last night President Obama announced the deal (see the video to the right), and what it would entail.

President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.

Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.

“We have arrived at a framework for a bipartisan agreement,” Mr. Obama said on Monday night, capping weeks of negotiations with leaders in Congress.

The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.

What Is In The Deal?

To recap, the following were agreed to by President Obama and Congressional Republicans. (No Democrat nod to this plan as of yet).

Extend Bush tax cuts for everyone, for 2 years.
Reduce Social Security tax levied on a worker's wages from 6.2% to 4.2% for one year.
Reinstatement of the estate tax at 35%
Extension of jobless benefits for another 13 months, beyond current 99 weeks.
Extend current tax rates on capital gains and dividends for two years, including for higher earners.
Extend a raft of business tax breaks, including credit for spending on research

Democrats Not On Board… Yet

So far the plan has been panned by Congressional Democrats and the liberal base, and Obama has admitted that there is a tough road to get this deal passed.

In reaching the deal, whose details still need to be worked out, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax. Democratic leaders didn't agree to the deal during meetings on Monday with Mr. Obama and Vice President Joe Biden, according to a House aide.

“I can tell you with certainty that legislative blackmail of this kind by the Republicans will be vehemently opposed by many, if not most, Democrats,” said Rep. John Conyers (D., Mich.).

In the Senate, Tom Harkin (D., Iowa) called it “an understatement” to say he was disappointed.

So at this point liberal lawmakers and activists are “left seething” at the deal, and convincing them that his is a good idea isn't going to be easy. Obama may need to rely on Republicans to help get this passed.

White House officials will now try to persuade Democrats to back the agreement, but anger on the left suggests that Mr. Obama might need to rely heavily on Republican support to move legislation through Congress.

Republican leaders spoke highly of the agreement. In a statement, House Republican Whip Eric Cantor said, “No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again.”

Senate Republican Leader Mitch McConnell also praised the deal and asked that Democrats in Congress now “show the same openness to preventing tax hikes the administration has already shown.”

The Republicans admit that they didn't want to extend unemployment insurance past the current 99 weeks or reinstate the estate tax, but that the political reality was that they would need to in order to come to a compromise.

If Tax Cuts Are Passed, Will It Lead To Growth And More Stability?

Many congressional leaders have stated that in order to get the economy moving again we need to pass something in order to restore a bit of stability for business. They need to know what's going to be happening next year so that they can adjust payroll, plan expenditures and move forward in their planning for 2011. Hopefully if this can get passed it will be a spark that we need to give business a boost.

What do you think about the deal that President Obama announced last night. Do you think it's a good thing, and will congressional Democrats get on board? Tell us your thoughts in the comments.

Will The Bush Tax Cuts Be Extended In The Lame Duck Session?

By Mr. Money 8 Comments

The end of the year is coming quickly, and if you're paying attention to the debate about the Bush tax cuts, you may have noticed that nothing has happened yet. There hasn't been any action on extending the tax cuts for either the higher income earners, or everyone else. If they aren't extended, everyone's taxes will go up.

Currently the Democrats and Republicans are trying to work out some sort of a compromise that would allow the tax cuts to be extended. The Democrats only want to extend them for those making less than $250,000, while the Republicans want them extended for everyone. The Republicans have drawn a line in the sand saying that they won't allow anything except an extension of the cuts for everyone, and have promised to not vote for cloture on anything else in the lame duck session until the tax cut problem has been addressed.

As of yesterday it sounds like most people think that the cuts will be extended for all taxpayers, but possibly not permanently. In other words, they'll have to address the issue in a few years once again. Why are the Democrats willing to cave in on this one? Possibly for concessions on extending unemployment benefits – as those are expiring soon as well for those who have reached the 99 week limit, and the unemployment rates continue to rise – up to 9.8% last month.

Geithner and Lew appear to be stuck in the middle, sources said. A senior Democratic aide said that the White House’s message has been clear: “You can’t leave town without doing something.”

Sources have predicted that the final agreement could include a full extension of the tax cuts for two to three years and an extension of unemployment insurance and a package of other tax extenders. [source]

What do you think will happen? Will they pass an extension before the session ends? Or will there be too little room for compromise?

Good Reading From Around The Blogosphere

Lots of great articles from around the blogosphere this week. Here are a few of my faves.

Hope you have a great weekend!

What Is The Real Unemployment Rate? Is It Really Only 9.8% Or Are Things Worse Than That?

By Mr. Money Leave a Comment

The past few years have been rough ones, and we have seen our unemployment rates go from 4-5% all the way up to 9.8% as of last month's unemployment report. As bad as 9.8% sounds, could the situation be even worse that that? Could the actual unemployment rate be even higher?

What Is The Actual Unemployment Rate?

When we look at the unemployment figures that the government puts out we get two figures. First, we get the standard jobless rate, which only looks at people who have reported looking for work in the past 4 weeks. Then, we get the real (U6) rate, which also takes into account the number folks who are either underemployed or have stopped looking for work because they can't seem to find anything. From MSN:

The official unemployment index, based on a monthly survey of sample households, counts only people who reported looking for work in the past four weeks. It doesn't account for part-time workers who want to work more hours but can't, given the tight job market. And it doesn't include those who have given up trying to find work.

When the underemployed and the discouraged are added to the numbers, the unemployment rate rises to 16.6%. The Bureau of Labor Statistics, a unit of the Labor Department, began tracking this alternative measure — known as the U-6 for its department classification — in 1995 after economists lobbied for a method comparable to the way Japan, Canada and Western Europe count their unemployed.

When you take into account the underemployed and discouraged workers, the unemployment rate rises to almost 16.6%! That number is up from 16.4% a year or so ago and from 9.7% in May 2008. It was 7.1% in May 2000. Here's a graphic showing those real jobless rates over the past 10 years.

The problem with the unemployment rates don't end there, however. The problem? There are even more people it doesn't take into account who are having a rough go of things:

The truth is that even the broader measure of unemployment doesn't fully capture how difficult the job market is for U.S. workers. It doesn't include self-employed workers whose incomes have shriveled. It doesn't look at former full-time employees who have accepted short-term contracts, without benefits, and at a fraction of their former salaries. And it doesn't count the many would-be workers who are going back to school, taking on more debt, in hopes that advanced degrees will improve their chances of landing jobs.

So when we hear of a the unemployment rate being less than 10%, we need to keep in mind that it is only one statistic that shows it being less than 10%. If other factors are taken into account the real jobless rate is higher than 15%. Remember the old saying about statistics popularized by Mark Twain?

‘There are three kinds of lies: lies, damned lies, and statistics.'”

You can get statistics to say just about whatever you want.

Jobless Are Unemployed For Longer

Not only are there more people unemployed nowadays than we might think, a lot of those people are unemployed for longer than was common in the past.

In the second quarter of 2010, about 46 percent of the 14.6 million unemployed persons were jobless for 27 weeks or longer and about 31 percent were unemployed for 52 weeks or longer. [source]

It has also been suggested that the availability of extended unemployment insurance benefits has contributed to the increase in unemployment duration. [source]

Because people are out of work for longer, and because there are more of them, the situation is thought to be more dire than other recessions in recent history.

“That largely reflects how more severe this recession has been than of 1982 and of the 1990s,” said Bernick, who has worked in the job-training field since the late 1970s.

Now, although severe layoffs are no longer occurring, hiring has not picked up significantly.

“The labor market is still very, very slow,” Bernick said. “Each job (opening) brings tens, usually hundreds, of applicants.”

So things are tough out there, inflation is coming and things are probably even tougher than some of the common statistics would show. At least for the near future, it doesn't appear that things will be getting much better, at least until companies start seeing a turn around, the tax situation stabilizes and they are able to start hiring again.

What do you think about the unemployment rates? Do you think they're even higher than some might think? Do you think the jobs situation will be getting better sooner rather than later? Should unemployment insurance be extended past 99 weeks for the unemployed?

Going Broke After Having Millions: How One Millionaire Family Lost It All

By Mr. Money 12 Comments

For the past few weeks I've been sharing the stories of some extraordinary people, folks who earned average incomes, but still found a way to retire wealthy. I called the series, “Retiring Wealthy On An Average Salary“. I've found writing the series to be quite inspirational for me, and it really gives me hope to realize that you don't have to be mega-rich or make a humongous salary in order to save enough for retirement.

Today I want to do something a little different. I want to look at one family that did everything wrong in order to lose a fortune of over 10 million dollars in less than 10 years.

From Millions To The Verge Of Bankruptcy

59 year old Nick Martin teaches grape growing and winemaking at a local community college, and his wife and their two children now try to get by living in a modest rental home on a combined $34,000 a year. They aren't living the high life, but it wasn't always this way. In 1998 Nick received a $14 million dollar inheritance, $10 million dollars after taxes. What did he and his family do with their newfound wealth? They did what so many folks who find sudden wealth do, they started to spend their money with wild abandon.

Grateful to have found work in this tough economy, Nick Martin teaches grape growing and winemaking each Saturday to a class of seven students in a simple metal building here at a satellite campus of Highland Community College.

Then he drives 14 miles in an 11-year-old Ford Explorer to a sparsely furnished tract house that he rents for $900 a month on a dead-end street in McFarland, a smaller town. Just across the backyard is a shed that a neighbor uses to make cartridges for shooting the prairie dogs that infest the adjacent fields.

It is a far cry from the life that Mr. Martin and his family enjoyed until recently at their Adirondacks waterfront camp at Tupper Lake, N.Y. Their garage held three stylish cars, including a yellow Aston Martin; they owned three horses, one that cost $173,000; and Mr. Martin treated his wife, Kate, to a birthday weekend at the Waldorf-Astoria, with dinner at the “21” Club and a $7,000 mink coat.

That luxurious world was fueled by a check Mr. Martin received in 1998 for $14 million, his share of the $600 million sale of Martin Media, an outdoor advertising business begun by his father in California in the 1950s. After taxes, he kept about $10 million.

But as so often happens to those lucky enough to realize the American dream of sudden riches, the money slipped through the Martins' fingers faster than they ever imagined.

They faced temptations to indulge, with the complexities and pressures of new wealth. And a pounding recession pummeled the value of their real estate and new financial investments, rendering their properties unaffordable.

The fortune evaporated in little more than a decade.

Autopsy On The Demise Of A Fortune

So how did the Martin family blow through almost $10 million dollars in less than a decade (almost $1 million a year)? They did exactly what you probably shouldn't do when you have new found wealth. They went out and started spending money. They bought a home in England, and a summer lake home in the Adirondacks. They bought cars, horses, and other luxury items. When Mr. Martin's novel that he was writing failed miserably, the family's living expenses and situation in England started becoming too pricey, and they moved back to the states. The first thing they did was buy a $650,000 home in Vermont. At the same time they were doing extensive renovations on their lake property with hopes of having that become a family legacy to pass on down to their children. The problem? The renovation costs quickly ballooned to the point where they spent over 5 million dollars on it. All of this was just as the economy had started on it's downward slide.

By March 2007, the Martins were determined to move to the lake full time.

They managed their expenses for a while, but the costs mounted and mounted some more as they worked at refurbishing the Adirondack property — eventually totaling a staggering $5.3 million, Mr. Martin said. He poured another $600,000 into the Vermont property, he said.

He vacillates between blaming the builders and blaming himself for letting costs get out of hand. “We should have built something quite modest,” he conceded.

Tensions rose in 2007 as summer came without any offers for the Vermont home.

“I thought that housing was going into a tailspin,” he said. “I had the feeling that something bad was happening.”

So “we started selling cars, shotguns, antique furniture, whatever,” Mr. Martin said. The Aston Martin fetched $395,000.

By the time they were done selling things, they were still in a huge hole, and they were having trouble trying to sell their real estate holdings, the things that they had spent the most money on. Why? they had probably over-built their lake home in an area that couldn't sustain it. Their lake home was on the market for just over 4.9 million, and then slashed to 2.5 million. Neither price got any bites, although one buyer did offer just under half of the 2.5 million. And since Mr. Martin wasn't making much money at this point either – compared to in the past – they weren't able to keep up on mortgage and tax payments. They ended up basically broke.

Though he faulted the conventional wisdom of investing in stocks and real estate for some of his woes, along with poor financial advice, he accepted much of the blame himself.

“We spent too much,” he conceded. “I have a fourth grader, an eighth grader and a girl who just finished high school. I should have kept working and put the money in bonds.”

They have stopped making payments on their $1.1 million mortgage and their $53,000 in annual property taxes in the Adirondacks as well as the mortgage and taxes on their Vermont home. They cannot afford those obligations on Mr. Martin's current salary of $51,000. Their household income is down from $250,000 four years ago.

Who Is To Blame?

Husband and wife both seemed to blame each other for their woes. Husband blaming the wife for her pricey hobby of raising expensive horses. Wife blaming her husband's taste for expensive cars. In the end they were both to blame for their poor planning, poor spending habits, and their lack of finding contentment in things other than material things.

While he says much of the blame is his own for their downfall, Nick Martin also still has a hard time accepting much of the blame. To me he seems a quite bitter and angry at so many people.

Mr. Martin is prone to ruminate over the loss of so much money. He is furious at the banks and the bankers, who he thinks gave him bad advice, and he still sounds angry at his brother and others who decided to sell the company and who he says gave him little voice. Some of them got more than $100 million each, he said, while he got $14 million, as did his father and his sister Ann, because they were all minority shareholders.

No matter how much money you have, it seems that the grass is always greener on the other side. He got an amazing $10 million dollar windfall, but was bitter because others got more. He had tons of money to save and invest, but is mad at the banks and bankers who gave bad advice and helped him to lose what little he did invest.

Others seem to think that Martin lost it all because he liked to keep up appearances, and keep up with the Joneses as it were.

Mrs. Martin says she believes the move from California was motivated in part because he resented his brother and brother-in-law's bigger role in the community.

She also speculates that the Adirondacks estate was alluring partly as a way of keeping up. “I think he wanted to show his brother and brother-in-law that he had a big home, too,” she said over dinner recently in Saratoga Springs, N.Y.

Now that they have lost it all, I'm not really sure that the Martins have learned their lesson because they're still wallowing in self-pity, and finding ways to blame others for their own mistakes. My guess is that if they were to get another 10 million, they'd blow it all again.

Where Did They Go Wrong?

So where did the Martins go wrong? If you look at the attributes that self-made millionaires have, the reason that they have become a success, you'll find that the Martins lacked many of those characteristics.

Discipline: They didn't have the financial discipline to come up with a solid financial plan, and they didn't take the time to understand what their options were for saving and investing. Instead they just spent.
Frugality: They had none. If they wanted something, they bought it. A new car? I'll take two! A new house? Sure, and a lake home to boot! And not a nice $300,000 home, I'll take the lake estate please!
Moderation: Sure it's ok to splurge once in a while, but the Martins had no sense of moderation. Instead they spent money on just about everything they had ever wanted.. and more! Instead, they could have each bought one or two things they had wanted, and save and invest the rest!

My guess is that many other people who become suddenly rich, like lottery winners, will often have similar troubles. They don't have the discipline or sense of moderation they need to save and increase their fortune, and in the end, end up going broke again.

What do you think of this cautionary tale? What lessons can you glean from their mistakes? Tell us your thoughts in the comments!

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