Tuesday, December 28, 2010

The Eye of the Recession's Storm

(This blog and it's editors have always been fans of Robert Kiyosaki, here is his latest posting)
Is the recession really (not just technically) over? Is the economy coming back? Are jobs coming back? Obviously, the answers to those questions depend upon whom you talk with. As the old saying goes, “If your neighbor loses his job, we’re in a recession. If you lose your job, we’re in a depression.”
Here in America, the economic news is still pretty dire. A recent survey of college seniors revealed that 85 percent said they planned on moving back in with Mom and Dad. They simply can’t find jobs. The October 25, 2010, edition of USA Today ran the headline: For Many Over 55, Debt Defers Dreams: Recession Strips Away Savings, Jobs. The article states, “The unemployment rate for Americans 55 and older was 7.2% in September, a major increase from 2.9% in September 2006.”
Overseas, the news isn’t much better. The British government recently announced austerity programs that will cut 500,000 government jobs and cut welfare payments drastically. The French rioted in the streets, protesting the retirement age being raised two years from 60 to 62. Japan is now sending work overseas, which means more unemployment in Japan. The Yen’s strength makes Japanese products more expensive. So they seek lower-wage countries to manufacture their products. Toyota is set to produce 57 percent of its product overseas, up from 48 percent in 2005. Nissan will produce 71 percent overseas, up from 66 percent just last year. Bye-bye, Japanese jobs.
What Does This Mean?
Recently, as I was finishing my dinner at a local Italian restaurant, my waiter asked me, “May I talk to you about my mortgage?”
“Sure,” I replied.
“I haven’t paid my mortgage in over 18 months,” he said. “What do you think I should do?”
“Has the bank been calling you?” I asked.
“At first, but lately I’ve heard nothing,” he said hesitantly. “And I’m not the only one. Three of the cooks in the kitchen have also stopped paying their mortgage.”
“And what are you doing with the money?”
“We’re saving it.”
“And what do you plan on doing?” I asked.
“Wait till they take our houses,” he said. “Do you think this is a good idea?”
“I wouldn’t do it,” I said with a smile. “Why are you doing it?”
“Because the mortgage is more than the value of the house. We’re better off not paying the mortgage and saving the money. Let them take our houses.”
I didn’t agree or disagree with this man…yet, silently, I couldn’t fault his logic. Since he was 18 months behind on his mortgage, he was so far behind that he was actually ahead.
As you probably know, the mortgage mess is only getting worse, not better. Many people aren’t paying their mortgages because they don’t have a job. Yet there are a growing number of people who have jobs but who are also refusing to pay their mortgage.
A medical doctor friend of mine confirmed this growing trend. He said the doctors he works with, doctors who make a lot of money, are buying a lower-priced second home and then defaulting on their primary residence.
If this trend turns into an avalanche, the real estate market will crash again. The only people holding onto their homes are people like me, people who purchased before the bubble and don’t owe much, if anything, on their homes.
If there is another real estate crash, it’s people like me -- people who pay their mortgages -- who might be the biggest losers.
Looking at the chart, it’s easy to see the eye of the storm. The second half of the storm is about to hit.
The leading edge of the storm was the subprime mortgage defaults, the storm that hit in 2007. The trailing edge of the storm will be the defaults of people who are solid citizens, people who have good jobs and good credit.
How severe the second front of the storm will be is yet to be seen. If there are more people like the waiter and cooks in the Italian restaurant and the highly paid doctors who don’t want to pay for a house that is going down in value, the second half of the storm will be very severe.
Good News
The good news is that the Fed and banks are hard at work trying to keep borrowers in place. The Fed and local banks have dropped interest rates, enticing people like me to borrow, borrow, and borrow some more, which I’m happy to do.
Thanks to my latest refinances, my wife and I will save over $7,000 a month in monthly mortgage payments -- that’s $84,000 a year savings. And as far as our rental apartments go, refinancing and saving 2 percent per year on over $100,000,000 in debt is substantial. Even better, since so many people are renting, our apartments are operating at near 97 percent occupancy, even when rents increase.
Bad News
The bad news is that inflation is likely to rise. This will make life even harder for the poor and the middle class. Every time the Fed implements “quantitative easing,” a.k.a. printing more money, two things go up: taxes and inflation. When taxes and inflation go up, more jobs are lost.
Making the situation even worse is President Obama’s Healthcare Reform Bill. In my heart, I understand why he put so much of his term in office to push this bill through. I have relatives who have no healthcare. So for them, the healthcare bill may be a godsend. But for millions of others this bill is their ticket to the unemployment line. The added cost of healthcare is forcing companies to lay off workers.
With Medicare set to go bust in 2019, I wonder how our leaders could pass another program we can’t afford.
So is the recession really over?
For some, the recession has been like Hurricane Katrina. They’ve lost everything in the storm but now the levies are about to break and the flooding will begin. For others, the recession never started. The reality is, unfortunately, that it’s far from over.
What advice do I have?
Over the years, my advice hasn’t changed.
In 1997, in Rich Dad, Poor Dad, I stated, “Your home is not an asset.” Real estate agents sent me hate mail.
In 2007 the first subprime mortgages began to collapse. In 2011, the second wave is about to hit.
In 2002 in Rich Dad’s Prophecy, I stated, “You may have up to the year 2010 to become prepared.”
In 2006 Donald Trump and I wrote Why We Want You to Be Rich, predicting the decline of the middle class. Today the working middle class is slipping into poverty.
For years, I’ve been an advocate for financial education in our schools, and I’ve preached that, as individuals, we must take financial education seriously. Today, my advice remains the same. Until we have comprehensive financial education, we’ll never see the end of our booms and busts.

1 comment:

Jazzie Casas said...

This was kind of a bizarre year for the mortgage market. In the first half of the year, you had a decent number of home sales keeping mortgages for purchases stable, thanks to the home buyer credit. In the second half of the year, that changed as demand crumbled when the credit was withdrawn. At the same time, you had very low mortgage interest rates throughout much of the year cause a mini-refinancing boom. 2011 will look very different, as the housing demand continues to struggle and mortgage interest rates have begun rising.

home buyer