To summarize our exploration of the market variables lying in wait to further pummel the economy in the future; if you hear a train, it might be inflation rushing toward us.
So far I have shown how unprecedented governmental manipulation of the mortgage market and an unprecedented increase in the money supply have put us in uncharted economic waters. I wish my concerns ended here but there is another aspect of the current situation that must be addressed if we are going to question the expert assertions that a recovery in housing is just around the corner.
This baddest of the bad news is the national debt. Most folks cannot comprehend the amount of money this involves, so I will scale it down to more everyday numbers.
Let’s substitute Cletus for the United States. Cletus earns $23,000 a year and he spends $35,000 a year. He owns a $148,000 house and has credit card debts of $1,160,000. He is borrowing $12,000 a year to support his lifestyle and is only making interest payments on the debt. His interest rate on his debt is less than 1%. If interest rates go up, Cletus is in trouble.
Would you loan this guy money? Now multiply these numbers by 100,000,000 and you get the situation the boys and girls in Washington have put us in. Cletus’s house is the national debt and the credit cards are the unfunded liabilities like Social Security and Medicare. How much longer is the rest of the world going to keep giving us money? This is not an exaggeration; you really have to multiply these numbers by 100 million to get Cletus up to our country’s debt level. Looked at another way, one out of every three people in the US would have to be Cletus to equal Uncle Sam’s finances. If you take out kids, the retired and unemployed, the national debt is around one million dollars for every other worker in the country. Soaking the rich is not going to fix the problem unless every other working stiff in America suddenly becomes a multi-millionaire.
To put a little more perspective on this, the estimated value of everything in our entire country, buildings, businesses, savings, cash, land, roads, etc. is almost 80 trillion dollars. Our unfunded liabilities—going up daily—are 116 trillion dollars. It reminds me of what my father told me years ago, “You can’t borrow your way out of debt.”
All the class warfare nonsense aside, this debt belongs to all of us and everybody is going to have to pay up or the country will go bankrupt—officially. When all that money goes to paying our creditors, there will not be much left over for things like mortgage loans. Less money available for loans means higher interest rates. Higher rates mean lower prices.
The final problem that the experts fail to address in their “better tomorrow” scenarios is that there are still too many houses. Just this week, the National Association of Realtors announced that they have been overstating home sales for the last four years. So the housing market has nationally been lousier than previously stated and the previous numbers inhaled vigorously. More supply than demand depresses values. Does my concern seem misplaced?
I know I am making some folks upset by not towing the “better tomorrow” line, but I want more reason to believe it than, “so and so said so” or “it always has before”. The financial state of the country wasn’t like this before and I want an explanation that takes the current situation into account.
The million-dollar question raised by all this is what should the average person do if our financial house of cards falls? It’s a good question and I wish I had a good answer. Buying a home if the price is artificially high might not be a good call even with a low interest rate. But refinancing to a super low 30 year fixed rate is probably a good call. Renting, especially a higher priced property, could make sense if you don’t expect to expire in the property. But calls like this are only legitimate if current economic factors cause the future to be different than the past.
It’s not that I am a pessimist by nature, quite the opposite, but I am a realist and I have trouble seeing the silver lining in our current economic cloud. I would be more encouraged if the experts could explain in clear, easily understandable language why record governmental spending, record governmental debt, an unprecedented increase in the money supply, historical manipulation of mortgage interest rates, high unemployment and a persistent over supply of for-sale properties is a formula for future good times.
If the boys and girls in Washington really have found the secret to a rockin’ economy, I am full of bologna and this column is for naught. But if they have miscalculated and high inflation and popped bubbles are in our future, what should the average person do? Good question. I wish I had a concise, foolproof plan for coping. I would make a fortune on the book. But I don’t.
I have some ideas, but I am not an expert in finance, economics, geo-politics or pizza delivery. So bearing this in mind, here are some ideas suitable for lining the birdcage or house breaking Skippy.
If you plan to be in your home for something approaching forever, go ahead and refinance at the lowest rate you can find. If you can get a rate of say 4%, and inflation goes to 6%, your real costs of funds is a negative 2%. This coupled with repaying the loan in cheaper dollars will go a long way toward negating the sting of the value of your property going down. Remember the old Wall Street adage; “it’s only a loss if you sell.”
In Luthernomics, a real estate purchase only counts as an investment if it generates positive cash flow. In a high inflation, dropping values environment, I think this is doubly true. If you have a rental property that is producing cash flow, inflation will tend to drive the rent up over time. So the increased rent helps to offset the drop in the value of the money while the property continues to pay for itself. That’s a home run as long as you keep a good tenant in place.
Keeping the property rented is a function of location, suitability for use and plain old picking the right renter. Hey, if it were easy, everybody would be successful at it.
As far as personal finances, living well below your means will be very important. Having a cash cushion will be an insurance policy against sudden price spikes and will grow into a war chest for picking up deals when property values drop. If you think mortgage money is hard to find now, imagine if values drop suddenly. Cash will be king, queen and the court jester. The trick is to not buy too soon. Of course, a desirable property that generates cash flow is a good deal at any price, but it does get better the lower the price.
Lastly, reduce or get rid of as much debt as possible. Don’t borrow to buy anything that will not generate cash flow. If that means buying a used car instead of new, so be it.
Pretty generic suggestions I know. Live well within your means, make wise investments, only purchase value, don’t waste your money and avoid debt. Sounds like my Grandfather during and after the depression.
The best part of this kind of financial plan is that even if the economic worst case fails to materialize, it’s still a good idea.