Howard County Maryland Blog

Local Politics and Current Events

Home Equity

Posted by David Keelan on Thursday, November 8, 2007

Just a quick survey.

How many of our readers took out a home equity loan over the past few years? 

Apparently across the country a lot of people did so that they could live a lavish lifestyle, pay for an expensive wedding, a car, etc.  Others took a home equity loan for the new roof, or new windows, or some other improvement – investing in one’s home is good.  Although tempted to do so we never touched the equity in our home. 

Unfortunately, many who did, in order to finance a lifestyle rather than home improvements, find themselves owing more on their houses than they are worth.  Sound familiar – this is like the late 70s early 80s all over again.

This also has some undertones of what is going on in Annapolis now.  Living beyond our means.  Going to the well once to often.

I am wondering how many people in Howard County are like the man in this article.

He and his bride exchanged vows on the grounds of a sumptuous private estate in the Napa Valley. They spent their honeymoon at a resort in Tahiti.

He had a choice.  Don’t have such a grandiose wedding but

rather than scale back, he chose instead, like millions of homeowners across the country, to borrow against the soaring value of his home.

 Here is the beginning of the article

RENO, Nevada:As his wedding day approached last spring, Marshall Whittey found that his money could not keep pace with the grandiosity of his plans. But rather than scale back, he chose instead, like millions of homeowners across the country, to borrow against the soaring value of his home.

He and his bride, Holly Whittey, exchanged vows on the grounds of a sumptuous private estate in the Napa Valley. They spent their honeymoon at a resort in Tahiti.

But now, in an ominous portent for the national economy, Whittey has grown tight with his money. His home is worth far less than it was a year ago, and his equity has evaporated. And like many other involuntary adopters of a newly economical lifestyle, he can borrow no more.

“It used to be that if I wanted it, I’d just go and buy it and finance it,” Whittey, 33, said. “I’m feeling the crunch, and my spending is down significantly.” (kinda like the General Assembly).

This article from the International Herald Tribune is based upon a paper written by by James Kennedy, an economist, and Alan Greenspan (yes, that one).

Many experts are expecting a slow down in the economy because this type of borrowing and spending is slowing, yet the consumer spending is still growing at 3.9% last summer.  When will these lines cross?

If consumption does slow down enough to throw us into recession it is a good thing that the dollar is falling in value against other currencies in that we can generate a lot more revenue on our cheaper exports.  I don’t know if it would be enough to make up for the loss in consumer spending (the engine of our economy).  Clearly, our engine has been fed by easy credit.  Seems like we have been fed easy credit so we can spur the economy and now those lending the money may have ended up suffocating the engine with too much paper money.

Couple this with the average savings rate of Americans.  In 2006 we spent $42B more than we saved.  Yep, it is true.  Nearly 28 million U.S. households–37% of the total–do not own a retirement savings account of any kind and on average have only saved $25,000 per family for retirement.  Half of the households headed by a worker aged 55 to 59 have $10,000 or less in a 401(k) or in an IRA – they may have retirement plans (I don’t anymore). 11% of all Americans have retirement savings of $250,000 or more. In order to replace an income of $100,000, most retirees would need savings of $1.5 million – very few of us on on that trajectory.

This is scary stuff.  Any young workers out there reading this – now is the time to save.  You would not believe what $1,000 invested today would be worth in 30 or 40 years – $10,000 to $22,000, notice the $12,000 jump between 30 and 40 years?  The miracle of compound interest baby!  If you saved that $1,000 now and added $100 every month to it then the values look like this, an additional $10,400 to $26,000.  If you have a 401k or 403b that your employer will GIVE matching funds to then all the better.  Free money is the best gift one can get. This is just a rough sketch of expected returns. If one is 25 years old and single earning $35,000 per year and puts 10% away with your company matching part of that you would have $900,000 by the time you were 65 years old.

What is the solution for this 25 year old? Get married and double your income. Go back to school and get a better job. Save more and spend less (hear me Martin O’Malley). It is hard for a 25 year old to think this far out. Someone who is 35 years old might feel behind the eight ball and be demotivated to improve their circumstances. It doesn’t matter. I don’t know about you but I would rather be middle class and frugal than old and poor. How about you?

When the papers quote experts talking about the sub-prime mortgage mess (which looks to drag out much longer) I wonder how much of the problem is associated with home equity loans rather than mortgages.  How less of a problem would the credit crunch be if we saved more and took a longer term view of our financial position.

I wonder if the fact that other cultures that are so much older than ours have an easier time to think long term. According to this report their is no linkage.

U.S. workers save on average $696 a month for retirement, more than double the amount saved by workers in Germany, Italy and France, and nearly 10 times the amount saved by workers in China. Eight of 10 working Americans surveyed have already started saving for retirement.

Encouraging, but is it enough?  Any thoughts?

3 Responses to “Home Equity”

  1. observer said

    too bad we can’t invest our own social security money, we would all be much better off. I don’t think there will be any money left in the pot when I retire or I’ll have to be 80 to start drawing benefits.

  2. […] some people continue to slash away at their equity, borrowing money for sometimes lavish purposes. David Keelan connects the dots, noting the commonalities between individuals overspending by borrowing money, […]

  3. Bruce said

    Germany and Italy are poor examples because of the large publicly administered safety nets and pensions for both blue- and white-collar workers.

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