December 31, 2007

Well, We're All Going to Hell (And Happy New Year!)

I TAKE IT MOST of my readers will end up reading this sometime on Jan. 1, so allow me to wish all of you my best and my hopes you'll have a happy and prosperous New Year. Unfortunately, it would appear that for many Americans, 2008 isn't going to be all that prosperous -- and accordingly, not all that happy.*

There are a couple of pieces of Bad News out there for Americans, particularly middle- and lower middle-class folks, who are most at risk of facing the negative consequences that go along with reduced valuations on real property. The first piece of Bad News comes from The Times of London, which reports that America's housing market could see price declines commesurate with the Japanese flu of the Nineties. It took years for Japan to get over that bug, which it caught when real-estate prices collapsed and sent the country into a wretched deflationary spiral. The trouble with this report is that it's not from some wacky gold bug, but rather Prof Robert Shiller of Yale University. Prof Shiller is the guy who coined the "irrational exuberence" phrase, so we can guess the man knows what he's talking about. Also, he is an expert on the residential real-estate market. His prognosis isn't good:

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

“Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.

Professor Shiller, author of Irrational Exuberance, a phrase later used by Alan Greenspan, the former Federal Reserve chairman, said: “This is a classic bubble scenario. A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.”

I have to admit I would normally approve of falling house prices, as they would mean I would, you know, "actually be able to buy a place." But I don't want those to come along with a deep and prolonged recession, because that could mean me losing my job, and having a job would be rather important were I actually to jump on the property ladder. I also don't want a deep and prolonged recession because that could well hit me where I do have money -- in the equity markets. Is it too much to ask for a nice Goldilocks economy (not too hot, not too cold) where salaries can slowly rise to the point where housing values are actually sustainable? I guess it is.

But if that wasn't bad enough news, the Los Angeles Times recently had a rather alarming story on Americans who have been taking out increasingly hefty loans on their vehicles -- and doing so through rolling over their loans on their former vehicles. Since vehicles depreciate in value, this is something akin to financial suicide on the part of the borrowers -- and it may also hit the people loaning them the money.

Now, when you read the story, you'll be downright stunned at what one might charitably call the innumeracy of the people taking out these loans. You may also, like me, have an initial reaction that the buyers made their beds and now they can lie in them. But that's not exactly helpful, now is it? Besides, it's one thing if it's only the borrowers getting fleeced, because they should have known what they were getting into -- but it's another thing entirely if the situation helps spur an economic slowdown which ends up biting investors in the collective ass.

The LAT reports:

Americans haven't just been taking out risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to.

As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.

Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45% of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, such as Toyota Financial Services and Ford Credit, are offering seven-year financing. And a few credit unions, particularly in the West, are tinkering with the eight-year note.

At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40% in the last decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

Quite frankly, this boggles my mind. I fully admit I'm not like most people when it comes to cars -- all I want in my car is a V6 engine -- but still, this is crazy.

I can't tell you how much I absolutely detest having a car note, and I have made it one of my financial goals to pay off the goddamned thing as soon as I can. Readers may recall I bought the Family Truckster back in February, and at the time I arranged for a payment plan that would have the car paid off in 32 months. I now own 62 pc of the car and will have it paid off at the end of the year, God willing, for a total loan term of 23 months. At the latest I will have it paid off in March 2009, for a loan term of 25 months. When I do pay it off, I will jump for joy and sing hosannas and look forward to having several hundred dollars per month added back onto my bottom line. Not only that, the car itself should last for a good six or seven years beyond that.

One of the reasons I don't like having a car note is because it requires me to make loan payments, and that's annoying. Another reason is that although the car is depreciating in value, it is still an asset and useful -- after all, if worse came to worst, I could sleep in the stupid thing and drive around looking for places to get a shower. There's something to be said for having that freedom. Another advantage of paying my car loan off quickly is that I'll have equity in the car -- and that could come in handy down the line. After all, if someone runs into the car next summer and it is totaled, I'll get a rather nice check that will let me buy another car without hassles and without a lot of associated debt.

I mean, my God. Borrowing thirty thousand for a car! Can you imagine it? (Please say no).

As I said, it's not really the borrowers' situations that bothers me -- it's everyone else who indirectly relies on those folks to keep earning and keep spending. After all, people in tough spots financially will do whatever they can to keep their cars, which give them the freedom to live in this day and age. If that means keeping up with the extra high payments on their car notes, they'll spend less on other stuff, which will hurt all of us.

Anyway, to recap: housing prices falling, people up to necks in hock, gloomy forecast again. I know I should secretly wish this state of affairs continues so I can cleverly take advantage of it down the line, but I suppose I'm having a minor crisis of confidence. This is so not cool and with it.

* Money doesn't buy happiness. However, not having money isn't exactly a ticket to paradise either.

Posted by Benjamin Kepple at December 31, 2007 08:17 PM | TrackBack
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