Paying the Rent After the Pink Slip

(Comstock)

A recent national survey indicates that “[o]ne in three Americans would be unable to make their mortgage or rent payment beyond one month if they lost their job.” Even higher-income households would find themselves in trouble quickly: “Ten percent of survey respondents earning $100K or more a year say they would immediately miss a payment.”

Even more Americans — 61 percent — wouldn’t be able to pay the rent or mortgage after five months of unemployment. Given the current state of the economy, it’s perhaps wise to heed Suze Orman‘s 2008 advice on this blog — she recommended an eight-month emergency savings fund.

This week brought two more bits of housing news which underline what strange times we live in. On Thursday, rates on a 30-year mortgage dropped below 4 percent for the first time ever. And yet, we also learned that the last decade saw the steepest decline in home ownership since the Great Depression. Home ownership dropped to 65.1 percent in April 2010, 1.1 percentage points lower than it was in 2000, and more than 4 percentage points below its peak around 2004, when ownership rates approached 70 percent. That’s the biggest decline since the 1930s, when home ownership plunged 4.2%.

(HT: Naked Capitalism)


Mikos

A lot of people *really* don't get the concept of risk, do they? Or perhaps are pathological optimists.

Joshua Northey

People are not taught financial responsibility at school. Students graduate with high school with zero understanding of debt mortgages, likely earnings, running a household. Heck many college students graduate this way. Yet financial literacy is probably one of the greatest factors in determining how happy people will be in their adult life.

Some people would say "that is not the schools' job it is parents' job", but parents are clearly failing badly at it and we need a different system. It is normal for people to go out and make purchases for completely frivolous consumer goods with money they haven't yet earned. "Sure I am losing my house, but for the last several months I have been driving a brand new car and watching a 70 inch TV." People are wired for a lifestyle that stopped existing 20,000 years ago where they would be lucky to live to age 30. They instinctively discount their future mental states way too much in a society where most of them will live into their 80s.

These should be the types of interventions the government makes in the markets. Not redistributive social engineering, but simple behavioral-psych things like "people are incapable of managing consumer debt adequately so we need robust safeguards".

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Joe J

"but simple behavioral-psych things like “people are incapable of managing consumer debt adequately so we need robust safeguards”."
I disagree with this, since in my experience it is the government making such safeguards, that causes more people to be reckless and financially blind. Basically the more safety nets you put out the more reckless people become.
To quote one, when she finally had some money left over. " Bills will always be there and will somehow get taken care of, but this money is here now, so better party with it now. "

Joshua Northey

By safeguards I am meaning things like an interest rate cap, which by its nature would mean you couldn't extend credit to the most credit unworthy, and similar things. Not the bankruptcy protections which you seem to be referring to. People shouldn't be shielded from the consequences of poor debt decisions, but they should be shielded from making those bad decisions in the first place.

Unless you are willing to let people starve or put them in slavery (and that clearly won't happen and is a bad idea anyway) they are not going to control their own behavior.

If you remove the safeguards and let people take out 50% loans against their homes a lot of people absolutely will.

You restrict credit by passing rules that make it unaffordable to extent credit to those who shouldn't be using it.

And yes I am enough of a paternalist to think that society should be determining what terms the hoi peloi cant accept on loans.

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Geoff

Elizabeth Warren seeks to educate and protect consumers about interest rates and lending exploits. But shouldn't the consumer be advised to avoid credit cards all together, save your money, and be ready for dips in the economy? Our government could save a lot of money by just telling people to stop using credit cards - as opposed to educating them about how interest rates could change.

Joshua Northey

All my friends always seem amazed at my family's financial strength and resiliency. When we had to move due to a promotion last year we bought a second house in the new town even though we cannot sell our first one. Our friends looked at us as though we were aliens. "How do you have the money to do that?"

The simple answer is we don't have credit cards (I got rid of the only one I ever had when I was still 18 I think), and we don't buy crap we cannot afford and/or don't need. Trust me the bank doesn't care about a nearly non-existent credit history if your debt service to income ratio is .15 and you keep several months of cash in the bank.

It is amazing how much money you have when you don't feel the need to buy a new car every 3-5 years and will settle for watching the perfectly acceptable TV you bought 10 years ago instead of springing for a new $2000 one.

I am working on a refinance right now and the guy I am working with from the bank can just not get it through his head that I don't care about what the upfront costs are, or minor reductions in what my monthly payment will be, or whatever other garbage he uses to sell to people. I only care about the total cost over the life of the loan.

Maybe he just doesn't want to hear it, but it is hilarious.
"If you get a new 15 year loan you will save X amount a month"
"Yes but I only have 13.5 years left on my current loan, so overall the actual saving are only 1/3 of what you stated".
"What do you mean?"
'..."

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164

Agree with everything you said except:

1. Credit cards are a good tool, just pay the bill in full every month or do an automatic pay in full from your bank account.

2. Dont dismiss the value of having a good credit score. Even with a good debt to income ration, higher score means a better deal. Bankers love doing it by the numbers. Also with a high credit score your car and house insurance rates will be lower -- they check.

cackalacka

Through the power of savings and historically avoiding unnecessary debt, I can survive another layoff for an extended period. But I'm a rational math-oriented person in a world of nitwits.

So I share a lot of the perspective many of the other posters have here.

That said, I think everyone should cut our friends some slack. Not everyone took (much less retained) finance or accounting or even remedial math in their formative years. We have an entire society that spends an inordinate amount of effort re-programming people to consume, after all, it is profitable.

Unfortunately, the poorly reasoned risk-taking mindset that gets the average Joe in trouble is pervasive at every level, particularly in the 'financial' 'services' 'industry.' Imprudence on the part of the mortgage borrower the day of the closing doesn't effect me all that much. Imprudence on the part of the lender (or their agents) on a grotesquely criminal scale that causes entire industries, countries, and continents to collapse kinda does.

So at the end of the day, while it is all well and good to feel superior to the average Jones family who leveraged themselves into oblivion trading in their Lexus for a BMW X5 and their 'modest' 3500 ft abode into a starter castle, I save my righteous anger to the idiots that thought they could profit from prodding the Joneses into that situation. Mainly because, the idiots DID profit from prodding the Joneses (and families on every street in America) into financial oblivion.

Somehow the 'financial' 'services' 'industry' went from stewards of accounts and gatekeepers of paper, to flippin nihilists.

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Jeff

Yes, lack of personal responsibility FTW!

Jeff

"And yet, we also learned that the last decade saw the steepest decline in home ownership since the Great Depression."

I saw this headline on CNN this morning. I think it's an incredibly sensationalistic way to communicate this statistic. The drop is still 1/4 of what it was in the '30s. The next time it rains a drop in New York I'm going to call it "THE WORST STORM SINCE IRENE!"

Allison

Why do people find it so hard to save money? I am single, in my late twenties, and I live alone in a condo I bought by myself 2 years ago without any help from my parents. I just crunched the numbers and if I were to lose my job I’d have at least 10 months worth of savings. And you know what? It really wasn’t hard to save!

I have my parents to thank for teaching me about financial responsibility. I was taught to ALWAYS pay all of my bills on time and in full and to always have at least 6 months worth of savings. When I was condo-hunting my dad kept telling me, “Just make sure you have plenty left over after the down-payment in case something happens, because you never know.” He told me this at least 5 times. I was also taught that it’s okay to spend a little more for quality on an essential item if you could. They would buy good cars but drove them for YEARS, up until the point where it became too much of a hassle to keep up with maintenance. Personally, I try to make meals at home, I look for deals, I rarely go shopping for clothes, and I try not to spend any money on anything unless I really, really need it. I’ll pay a little extra on outdoor gear because I like to hike and camp and I don’t want my equipment falling apart over time. I don’t mind having the occasional meal out with friends. I’ll splurge a bit on a vacation because I like to travel but I look for cheaper hotels and deals on flights. But, overall, I do my best to save.

I could understand that if you are struggling financially it could be hard to get out of that hole, especially if you’ve been out of work for a long time. I couldn’t imagine how hard it could be if you had medical bills to pay without any insurance, as is the case with so many uninsured people in this country. But like what Joshua mentioned above, how could I have sympathy for someone watching cable on a 70 inch TV in their new Nikes? I am surprised at even some of my friends’ spending behavior and we’re all college graduates with decent jobs. My aunt gave me a gift card to a high-end department store and I decided to use it to help buy a pair of jeans since one of my pairs were starting to get holes in them. (I never own more than one or two pairs of jeans at a time, because really, why would I need to?) They were having a sale so I went with a friend and thanks to the gift card I only spent about $15. Meanwhile, my friend put at least $350 on her credit card. She bought a purse she didn’t need (she has at least 5 purses), a pair of jeans (“I already have a pair like these but I love them so much that I wanted another!”), some jewelry, and I can’t even remember what else. She makes all of these pricey non-essential purchases and then will complain about credit card debt and her student loans. I can’t fathom how that kind of rationale works. It’s shocking to me.

I’m seeing my parents this weekend; maybe I should thank them by taking them out to a moderately priced restaurant.

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James

Humm... She's good with money, doesn't have a dozen purses or closets full of expensive clothes she never wears, plus she likes to hike & camp. I think I'm in love :-)

Allison

Sorry, James. I'm taken. :-)

James

Darn.

Miguel

We're in this boat, somewhat intentionally. We see it as a worthwhile gamble.

My wife and I graduated college at about the same time. We then had student loans ($30k), a car loan ($18k), and a mortgage ($100k).

We intentionally only keep a small ($500ish) emergency fund, because we decided we want to get rid of the debt before we focus more heavily on savings.

I feel secure in my current job and I'm pretty sure I could get a new job within 3 months if something did go south. That would be a challenging 3 months, but we could make it on Credit Cards.

A good plan? Not really, but good enough to gamble on it.

BSK

Why are you so confident you could get a new job in 3 months? Look how many people have been unemployed for years during this latest recession...

Erik

Why doesn't anyone have any savings? Why do they spend money as fast as they can get their hands on it?

Think about our national plan to fix the economy and get out of the recession: force people to "do their part to help the economy" by going out and buying things. Tax credits, stimulus checks, good old-fashioned coercion. We are doing this to ourselves.

Exposing families to unexpected, devastating cutbacks and sacrifices by encouraging everyone to "spend, spend, spend" isn't just wrong, it's also bad for our economic recovery. Tell the Keynesians to stop trying to manipulate our already fragile economy. Saving is healthy.