Monday, June 2, 2008

Mortgaging the Farm

" The future ain't what it used to be "
- Yogi Berra

Zero savings (negative savings rate), falling home values (disappearing home equity), vanishing home equity lines of credit (banks are “dis-approving” previously approved credit lines), upward-adjusting variable-rate mortgages, increasing cost of living, $4 per gallon gas, job insecurity, etc, etc, etc.

What is the strapped U.S. consumer to do? Caught between the proverbial rock-and-a-hard-place and not enough room to roll over.

Repeat after me: WE DID IT TO OURSELVES.

We took the easy money. Why save when I can borrow from my house at a near-zero interest rate (in real terms)?

And what is government’s response? Throwing more money at us: Lower Fed Funds rates, “economic stimulus checks”, homeowner bailout legislation, Wall Street bailouts (see: Bear Stearns – though to be fair, I don’t think the Fed had any choice on this one), “Elect Me Gas Tax Holidays”. Say what you will about Obama, but he’s right on at least that last one.

$600 tax rebates? Does anybody really think these checks will be spent on anything other than rent, food and debt reduction?

All of this is designed to keep us spending every dime that we earn and dimes we don’t earn. Now that we can’t tap our homes for easy money, we’re going back to our credit cards: consumer revolving credit outstanding is increasing, not decreasing as one might expect it to do in the face of a recession. When that doesn’t work, we’re taking out loans against our 401k accounts and considering exotic home loans like reverse mortgages (for those 62 and older) and “equity-sharing” home loan arrangements. All to prop up that which shouldn’t have been built in the first place – by this I mean the massive debt pile, not your home ;-).

Here’s a simple question: what happens when all of the possible avenues to keep the ship U.S.S. Consumer afloat have been exhausted? What then?

A simple personal prescription:

Don’t buy anything you don’t need.
Don’t buy anything you do need with credit.
Open a savings account today – make regular deposits. Here’s an easy one: www.ingdirect.com
Start a debt reduction plan today. Here’s an easy to use spreadsheet: http://downloads.zdnet.com/abstract.aspx?&compid=61504&docid=292213

You can’t mortgage the farm if it’s already mortgaged. Change your behaviors, change your life. Put yourself in a position to choose rather than react.

Questions? kimm@sweetwaterinv.com

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