economy

This Is Going to Hurt

July 7, 2010 By Jon Griffith 2 Comments

The economic crisis as we have experienced it thus far has been rather devastating. I have close friends who are out of work, who have been forced to sell their homes for less than they owe, and who have lost everything they have. I’m thankful that I’m able to be there to help them through this time.

All but one of the homes that I have sold in the past 2 years has been under water. I also haven’t placed a buyer in a non-distressed home (short sale or foreclosure) in the same time frame.

Some said that we would be out of this mess by now. Reality dictates otherwise, and it’s been that way for a while. We can continue down a road of denial steeped in a bog of irresponsible optimism, or we can open our eyes and see the housing market for what it is.

If you’ll recall, when the market shot through the roof sporting unsustainable prices, it was a direct result of lenders offering incentives (free money) to people who weren’t in a financial position to buy stamps, let alone a house. When you give money away, you are effectively stealing future business from the marketplace. In other words, millions of people who would have otherwise not purchased a home until a future date were lured into buying.

The consequences of those purchases resulted in a surplus of homes, and if you know anything about the laws of supply and demand, when there’s too much supply, the price of the product naturally falls because the suppliers (home sellers) are forced to compete against each other, which means lowering their prices to be competitive.

Many economists share the opinion that the free market can take care of itself without intervention. One example of intervention is minimum wage. Minimum wage is an example of a price floor. In other words, we artificially set a price for the supply of labor regardless of the demand. It’s manipulation of the basic laws of supply and demand, and it doesn’t work.

In the real estate market, we recently went through a period where the government offered $8,000 to anyone who entered into a purchase contract to buy a home before April 30th. Sound familiar? By offering money to people who would have otherwise not purchased stamps, let alone a house (see the pattern?) we have yet again borrowed from the future to acquire buyers to buy now. Naturally, when the dangling carrot is revoked, sales fall off, and the market begins to correct itself. Unfortunately, like any swing, it will over-correct by swinging past the balancing point, and this will lead yet again to more foreclosures, more short sales, and more unemployment.

It’s 2010. We are nowhere near recovering. In fact, we are in the midst of a wave of mortgage rate resets that are going to devastate the 2nd batch of unsuspecting home-owners who had no idea what type of loans they were getting themselves into back in 2005 and later.

So what makes me think there’s a problem?

Option ARM mortgages. These are miserable products, and there are billions of dollars worth of Option ARMs (Adjustable Rate Mortgages) that are resetting over the next 2 years. Option ARM mortgages have a very low rate of interest in the beginning, and even allow for the borrower to go negative on their mortgage. In other words, their payment can be so low that the balance of their loan increases instead of decreases as they may payments. What a bargain! In the midst of declining market values, your loan balance is going up.

The risks of an Option ARM place you on a very slippery slope akin to betting your life savings on one company’s stock. Most borrowers will suddenly be hit with “payment shock” as their payment is reset after a period of time has passed. Option ARMs can negatively amortize up to 110-125% of the home’s appraised value at the time of purchase. Once this happens, it caps, and the payments are amortized based on a normal 30 year period, or other similar terms. Either way, most mortgagors (home owners) suddenly see their payments skyrocket to an unaffordable level. That means distressed home-owners, which leads to loan mod applications, short sales, and foreclosure (in that order.)

What’s the Solution?

It’s time to get real about your money. It’s time to get real about the future of our economy. In the most uncertain economic times that we have known, with speculation that we’re entering the Greater Depression, and being witness to some of the most heinous fiscal decisions our federal government has ever considered, it’s time to get to work. It’s time to start going without those little luxuries that you’re accustomed to. Adjust your lifestyle to fit a greater vision of how you see yourself in the future and save your butt off. Stop spending other people’s money with the justification that “it’s a low rate of interest,” or “it’s only $7.00/month extra,” or “I’ll just pay it off the next time I get paid.” You may not get paid again, and then where will you be?

Don’t be fooled by what the optimists are saying. We are not out of this mess yet, and it will be a long while before we ever see what we used to know as “normal” appreciation in the real estate market. Bottom line? This is going to hurt, for a while.

Filed Under: Blah Blah Economy, Coffee Shops, Market Updates, Short Sale Success Stories Tagged With: amortization, economy, foreclosure, mortgage, negative amortization, option arm

Should I Buy a New Or Used Car?

March 14, 2009 By Jon Griffith 5 Comments

Used. Always used. Buying a new car is one of the worst financial decisions I have ever made.

Monthly Payment

The monthly payment is the first thing that everyone looks at when they finance a car. Why? Because they live in a cash flow mentality. In this economy, cash is king. If you don’t have it, you can’t spend it. If you can’t spend it, you can’t make it. If you can’t make it, you won’t have it, and the circle continues.

If you’re thinking about a monthly payment, and any portion of that payment is going to be paid to anyone other than yourself (in other words, the bank), then you’ve already lost the battle, because you’re headed into debt. There may be a reasonable explanation for why you’re seeking financing for something you don’t have enough cash to purchase up front, but my advice to you is to completely avoid it altogether. In order to succeed at this, you will have to radically change your idea of what you should be driving. One of the mistakes people make when they consider their monthly payment on a new or used car is how much it really is going to cost them every month. The monthly payment every month is only the financed amount, and it hides all of the other expenses you’ll incur throughout the life of the car.

Since I’m such a nice guy, I’ll go ahead and lay out my stupidity (Dave Ramsey calls what I’m about to explain a “stupid tax”) for all to see, with no holds barred.

My Stupid New Car Buying Experience

In March of 2008, I purchased a new Honda CR-V, loaded. The only feature I didn’t buy was the All Wheel Drive. Big deal. So what did my car cost? The sticker price was $27,895. Divide this by 72 and you have a monthly payment of $387.00, right? Wrong.

When you buy a new car, you have to add to it the document fee, which in my case was $368.00, sales tax, which was $2259.50, and title and registration, which was another $514.71. These are just the up front fees. Then there’s the finance charge. My loan was at 7.9%, which over a period of 72 months is $8162.47.

Add all of these up, and the price of the car goes up to $39139.68. Divide that by 72 and you have a monthly payment of $544.00. But is that the total cost of owning the car? No.

In the first year, the car depreciates roughly $4200.00, so for the first year, you’re paying $544 per month plus $4200.00 divided by the first year (12 months) or $350.00. Color me stupid, but that’s $894.00/month. Add insurance at $1200/year and that’s another $100/month. Now we’re up to $994.00/month. Fuel for me last year, as a REALTOR, was $2937.00. That’s $244.00/month.

My vehicle, which appears to be costing me only $544/month (which by the way, is ridiculous and I should be stabbed through the eye with the very pen I signed with) is actually costing me $1238/month in real money!

The following is from Edmunds.com. It shows what you can expect to be the real cost of owning a 2009 Honda CR-V.


.		Year 1	Year 2	Year 3	Year 4	Year 5	5-Year Total
.	Depreciation	$4277	$2729	$2402	$2130	$1911	$13449
.	Financing	$1801	$1455	$1082	$680	$247	$5265
.	Insurance	$1258	$1302	$1348	$1395	$1416	$6719
.	Taxes & Fees	$2439	$374	$313	$262	$220	$3608
.	Fuel	$1996	$2056	$2118	$2182	$2247	$10599
.	Maintenance	$93	$546	$359	$872	$1108	$2978
.	Repairs	$0	$0	$105	$254	$373	$732
.
.	Yearly Totals	$11864	$8462	$7727	$7775	$7522	$43350

The Used Car Buying Experience

Let’s assume that I decided way back at the beginning, that I would be satisfied with driving the half-way okay car that I had which was completely paid off and only representive a small amount of “inconvenience” in my life. No NAV, no fancy leather, no sun-roof…etc. Big deal right? Right. Now, with a paid for car, the bank is getting nothing.

At the time, my truck was worth $8000.00. That actually means that I could have moved from the truck into a car that was more conducive to showing property for the same price, or perhaps a bit less. But, I would have been able to set my sights on that newer car without losing $1238/month.

Here’s how it starts. For 10 months, I would sock away $544.00 every month in my own savings account. Hey, I was willing to pay it to the bank, so why not just pay myself? After 10 months, I have $5440.00. Now I trade my $8000.00 truck, which would still have been holding its value, in to a used car dealer for a car that costs $13,440.00 (That’s $8000.00 + $5440.00.) Not bad. Yet again, I save for 10 months an additional $5440.00 and I trade my most recent car in for another car at the price of $18,880.00. 20 months into the process I’m driving a fairly nice used car. Keep in mind, I’m never buying new cars through this process and I’m always upgrading to cars that are holding their value, like a Honda or Toyota. For another 10 months, I save an additional $5440.00 and I trade my $18,880.00 car in for a used $24,320.00 car. 30 months have gone by and I haven’t paid the bank a red cent, and every 10 months I get to upgrade to a newer car, and not only that, but the $24,000 car I’m in now, was purchased by someone else NEW just 3 years earlier for a whole lot more than $24,320. Let the first owner take the depreciation. Let’s do it again. 10 more months of saving $544/month for another $5440.00 and I’m now able to trade in for a $29,760.00 car, paid for, IN FULL!

If you’ll recall, the price of my new Honda CR-V was $27,895.00. It’s been 40 months or 3.3 years, it’s 2011, and I can actually now purchase that 2008, loaded CR-V with miles on it, for much less than its original sticker price. In fact, that car that I had to have last year, would probably cost me under $20,000 in 2011, and would have all of the same features!

This is an absolute no brainer. When you buy a new car, you lose, no matter what. If you’re in a financial position to be able to take that loss, in other words, if you have the money to blow, then you can buy a new car, but you lose. It’s a mathematical fact. Most of us do not have that money because we jump in before we look at the facts. So here’s where I am now, as a result of my impatience. I have a one-year-old car with 20K miles that’s worth about $22,000. My monthly payment is $544, but as we’ve seen, the actual cost of ownership this first year has been over $1200/month. I still owe $27,000 on the car, which is a hair under the sticker price, and the only way out is to sell it and take a note for the difference.

Instead of having a paid for Honda CR-V in 40 months, I have to get rid of it and take an $8000.00 loss, which means I’ll be paying off nothing for a while. Are you as stupid as me?

Filed Under: Featured, Featured Article, Personal Finances Tagged With: buying, car, cost, economy, money, new car

Stop the Bleeding

October 17, 2008 By Jon Griffith Leave a Comment

In 2004 I was part of a computer business which was suffering from excessive financial bleeding. The dot com bubble had affected us dramatically and we failed to make the adjustments we needed to make far enough in advance to survive. We entered a state of financial crisis as we were spending far more than we were making, and we immediately cut our most expensive cost, labor. In one day, I had to let 4 people know that we would no longer have the money to pay for their services. I capped the bleeding, albeit painfully. Unfortunately in a business, changes like this affect people’s lives who are depending upon you to provide them with an income. It’s a very emotional process for both the business owner and the employees, however, when a business is failing, it would be irresponsible not to let the employees know in advance that things are changing.

Starbucks Is Not Invested In You

…but that doesn’t seem to make it easier to stop paying them. You see, when we’re talking about cutting costs by spending less on things that don’t have emotions or families to support, it seems as though we have a harder time doing so because nobody is depending upon us. Why after all would you feel obligated to tell your cup of coffee that you can no longer afford it. Your expense goes unseen by most and you may even enter into denial about how much you’re spending every day on it. Make your coffee at home, or cut your consumption in half if not eliminate it completely.

There’s A Hole In The Bucket Dear Liza, Dear Liza

I look at finances like a Hole in the Bucket, dear Liza. Money comes in and money goes out. The amount of money that goes out is directly proportionate to your expectations of lifestyle and the habits you have developed, which are all subject to change according to your priorities. In this economy, your priorities may be to cut costs and spending as much as possible to make it through.

I get a kick out of the song that we’re all familiar with from Sesame Street because one thing is overlooked. There’s not just one hole in the bucket. There are two holes. One with which to fill, and one with which to drain. Liza never thought of asking Henry one important question. “Is the bucket draining faster than it is filling?” If it is, fix the hole. If it isn’t, then you might not be in as much financial trouble as you thought.

When you become comfortable with a routine, it becomes very difficult, sometimes impossible it seems, to break the pattern. But, when you do break that pattern, it will allow you to take control of your money and follow a few simple healthy behaviors that will surely set you on the right track.

A Spending Plan

When we look at our spending in terms of percentage of income, it gives us a stronger boundary by which we can live. If we look at our spending in terms of dollars without knowing what percent of our income we’re spending on each obligation or indulgence, we lose perspective of how much we’re hurting our financial future. We also find ourselves saying things like, “I’ll start giving when I can afford to.”

Affording something is a matter of perspective, and prioritizing what we love to do. One may say that they cannot afford something when in fact, they can, but they’ve misappropriated funds to something else that they believe they can afford but in fact cannot.

It’s critical that you design a set of basic rules, rules that can bend and change according to your situations, but that can be consistently applied to any income situation you are experiencing. This builds a foundation that can be applied whether you make $10.00 per hour or $500.00 per hour. One percent is one percent no matter what. Over all, we need consistency in both income and spending in order to reach our life long financial goals.

Filed Under: Blah Blah Economy Tagged With: bleeding, crisis, economy, money, pattern, Sesame Street, spending

What To Do In Uncertain Times Like These

September 27, 2008 By Jon Griffith 1 Comment

Turmoil. That may be the first word you think of when you hear the word economy. Believe me, I hear it and feel it every day too! With talks of bank failures, bail-outs, stock values, election campaigns…whirrrrrrrrrrr BANG! That’s what happens inside my little brain. I tend to want to shut down and ship out.

Here’s the problem we face. Most of the time we act in haste on feelings and forget that the feelings are a result of something that has already happened. It’s at this point when we face the most difficult challenge of choosing the best response to our fear, anger and sadness. In times where things seem desperate, or uncertain, remember not to react in an unhealthy and damaging way. Take inventory and make a healthy, rational decision about what you’re going to do.

I recently created a poll on my website, www.RealScottsdaleLiving.com which asks you whether or not you believe that the United States is headed for a 2nd Great Depression. Of 18 votes in the past 12 hours, 16 people’s opinions indicate that we are. I’d love to know what you think about these economic times.

What about the banks? Ahh yes, what about the banks…

The American Bankers Association says that most banks who are considered to be in trouble return to profitability without intervention, and you won’t know about it, so you won’t know if your bank is going to fail. So let’s say your bank does fail…does that mean that you won’t have access to your money? That depends. If nobody buys your bank’s assets and deposits, and/or there’s no new company formed to handle the funds (usually occurs between Friday and Monday) then your money would not be accessible. If your bank is purchased, then you most likely would not see an interruption of service. If your funds are not accessible, on the Monday following the failure, the FDIC would begin to send you checks in the amount of your deposits.

What about the stock market?

This is where the impulsive selling could plunge you into a panic causing you to pull the trigger and sell. If you’re financially independent and you’re not still working towards building your life’s nest egg, then you can get out of the market. Most of us are not there yet, and the stock market has proven to be the highest return on investment over the long haul than any other investment vehicle. Stick with it and don’t sell off just because you’re afraid of losing. Remember, you don’t actually lose your money in the stock market until you sell. If you’re concerned about a particular company, do your homework and move your funds somewhere else.

What about real estate?

Well, they aren’t building any more land. The Earth has only so much of it, and since we are creatures who crave community, it’s not likely that you’ll be interested in purchasing a plot of land in the middle of nowhere unless you like that sort of thing. Property also goes up over the long haul, and with interest rates as low as they are, and thousands of short sales and foreclosures saturating the market, as a buyer, you are in a position to reap a huge reward down the road. My advice to you, if you have money sitting around doing little or nothing, is to buy a house.

There’s no crystal ball in any economy. All we have are patterns of the past, and the patterns show that we grow, consistently, without fail. We are getting smarter, more innovative, and there are more of us. The economy has nowhere else to go but grow. The question for you is whether or not you’re patient enough to let it happen.