Wednesday, September 24, 2008

Uncertain Times

Years ago, while studying for an MBA, I took a course in macroeconomics. I found it incomprehensible then, and I find the United States' current economic situation equally incomprehensible now. The more I read and listen to various opinions, I wonder if anyone really understands it. What are we to think? What are we to do?

As baby boomers, my husband and I are approaching retirement. Our retirement accounts are decreasing in value. Our house is decreasing in value. We were thinking of paying off our mortgage, but now do we want to tie up cash in a house that might have little value? Do we take all our cash and stick it under the mattress? Is the sky really falling? Who knows?

Are we victims of "massive fraud" as Bob Barr claims? Is Secretary Paulson really "incompetent" as Lou Dobbs claims? What about former CEOs walking away from companies they have ruined, with hundreds of millions of dollars in severence pay?

It's all still a mystery to me. Does anyone out there understand it?

1 comment:

Jenny Jill said...

What has happened, Judy, is that people who cannot afford mortgage payments were given mortgages. (The mortage brokers did not demand large enough downpayments to ensure that the monthly payments were affordable.) The mortgages were bought by a series of investment companies in a long chain of companies now well removed from the original loans.
Building homes is good for the economy. Owning a home is better than renting in that you put money into equity in your homes. The equity is based on the down payment plus the amount you can pay down. The problem, of course, is that the home owner is paying interest on the loan (the profits for the investment companies that hold the loans) at the same time.

The mortgages were secured by the homes themselves. If the mortgagees defaulted, then the mortgage lenders take back the homes. Well, sure enough, many, many of the home owners defaulted on the homes - but in such numbers that there was a glut on the market and the value of the homes went down as mortgage holders tried to sell the homes to get back their money.

Investments are considered long-term and YOUR investments must be considered to be long-term. The problem with this glut is that everyone is panicking and trying to sell both stocks and home at the same time. You have to sit on your holdings. They will come back. We have watched our investments and the market will eventually self-correct. This is the advice our investment counsellor tell us. You have to look long-term, this is only a short term blip on the radar. It is silly to sell now, both property and stocks, as the investment accrues over the long term.

I think there were massive frauds occurred in the beginning as the loans were made to those who were doomed to default on their homes. There is a lot to maintaining a home. I say sit tight. The impact has been world-wide, here in Canada our portfolio has gone down in value - but this, too, is short-term and only on paper. We will sit on it and eventually it will accrue more value.

My hope is that the CEOs will be fired, and the $700 billion will go to those who have lost homes, not stock values, which will increase later. I hope that the CEOs involved will not get their bonuses and your government will ensure that those who screwed up will not benefit from more cash.

For you - to pay down your mortgage is ALWAYS a good priority. The lessons the difference between your interest payments and increases your equity. If you sold your house now for, say $200,000, but have to pay off the mortgage of $100,000, you will only get half the real value. Look at your interest payments - they add up over time. The housing market is very dependent upon location - and while the value of your house may go down a small amount now, until you actually sell it it does not matter. The houses where mortgagees defaulted have really gone down since there are few buyers in those locations. The selling market depends upon market demand. In Toronto, for example, condos are being built left, right and center, and there is a high demand for folks who want to live close to their place of work. Their value will not go down, despite influence from American economics. Home value is totally geographically dependent.

So - hang tough. Things will correct themselves, as they always have over time!
/my two cents worth!