December 10th, 2008 — , , , , ,
A year ago I wroteabout the government’s plan to freeze mortgage rates and how ridiculous it was. I also suggested that people should just walk away from their gigantic loans and buy something cheaper. A lot has happened since then. There were countless attempts by the government to revive the housing market with very little success, and many people did walk away from their underwater loans and buy cheaper homes. Yesterday, showed that more than 50% of borrowers who received loan modifications end up defaulting again anyway.
When I read the news I thought to myself, “well, what did you expect?” Many of these loan modifications either changed the loan term from 30 years to 40 years or lowered the interest rate, but the borrowers still owe a gigantic debt on a depreciating asset. There is no incentive for them to pay the debt if they can find a place to live in for even less money than the reduced mortgage payment. Seriously, who would want to pay a $400,000 debt on an asset that is worth only $200,000?
Additionally, all of these loan modifications encourage bad behavior. The borrowers probably think that if they don’t pay they will be bailed out again because bailouts are all the rage right now. Everyday the news is reporting some kind of government action to deal with foreclosures. So if you already got free housing for 3 to 4 month and then got a modification on your loan, then you have another 3 to 4 months until a foreclosure comes. That’s 6 to 8 months of no housing payments even if there is no second modification, and that seems like a good financial incentive to default.
Another driver in re-defaulting is the worsening economic state of the world. , and perhaps a lot of people no longer have the amount of income they had when they received the loan modification. For now, I think the unemployment situation is only going to get worse.
I think the lesson in this is that the government should stop messing with the free market and let foreclosures happen naturally. These modifications and bailouts are just prolonging the pain for everyone involved. I suppose that more than 40% of these borrowers are still paying for their modified loans, but they really may be better off by renting and saving for a down payment on a cheaper home. Home prices have come down more than 25% in many parts of the country, and it is slated to go down even further. It would take a while for a foreclosure to come off someone’s credit report, but that might be the perfect time for that person to build up a sizable down payment.
I think home prices will go down for at least another 4 to 5 years and recover if the government stops with the interventions. If they continue to manipulate the market through interest rates and loan modifications then it may take the housing market a longer time to recover precisely because the bad apples will still be hanging on. For example, if a person gets a foreclosure now then it would take seven years for it to come off their credit report. So in seven years this person would be a prime borrower again. However, if he hangs onto the mortgage through various bank and government deals and then redefaults after two years, then it would take nine years from now for that person to become a prime borrower again. The sooner people get foreclosed on, the sooner they can rebuild their credit and become suitable homebuyers again. The housing market will only recover when the demand returns, and I truly believe that all of these government polices to prevent foreclosure will simply stall the recovery of the housing market.
December 7th, 2008 — , , ,
Okay obviously this post is a bit late for Thanksgiving, but I had a good time with my family and ate a lot of food last weekend. Lately I haven’t been blogging much just because a lot of random things are happening. I am swamped with real life so to speak. While I have had time to sit down and write I did not have much to say so I didn’t write much. So anyway, it’s December again, and it’s almost Christmas and the news is full of gloom of doom. I think to get away from all the depressing news I need to write down all the things I am thankful for.
First, I am very thankful for my family and friends. I am just happy to be loved. This year I am also grateful that I got to see my elderly grandparents in China. They are a hilarious couple and I may write a story or two about them later. If you want to read a little bit about them my hubby wrote .
Second, I am very thankful that my entire family amidst the massive layoffs in November My hubby is in the video game industry and apparently this industry is . In fact, his company is still hiring people for new projects. As long as we have a steady stream of income we should be able to ride out this recession without too much of a problem.
Third, I think a lot of people are thankful for this one – prices are going down on gas and food! Actually the price of gasoline is $1.75 a gallon now on my street and that means my hubby and I would save around $100 a month on gas. I have not seen those prices for gas for about 5 years. I noticed that milk and bread also got a little bit cheaper and it is expected that food prices would come down a bit more. This is definitely good news for people who need a little financial relief though some economists are worried about deflation, but that’s another story entirely.
Next, I am happy that my sister in law is getting married. I don’t talk to her all that much because she lives about 500 miles away, but she’s getting married in two weeks and that’s pretty exciting. The hubby will be a groomsman and look all sharp. She picked a very expensive tux rental and that annoyed me and my mother in law a little bit, but that’s just because we want to save money. My father in law and hubby should look pretty good though.
Also, I am thankful that my hubby and I got to go on vacation and various weekend trips in the past year. Okay, this is actually a story about my grandparents. When we were in my grandparents’ condo, my grandmother kept on telling me that I am so lucky that my husband is willing to travel with me. Then she went on and complained that my grandfather was so cheap that he never took her traveling in their 54 years of marriage and now they are too old to go places. My parents always say that I am frugal like my grandfather, but I am not that cheap! I think there really needs to be a balance between hoarding your money and wasting your money and there is no point in hoarding your money senselessly because in the end you really can’t take it with you.
Finally, all of these things are gifts from God so all the thanks goes to Him. I know that I have a lot more than most people in this world and I don’t take it lightly. Everyday is truly a gift.
November 24th, 2008 — , , ,
When I left for vacation I mentioned that we still haven’t closed on the house, yet. Well, on the day we left I got a call right before the plane was about to take off that said that our money was received and everything was fine. So now we are officially homedebtors.
Right now my in-laws are still living in the home and we will be visiting for the holidays and also my sister-in-law’s upcoming wedding. My in-laws won’t leave until next year and we are working on finding a caretaker who could keep the home occupied for at least a year. The caretaker will be responsible for the maintenance and any utilities they use. There are a few families that know my in-laws who are interested right now since it would be a good deal for them, but we are still going to have a formal application process to screen them. Since my in-laws may return after a year abroad the caretaker is just temporary.
We did not buy this home as owner-occupied/primary residence since we don’t intend to move down there for quite a while, and that raises a few issues. First of all, our homeowner’s insurance is simply Dwelling Fire, which means that nothing inside the home is protected. This is not a big deal since we are not living there. Second, if we do sell the home in the future we will have to pay capital gains taxes. In the past people could avoid this by moving into the home for two years, but the laws have changed so that starting from 2009 this isn’t the case anymore.
Overall, the situation isn’t that bad because we have 30% equity in the home right now based on a recent appraisal and the mortgage is 15% of our gross income. Since we already itemize on our taxes we can claim the mortgage interest deduction, and that cuts down the mortgage a bit more. We plan to keep the home for a very long time and possibly pass it onto our kids so I’m not too worried about the value going down a bit more. We are also planning to pay off the mortgage in 13 years instead of 30 by adding extra principal onto every payment, so we now have 155 more payments to go.
There is a possibility that we will move down there in a few years if the hubby gets the job he wants down there, and if that’s the case then we would have a nice house to live in.
November 19th, 2008 — , , ,
Today my hubby finished sorting all the pictures from our trip. He really took a lot of pictures! Since a picture is worth a thousand words, this shall be a photoblog of the ancient and modern that we saw on our trip. Most of these pics were taken by my hubby, but I have permission to use them on my blog. If you want to use any of these photos please ask me to ask my husband for permission. Enjoy!
The Great Wall – Beijing
Tiananmen – Beijing
Temple of Heaven – Beijing (This is probably my favorite structure in Beijing. It is around 600 years old and built without a single nail).
Terra Cotta Army- Xian (They were a lot bigger in size and numbers than I thought. These are around 2000 years old)
Five Pavillion Bridge – Yangzhou (This is the symbol of my hometown Yangzhou. Built in the 1700s by salt merchants on the Slim West Lake)
Bird’s Nest & Water Cube – Beijing (We didn’t get to stop and go into these, but they were quite impressive and looked even better at night)
CCTV tower – Beijing (A really weird looking building)
Runyang Bridge on the Yangtze River – (This bridge connects Yangzhou & Zhengjiang and its southern section is the 4th longest suspension bridge in the world)
Pudong Skyline – Shanghai (These new buildings east of the Huangpu river sprung up in the last 15 years.)
Speed counter of the Shanghai Magnetic Levitation Train (It’s going about 260 miles per hour for you non-metric folks).
There is not much to say besides that you have to see it to believe it all.
To be continued…
November 17th, 2008 — , , , ,
Despite censorship and propaganda, Chinese people are very aware of what is going on in their country and around the world. Every person I met knew of the financial crisis in America, and even the masseuses knew of Obama and McCain. I’m fairly sure most people here in America have no idea who the Chinese president is. (Funnily enough the Chinese president’s last name is “Hu”). Here are some of the tidbits I heard about how the financial crisis and other factors are affecting China’s economy and the lives of everyday folks.
First of all, the stock market in China plunged more than 70% from its highs. The central government called this a correction, but the people I talked are pretty aware that it’s more than that. However, the percentage of people in China with skin in the stock market is very small. Most people put their money in the four large government capitalized banks and collect interest and many people still have traditional pensions for their retirements. However, orders for Chinese goods are down significantly for next year and many factories are closing down due to lack of sales since the United States is China’s largest trading partner. Everything from shoes and plastic forks are seeing decreases in orders. Unemployment is fairly high since China has way too many people.
Another event that affected China’s economy is the Olympics. In order to ensure that the event was a success with the least amount of restrictions China created new Visa rules to curtail the entry of foreigners. As a result, the amount of tourists dropped by quite a bit. Most of these Visa restrictions have been lifted, but the outlook for tourism is still lower than previous years because many foreigners are not travelling in the current economic climate.
The people I spoke to were also quite curious about home and car purchase in America. Cars carry a tariff as high as 25% to 100% in China, but people still buy them. Condos in large cities like Beijing and Shanghai are extremely expensive, and yet people still manage to pay in cash or put at least 30% down. The tour guide in Shanghai told us that most people also get very short term mortgages where they pay a home off in 5 years. She thought that a 0% down loan is absolutely ridiculous and said that the bankers in America must be idiots. Home prices in China hasn’t really fallen because people save up so much cash to buy something, but home sales have slowed significantly after a rapid run in prices.
Most people I spoke to believe that the Chinese government is doing the best it can under the current economic climate. Everyone agreed that their lives have vastly improved in the last two decades of reform, and even though some people said that they were dubious about China’s large purchase of American government debt, they seem to agree with the fairly conservative economic policies of the central government. China is also focusing on education and scientific research much more than before to cultivate its own engineering and scientific talent. Another emerging trend is that more and more Chinese students of my generation who go abroad are returning to China after they graduate. This is a big difference from my parents’ generation, who went abroad and never returned.
For the most part,it seemed like business as usual in China. In my hometown, the restaurants we went to were packed to the brim and my grandfather said, “I bet you can’t see a financial crisis here.” There weren’t as many tourists, but I guess that’s better for pictures. In Shanghai it was hard to hail a cab, and car license plates are auctioned off each month for more than $5000 each. In Beijing, the construction cranes were still working overtime to erect modern and bizarre skyscrapers. China is definitely still growing amidst this global financial turmoil, and there is definitely a sense of pride and optimism in the misty polluted air.
To be continued…