Carnival of Personal Finance #206
Posted by linke in Economics, Personal Finance, Real estate on May 27th, 2009
I am in the Carnival of Personal Finance again this week. This time for my article on Renting vs. Buying.
A lot of meetings and appointments this week. More later.
Carnival of Personal Finance
Posted by linke in Automobiles, Frugality, Personal Finance on May 18th, 2009
Well, I made it into this week’s Carnival of Personal Finance. My entry was the about the frugal beauty of my old truck. You can see the rest of the Carnival highlights here.
http://www.wisebread.com/carnival-of-personal-finance-205-pay-it-forward-edition
This week’s theme is “Pay It Forward.” I will have to review the other entries when I get the time and link to the ones I like. Thanks to anyone and everyone who voted for me.
Renting vs. buying
Posted by linke in Economics, Personal Finance, Real estate on May 15th, 2009
I recently read an article on CNBC.com regarding the latest real estate trend… renting. Currently, my wife and I rent our home. As strongly as I believe in homeownership, personally, now is not the time for us to buy. I wrote briefly about my current job status in another post, but here is what happened to us.
1. We moved from NC to TN in 2006 for my new job.
2. We immediately purchased an untouched ranch style home built in 1958.
3. We spent every weekend for months and tens of thousands of dollars renovating the house.
4. The company I worked for declared bankruptcy in January 2008 (they were heavily tied to construction).
5. One third of the staff was laid off in April 2008 – including me.
6. We completed the renovation and put the house on the market as quickly as possible. (We did not believe I could find comparable employment in the area).
7. We sold the house in less than two weeks to the second couple who walked in the door during the worst real estate market most people have ever seen.
8. We only lost $20,000 on the deal
9. We received nothing for our blood, sweat and tears put into the renovation.
10. I am actually happy about it, because it could have been a lot worse.
Due to my own employment status, we are renting, not buying. It took me eight months in a new town to find somewhat comparable employment - although I would still classify myself among the “underemployed.” I am working a long term contract position with benefits. For clarification, underemployment is someone who is employed, but not in a field or at a salary level that their education, skill level, etc. would normally dictate.
The glut of housing inventory continues. As of the end of March 2009, there are 3.7 million unsold existing homes on the market. As the housing crisis continues, a lot of sellers are leasing their homes to ease the monthly cash bleed. I have been amazed at how many for rent signs have appeared in my area during the last six weeks. I believe there is now a shadow market in real estate, similar to the underemployed situation. There are a lot of homes that the owners would love to sell, but they are leasing due to the lack of buyers and available credit.
The decline of homeownership. As the Great Recession continues, the national homeownership percentage will continue to fall. We now know that a lot of the people buying homes earlier this decade did not really qualify for their mortgages. The current trend in foreclosures will have to continue for a while. The moratorium recently ended and April 2009 foreclosures just rose 32%. A lot of current and recent homeowners will not have the credit to qualify for a new mortgage. Therefore, the smaller pool of potential buyers will take longer to eat thru the current over supply. We are simply using a smaller denominator now.
Renting does not mean breaking even. A lot of the owners renting out houses are not breaking even. They are simply slowing the hemorrhaging of cash. As the supply of rental units increases, the competition will drive prices down. As a landlord, you have to cover PITI (principal, interest, taxes and insurance) as well as maintenance. If you use a management company, their fees will cost you at least five percent of the rent right off the top.
Exposure. By holding on to a property and leasing it out, a homeowner/landlord is still exposed to any further declines in the property’s value. If prices continue to drop and the economy does not begin to recover by the end of the year, then you have the potential to double dip on your losses. You can be losing money on a monthly basis due to your rental income not covering your expenses along with a continuing decline in property values.
We took our lumps and losses and sold out early. We paid off the cars and are snowballing our debt and building savings. So now we wait and see what happens with my job and the housing market.
My car costs how much?
Posted by linke in Automobiles, Frugality, Personal Finance, Savings on May 11th, 2009
Jeff Yeager, The Ultimate Cheapskate, recently wrote an article for Bottom Line Personal entitled “5 Big Ways to Save $20,000 a Year.” For the most part I agree with the ideas he mentions, although some are more specific and do not apply to most people. Living at home during college to save and on room and board is the best example of this. With that said the idea I disagree with is that by letting go of the second or third car a family owns, you can save $9,000 per year.
This amount, $9,000, apparently comes from AAA, but I was unable to locate a source on their website. I did locate and older table from 2003 showing estimates from $6,400 to $8,500 per year. In the fine print, they do say these amounts are based on relatively new vehicles (state as the first four years of ownership). Depreciation appears to be roughly half of the annual amount in every vehicular category.
Based on the second table in the article, the individuals surveyed put their own costs at around half of what AAA estimates, or $3,700. Again, this is from 2003.
The analyst in me has been trained to look at items on a cash basis. Based on cashflows, a vehicle will definitely cost you more while you are making those monthly payments. However, if you deduct the depreciation as well, then you are double dipping on the expenses and that is simply incorrect. Depreciation is always taken into account on financial projects, but only for the tax impact (to accurately estimate the cashflows).
My wife and I own three vehicles – two cars and a truck. (You can read about my truck here). All three vehicles are paid off and it does not cost us now nor has it ever cost $9,000 per vehicle per year. That is $27,000 per year for the two of us. Our most painful years were when we made payments on two vehicles simultaneously and the combined amount exceeded $1,000 per month. From now on it is just gas, maintenance and insurance.
The AAA table also shows the average annual insurance amount per vehicle at approximately $1,000 per vehicle. We do not pay that much now on three vehicles and we have excellent insurance. We also have excellent driving records, a good credit rating and no points on our licenses. Also, these are not old beater cars. While my truck may be past its prime, the other cars are a 2004 Civic EX and a 2002 330i, both with less than 70,000 miles on them.
Based on my own estimates, excluding major repairs, but including basic maintenance, I calculate our own fleet of cars to cost less than $1,500 apiece annually. This amount includes all insurance, gas, oil changes, registration fees, and property taxes. This even covers tires for the truck and Civic. If you drive less than 10,000 miles per year, which we now do, tires can last a long time.
Another thought, once a vehicle is paid for, that is a sunk cost. Any annual decline in value is not relevant. What matters is what you can sale the car for when you are done with it. That sale is a positive cashflow back into the equation and reduces your overall cost of ownership.
What you drive is a factor that plays into the overall cost of automobile ownership. Some brands and models are simply more expensive to maintain than others due to a variety of reasons. And some brands do not last as long as others, period. I personally believe one of the most important factors is how long you are willing to keep, drive and maintain any given vehicle. Length of ownership is essential to keeping costs down over an extended period of time.
Your mileage may vary. J
The $5 Rule
Posted by linke in Frugality, Personal Finance, Savings on May 8th, 2009
The $5 rule goes as follows: Five bucks…is five bucks. It is nothing more complicated than that. The rule for me goes back about twenty years ago to a conversation I had with a former manager of mine. We were talking about the cost of something and the potential savings and I simple said, “Hey, five bucks is five bucks.” And the rule was born.
We applied the rule in a variety of instances. And $5 went a lot further back then. Five bucks was a good lunch out, a half of a tank of gas, etc. I still apply the rule today. I do not factor the cost of my time into the equation or anything else. Just very simply, five bucks is five bucks.
A few years ago I came across the idea of saving five dollar bills. This concept dovetailed beautifully with the original rule – since you were literally saving … five bucks. One dollar bills are easily set aside and saved, but then that is five pieces of paper to deal with. It is not that hard to save the $5 bills that come into your life. You will hardly even miss them. However, if you break a $20 bill to purchase something small and wind up with $17 in change, you could have a potentially conflict. A five, a ten and two ones are not a problem, but three fives and two ones could. So, save what you want. If you have several $5 bills, maybe you only want to save one. Whatever works for you, these are just my thoughts on what I do.
By the way, I never carry charge when I leave the house and always save my change at the end of the day if I have any. Over the course of a year, you will be surprised how much money you can save this way.
The frugal beauty of an old truck
Posted by linke in Automobiles, Frugality, Personal Finance on May 5th, 2009
“You can set my truck on fire, roll it down a hill
But I still wouldn’t trade it for a coupe deville
It’s got an eight foot bed that never has to be made
You know if it weren’t for trucks we wouldn’t have tailgates
I met all my wives in traffic jams,
You know there’s something women like about a pickup man” – Alan Jackson
Trent at The Simple Dollar talks about his old truck here. The point of his article is to stay focused on the larger overall goal. But he talks about the high mileage, the rust spots, etc, but also how he will keep driving it due to his larger goals. I am here to tell you about the frugal beauty of an old truck.
Hello, my name is Linke and I drive an old truck. Things of beauty, grace and speed are often referred to in the feminine. My truck is male, sluggish and answers to the name of Yota. That is Yota with a “t,” not a “d.” That is another green character.
Yota, obviously, is short for Toyota. He was born in Japan in 1992. I adopted him and brought him home in November of 1992. His adoption cost me $12,300. He is the only new vehicle I have ever had and probably always will be. Yota’s mileage is in excess of 225,000 and growing daily. He is still my daily driver and carries me back and forth to work five days a week. The number of times he has failed to start can be numbered on the fingers of one hand. All of them involved a dead battery. Either I inadvertently left the lights on, or his three year battery reached its 38 month life expectancy. In other words, none of the failures were his fault. Yota still gets approximately 26 mpg around town and approximately 32 mpg on the highway.
Now, Yota is not without his faults. The driver’s seat upholstery is split (it has been sat on for a few hours – see below) and he burns a little oil. The rear bumper is messed up and the front of the hood has a couple of minor dings. But he has no rust. The driver’s side seat belt is literally worn out. He has been in three accidents and has been hit in the same passenger’s side rear quarter panel every single time. He has not lost an accident yet.
Yota has been paid off for over 15 years. In other words, that is 180 months without a car payment. He has saved me a small fortune through the years. Other than tires and oil changes, he required no replacement parts for his first 115,000 miles. The original platinum spark plugs were only supposed to last for 100,000 miles. They were replaced at 115,000 miles, but were still in good condition. 150,000 miles was a big year for Yota. He needed a new clutch that year, a couple of wheel bearings, new brakes all around, tires, belts, etc. That year he cost me over $1,500 in maintenance. His A/C still blows cold and has never been serviced or recharged – (and we do not want a leak, because the refrigerant from 1992 is not exactly going to be environmentally friendly.)
I guess most people would have traded Yota in years ago. According to those who study such things, the average length of automobile ownership in the US is now up to 56.3 months versus 49 months just six years ago. So, the average person would have purchased three other vehicles by now. In other words, if one assumes that most people go for the four or five year loan, then they are never without a monthly payment. One can look at this a couple of ways, but the easiest is to say that X years of monthly payments averaging $X00 per month (which basically covers interest and about 3% inflation) is approximately $X,000.
For my own calculations (using a few different methods), I arrived at savings amounts in the range of $40,000 to $54,000 over the average buyer. Personally, I would probably have only traded once during the seventeen years and believe my savings to be more in the $25,000 range. Your mileage may vary. (Pun intended).
· 225,000 miles (and still going)
· 7,895 gallons of gasoline
· 250 quarts of oil
· 20 tires
· Three CD Radios
· One drivers side seatbelt
· And over 5,000 hours of shared time on the road
· Priceless.
The rally continues…
The rally continues. Citibank needs an additional $10 billion in capital. The stock is up. That is bad news, not good news. Bank of America needs well over $10 billion in additional capital. No one is saying how much yet. Rumors are as high as $60 billion, but that seems way too high. Bank of America is rallying today as well.
Pending contracts on home sales are up, but these are not closed loans. This activity may just be due to the $8,000 first time homeowner credit coupled with the historically low rates last month.
Unemployment is predicted to hit 9% when it is reported for April, yet the market continues to rally. The RUT is now up approximately 50% from its March 2009 lows. Now that is a rally!
Fiat has swooped in and is merging/buying both Chrysler and GM assets in the US and abroad. Who knew?
With a rally of this magnitude, this may well be the year to heed the old Wall Street adage to “Sell in May and go away.” If you are up significantly already this year, why not? One could easily get back in during September/October at lower prices than these and keep the year to date gains.
On another note, the real estate market in my area appears very stagnant. There are many houses on the market that have not sold since last summer or early fall. Interestingly enough, the prices have not been reduced either. How does one justify the same price over nine months without a sale? I looked at a home two weeks ago that is a realtor’s personal residence. The price on it has now been reduced $10,000 in just two weeks on the market. Perhaps she actually intends to sell.
Misguided Optimism?
I used to work for someone who always said that my group was the “data” people. We dealt in facts and data, not hearsay and assumption. The following is a brief synopsis of why I question the misguided optimism I see on Wall Street. I do not see a dramatic improvement by year end. Exactly how does one justify the S&P being up 31% over its March low?
• In February, new home sales were up 4.7% to 337,000, and still down 75.7% from their July 2005 peak. In the last three years, housing starts have plunged from 1,823,000 to 358,000, or 80.4%.
• In the first quarter of 2009, more than 2 million jobs were lost, causing the unemployment rate to jump from 7.6% to 8.5%, the highest since November 1983. The unemployment rate in California, the world’s eighth largest economy, has hit 11.2%, the highest since January 1941.
• Underemployment, which combines the unemployed, with involuntary part time workers and discouraged workers, reached 15.6%.
• The American Bankers Association reported that 3.22% of consumer loans were delinquent at the end of 2008. That is the highest level since the ABA began tracking overall loan delinquency rates in the mid 1970’s. And that was before 2 million jobs were lost in the first quarter.
• An average of 5,945 bankruptcy petitions were filed each day in March, up 9% from February and 38% from a year ago.
• The surge in job losses are working their way up the income ladder, with an increasing number of middle income and upper middle income workers being affected. This is pushing many of those who previously were considered prime credit risks over the edge. Two-thirds of mortgages in the U.S. are held by the best credit risk, prime borrowers. According to the American Bankers Association, 5.06% of prime borrowers have missed at least one mortgage payment.
• In the fourth quarter, a number of states mandated a freeze on foreclosures. According to RealtyTrac, foreclosure filings increased to 341,180 in March, up 46% from a year ago.
• Moody’s Economy.com estimates more than 2.1 million homes will be lost this year, up from 1.7 in 2008.
• Existing home sales have declined 33.3% since peaking in September 2005. The median price has dropped 28.7%, after peaking in July 2006 at $230,900.
Inflation has been defined as too much money chasing too few goods. The current situation is too little money chasing too many goods everywhere in the world, and that dynamic isn’t likely to change anytime soon.
Chrysler goes down. Is GM next?
Posted by linke in Automobiles, Economics on April 30th, 2009
Well, the market was up big time this morning. Even with bad earnings reports, the announcement that Chrysler’s bankruptcy was eminent and the swine flu spreading across the country, the market soared out the gate. Amazing. It is almost like I live in a completely different world than Wall Street. And let’s face it folks, the guys on the street can no longer be considered the smartest guys in the room. There are a lot of high powered MBA’s driving some major corporations straight down to the bankruptcy courthouse.
So Chrysler is filing bankruptcy and GM probably will in the near future. The gap between what the GM bondholders want (51% equity) and the outstanding offer (10%) is just too large to bridge. In addition, the bondholders deal gives 41% to the UAW and 0% to the federal government, while the company plan gives 89% to the federal government. I do think the government/taxpayers should get some equity in the deal, but I cannot blame the bondholders for forcing GM into bankruptcy - they will probably get a better deal under that scenario.
I thought we loaned them tens of billions of dollars so this would not happen. Now everyone is talking about how great this will be. The CEO of AutoNation was going on and on this morning on CNBC about how bankruptcy was going to make Chrysler thrive. The nation already bailed them out once before. And this time we are bailing out a private equity group.
This whole blog is strictly my opinion and personally, I think that no company is too big to fail. The government has no business taking over these companies, or bailing them out. The AIG bonuses would never have been an issue if the company had gone under.
The market has fallen down to the breakeven range now. Perhaps the gravity of our situation will settle in by the close today.