April 3, 2020

Sketch Guy: When Labeling Yourself Middle Class Can Hold You Back

It seems to me that we really like the idea of what it means to be middle class. And why wouldn’t we? For most of us, we associate it with things like having steady jobs, owning a home and taking regular vacations. It’s the American dream brought to life, and we like it so much that it’s become not only an economical identity but a cultural one, too.

If you think I’m exaggerating, take a look at a recent Wall Street Journal/NBC News poll. The results revealed that what we define as middle class has more to do with how we think of ourselves than any particular number. Not too surprisingly, we tend to compare ourselves against what we know:

■ 48 percent of people earning $40,000 – $50,000 consider an income of $50,000 middle class.

■ 50 percent of people earning $50,000 – $75,000 consider their income middle class.

■ 39 percent of people earning $75,000 – $100,000 consider their income middle class.

Why does this matter? Because labels with strong emotions behind them, like “middle class,” change how we think about ourselves and make decisions, especially financial ones. For instance, when people identify themselves as middle class, I see many of them make a common mistake: they fail to engage in the process of financial planning.

The reasons probably won’t surprise you, but if people call themselves middle class, they probably don’t think in terms of having wealth or assets that can benefit from financial planning. They think in terms of having a mortgage, a 401(k) and maybe a savings account. They’re not wealthy, and only the wealthy need to worry about investing or planning.

That’s wrong on so many levels.

I’m not arguing that we’re all secretly wealthy. I’m suggesting that we’re cheating ourselves out of greater financial security because we’re making an assumption about what the labels mean. The reality is that most of us have good reasons to plan for the future, like buying a home, paying for college and enjoying retirement.

There is no reason we shouldn’t be using every tool available to help us improve the odds we’ll reach those goals. It doesn’t matter that we may not have as many options as those available to an investment banker. We owe it to ourselves to understand the options we do have and then make plans that get us to where we want to go.

We’re making a similar mistake if we assume we won’t find people to help us when we do need more help. The reasons often come down to money. Time after time, people will tell me they aren’t seeking help because they can’t afford it.

The problem with this assumption is that it ignores the professionals — C.P.A.’s, lawyers, advisers — who make it their mission to help people who don’t have seven-figure balance sheets. There are plenty of them out there; we just need to take the time to find one if we need help.

We’ve got to stop making assumptions like this one and others like it. All they lead to is the common mistake of thinking that financial planning doesn’t matter to people who identify with labels like middle class. I don’t know of anyone who can afford the consequences of that particular thinking.

Instead, we need to make smart financial decisions and not limit our options based on how we label ourselves. We need to take the best information available and make the most of it, even if it means doing things we associate only with wealthy people. Regardless of how much, or how little, we think we have, we’re cheating ourselves if we assume that we don’t need a plan to take care of it and make the most of it.

Article source: http://www.nytimes.com/2013/09/24/your-money/financial-planners/when-labeling-yourself-middle-class-can-hold-you-back.html?partner=rss&emc=rss

Bucks Blog: Rising Rates, and the Rent vs. Buy Decision

Mortgage rates have been rising, making it a bit more expensive to borrow to buy a home.

Home prices have been on the upswing, as well. (The Standard Poor’s Case-Shiller home price index showed a 12 percent gain in home prices in 20 cities from April 2012 to April 2013.)

But some perspective is warranted. Mortgage rates are still historically low — they’re expected to hover around 4 percent for the second half of the year, according to Freddie Mac. (The average rate for a 30-year, fixed-rate mortgage was 3.93 percent last week; a year ago, the average was 3.71 percent).

And while home prices are rising, they are still relatively affordable. According to a Freddie Mac statement on June 18, “At today’s house prices and income levels, mortgage rates would have to be nearly 7 percent” before the typically priced home would be unaffordable for most families making a typical income.

Jed Kolko, chief economist at Trulia, a real-estate site, wrote in a recent blog post that despite the recent upswing in mortgage rates, the cost of owning a home is still low when compared to the main alternative: renting. In most markets, he argued, buying is cheaper than renting, and it will remain so until mortgage rates move significantly higher.

To see how much rates would have to rise before it becomes cheaper to rent, Trulia updated its “rent vs. buy” analysis to reflect home prices and rents (based on properties listed for sale and for rent on Trulia) from March, April and May. The result? Rates would have to rise to an average of 10.5 percent before the scales tip in favor of renting nationally, Trulia found.

In some markets where home prices are much higher, like many cities in California, the calculated “tipping point” is much lower. In San Francisco and San Jose, rates have to climb just over 5 percent to make renting more attractive. In New York and New Jersey, the tipping point comes around 7 percent.

While such rent vs. buy comparisons can be informative, they are, by necessity, made using a series of assumptions, which may or may not reflect your personal financial situation, said Daniel McCue, research manager at the Joint Center for Housing Studies of Harvard University.

For instance, he noted, Trulia’s calculator assumes a 20 percent down payment. For a $200,000 home, that is $40,000 — an amount the typical renter is unlikely to have handy.

The site’s rental listings also may not capture many individual apartments owned by smaller landlords, which may be less expensive than large, investor-owned apartment complexes, he noted.

The analysis also assumes that the buyer will stay in the home for seven years and so will   benefit from a modest appreciation in price. But if you are young and mobile, you aren’t necessarily going to stay in a house that long — so you lose out on the chance to earn back closing costs and other home-buying expenses.

(A complete list of the calculation’s assumptions is available on Trulia’s Web site).

In short, rent vs. buy calculations can help track trends, but it’s hard to say that there is a single, magic number where home buying must be cheaper than renting — for you.

Are rising mortgage rates affecting your decision to buy a home? Do you think continuing to rent makes sense?

Article source: http://bucks.blogs.nytimes.com/2013/06/28/rising-rates-and-the-rent-vs-buy-decision/?partner=rss&emc=rss

Bucks: Thursday Reading: Compare College Costs on a New Web Site

June 30

Thursday Reading: Compare College Costs on a New Web Site

A new federal Web site lets families compare college costs, Federal Reserve caps debit-card swipe fees, owning a home still retains its allure and other consumer-focused news from The New York Times.

Article source: http://feeds.nytimes.com/click.phdo?i=4b349c4e6615e5c5e90daf16603572fb

House Prices Fall to New Post-Bubble Low as More Rent

The Standard Poor’s Case-Shiller Home Price Index for 20 large cities fell 0.8 percent from February, the eighth drop in a row. Prices are now down 33.1 percent from the July 2006 peak.

“Home prices continue on their downward spiral with no relief in sight,” said David M. Blitzer, chairman of the S. P. index committee.

Housing is in persistent trouble, industry analysts say, not only because so many people are blocked from the market — being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage — but because even those who are solvent are opting out.

The desire to own your own home, long a bedrock of the American Dream, is fast becoming a casualty of the worst housing downturn since the Great Depression.

Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply, to 66.4 percent, from a peak of 69.2 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier.

“The emotional scars left by the collapse are changing the American psyche,” said Pete Flint, chief executive of the housing Web site Trulia. “There was a time when owning a home was a symbol you had made it. Now it’s O.K. not to own.”

Trulia, a real estate search engine for buyers and renters that is based here, is a hive of renters, including Mr. Flint. “I’m in no rush at all to buy,” he said. He expects homeownership to decline further to about 63 percent, a level the country first achieved in the mid-1960s.

The new Case-Shiller data did not offer much room for short-term optimism. The national housing index, which is reported quarterly, fell 4.2 percent in the first quarter after a drop of 3.6 percent in the fourth quarter of 2010. This, too, is a new recession low.

Twelve of the 20 cities in the index hit a new recession low in March. Washington was the only city where prices rose both in March and over the last year.

Years of declines are teaching potential buyers to expect more of the same. Tim Hebb, a Los Angeles systems engineer, expertly called the real estate bubble. He sold his bungalow in August 2006, then leased it back for a year. Since then, the 61-year-old single father has rented a succession of apartments.

“I have flirted with buying again many times over the past few years,” said Mr. Hebb. “Let’s face it, people are not rational creatures.”

But he always resists, figuring housing is still overpriced and even when it stops declining it will stumble along the bottom for years and years. He says there is plenty of time to get back in if he should ever want to.

Housing prices are now back to where they were in mid-2002. Such a decline was literally unimaginable to the boosters and many of the analysts in the middle of the boom, who were fond of saying that house prices never fell on a national basis.

But as credit dried up and the easy refinances disappeared, the foreclosures began. Prices fell sharply in late 2006, 2007 and 2008.

The market turned around in 2009, prompting hopes that the worst was over. A government tax credit proved wildly popular but after it expired a year ago the declines resumed.

When demand will naturally reignite to stabilize the market is a matter of debate. Most economists have been saying that they think the price declines will level off in the second half of this year, although a few think they will continue until 2012. What no one seems to anticipate is any sort of a brisk recovery. Instead they see a muddling along until the foreclosure crisis diminishes and the excess housing supply is soaked up.

The financial blog Calculated Risk estimated the excess housing supply this week using 2010 Census data, which it compared to 1990 and 2000. The blog concluded that the excess supply in April 2010 was about 1.8 million units but probably several hundred thousand fewer now.

Article source: http://www.nytimes.com/2011/06/01/business/01housing.html?partner=rss&emc=rss

Housing Index Is Expected to Show a New Low in Prices

Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply, to 66.4 percent, from a peak of 69.2 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier.

Disenchantment with real estate is bound to swell further on Tuesday when the most widely watched housing index is all but guaranteed to show that prices of existing homes sank in March below the lows reached two years ago — until now the bottom of the housing crash. In February, the Standard Poor’s/Case-Shiller index of 20 large cities slumped for the seventh month in a row.

Housing is locked in a downward spiral, industry analysts say, not only because so many people are blocked from the market — being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage — but because even those who are solvent are opting out.

“The emotional scars left by the collapse are changing the American psyche,” said Pete Flint, chief executive of the housing Web site Trulia. “There was a time when owning a home was a symbol you had made it. Now it’s O.K. not to own.”

Trulia, a real estate search engine for buyers and renters that is based here, is a hive of renters, including Mr. Flint. “I’m in no rush at all to buy,” he said. He expects homeownership to decline further to about 63 percent, a level the country first achieved in the mid-1960s.

Tim Hebb, a Los Angeles systems engineer, expertly called the real estate bubble. He sold his bungalow in August 2006, then leased it back for a year. Since then, the 61-year-old single father has rented a succession of apartments.

“I have flirted with buying again many times over the past few years,” said Mr. Hebb. “Let’s face it, people are not rational creatures.”

But he always resists, figuring housing is still overpriced and even when it stops declining it will stumble along the bottom for years and years. He says there is plenty of time to get back in if he should ever want to.

The market signaled further trouble on Friday when the April index of pending deals was released by the National Association of Realtors. Analysts had predicted the index, which anticipates sales that will be completed in the next two months, would be down 1 percent from March. Instead, it plunged 11.6 percent.

Many of those in the business of building and selling houses believe the current disaffection with real estate will pass. After every giddy boom comes the hangover, they acknowledge, but that deep-rooted desire for a castle of one’s own quickly reasserts itself.

“There’s no question that people are reticent to own,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the builder of high-end homes. “They’re renting and they’re happy renting because they’re scared.”

Yet those fears will fade, he predicted.

“Most people still want the big house with the big lot in the desirable school district in the suburbs. No one ever renovated the kitchen or redid a room for the kids in a rental,” Mr. Yearley said. “I think — I hope — we’ll be O.K.”

The market’s persistent weakness, however, runs the risk of feeding on itself. Buyers are staying away despite the lowest interest rates and the highest affordability levels in many years, which in turn prompts others to hesitate.

Trulia and another real estate site, RealtyTrac, commissioned Harris Interactive to take a poll last November about when people thought the market would recover. A third of the respondents chose 2014 or later. But in a new poll, released this month, the percentage giving that answer rose to 54 percent.

The sharp decline in prices since 2006 has meant a lost decade for many owners. But what may prove even more discouraging to potential buyers is academic research showing that the financial rewards of ownership were uncertain even before the crash.

In a recent paper, a senior economist at the Federal Reserve Bank of Kansas City found that the notion that homeownership builds more wealth than investing was true only about half the time.

“For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership,” the economist, Jordan Rappaport, concluded.

Economics affects potential owners in other ways. A house is a long-term commitment that many are loath to make in uncertain times like these.

“What I’m hearing from people is that they don’t want to be tied to a particular geography, which inclines them to renting,” said Mr. Flint of Trulia.

San Francisco is one of the country’s most expensive cities, so renting has a natural appeal here. But the Associated Estates Realty Corporation, which owns 13,000 apartments in Georgia, Indiana, Michigan and other Midwest and Southeast states, also is seeing more people deciding to rent.

“We have more of what we call ‘renters by choice’ than I’ve seen in the 40 years I’ve been in the apartment business,” said Jeffrey I. Friedman, chief executive of Associated Estates.

For decades, the company has asked former tenants why they were moving out. During the housing boom, as many as a quarter of those moving on said they were buying a house. In 2009, the percentage of new owners fell in the first quarter to 13.7 percent, the lowest ever.

Last year, as the economy improved, the number rebounded. This year, it fell back again, to 14 percent.

Builders clearly believe that the future includes many more renters. So far this year, construction of multiunit buildings is up 21 percent compared with 2010, while single family-homes are down 22 percent. Sales of new single-family homes are lower than at any time since the data was first kept in 1963.

Susan Lindsey, a San Diego software programmer, was once eagerly waiting for the housing market to crash. She said she would have no guilt about swooping in on some foreclosed owner who had bought a place he could not afford.

With prices now down by a third, however, she is content to stay in her $2,500-a-month rented house. She prefers to invest in gold, which she has been buying since 2003.

“I could afford a median-priced house, no problem,” said Ms. Lindsey, 48, as she headed off for a holiday weekend in Las Vegas. “But I would be paying more to live in a place I like less.”

Article source: http://www.nytimes.com/2011/05/31/business/31housing.html?partner=rss&emc=rss