Very Interesting Article...should be titled "Meet the Joneses"

From smartmoney.com

AT 46 YEARS OLD, J. Roberts seems to have it all. Together, he and his wife earn $165,000 a year. With their two children, they live in a 2,835-square-foot, four-bedroom, three-bathroom home in an upscale Dallas suburb, complete with marble floors, a state-of-the-art kitchen, two living rooms and a pool in the backyard. Three cars — a 2001 Ford Explorer SUV, a 2003 Volkswagen GTI and a 2005 Mini Cooper — are parked in the garage.

Yet, Roberts — whose name we've changed to respect his privacy — feels far from the American dream. He and his wife have accumulated more than $50,000 in credit-card debt over the past 20 years, most of it a "hangover" from their early years together when money was tight. That debt, combined with their everyday expenses, like the upkeep of their home (which has $50,000 in equity), leaves little left over for long-term goals like saving for retirement. Right now, the Roberts' retirement savings barely reaches $15,000. And paying off those credit-card bills — at a time when one child is in college and the other a high-school junior — seems downright impossible.

The Robertses are not alone. Across the country, today's families are burdened with debt, struggling with mortgage payments and saving next to nothing. It's a trend that has grown steadily over the past two decades, thanks in part to the low interest rates welcomed during the Alan Greenspan era.

Greenspan, who steps down today as Federal Reserve chairman, has been credited for deftly leading the nation's economy through two recessions that may have been much uglier without his bold and well-timed interest-rate slashes. And overall, the economy has experienced unprecedented growth during his reign: Among other things, home ownership is at a record high, while unemployment and inflation remain low.

But some economists and consumer experts say that Greenspan's financial maneuverings could cause serious side effects for consumers over the next decade. "Greenspan was able to significantly expand consumption based on debt in America," says Robert Manning, professor of finance at the Rochester Institute of Technology and author of Living With Debt, a 2005 report on consumer attitudes toward debt. "It's true that consumer credit has tremendously elevated people's lifestyle, and they've enjoyed a lifestyle they couldn't ordinarily have had. But at what cost? These are people who aren't going to be able to retire the way they're living today."

Truth is, when you look at the numbers on housing, debt and income levels over the past few decades, you'll find Americans aren't much better off today than they were 20 years ago, two years before Greenspan took office. In many respects, they're actually doing worse.

Deeper Into Debt
It's no secret that debt levels have ballooned over the past 20 years, from $124.4 billion in revolving debt in 1985 to nearly $800 billion in 2005, according to the Federal Reserve. The average American household currently owes $8,650 on their credit cards, according to the latest survey on consumer debt by Demos, a New York-based economic research and advocacy group.

And much of that debt has been accrued covering everyday items. Seven out of 10 households reported using their credit cards to pay for car repairs, basic living expenses or house repairs, in effect using debt as their "safety net," according to that same study. One out of three families reported using credit cards to cover basic living expenses for on average four of the last 12 months.

It's not surprising then that Americans today aren't saving anything — anything at all. In fact, for the first time since the Great Depression years of 1932 and 1933, the personal savings rate dropped below 0% (to -0.5%) in 2005. Translation? Americans were spending more than they earned, either dipping into savings or falling deeper in debt.

A House of Cards?
One exceedingly bright spot in the economy has, of course, been the hot housing market. Over the past five years, home prices have soared an average 55% across the country, according to the Mortgage Bankers Association. For many homeowners, that's created cash windfalls.

Much of that new equity has been tapped, however, as Americans have taken advantage of low home-equity loans and line-of-credit rates to pay off credit-card debt, foot the bill for family vacations or fund home improvements.

According to Demos, the average American homeowner's equity has fallen from 68.3% in 1973 to 55% in 2004. While that shouldn't be a problem if home values keep appreciating, should the market head down or remain flat — as some economists predict — homeowners could find themselves owing more to their lenders than their homes are worth.

And home buyers are now borrowing more to buy their homes. In the first half of 2005, a full 23% of the dollar volume of new mortgage originations was attributed to interest-only loans, according to the Mortgage Bankers Association. Another 7% were payment-option adjustable-rate mortgages, or ARMs, through which borrowers have the option to make less-than-interest-only payments, thus negatively amortizing their loans.

Twenty years ago, these products' share was so tiny on the market, "it was an asterisk," says Michael Frantantoni, senior director of single-family research and economics at the MBA. Typically, they were used as investment-planning tools by the wealthiest households, freeing up, for instance, cash flow to invest in the stock market for better returns.

Needless to say, these mortgages carry huge risk for homeowners who may not be able to afford the significantly larger mortgage payments due several years from now. "It's true there are a lot more innovative products out there that have enabled young people who can't save up for a 20% down payment to get into homeownership," says Tamara Draut, director of the Economic Opportunity Program at Demos. "The problem is their status of a homeowner is a lot more fragile."

Vanishing Earnings
Over the past 20 years, the average household income has increased a mere 1.22% annually, from $47,518 in 1984 to $60,528 in 2004 (in 2004 dollars), according to the U.S. Census Bureau. At the same time, many Americans are shouldering new costs — like retirement planning and health care.

"Productivity has been on the rise, but that gain in productivity isn't going to workers," says Draut. "Incomes are stagnating, costs are continuing to outpace inflation, whether it's housing costs, energy costs or higher-education costs." As a result, Americans have been turning to credit cards to pay the bills — and then to their home equity to pay off the credit cards. Going forward, Draut says, consumers' only option is to reduce spending. "There's no more equity left to tap, credit-card debt keeps going up, and wages aren't growing," she says.

That's exactly what Roberts plans to do. He is thinking about moving his family into a smaller home, located in a still underdeveloped area about 30 miles further out of the city than where they live now. "Moving out to the boonies is not a pleasing thought," Roberts says, especially since the increase in home prices means they'll need to take out roughly the same mortgage as they owe on their current one to buy a smaller home. But it may be the family's only way out of the financial rut.

Re: Very Interesting Article...should be titled "Meet the Joneses"

This guys makes $165K/year (in Texas, no less) and owes $50K in credit card debt? That's money mismanagement and living beyond your means. IMO, you can't blame that on the economy, Greenspan, or the housing market.

Re: Very Interesting Article...should be titled "Meet the Joneses"

Re: Very Interesting Article...should be titled "Meet the Joneses"

I agree it's money mismanagement.

Out of your friends/collegues, etc. would say the majority or minority have a good handle on finances, retirement, etc?

The majority of my friends (myself included) make what I consider an above average salary. I would say that the way the economy is going for us is that we are headed for a very bad fall in our later years.

Re: Very Interesting Article...should be titled "Meet the Joneses"

I also agree with you, but according to some other articles alot of people live like that. I was reading another article that was talking about how American Savings are at an all time low.

Re: Very Interesting Article...should be titled "Meet the Joneses"

I think it's a cop out to blame people's spending habits on Greenspan. Companies responded to low interest rates in an effort to sell their products - which they did. How many people bought cars because they could get 0% financing? How many people bought houses out of their price range because of low rate and unconventional mortgages?

I am very concerned about the outlook over the next 5-10 years. I am concerned about galloping inflation like we saw in the 70's even though better safeguards are available. I am also very concerned about the forclosure rates over the next few years.

Re: Very Interesting Article...should be titled "Meet the Joneses"

Interesting article, but sorry, I don't feel bad for them. $165k in Texas? I can't imagine what you have to make in NY to compare. The "I want more, more, more" thing is going to be the undoing of so many people.

Re: Very Interesting Article...should be titled "Meet the Joneses"

This guy is not living within his means -- how about paying off your credit cards BEFORE you buy gas-guzzling SUV?? Or trendy car # 3?? And WHY do we think we must live in MANSIONS? Since we do we need sooo much room? No, I would not blame it on Greenspan. I would blame it on American excess.

I heard on the radio yesterday that American's are now saving at a rate of .... MINUS 5%. Yes we are spending more than we are making and saving nothing. We will be in big trouble soon...

Re: Very Interesting Article...should be titled "Meet the Joneses"

Here is the other article I was talking about

Here's the AP article from msnbc.com

I find this postively frightening.....

WASHINGTON - Americans’ personal savings rate dipped into negative territory in 2005, something that hasn’t happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before — in 1932 and 1933 — two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs.
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With employment growth strong now, analysts said that different factors are at play. Americans feel they can spend more, given that the value of their homes, the biggest asset for most families, has been rising sharply in recent years.

But analysts cautioned that this behavior was risky at a time when 78 million Americans are on the verge of retirement.

“Americans seem to have the feeling that it is wimpish to save,” said David Wyss, chief economist at Standard & Poor’s in New York. “The idea is to put away money for old age and we are just not doing that.”

The Commerce report said that consumer spending for December rose by 0.9 percent, more than double the 0.4 percent increase in incomes last month.

A price gauge that excludes food and energy rose by a tiny 0.1 percent in December, down from a 0.2 percent rise in November. This inflation index linked to consumer spending is closely watched by officials at the Federal Reserve.

The central bank meets on Tuesday, when it is expected it will boost interest rates for a 14th time. However, many economists believe those rate hikes are drawing to a close with perhaps another quarter-point hike at the March 28 meeting as the central bank is starting to see the impact of the previous rate hikes in a slowing economy.

The government reported on Friday that overall economic growth slowed to a 1.1 percent rate in the final three months of the year, the most sluggish pace in three years.

That slowdown was heavily influenced by a big drop for the quarter in spending on new cars, which had surged in the summer as automakers offered attractive sales incentives.

A negative savings rate means that Americans spent all their disposable income, the amount left over after paying taxes, and dipped into their past savings to finance their purchases. For the month, the savings rate fell to 0.7 percent, the largest one-month decline since a 3.4 percent drop in August.

The 0.5 percent negative savings rate for 2005 followed a 1.8 percent rate of savings in 2004. The last negative rates occurred in 1932, a drop of 0.9 percent, and a record 1.5 percent decline in 1933. In those years Americans exhausted their savings to try to meet expenses in the wake of the worst economic crisis in U.S. history.

One major reason that consumers felt confident in spending all of their disposable incomes and dipping into savings last year was that a booming housing market made them feel more wealthy. As their home prices surged at double-digit rates, that created what economists call a “wealth effect” that supported greater spending.

The concern, however, is that the housing boom of the past five years is beginning to quiet down with the rise in mortgage rates. Analysts are closing watching to see whether consumer spending, which accounts for two-thirds of total economic activity, falters in 2006 as Americans, already carrying heavy debt loads, don’t feel as wealthy as the price appreciation of their homes would seem to indicate.

Are you saving more or less than you did a year ago?

For December, the 0.4 percent rise in incomes was in line with Wall Street expectations. It followed a similar 0.4 percent increase in November, with both months lower than the 0.6 percent rise in October.

The 0.9 percent rise in spending with slightly above the expectation for a 0.8 percent increase and was almost double the 0.5 percent increase in November.

Re: Very Interesting Article...should be titled "Meet the Joneses"

Re: Very Interesting Article...should be titled "Meet the Joneses"

Re: Very Interesting Article...should be titled "Meet the Joneses"