Do the elections of 2010 mean anything?

Yesterday's election in the U.S. may have changed who the Speaker of the House is, but the smart money hardly noticed as evidenced by the stock markets today.  The Dow was up just 0.24%

In the words of Benjamin Graham, "in the short run, the market is a voting machine but in the long run it is a weighing machine."

What this says to me is that while the topsy turvy world that is the American electorate voted to change their Congressperson as a way to vent, Wall Street doesn't believe that things will actually get any better anytime soon.  As there were more Democrats in Congress, it just makes sense that more of them were made to pay for the recession we are going through.  In American politics there has always been a very strong "throw the bums out" strain when things in the economy are going poorly.  So it was an outcome that was not a surprise as it has happened with regularity during midterm elections in the past.  In recent memory alone:

• Newt Gingrich (R) became Speaker during President Clinton's (D) tenure
• Nancy Pelosi (D) became Speaker during President Bush's (R) tenure

And so John Boehner will be the new Speaker of the House.  But one person cannot change the tough times we are in.  So what will John Boehner do?  Reading his past speeches doesn't instill much confidence he will do anything to move the country forward.  He was after all the architect of the "hell no" strategy intended to thwart any legislation proposed by the President.   He has proposed no new ideas, a cynical approach to leadership.  An obstructionist is the last thing we need in America right now.

So do the elections of 2010 meaning anything?  If it means anything at all it's that the recession caused by the mortgage bubble that tanked the economy in 2008 is still with us and has caused a lot of pain for American voters who want to "throw the bums out".   And they'll do it again in 2 years if things don't improve.

I still see the glass half full and believe that there is hope that things will improve but it won't be easy. The formula for turning things around involves just 2 actors: the private sector and the public sector, or the government.  Just today the Fed Reserve, the nation's central banker, announced it is buying $600 billion in debt as a way to bring down long term interest rates.  Now we need the private sector to hire Americans and not send jobs overseas.  American companies are sitting on a record amount of cash (Apple alone added $17 billion to its balance sheet last year) and without more investment the only other option is another stimulus bill from Congress which Mr. Boehner has already dismissed. At times like these we need leadership.  Will they answer the call?

Your savings didn't do so well this past decade.

In the 10-year time frame ending Sept 30, 2009, this chart shows how the U.S. stock indices (and your money in them) performed - not a pretty picture.  Your "certified" financial planner has probably told you that over a decade stocks increase 12% on average.  Now you know what kind of advise you have been getting.

By keeping the interest rate low, the Federal Reserve has created all sorts of problems for the U.S. economy.  Not the least of which is depriving hard working, hard saving American families of a safe investment vehicle, such as FDIC insured bank accounts, in which they could deposit their money and earn a decent interest in return.

Without real interest-bearing accounts, Americans deposited their savings and retirements in the U.S. stock market and have lost an entire decade. 

So a penny saved is a penny earned but not much more.  For many Americans this means that retirement is much further off then they thought.

Should I walk away from my mortgage?

If you are like many U.S. homeowners your mortgage is more than your house is worth.  If you are in Nevada you are in the 2/3 majority, in some California counties the number is even higher.  So you are asking yourself whether you should walk away from your mortgage since your bank has refused to reassess and reduce your mortgage.

There is a lot of writing on this subject mostly from financial columnists (MSN, Kiplinger, etc.) who were advising you just a short while ago to not worry about ARMs and to get into the real estate market to "build equity".  But they never really get to the point about what you should do now.   Even state and federal governments aren't doing their responsibility to fully help you know your options, take for instance Feddie Mac which I think puts undue pressure on staying in your "under water" house: http://www.freddiemac.com/avoidforeclosure/your_options.html.


My view is that if your mortgage exceeds the market price of your home by  more than 15% you should give the keys back to the bank.  Why?  Because making up 15% is a long way back for the real estate market and it won't happen for a long time, probably more than 5 years.

Simple example: you bought a $500,000 home with 10% down. You've been making payments for several years and your mortgage is now $425,000.  Your neighbor's house sold for $350,000 in Q4 2009 (Oct - Dec).   If you sold the house today you would have to find another $75,000 (plus fees associated with the sell) to pay the bank which is 20+% of the sales price.  If you have that much additional cash sitting around, save it and buy some I Series U.S. Savings Bonds. 

I came to my conclusion after reading a lot of opinions on the subject.  The writing that most influenced me was from Professor Richard Thaler at the Univesity of Chicago writing in "Sunday Money" at the Times.  (There's also a paper by Prof Brent White:http://online.wsj.com/public/resources/documents/WalkingAway1029.pdf)  Here are the main points:

• One can have a good credit rating again--meaning above 660--within two years after a foreclosure.
  
• If lenders and big property owners are doing what is in their interest, such as defaulting, then why shouldn't home owners? (Example: Tishman Speyer of New York)
  
• In states like California and Arizona, mortgages are non-recourse which means that the lender has no claim on a borrower's other possessions separate from the home.  In fact says Professor Thaler, homeowners in California and Arizon pay extra for the right to default without recourse.
• The economic and social costs of giving the house back to the bank is far less than the cost of paying off an underwater mortgage.

So if you are "under water"  on your mortgage seriously consider giving the keys back to the bank and look forward to another day when you might be in a position to re-enter. It will be a big burden of your back (and heart) and it's not as big of a deal as you might think.