Some Potentially Useful Numbers

I could blame my latest "vacation" from posting journal entries on the cold I've been fighting off, or on the knee that's blown out hard. (I'm beginning to understand why old people talk about their failing body parts so much; I didn't know that any part of my body could hurt this much.) But no, it's more because lately, my thoughts have been so weirdly incoherent and wandering, I've been hesitating to write them down. I've been short on answers lately, and long on questions that I don't have answers to, questions I don't even know if I'm phrasing the right way, questions more philosophical than useful. For example, here's one. We want a mobile work force, one that's ready to relocate if the jobs leave their home town, willing to go wherever the jobs are. But we also want people to buy their own homes, settle down, care about and improve their neighborhoods. If we want people to be able to relocate across the country to follow their best possible job opportunity, why do we write 30 year mortgages? Now, I know that some of you just said, "wow, Brad, that's a good question, tell me your thoughts on it." Sorry. I'm short on thoughts. All I have, lately, is questions. Weird ones, as I say; that may be the least weird of them.

But when I finally got around to reading the New York Times Sunday, later than usual thanks to a hurricane-powered cable-modem outage, I saw that the headlines are entirely dominated by speculation over just how bad today's, Monday's, stock market drop is going to be, on the news that one of Wall Street's oldest and most famously stable investment banks is being bought at pennies on the dollar, and another is going into bankruptcy, a near total wipe-out of both investment banks' stocks. And, just as importantly, the markets are going to be reacting to the fact that the government did nothing to stop it, which tells them that all the other technically insolvent financial services firms are (as some were predicting) on their own, shouldn't be waiting for a bail-out. And this makes a good time for me to offer you some numbers, I've been collecting, that may help you with your own personal financial planning:

12/31/2009: That's the date when you can assume that the economy will stop getting worse. Why? According to an article I saw (and lost, sorry) about a month ago, by the end of 2009, 97% of all of the teaser-rate mortgages will have reset. Only a tiny handful will be remaining to trickle in over the first couple of months of 2010. Among the implications of this, that's the date on which the glut of foreclosed houses being dumped onto the market all at once will peak. It will be months or years before there are enough buyers to work their way through that huge backlog of sales, but at the very least, it will have stopped getting worse.

The other major implication of this is that any financial institution left alive by the end of 2009 will probably survive. If you want to be pessimistic, stretch that date out to March 31st, 2010, to allow for the last of the December '09 loans to be defaulted and foreclosed on, for the institutions stuck holding fragments of those loans to have to give up on them. But for all practical purposes, the melt-down of our financial services sector will stop getting worse by the end of 2009. As with the housing glut, it will take time for the surviving firms (and probably some help from the government) to raise the capital necessary to start making serious numbers of loans again, for anything, but the credit supply should, barring further disaster, stop contracting by the end of 2009. Which means that some time in 2010, regardless of anything else, companies may be able to start hiring again, and consumers may be able to shop again.

One third of the median income on your block: That's the number that everybody forgot to factor in, the number that got us into this problem in the first place. That's the answer to the question, "what is the highest possible loan payment that anybody can really afford to pay for a house on your block." That's not a guarantee that your house is worth that much. Your house might be a wreck. But assuming that it's not, assuming that your house is roughly as good as the median house on your block, that number can tell you what your house is really worth. Go to the US Department of the Census web page. Look up the median income for your census tract. Knock about a third off of that for taxes. Divide the resulting number by 36, to give you 1/3rd of the monthly take-home pay for a median household in your neighborhood. Now plunk that number into any random loan calculator, at whatever interest rate someone living in your neighborhood is likely to qualify for, 30 year loan. Add a couple of grand to at most five grand for down payment. There. No matter how much you paid for your house. No matter how much houses sold for in your neighborhood during the housing bubble. No matter how many improvements you put into your house, even if you made the silly mistake of making your house the nicest house in the neighborhood? No matter what some politician or banker or (gods forbid) realtor tells you about the potential investment value of your house? That's what your house is actually worth.

Hint: You can probably short-cut this calculation, if you go back and look at what a comparable house sold for ten years ago, before the bubble started inflating, before people started buying houses on "the greater fool theory" (the one that says it doesn't matter if you pay a stupid price for something, as long as you can count on an even greater fool to pay you even more for it later). If you want to be insanely optimistic, push that price up by roughly 30%, to allow for inflation, and hope that the glut of foreclosed houses hasn't pushed the value of your house below that.

If you have to sell your house any time soon, whether because you lost your job, or you're going bankrupt because of medical bills, or because your teaser-rate mortgage reset and suddenly you can't get refinanced because your equity in the house went negative? That's what you're probably going to be able to get. At best. And even then, you may not be able to get that much until some time in 2010.

Plan accordingly.