Analysis of a Society That Forces You Into Debt.
- From: periodistalibre@xxxxxxx
- Date: Wed, 12 Sep 2007 21:17:39 -0700
The Ministry of Truth, otherwise known at the Bureau of Labor and
Statistics, tells us that inflation is low to moderate. In fact,
inflation is so low all you need to do is purchase 10-year Treasury
notes and you'll be fine. But we do have inflation and this is
apparent in the credit markets. We live in a society were folks are
forced to go into debt. Instead of addressing our negative savings
rate, corporate America decides to create credit products that will
put you even further in debt. They use the machines of marketing to
subtly make you feel that having 10 credit cards, student loan debt,
and steroid induced mortgages is okay. In fact, if you don't have
these products you are some loser flunky that simply doesn't
understand success 2.0 in this country. I'm sure many of you have seen
the current spin of advertising. Have you seen the commercials where
anyone paying with cash at the mall, fast food store, or ball game is
seen as some slow scumbag? The subconscious message is this, "hey, you
are a lowlife if you carry infectious cash, pay with a credit card and
GET IN LINE!" So what if you want to pay with cash. In fact, you
should get kudos for doing this since it demonstrates that you are
paying with real world money instead of mortgaging your future for a
cup of espresso.
We are going to examine how our society by default forces people into
debt. We are going to look at credit scores and why there is pressure
to maintain a high 3 digit number. 80 percent of millionaires in this
country have a college degree so we will look at the cost of going to
college. Many people live out in the boondocks and commute to work so
we'll examine our driving culture. Most people eat and don't live off
air, so we'll dig into our eating cost. And most of us need to live
somewhere so we'll take a look at housing cost.
The Good Character Factory, Credit Scores
Most people realize that they need to have good credit. In a society
run by information gathering and data mining, most of what you do can
be tracked. Many insurance companies will use your credit score in
determining your insurance rates. Some employers will run your credit
as a method of determining your character. They can easily call
references and ask you to submit official documentation but 3 digits
are a much better representation of who you are. In fact, folks are
sometimes penalized for canceling credit cards because their debt
ratios fall lower than they would like. You aren't carrying around
enough credit insurance. And if you are looking for a rental property,
your credit score may determine whether you get the place you want.
Relying on one single measure for character judgment is as useful as
examining GPA for financial success. They are both important but
relying on one single measure for all the important financial things
in life is dangerous. There are technically 3 items in measuring
credit worthiness; character, capacity, and collateral. In today's
market fogging a vanity mirror means you are credit worthy.
Then we have the opposite extreme with the subprime debacle. Even
though folks have horrendous FICO scores that looked more like
baseball batting averages, mortgage lenders decided it would be
prudent to issue out $500,000 exotic mortgages. In this case, greed is
more powerful than a credit rating. And now these companies are
surprised that someone with a $40,000 annual income doesn't have the
character to pay back a $4,000 monthly mortgage payment. Maybe people
should of thought of that instead of churning higher commission cuts.
Believe it or not, getting credit is still not that hard even with all
the talk about a tightening market. If you doubt this just take a look
at all the spam in your e-mail box. Or you can see that credit card
companies are still offering low rates in your snail mail. Credit
scores also impact the interest rate on your auto, home, and credit
cards and over a lifetime, this can add up to hundreds of thousands of
dollars. And don't think we haven't had any historical warning. Let us
take a look at some famous credit quotes:
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
William Shakespeare (Hamlet 1:3)
One of the greatest disservices you can do a man is to lend him money
that he can't pay back. Jesse Holman Jones
Lending money to someone that can't pay is wrong on so many fronts. We
can yell personal responsibility but never in our history have people
been able to have access to so much credit with such little
repercussions for lenders and borrowers. Lenders are now screaming for
a handout. Why don't we audit their underwriting standards and see if
the people that got these absurd loans had sufficient income and good
credit since they are so married to these tools? In fact, the
government can amend their bailout corporate welfare by stipulating
that only loans that met historical underwriting standards of 28 to 33
percent income to housing ratios and solid credit histories will be
eligible for a bailout. In this credit bubble, character, capacity,
and collateral were all thrown out the window.
Education Just Got More Expensive
The LA Times has a great story about families wrestling with the
college price tag. Amazingly, some private institutions annual fees
cost more than the median income of the American family. So what to
do? Go into debt or forego a college education (which we already
mentioned that 80 percent of millionaires have a college degree). They
have a fantastic chart breaking down the numbers for a 4 year degree.
I'll summarize the annual cost here which include tuition, housing,
books, and transportation:
Georgetown: $51,290 (Private 4 year)
UCLA: $23,301 (Public 4 year)
Cal State Long Beach: $17,228 (Public 4 year)
Pasadena City College: $13,776 (Community College)
A student graduating from Georgetown paying down $20,000 a year, will
end up borrowing $140,996. If they want to pay off their student loan
in 10 years they will need to fork over $1,711 a month assuming 8%
student loan rates. Now assume this student goes to Georgetown and
comes out making $50,000 per year. Chances are many of these people
will want to go further and pursue graduate school. Many top law and
business schools will cost $50,000 per year. So we add another
$150,000 in debt unless they have someone to help with these
payments.
As you can see, many future undergraduates will come out with
amazingly high student debt. We're not talking about $10,000 or
$15,000. We are talking about mortgage level debt. And what if they
want to buy a home? More debt! Debt, debt, debt. Its as if we are
programming the future of America with this mentality that to get
ahead, you are forced to go into debt. And for many students that come
from lower to middle class families they have no choice. Well they do
have a choice, either forego college or sign away for loans. The LA
Times article also breaks the misconception of many parents sending
kids to public 4 year institutions. Even though it is cheaper,
competition is stiff and class sizes may not be as accommodating as a
private school. It is a hard challenge and I don't envy parents of
today sending their kids off to school.
What is The Median National Income?
The median family income for US households is $46,326. How in the
world will the median family (which means half fall below and half
fall above) near the median be able to send their children to college
without saddling up debt? As you can see our society is almost
completely based on credit. For those that don't have wealth reserves,
you must bite the bullet and take student loan debt, mortgage debt,
and credit card debt. Of course, you shouldn't spend beyond your
means. But even if you have a distaste for credit you still need a
strong credit score for better mortgage rates, lower insurance
premiums, and sometimes a nosy employer.
But something doesn't seem right with the median family income. How
can it be that the annual price of college looms over the annual
family median income? Many stories are hitting the newswires about
students graduating and struggling to manage their debt. Many turn to
using credit cards to stay afloat. And the vicious cycle of debt goes
on and on. To breakdown the numbers further on income, I wrote an
article on affluence in America. Here are some stats breaking down the
numbers further:
Household income (overall percent of US households over):
Percent of Households over:
$65,000 34.72%
$80,000 25.6%
$91,705 20.0%
$100,000 17.8%
$118,200 10%
$166,200 5%
$200,000 2.67%
$250,000 1.5%
$1,600,000 0.12%
Even families making $100,000 a year, only 17.8 percent of all US
households, will still have a challenge sending their kids to a 4 year
private college. And most people want the best for their kids so they
are not likely to scrimp in this arena. This isn't a choice between a
Camry and a Hummer, this is your child's future. And here is a nice
caveat, student loan debt is not wiped out by bankruptcy. And now
imagine this hypothetical family sending a child off to college and
carrying a $400,000 mortgage on a home. Do you think folks in these
Real Homes of Genius even have the income to support their home loan?
Too much credit floating around.
4 Wheels of Credit
We are a car loving society. So many car makes and models exist that
you can assign each letter of the alphabet and still have remaining
vehicles unnamed. Driving around on the freeways, you would think that
hardly any person drives a car older then 3 years. But what is the
average cost for all this? According to Edmunds the average car loan
in 2003 is $23,801. And according to this same survey the average
monthly payment is $447. This isn't factoring insurance and fuel cost.
Insurance cost can easily be $1,200+ year for a new car and fuel cost
can be $150 to $250 per month. And unless you live in New York City or
relatively close to your work, public transportation is not an option
unless you want to spend extra hours.
Do we Really Need to Eat?
You rarely hear about the monthly cost of eating. But let us take a
look at some data put out by Claritas regarding yearly eating habits
for California families:
Cereal: $342
Bakery products: $667
Seafood: $170
Meat: $1,286
Fruits and Vegetables: $915
Juices: $229
Sugar and other sweets: $427
Fats and oils: $64
Nonalcholic beverages: $703
Prepared foods: 1,252
Fresh mild and cream: $179
Eggs: $103
Other Dairy products: $436
Annual cost: $6,773
Keep in mind this doesn't factor in dining out. According to
Restaurant.org:
"Consumers with a household income of $75,000 or more eat an average
of 4.9 commercially prepared meals per week, compared with 3.2 meals
for those with an income of less than $15,000. Close to two-thirds of
individuals with a household income of $75,000 or more report eating
at least one commercially prepared lunch per week, compared with one
out of five consumers with an income of less than $15,000."
So clearly the more you make the more you eat out. If you eat at a
restaurant once a week with your family, it can easily cost you $50
with gratuity. So that is an added $200 per month on the lower end.
Putting It All Together
And how can we forget the median cost for a single family residential
home in Los Angeles County. Even though the bubble is bursting, the
median price for a SFR in LA County still sits at $547,500. So let us
run a hypothetical budget using all these expenses from college, car,
eating, and a mortgage payment. Let us assume that we buy the median
home, send our kid to college and offer them $20,000 per year, have 2
average cars in our household, and eat the average amount of food. How
will our budget look?
Monthly Budget
PITI: $4,100 (Putting down $54,750 on $547,500 and using current jumbo
rates on a $492,750.00 mortgage - 30 year fixed conventional
financing)
Auto Loan Cost: $894 (2 cars with each carrying a $447 monthly loan).
Auto Insurance Cost: $160 (2 cars full coverage)
Fuel Cost: $300 (assuming that we only use $150 per vehicle)
Food Budget: $564
Dining Out: $200
College Support: $1,667 (Providing our kid $20,000 a year support to
attend a 4 year private school)
Utilities: $120 (includes Gas, Electric, and basic phone service)
Credit Card Service Debt: $168 (According to Bankrate, average
household credit card debt of $8,400)
Health care cost: $575 (Lower approximation for a family of four full
coverage, according to The National Coalition on Health Care.)
Total Monthly Expenses: $8,748 or $104,976 annually.
Is it any wonder that we are in a massive credit bubble? Helps us
understand why we have a negative national savings rate. And I am hard
pressed to believe that the above looks like low to moderate
inflation. The game is rigged and forces everyone to go into some sort
of debt.
How do these numbers compare to your household budget?
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