Personal Finance Thursday, July 24, 2008

A Must Read

I'm giving you a reading assignment and I want a short report afterward. I'm serious.

As the mortgage crisis continues to pick up intensity like Hurricane Dolly, let's look at not just how the banks and mortgage professionals push the economy down the toilet, but how Americans have radically changed their view of what it means to own a home.

To see how we got here you have to read Alexander von Hoffman's op-ed article from Sunday's Post.

The headline alone sums it up: Home Values Are Down, and Not Just at the Bank.

Hoffman, a senior fellow at Harvard University's Joint Center for Housing Studies, brilliantly writes about how our changing values of homeownership helped contribute to this mortgage mess.

"We have strayed so far from what made owning a home an unassailable American value," Hoffman writes. Becoming a homeowner no longer requires patience, thrift and strong moral character. In the last few years, just about anyone could, and did, get a mortgage. As home prices skyrocketed, Hoffman writes: "Outright greed took hold." Some homebuyers "flipped" houses for a quick profit, while others treated their homes as ATMs, depleting their equity to finance purchases outside of their means.

Hoffman says too many people have stopped thinking of their home as a shelter for the family or a sanctuary in troubled times, and instead thought of it as an "investment," that would only ever go up in value.

Take a look at this question submitted to Kiplinger's Money & Ethics column penned by editor-in-chief Knight Kiplinger. A reader was concerned that her husband wants to intentionally default on their mortgage because they've lost all their equity. They can afford to pay the mortgage but her hubbie says "Everybody's doing it." By defaulting he thinks they can take advantage of lower home prices and get a cheaper house. She disagrees and thinks it's unethical.

Read Kiplinger's response in Keep the House, Especially When You Can Afford It (July 20).

This situation certainly proves Hoffman right.

So can we change? Is it too late?

"Maybe we should rethink what it means to own your own home," Hoffman says in his op-ed piece. "We could think of it as a source of emotional security instead of a collateral security."

Read Hoffman's article and tell me what you think. What has owning a home meant to you? Be honest. Was getting wealthy from the built-up equity high on your list of reasons to buy your home? Have you extracted equity to consume more and now regret it?

Folks, we won't get out of this mess and certainly we won't learn from it until we all examine our own views of homeownership. So read Hoffman's article. Then report back to me. Send your comments to colorofmoney@washpost.com. In the subject line write "Home Values." Please include your name and hometown.

Housing Crisis Hits Hard

Studies have shown that African Americans have been hit particularly hard by the housing crisis.

The Root columnist Kai Wright has a personal take on the issue. In his column Homewreckers he writes about how his mother lost her home after accepting a subprime refinance loan from Countrywide. "She did everything a woman of her generation was supposed to do to earn economic security in her golden years, not least of which was moving from being a renter to investing in a home more than 10 years ago," Wright writes. "Now she's back to being a renter, having lost the house."

Wright was online last week to discuss his story and how the subprime mortgage meltdown has affected African Americans.

Not only are people chatting online about their housing woes, but they're also turning to their church for help. My pastor, John K. Jenkins of First Baptist Church of Glenarden, has been preaching for years about the danger of overspending. He's been on a mission to get worshippers to cut their credit card habit. Read what Jenkins and other ministers are doing to help their congregants be better stewards of their money during good and bad times in Calling on Gospel to Call Off Debt by Post staffer Ovetta Wiggins.

Loss of a Job Requires a Plan B

Earlier this month, Starbucks announced that it would be closing 600 stores and laying off up to 12,000 employees. Wachovia has announced it plans to lay off 6,350 employees and leave 4,400 more positions unfilled after posting an $8.9 billion loss in the second quarter, reports Post staffer David Cho in Banks' Health Questioned as Wachovia Posts $8.9 Billion Loss.

You may not work for one of those companies, but what if you got a pink slip? Do you have a plan to weather unemployment? Financial professionals participating in this week's "Ask The Experts," addressed this question on Sunday. Read what they suggest:

* Barry Glassman, Senior Vice President at Cassaday in McLean

* Ryan B. Wibberley, President and Founder of CIC Wealth Management in Rockville

* Jim Ludwick, Founder and President of MainStreet Financial Planning in D.C., Md. and Ca.

Take a look at my column Staying Out of the Red Despite the Pink Slip (June 12) for more advice about surviving a layoff.

Financial Crash Triggers Animal Instincts

Much of the news of late should make us reflect on our tendency to react first with fear.

Post staff writer Michael S. Rosenwald, the brains behind the Financial Lobe column, examines our herd mentality in Why We Buy Into the Herd, Even When It's Not Good for Us (July 20).

"Behavioral economists and psychologists see some classic behaviors at play here, leading to herds of people taking measures -- dumping stock, lining up outside banks when they don't need to -- that can actually exacerbate the problems for everyone, causing tornado-like spirals that suck in even wider swaths of people," Rosenwald writes.

If you want to find out how to act counter to the crowd read Rosenwald's article.

Retirement Money

The Social Security Administration unveiled a new online calculator for retirement planning that helps you estimate your retirement benefits at different ages.

This new tool couldn't arrive at a better time. On Sunday, I wrote about how an increasing number of workers are raiding their retirement accounts by taking out a loan against their 401(k) plans.

Read more to find out why there are more pros than cons to tapping this money.

Some of you agreed with me. Here's what you had to say:

Maureen Zupan said that she was happy I pointed out that this money is not tax-free. "You are going to get taxed on the money," said the resident of Syracuse, N.Y.

Mark R. Lindon of Virginia wrote: "Retirement accounts should be placed off limits except for dire circumstances. First house or college is not dire. Potential life threatening illness and loss of job are the only reasons anyone should tap their account. Relying on the government to support someone in retirement is not viable anymore. We must fund our own. My wife and I max out contributions to all of our retirement accounts and have no intent to tap them at all until we need them for retirement."

Despite similarity in location, others had a different point of view.

"I appreciate the flexibility of borrowing against a 401(k)," wrote Jeff A. of Saratoga Springs, N.Y. "My wife and I have used this option to fund short-term cash flow and paid ourselves back in 12-24 months. And, perhaps more importantly, we generally find it comforting to know that the borrowing option is always there should we find ourselves in need of emergency funds."

Charles Morrill of Charlottesville, Va., says that yes, borrowing from one's 401(k) is a bad idea and Americans should know to save. But he wrote: "There isn't enough money, and at the rate prices are rising, there never will be. It's dirt simple to write stories about the individual issues and point out that we're not saving enough, or we're irresponsibly borrowing from our 401ks, or that we've not saved enough for the child's education. Piece of cake! Very hard though, to come up with a complete picture of how most Middle Americans ought to navigate the financial shark infested waters of the new century."

I understand the pressure that rising prices can place on your finances. Perhaps Mr. Morrill should read my column Whip Inflation Now, Before It Whips You (July 3).

You Asked

Here are a few questions left over from my online chat last week:

Q: My husband and I are looking to buy a home (rent just went up 30% and we need the tax break). We have $20,000 in student loans (paid down from $50,000 in two years) and a house in a depressed market (Ohio). We've been renting it (no income, but covers costs) for four years. We have about $35,000 for a house, which is about 3-5% using a fixed FHA loan. Given the current market, should we buy a home now or rent one more year, pay off the student loan, sell the Ohio house (maybe we can get $5,000 to $10,000 if we're lucky) and wait for the mortgages/banks/general economy to balance out?

A: No. Yes. Probably yes. I have no idea.

No, you shouldn't buy a home with $20,000 in student loan debt. Yes, pay off the student loan so that when you buy your next home, you move free of a major debt. If you don't want to be landlords then sell the Ohio home and use the proceeds to build back up the down payment fund because you should take $20,000 of that $35,000 and pay off the student loan. Now I can't tell you when to buy. I can't tell you when the economy will balance out. It's crazy right now. Banks are losing billions. Homeowners are losing their homes and the numbers don't seem to be going down. Housing prices in many areas of the country are still dropping. Good for buyers, bad for sellers. But I can tell you the best time to buy a home is when you can afford it.

Q: Do you believe that freezing your credit with all three bureaus will prevent identity theft? Clark Howard believes that it is a foolproof way to stop ID theft. Dave Ramsey thinks it is not foolproof since ID thieves go to merchants who don't do credit bureau checks before giving credit. What is your opinion regarding freezing one's credit standing?

A: I think both Howard and Ramsey are right. A good crook will figure out a way to steal from you. But your job is to make that as hard as possible. So if you are concerned about your identity being stolen getting a security freeze is a good way to protect yourself.

If you want to know more about how a security freeze works read my columns, A Way to Freeze Out The ID Thieves and A Security Freeze Can Protect Your Credit But Take Some Time to Thaw.

Q: Michelle, following up on your idea I recently started a "life happens" fund for funds separate from my "home" monthly budget and my emergency savings (currently around 7 or 8 months). I want a year, as I know I could not really replace my current job since I'm in my early 50s. Should I keep the "life happens" fund separate from the emergency savings?

A: If you're very disciplined you can keep the two funds together. A life happens fund is money you keep to pay for the things in life that happen and you don't typically plan for such as a major car repair. You build up this fund so you don't deplete your emergency stash which should be used if you lose your job for example.

If you aren't disciplined, keep the two funds separate. You could just have a checking and savings (separate from your household budget accounts) and make the checking your life happens fund and the savings your emergency fund. Definitely keep both your emergency fund and life happens fund separate from your regular checking and savings otherwise you'll be too tempted to tap it.

Q: Michelle, What do you think of the idea of home ownership as an investment? Has it come to the point where it is yet another example of an "unnecessary luxury" dividing the rich from the rest of us? I bought my house 3 years ago as a step to save for my old age (which at 53 years old is next week). I also bought it because I feel rootless as a renter. But now I wonder if the added expense now will actually pay off at any time in the future. Any opinions?

A: This is a good place to end this week's e-letter because it brings us full circle.

Let me say it again. Read the op-ed piece by Alexander von Hoffman Home Values Are Down, and Not Just at the Bank.

I think home is where the heart of the family is. I treat my house like a home not an investment. It's a place where I can go and be with my wonderful and fine husband and three great kids. It's where I live, love and laugh. If by some chance I can make some money when I sell my home, great. But while I'm living in it, I hope to get more than anything I could buy with money.

You are welcome to e-mail comments and questions to singletarym@washpost.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested.

Charity Brown contributed to this e-letter.

-Michelle Singletary