Supply and Demand

Since we live in a supply and demand economy, it seems a logical starting point to analyze the quantity of habitable homes in existence and compare that quantity to the number of individuals that make up the home-buying consumer marketplace.  According to estimates of the housing inventory by the US Census, there are approximately 130 million homes in existence in the United States.  For the purposes of our discussion, let us assume that 1/2 of owned homes will be occupied by married couples between the ages of 25 and 75 (with or without children under the age of 25 or parents/grandparents over the age of 75) and that the other 1/2 of owned homes will be occupied by single adults between the ages of 25 and 75 (under the same conditions).  According, again, to estimates by the US Census, of the current US population between the ages of 25 and 75, we have approximately 184 million people in our home-buying consumer marketplace.  If 2/3 (123 million) represent married homebuyers (62 million homes) and the remaining (61 million) represent single homebuyers (61 million homes), we have an effective home-buying consumer marketplace of 123 million buyers.

We see an initial disparity of 7 million unaccounted for homes.  Whether these remaining homes represent a significant pressure for lower home prices is up for debate.  According to US Census data, the population in the age group of 25 to 70 will increase by approximately 22 million by 2020, filling those unaccounted for homes as well as increasing demand for additional development.  Further, in the immediate future, might these “extra” homes serve simply as a buffer of “for sale” homes on the market for the mobility of buyers, contribute to the inventory of vacation homes, or serve as rental homes?  For simplicity’s sake, let us conclude that for the immediate future, there is neither a significant number of homes in the US to represent a surplus when compared to prospective market demand, nor is there a significant lack of homes in the US compared to prospective market demand.

Price

According to the US Census, the median home sale price in February, 2010 was approximately $220,000.  According to Bankrate.com, one’s monthly mortgage payment, including principle, interest, taxes and insurance (PITI) should not exceed 28% of one’s gross income.  According to the US Census, our median household income (for 2007) was approximately $50,000.  At 28%, this affords us approximately $1,200 per month for our PITI.  Assuming a combined tax and insurance cost of $3000 per year, with a 5% interest rate, we should only be able to afford a $180,000 home.  This supports a decline in home prices by 18%.

The median affordable US home could be offset by an increase in median income.  According to Federal Reserve data, our monetary base increased from $1.6 trillion to $2.1 trillion in the past 12 months.  This represents a 24% increase in the money supply over the course of a single year.  The 24% increase in the money supply should trickle, increasing both median income and median home prices by 24%.  This would offset the aforementioned projected 18% decline in home prices.  Should the US Federal Reserve continue to print additional currency, I gather we will continue to see a related increase in home prices.

1.  Make it a priority to pay off your credit card balances.
If you’re having trouble, contact the National Foundation for Credit Counseling (NFCC).  They are not miracle workers, but are the “good guys” you can trust.
     www.nfcc.org
     800-388-2227

2.  Stick to your long-term retirement investing plan (so long as you have at least 10 years until retirement).
Side Note that interested me:  you can learn about Roth IRA conversions/rollovers at www.fairmark.com/rothira.

3.  Push as hard as you can to find a way to set aside at least eight months of living expenses (an Emergency Fund) in an insured savings account.
- Make sure your bank or credit union is covered by federal deposit insurance (FDIC).
- Check that what you have on deposit is eligible for full insurance ($250,000 limit for 2009 and may revert back to the $100,000 it was in 2008).
- These emergency fund savings do NOT belong in the stock market!

4.  The most effective cash-generating action you need to take in 2009 is to spend less.
- Separate wants from needs
- What you “deserve” is irrelevant; what you can truly afford is all that counts.
- Fill out a “Household Cash Flow worksheet,” or as I like to call them, Income/Expense Summaries.  Available for download at www.suzeorman.com.

A challenge from Suze.  Within a month of reading this book:
a.  Do not spend money for one day
b.  Do not use your credit card for one week
c.  Do not eat out at a restaurant for one month
- Subsequently, make a promise to yourself to eliminate your outstanding credit card debt as soon as possible.

5.  Expect that this year will continue to be a very tough time for Real Estate.
- Push for a “mortgage modification” if your current loan is too expensive
- Stay informed about new programs, from lenders and the government, in the months ahead that aim to keep more homeowners out of foreclosure (see suzeorman.com).
     – The NFCC has HUD-approved housing counselors who can advise you and will act as an advocate with your lender for the best resolution for your situation (call 866-557-2227 or visit www.housinghelpnow.org).

6.  If your child is heading to college within four years and your college savings are in the stock market, you should begin to phase it out so that you are 100% out by the time he or she is 17.
- Look into Stafford Loans and stay away from private loans.
- You must fill out the Free Application for Federal Student Aid (FAFSA)

7.  Protect yourself and your family
- Build a substantial (ideally eight months worth of expenses) savings account today so you will be okay if you’re laid off.  Maybe this can’t be established immediately, but at least start contributing to one.
- DO NOT…DO NOT go without health insurance!
    - go to ehealthinsurance.com in you need to find some.
- Purchase an affordable term life insurance policy if anyone is dependent on your income.
          -see selectquote.com and accuquote.com
- Make sure you have all your estate planning documents in order
     – You need:
          a.  a revocable living trust with an incapacity clause
          b.  a will (a will alone is not enough)
          c.  Two durable power of attorneys – one for health care and one for finances.

In closing Suze asks that we remember 3 things:
1.  When it comes to money, if it sounds too good to be true, it is.
2.  If you cannot afford it, do not buy it.
3.  Always choose what’s right, not what’s easy.

And in case you’re not familiar with Suze Orman, we would typically read a further ending with her signature phrase, “people first, then money, then things.”

Here’s a retirement calculator that should keep you busy for a little while.