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Sunday, March 15, 2009

Is it OK to Walk Away?

Is a home an investment or simply a dwelling where we reside? Should I give the lender the keys to the house the moment it is worth less than the balance of the mortgage? Is it okay to walk away?

Here's the dilemma. The Jones family lives in a beautiful home in a Phoenix suburb. They have children whose only memory of home is that house. They refinanced the home a few years ago when values were high and pulled some cash out. The cash was used for a variety of things. As home prices have fallen, and fallen, they find themselves with a loan balance that is two hundred thousand and fifty dollars more that what the home is actually worth today. Fortunately, both Mr. and Mrs. Jones fall into the 90% of people who are still employed and are capable of making the mortgage payment.

Mr. Jones looks at the situation and decides action must be taken. Men are problem solvers and this "upside down" issue needs to be addressed. It seems foolish to pay the lender a quarter of a million dollars more than what this home would fetch on the market today. If the lender won't write-down the principal balance, then let's mail them the keys and rent a house in the same neighborhood. A logical and practical solution.

Mrs. Jones views things differently. She doesn't want to move. This is her home. This is where she wants to continue to raise her children. This home is not an investment. The decision should not be based as if it is an investment. If the payment is affordable, then she wants her family to stay put.

This debate is likely taking place in thousands if not millions of households. I am aware of this particular debate, because I know the Jones's. That's not really their name. It has been changed to protect the delinquent. My own opinion is that people should keep their homes if they can still afford them. I will admit that I have not been placed in their situation, at least not yet. I don't envy their dilemma.

Monday, March 2, 2009

Stock Market Death Watch

As I write this, the Dow Jones Industrial average is at 6820 and falling. I have not witnessed a bear market like this in my lifetime. In fact, people twice my age haven't witnessed anything like this in their lifetimes either. I hear comparisons of this economy to 1982. I was only nine years old at the time, the same age as my oldest son is now. Back then I was more interested in Star Wars than the economy. I won't try to make comparisons with that recession, rather I tend to believe that this recession will represent a fundamental change in our economy.

As humans we tend to make assumptions and predictions based on our own experiences. Some people may look at the '82 recession and make predictions based on what happened then. Others may look at the Great Depression, and draw comparisons there. It appears the Obama administration is attempting to define their legacy as the New Deal Part 2. In the media I hear people cry to the government for help. Save UAW jobs in Detroit, save Citi, save me, save you. Instead of trying to preserve our economic fortunes of the past, perhaps we need to acknowledge the fundamental changes that are occuring. Like farmers moving from rural areas to cities to accept industrial jobs a century ago, this change will require a great number of people to get out of their comfort zones.

Changing jobs is difficult. Changing industries is more difficult, not because former mortgage loan officers are incapable for becoming nurses (just as an example, they certainly are), but because it requires one to try something that they don't know how to do yet. Individuals are not born to do a particular job. They can do any job as long as long as they have an open mind and the willingness to learn. A great example is Daniel Seddiqui. The 26 year old from Utah is 24 weeks into his journey to work 50 different jobs for one week each in all 50 states. In this journey, Daniel has worked as a corn farmer in Nebraska, a wedding coordinator in Las Vegas, a park ranger in Wyoming, and a cheesemaker in Wisconsin just to name a few. Every week he learns a new skill and is getting an education well beyond anything he could pay tuition for at a University. Perhaps government hand-outs need to instead be hand-ups to provide training and education for those individuals that are willing to adapt.

Adapting doesn't have to be as drastic changing industries. Perhaps it can be as easy as adjusting a product to fit the current environment. Hollandia International makes high-end beds. They made a custom bed for a client that contained a safe where he keeps a gun close by while he sleeps. Hollandia has adapted that concept to the recession and now markets a SAFE-T Bed so you can keep your cash in your mattress and feel secure about it. Brilliant! The Dow has dropped another 3 points since I started writing, so cash in the mattress sounds like a good investment in this deflationary environment.

Obama and Congress have a choice to make when they create bail-outs and programs to assist those that cry out for help. They can spend our money in an attempt to preserve the past, or they can accept the fundamental changes that are occuring and attack them head on with programs to help retrain individuals that are willing to adapt.