Middle Path Finance

Can the $100 house make sense?

The economic downturn has revived the myth of the $100 house. Investors poured millions of dollars into "investment" real estate sight unseen during the boom. Even though the bubble has popped, infomercials and sensationalistic ad campaigns are still touting real estate as an investment, this time using the lure of the $100 house. Or the $1000 house. Whatever the number, it's usually an obscenely low amount of money for a real estate purchase. We're supposed to believe that there are great deals out there, and if we are smart, we can profit when real estate prices recover.

But now that the landscape has changed, does the $100 house exist? And if it does, is it a good investment? The answer, surprisingly, might be yes.

I ran across this intriguing piece in the New York Times.

"Ah, the mythical $100 home. We hear about these low-priced “opportunities” in down-on-their-luck cities like Detroit, Baltimore and Cleveland, but we never meet anyone who has taken the plunge. Understandable really, for if they were actually worth anything then they would cost real money, right? Who would do such a preposterous thing?"

That is the million dollar question. Or rather, the $100 question. I don't believe in get rich quick schemes and I certainly don't believe the hype-mongers claiming we can all get rich off of foreclosures. But for the right person, with the right intentions, the current glut of under-priced, damaged homes in economically depressed cities is a once in a lifetime gift.

The article really made me think about who this sort of situation can really work for:

"A local couple, Mitch Cope and Gina Reichert, started the ball rolling. An artist and an architect, they recently became the proud owners of a one-bedroom house in East Detroit for just $1,900. Buying it wasn’t the craziest idea. The neighborhood is almost, sort of, half-decent. Yes, the occasional crack addict still commutes in from the suburbs but a large, stable Bangladeshi community has also been moving in.

So what did $1,900 buy? The run-down bungalow had already been stripped of its appliances and wiring by the city’s voracious scrappers. But for Mitch that only added to its appeal, because he now had the opportunity to renovate it with solar heating, solar electricity and low-cost, high-efficiency appliances."

After this couple moved in, they bought two adjoining lots and turned one into a garden. They bought a house down the street for $500 and sold it to an artist for a $50 profit. One by one, when the opportunity arose, the couple and others like them bought these cheap, damaged homes and have turned it into a real community.

When your intention is to stay, to build a community house by house and block by block, the cheap house is a gift and an opportunity that comes by once in a lifetime. To pass it up, if you have vision and purpose, would be utterly foolish.

Hey thrifty people, This recession is your fault

Everyone knows we're in a recession, and the economic landscape is pretty grim.

In 2008, Americans lost $7 trillion in stock market wealth. We lost another $1.2 trillion thanks to tanking home values. In 2008, 2.6 million Americans lost their jobs, and the Conference Board estimates another 2 million people will lose their jobs by mid-2009.

No wonder people are skipping the mall and saving their money. But the unseemly side effect of a deepening recession in an American economy so dependent on consumer spending is saver bashing. Yes, blaming all of the country's woes on people who don't spend money.

A curious slate of stories has emerged in the news in recent weeks, all bashing people for being frugal and actually using their money to invest, pay off debt, or god forbid, start a savings account.

Here is a round up of my favorite shame-on-you-for-being-thrifty articles that have appeared in recent weeks.

• One of my personal favorites is this one from CNN Money, where the expert says that yes, it's better for the country as a whole if people save more, just not right now and not everybody at once. The author even admits that the U.S. savings rate, although almost 3 percent higher than in recent years, is still paltry by international standards.

"It's not that the savings rate today is high by historic measures, or by comparisons to some other countries. But it has moved sharply higher in recent months -- at a time when what the economy needs most is for consumers to be spending more freely."

• Businessweek does a good job explaining why a savings rate increase is good, just not if people start saving all at once. Just let us remember that we are borrowing money, as a nation, from the countries that do have a higher savings rate. 

"However damaging its short-term impact, there are good reasons for wanting the saving rate to climb over the long term, most importantly the fact that more savings means a bigger pool of capital to finance companies' investment in improved productivity and innovation, says Nicholas S. Souleles, a finance professor at the Wharton School. Without a higher level of savings, innovation and increased productivity would stall, leading to wage stagnation and a lower standard of living in the future. Ideally, savings would build up gradually. The last thing you want to see in the middle of a serious recession is for savings to go up all at once, says Souleles."

• There is also this lovely primer on Keynsian economic theory courtesy of the New York Times. At least this one is a bit tongue-in-cheek, but it does raise a good point:

"John Maynard Keynes, the great 20th-century economist, would have appreciated the apparent absurdity in these mixed messages. He coined a phrase, “the paradox of thrift,” to point out that what was rational for an individual during hard times — saving money — could be ruinous for an entire economy. Eventually, many of the savers may end up out of work because everyone else is saving, too."

• If you really want to throw on the guilt, read this Wall Street Journal story about how one family's spending cuts ripple through an entire town. This story, although the intentions were likely good,can't help but leave a "how could you?" taste in your mouth if you so much as dare to cut back on restaurant meals or haircuts. The story follows the layoff of Mr. Smith (his real name.)
  

"Now they realized those carefree spending habits were the first thing that had to go. Mr. Smith stopped perusing the list of new video releases and buying DVDs that would go unwatched for months. Mrs. Smith stopped shopping at Harold's, the upscale clothier that had been a favorite since her days at the University of Oklahoma.

Thousands of other shoppers were making similar decisions to cut back, and the drop in sales sent Harold's, already struggling to compete with larger rivals, underwater. The 60-year-old chain filed for bankruptcy in November, and this month closed all 43 of its stores in 19 states."

Finally, some relief for credit card customers

Yesterday, the Office of Thrift Supervision finalized new rules that address what many consumers and consumer advocates call unfair practices by credit card companies.

The rules address issues such as double-cycle billing, a card company's ability to arbitrarily raise interest rates, and the ever-shortening grace period.

Here is what credit-card holders can look forward to:

1. Interest rates. Under the new rules, the interest rate a card carries must be disclosed when the account is open and remain set for a specified period of time. Card issuers will only be able to raise that rate after the end of that set time period, and the new rate would only apply to new purchases. The old rate would apply to past purchases.

This rule is a boon to those trying to get out of debt. If you have debt and are trying to pay it off, this will help you. It will prevent you from suddenly having to pay 29 percent on your debt instead of the 11 percent you were used to.

Recently, card issuers have been raising rates across the board, even for those who never pay late, simply because they need to make up for profits lost to bad mortgage loans. Why should you pay a higher interest rate on your credit card just because your bank made a mistake? You shouldn't. And under these rules, you won't.

The only exception to this rule: If you make a late payment, that's more than 30 days late, your rate can go up. On past purchases as well.

2. The disappearing grace periods. Grace periods, or the time you have to pay the bill before it is considered late and you start accruing interest and fees have grown ever shorter in recent years. Banks have been trying to trick consumers into making late payments. The new rules now say the shortest a grace period can be is 21 days. In the 1980s, grace periods were a luxurious 30 days, but in recent years that has been cut to about 20 days or no days at all.

3. Payments are now applied to your lowest-rate balance first. This is one trick the credit card companies loved. Say you had a card with a 0 percent rate on balance transfers and a 10 percent rate on new purchases. say you made a few purchases. Of course, when you send your payment, you want it to apply to the part of your balance carrying a 10 percent interest rate. Forget it. The bank would always apply that to your 0 percent balance, and until you paid off your entire 0 percent transfer, you'd still be paying 10 percent interest on part of what you owe. It was a huge profit center for banks and a serious drain on you. Not so anymore.

The new rules say that card companies must apply your payments to the balance with the highest interest rate first OR equally across all balances. My guess if the banks will opt for the second, but it's still an improvement.

4. Double-cycle billing. This is the most egregious of bank practices. Say you have a credit card balance of $100 in March. You pay $50, so in April your balance is $50. Guess what. If your card uses double-cycle billing, which many do (particularly Discover Card), you still paid interest in April as if you owed $100. How? They use your average balance over two months to calculate your interest payment instead of calculating it based on how much you actually owe. How is that fair? It's not. Thankfully, this will soon be illegal.

5. High-fee cards for borrowers with bad credit. This rule applies to secured credit cards. Many have high upfront fees and low credit limits, making the fees almost equal to the credit limit. It's a high price to pay to rebuild your credit rating. The new rules limit these fees to 25 percent of the credit limit and no longer allow banks to charge them as a one-time upfront fee. They must now be spread over the first 6 months the card is open.

How do these new rules help you? If you are trying to pay off your cards, you should have a little more help. When you make a payment it's more likely to go to your highest interest-rate balance, which will help you pay down your cards faster. If you are paying more interest than you should, thanks to double-cycle billing, this will save you a bundle in interest charges and help you pay off your balance faster.

And, this will prevent any sudden interest rate shocks if you carry  balance and pay your bills on time. Right now, a bank can raise your interest rate on your total balance with only 15 days notice, and even that is given on a small-type notice in your bill that no one reads. 

If you want to read more,
Here are the rules issued by the Office of Thrift Supervision.
Here is Bankrate.com's round up of the new rules.
Here is a story from MarketWatch

Just remember, there is a catch. The new rules don't go into effect until January 2010, so you will still have to fight the good fight with your credit card issuers in 2009.