Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
BREXIT, Italy’s Deficit, The EU Summit And Fomcs Minutes In Focus - 16th Oct 18
Is this the Start of a Bear Market for Stocks? - 16th Oct 18
Chinese Economic Prospects Amid US Trade Wars - 16th Oct 18
2019’s Hottest Commodity Is About To Explode - 15th Oct 18
Keep A Proper Perspective About Stock Market Recent Move - 15th Oct 18
Is the Stocks Bull Dead? - 15th Oct 18
Stock Market Bottoms are a Process - 15th Oct 18
Fed is Doing More Than Just Raising Rates - 14th Oct 18
Stock Markets Last Cheap Sector - Gold - 14th Oct 18
Next Points for Crude Oil Bears - 13th Oct 18
Stock Market Crash: Time to Buy Stocks? - 12th Oct 18
Sheffield Best Secondary School Clusters for 2018-19 Place Applications - 12th Oct 18
Trump’s Tariffs Echo US Trade Policy That Led to the Great Depression - 12th Oct 18
US Dollar Engulfing Bearish Pattern Warns Of Dollar Weakness - 12th Oct 18
Stock Market Storm Crash, Dow Plunges to Trend Forecast! - 12th Oct 18
SP500 Stock Market Sell Off Well Forecast by President Trump - 11th Oct 18
USD and US Tr. Yields Retreat, GBP Gains on Brexit-deal Report - 11th Oct 18
Loss Of Yield Curve "Shock Absorber" Could Mean A Rough Ride Ahead For Markets & Housing - 11th Oct 18
Just How Bearish is the Stock Market’s Breadth? - 11th Oct 18
Here’s Why Gold Stocks, Gold, and Silver Are Great Buys Now - 10th Oct 18
Russian Ruble Technical Chart Analysis and Forecast - 10th Oct 18
Society Trends To Keep in Mind in the USA - 10th Oct 18
[eBook] How to Identify Turning Points in the Market - 10th Oct 18
Euro Vulnerable as Slowing Growth Reveals Underlying Issues - 9th Oct 18
Construction Companies to Watch For in 2019 - 9th Oct 18
ECB Meeting Minutes and US Inflation Data in Focus - 9th Oct 18
Interest Rate Shock-Time to Find Out Who has been Swimming Naked - 9th Oct 18
Unintended Consequences of Expanding Sheffield's Best Ranking State Secondary Schools - 9th Oct 18
Crude Oil Price Trend Forecast 2018 Update - 9th Oct 18
Inflation Is Starting To Heat Up - 8th Oct 18
Stock Market Seasonal Influence at Work - 8th Oct 18
Barrick Randgold Deal Breathes New Life into Gold - 8th Oct 18
Stock Market Sell Off, Dollar Rally Expected, Now What? - 8th Oct 18
The Chartology of Gold and Silver - 8th Oct 18
The Income for Life Playbook - 8th Oct 18

Market Oracle FREE Newsletter

Trading Any Market

Americans Find A New Source Of Spending Money

Economics / US Economy May 06, 2014 - 05:06 PM GMT

By: Raul_I_Meijer

Economics

Hurray! Americans have found a new source of spending money; after ATM-draining their home equity till even the roofs were underwater, and maxing out every single little shred of plastic they could lay their hands on, “families looked around for what was left”, and now it’s time to empty out 401(k)’s until there’s really nothing left at all anymore. Then it’ll be recovery or die, presumably. But a recovery is not going to happen, and certainly not for society’s bottom rung. Oh well, maybe there’s some form of slavery they can enter into. Not surprisingly, the US government is quite content with this new development:


Early Tap of 401(k) Replaces Homes as American Piggy Bank

“They get hit with the penalty at exactly the time when they’re the most vulnerable,” said Reid Cramer, director of the Asset Building Program at the NAF, which tries to improve savings for lower-income families. “So it’s a real double-whammy.” For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option.

The IRS collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to. [..] Adjusted for inflation, the government collects 37% more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38% from the 2007 peak, according to Federal Reserve data.

“They didn’t have access to the home equity that they had in the past”, Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4% of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration.

But wait, there’s hope. Eternal hope. Karen Weise for BusinessWeek reports in a piece filled with joyful glee that Americans who still have a home are less underwater than they used to be:

America’s Underwater Homeowners Are Afloat Once Again

At the bottom of the housing crash, more than a third of all homeowners owed more than their houses were worth. They were plunged underwater by a combination of collective overborrowing during the housing bubble and plummeting prices during the crash. Bit by bit over the years, homeowners have been climbing out of that hole, and new data from Black Knight Financial Services show that borrowers are approaching a threshold that will see only one in 10 U.S. borrowers underwater on home loans.

But not so fast, I beg of thee. Let’s see what’s brought about this happy news. Karen does know something:

Foreclosures wiped away the mortgages of many of the most indebted. In January 2010, 10% of borrowers owed at least 50% more than their homes were worth. By January 2014, that number fell to 2% of borrowers.

Hmm. That puts a bit of a dent in the joy, doesn’t it? The last number I’ve seen for total foreclosures in the US since the wrecking ball came down is about 7 million. If we may assume the majority of those were the deepest underwater loans out there, it’s no wonder that A) there are fewer “owners” underwater, and B) the average amount owed has gone down. On top of that, there’s something else that murks the numbers:

Cash buyers have flooded the markets, making up more than a quarter of all home sales in March. That means homes that were once financed with debt are now paid for entirely with equity.

By now I don’t feel all that joyful anymore, but Karen has less scruples. She came to write a happy piece, and she’ll stick with that idea. For the rest of us, what this comes down to is that the tens of thousands of all-cash purchases by the likes of America’s biggest homeowner, private equity fund Blackstone, have not only lifted prices, they also make numbers of average debt owed look much better. Just don’t tell the better-looking “owners” that Blackstone cut its purchases by 90% recently, and other all-cash buyers will follow suit, if they haven’t already. A simple matter of supply and demand, investment and return.

Average debt owed went down because the “worst offenders” of the subprime craze were foreclosed on, home prices rose somewhat because institutional investors stepped in to scoop up foreclosed properties, banks sit on huge numbers of homes they don’t want to finalize the foreclosure process on lest they have to transfer the losses to their books, and mortgage rates are only now coming up from a very low bottom. All factors that distort the picture.

The proof in the pudding: If these factors did not strongly influence the numbers we’re seeing, one number would be very different: the amount of home-equity loans. If things were really that much better now, banks would be more than happy to let people borrow more, not less, against their homes. They’re not. And that’s as good a sign of what is real and what’s not as we should need.

So count on a huge wave of Americans draining their 401(k)’s and other pension provisions, because many don’t have anywhere else to turn anymore. And don’t forget that much more even than home-equity loans, early 401(k) withdrawals are signs of desperation. They’re not used to buy granite kitchen tops or trips around the world or flashy foreign cars. Your typical early 401(k) withdrawal is about survival. About people who look around for what is left, and find nothing else.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules