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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.
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