Copyright 2006 Paul Jerome
I've noticed a few things lately. Revolving debt is approaching a trillion dollars and there are quite a few homes for sale. Today I'll offer some insight into credit cards, Bill Gates, the housing market and saving money.
The Federal Reserve Board statistics pegged revolving debt at an astounding $816 billion at the end of last quarter. Bill Gates fortune was $50 billion in Forbes 2006 survey. Considering Bill Gates philanthropy and the relative popularity of this great article site, I offer this suggestion:
Dear Mr Gates,
Would you please consider contributing $40 Billion toward our credit card debt?
Thank You.
Now let's suppose that we catch Mr. Gates in a good mood and he reads this and decides to help us out (Bill email me and we'll talk). First thing he'd have to do is sell a whole lot of Microsoft stock. What do you suppose would happen to the price of Microsoft stock if a billion shares were suddenly for sale? The price would plummet. Why? The answer is simple. There would be more sellers than buyers. In the short term, the price drops to a level where supply equals demand. Over the long term, what guides supply and demand are the stock's earnings. The long-term value of a stock is not changed by a short-term increase in the number of sellers, although that increase in the number of sellers does create a tremendous opportunity for buyers. Such is the condition in today's real estate marketplace. While stocks are a function of the earnings, real estate is a function of the rents. The euphoria of buying a home and selling it for $50k more in a few months has pushed real estate values to unsustainable levels. Now that world news is reporting a housing slowdown, 'for sale' signs are appearing on every block. Housing prices will gradually begin to approximate a historical calculation that can be derived from the rental income received. Again, this provides a tremendous opportunity. This opportunity exists for both homeowners and those contemplating entering the housing market. Please allow me to explain.
I suppose I should start by listing who will not be benefiting by current market conditions – anyone pressed to sell their home today. For reasons listed above, this is not the best time to put your home on the market. Smart homeowners are taking their home off the market and pulling cash out to pay off credit cards and consolidate bills, enabling them to wait out this period of over-supply. After this over-supply cycle has ended, it will be time to sell.
For those of you considering entering the housing market, you may not be aware that we are at an unprecedented time in history. This is good news. Sellers are willing to assist you with financing in the form of a second mortgage. Not only do you have a selection of homes but this type of financing enables you to buy with 'no money down' even with a credit score as low as a 500. The only caveat is that you need to be able to afford the monthly payment. You don't want to put yourself in a position of having to sell the home shortly after you buy it. Today's market is ideal for building a portfolio of real estate for the long term.
Now I'm not holding my breath for Bill Gates to take us up on our $40 billion credit card request, so I'll make another suggestion. It won't involve actual cash, but it is another way to accomplish the same result. The MASSPIRG Consumer Association completed a report titled "Deflate Your Rate: How To Lower Your Credit Card APR". An interesting finding was that 56% of the consumers in the study were able to lower their APR with one five-minute phone call to their credit card company. The report offers the following script:
"Hi, my name is [Your Name]. I am a good customer, but have received several offers in the mail from other credit card companies with lower APRs. I want a lower rate on my card, or I will cancel my card and switch companies"
The study indicated that the average reduction in APR was 5.53% for those who were successful. If everyone is able to accomplish the same results then the savings would be 56% * 5.53% * $816 billion, and that is approximately $25 billion. It's not quite the $40 billion we were looking for, but it's close.
In conclusion, saving money is important to everyone and our success in the future will depend on the decisions that we make today. Much can be gleaned about housing from recognizing supply and demand forces at work and knowing what really affects long term values. Both homeowners and homebuyers should be proactive in the financial decisions they're making now to ensure long-term success in the real estate market. Credit card debt is approaching a trillion dollars, but a simple phone call may be all it takes to save American's billions in interest. And finally, while I can't rule out a generous contribution from Bill Gates to help us with our finances, something tells me that he as well as we ourselves would be pleased if we followed the steps outlined in this article and discovered our own financial independence.
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Paul Jerome is a mortgage expert and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information regarding credit repair and responsible mortgage lending.
http://www.brokencredit.com
