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American are shedding their mortgage debt

USA Today has a story on an interesting trend:

Americans are reducing mortgage payments at a record clip, directing cash that once went for debt into consumer spending and savings.

Low interest rates, defaults and refinancings have shaved more than $100 billion off the nation’s annual mortgage bill — an amount comparable to all unemployment benefits for one year or this year’s Social Security payroll tax cut.

“This is a form of economic stimulus that goes to Main Street rather than Wall Street,” says Nicholas Carroll, a journalist on consumer finance and author of Walk Away From Debt for a Better Future. When freed from a mortgage payment, people’s first purchases tend to be necessities, such as socks and underwear, he says.

Homeowners have trimmed interest payments alone by 11% — or $67 billion a year — from the peak in 2008, according to the Bureau of Economic Analysis (BEA). The savings come equally from grabbing lower interest rates and reducing what’s owed by paying down principal or defaulting on loans.

This is another positive byproduct of the real estate bust. Home prices keep coming down, and more and more Americans are underwater on their mortgages. So many of them are walking away. Homeowners with jobs and good credit are taking advantage of low mortgage rates to refinance and lower their payments.

This results in more disposable income, so Americans can spend more on typical consumer products.

Tactics for a frugal lifestyle

If you like nice things, it can be difficult to lead a frugal lifestyle – unless you’re willing to work at it! The key is being smart and creative and doing the leg work.

Here’s a great article on tactics for finding incredible bargains for luxury or designer goods. The author likes watches, so he digs around on the Internet for deals:

I Love Movado Watches

Anyone who knows me knows that I love Movado watches and will rarely, if ever, wear anything else. At a $30,000-a-year salary, I certainly can’t afford to shell out $1,000 or $2,000 on a watch. So I had to find a new source. I began scouring Craigslist, eBay, and pawn shops for good deals on watches. I found three Movado watches that were used and paid less than $500 total for all three of them. I recently sold one of these watches on eBay for $600. I now wear watches valued at more than $800 each, and I basically paid nothing for them.

Give it a try!

Collapsing home prices are good for the young

Robert Samuelson is usually bringing bad news. He’s a respected economist, but nobody will accuse him of being an optimist. In fact, he’s very bearish on our fiscal future and he believes that life will be more difficult for the next generation of Americans given our massive debt and the inevitable need for higher taxes or cuts in benefits like Medicare and Social Security.

But he sees a silver lining with the collapse of housing prices. It’s terrible for anyone who bought a home in the past decade, but it’s good news for young people who home to buy a home some day.

But housing’s troubles may have a silver lining. If you’re a homeowner, the steep fall in prices is calamitous. But if you’re a future buyer, it’s a godsend. What we’re seeing is a massive wealth transfer from today’s older homeowners to tomorrow’s younger homeowners. From year-end 2006 to 2010, housing values fell $6.3 trillion, reports the Federal Reserve. Assuming there’s no sharp rebound in prices — a good bet — that’s $6.3 trillion the young won’t pay.

Up to a point, the lower home prices merely deflate the artificial “bubble.” But there’s evidence that the declines transcend that. The National Association of Realtors routinely publishes a housing “affordability” index, which judges the ability of median families to buy the median-price home at prevailing interest rates. By this measure, existing homes are the most affordable since the index started in 1970.

Young buyers “will be able to enter the housing market at bargain prices,” argues NAR economist Lawrence Yun. When home prices again rise, increases will parallel income gains, meaning that the relative burden of housing costs will remain roughly stable, Yun says. He expects only modest increases in interest rates. (A rise of one percentage point — say, from 5 percent to 6 percent — on a $150,000 mortgage boosts the monthly payment about $95.)

The important thing for young people, however, is learning to avoid credit card debt. If they don’t learn this lesson, lower housing prices won’t matter much as they wont be able to afford a mortgage payment if they’re loaded up with credit card payments.

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