Going Broke on $200,000 a Year: Step by Step Process of Going Down with a High Salary.

You may have noticed that gas prices have gone up recently. I’m just taking a wild guess that you’ve heard of this. For those of us in commuting urban areas we are all too familiar with fuel prices. Gas prices always go up during this time of the year right before the summer driving season. The only difference this time is prices are going up at unprecedented speed and this time, high energy prices might be here for sometime. Most would think that during economic downturns such as the one we are in, you would expect to see falling prices running in line with falling demand or people simply adjusting to a different lifestyle. This isn’t the case.  Housing prices are tanking but you need to remember they were up in the heavens and made no fundamental sense - prices are now only coming down to reality.  Yet other cost of living items are going up and going up fast. If you are planning on sending your kids to the top public institution here in California, the University of California you can except to pay more this upcoming year : “Despite angry protests from students that led to 16 arrests at UCLA, California’s two public universities took actions Wednesday to charge higher fees for education in the fall. The trustees of the Cal State University system voted to raise annual undergraduate student fees 10%, or $276. A key committee of the University of California regents approved a 7.4%, or $490, raise per year for undergraduates that is expected to be endorsed by the full Board of Regents today.” Most of the higher paying jobs in our country such as those in the engineering field require you to have a bachelor’s degree. This isn’t like a high school grad going off to become a mortgage broker and pulling in six-figures just by stuffing people into toxic mortgage products that are now showing their after-effects on our economy. That industry is taking its last few gasps. What happened in the travel industry will happen in housing. Websites like Zillow and Redfin make it fool proof in finding a home and not going with the traditional 6 percent commission. In fact, Zillow now offers an anonymous mortgage quote marketplace were you can remain completely anonymous and let lenders compete for your service. This isn’t like other mortgage online shops where they take all your information and sell it out to marketers; here you have the opportunity to say “I make $150,000, my credit score is 740, and I’m looking for a $500,000 loan. What can you do for me?” Why would you go back to paying for a service that brings so little?  And this coming from someone that was in the industry. You can also use Google Maps with many widgets to find excellent schools, view neighborhoods, and you have a much better sense of what you are looking for. You can pay a real estate attorney a flat fee to review loan docs and the contract, pay an appraiser and title company to review the transaction, throw it in escrow and you are done. Clearly anyone that thinks the days of high YSPs is going to come back is delusional. And why is that? Let me show you a hypothetical case of a colleague that was in the industry that was pulling in $200,000 a year during the good times. On paper and visually he was rich but in reality he was a walking debt zombie. He is flat broke now. Actually, a homeless person is richer since they have zero net worth where he actually had a negative net worth and had to declare bankruptcy. You’ll see why in a few seconds. In regards to salary, car, and other payments I have a pretty good idea how much he was pulling in since he would gladly show me and tell me. The other items I will fill in (food, etc) based on his typical behavior. Going Broke on $200,000 First a little information on this guy. I’m sure many of you know one or two of these kinds of people. Generally a good guy but absolutely no idea on how to become wealthy. Whenever I would mention macroeconomic policies he would simply glaze over; he was in for the thrill of making fast money and living a fast life. He had what would seem to be everything. A nice BMW which was leased, he ended up drinking his own Kool-Aid and purchasing a place out in the OC for $700,000 zero down of course on a 2/28 mortgage, and was going out all the time charging everything up. You also need to remember that with a high income and especially being on commission, you are taxed to the max. $200,000 dwindles quickly even before you see your paycheck. So let us now look at the reconstructed budget: Anyone not from the OC really cannot relate to this so let us go into this a bit further. There is a hidden society of people that seem to fit to a tee the new idea of the brand new rich. That is, these folks seem to unconsciously realize that being rich means driving a luxury foreign car, eating out at certain restaurants, and spending a lot of money on trendy clothes. Your budget can be radically depleted and there are plenty of shopping centers all the willing to take your money (hi Fashion Island!). On the outside, he would seem to be living large but knowing his budget, I knew this guy had zero in any retirement accounts and all of it was going out as quickly as it came in. He bought a place zero down in the OC for $700,000 on a pathetic 2/28 mortgage. It was okay during the first 2 years but once his rate reset that is when all hell broke loose and his lack of financial knowledge became apparent. The rate on the budget is the adjusted rate when it reset and the mortgage payment reflects that. You’ll also notice the $600 for the BMW lease which of course also carriers higher fuel costs since it recommended 91 octane and also had higher insurance premiums since he was a younger guy. Insurance companies do not like young single guys in fast foreign cars. He would eat out all the time and blew money on lunches practically 2 or 3 times a week. Lunches went from $7 from your Jack in the Box quick lunch to $50 at a sit down restaurant with drinks and tips. Once his rate reset, it didn’t take long for him to realize things were going to go down fast. Keep in mind this is the peak income from the good times. He also got smacked down once the mortgage market here in the OC went into the abyss. So you have 2 things hitting you squarely in the face: 1. First, your job is dependent on real estate selling and moving fast and with it shutting down and wholesaling collapsing, he was left with half his income in one year. 2. The rate on his home was a time bomb. For two years the balance did nothing except sit. Once the rate reset you had a lower income and a ridiculously higher housing payment.  Plus your home was valued at $100,000 less than what you paid for. It was game over pretty quickly. Even if he stayed earning $200,000 a year he was running budget deficits. He tried living off credit cards for sometime but he had to throw in the towel. There was no way he was going to sell the house even remotely at that price and his income only kept decreasing as the months went by. When all was said and done, this guy was left with nothing and a bankruptcy. I would have a little more sympathy for him until he told me, “it will get better. This is only a temporary drop.” I felt like telling him, “no it won’t amigo and I would show you my site and point you to a few hundred essays showing why your industry was a once in a lifetime boom but that wouldn’t change your attitude.” Things will never go back to how they were.  Get used to high energy costs. And when people made $200,000+ a year for many years and have nothing to show for it, you know why this bubble had to burst.  Now the new GSE bills are requiring brokers to have criminal background checks and also licensing.  It was fun while it lasted. Looks like colleges are going to get that 10 percent more since many are going to need to go back and retool their knowledge base. Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information Share This Related Posts: ■ Zillowed, Disappearing Inventory, and Free Housing: 3 Major Psychological Reasons Why Housing is Still Declining and Living Rent and Mortgage Free. ■ Mission Accomplished: 3 Housing Issues: Multiple Bottoms, Declining Dollar, and More Sub-prime and Alt-A Defaults. ■ Hope Now Alliance: Not to be confused with Apocalypse Now Mortgages. ■ Are you a Debt Slave? ■ Mortgage Equity Withdrawal Syndrome. The 3rd Rail of the Housing Led Boom.