The United States Economy - The Ferrari Effect

07 F430F1 Spider, Russo Corsa, Beige Lthr, 721 mi, $339,995’07 F430F1 Spider, Russo Corsa, Beige Lthr, 1,321mi, $324,995’06 F430F1 Spider, Nero, Cuoioe Lthr, 4,545mi, $314,995’05 F430F1 Spider, Grigio Silverstone, Girgio Lthr, 3,444mi, $289,995

These Ferrari ads are straight from yesterday’s business section. What can be gleaned from this, vis-à-vis the U.S. economy? Well, when you consider the base price of a 2007 Ferrari F430F1 Spider is $211,000 before any (extremely high priced) options are added, it means that there is tremendous demand for a car that costs upwards of a quarter of a million dollars. Now the price of admission to enjoy the wonderful shriek of a Ferrari power plant at full boil has never been cheap, but this makes that $1,995 2nd sticker your local Mitsubishi dealer has on a new Evo X look positively tame.

This indicates that certain segments of the U.S. economy are humming along nicely indeed. I call this the “Ferrari effect”. When there is such pent-up demand for extremely expensive goods, it indicates that there is an extreme amount of wealth floating around, and those that hold it aren’t afraid to spend it. That propensity for the wealthy to continue their unabashed spending on luxury goods is a great thing for the rest of the economy.

Ferrari must agree that those that have money will continue to spend it, as they just announced that carbon ceramic brakes, formerly a (are you firmly seated) $16,800 option on the F430, will be made standard equipment for 2008. Rest assured, they will not just give those beautiful discs of carbon away, a large portion of the $16,800 will be rolled into the base price of this year’s cars.
It is really quite astounding the level of demand of such an expensive vehicle. A client of mine recently took a journey to the local Ferrari dealer to buy Ferrari’s latest masterpiece, the 12 cylinder 599. The 599 lists for over $250,000, but that hasn’t discouraged a lengthy queue of buyers from forming. My client actually returned from the dealership with a 2005 F430F1 that he paid who knows how much for, after putting down the requisite deposit to secure his place in line for the 599. Sometime in the next 24 – 30 months, he’ll actually take deliver of it.
Something else that indicates the propensity of those that have money to spend it when they really want something
(As an aside, many of the very wealthy people I’ve known, and I've known quite a few (never been one of them, though), are extremely cheap. They won’t spend one extra penny if they don’t see the value in it. It’s an extremely common trait in those that have generated their own wealth. From that you can draw your own conclusions. Consider this, however; the major cause of the massive level of credit card debt exhibited by Americans today is a pattern of consistently spending beyond one’s means. Anecdotal evidence from those people I’ve seen that have accumulated a large amount of wealth do not have that trait.)
is the price structure of luxury vehicles, such as Porsches and Ferraris. Many would expect cars in this price stratum to have a very high level of standard equipment. Actually quite the opposite is true. Many things you’d expect to be standard are actually options, and very expensive options at that. For example, consider the Bose sound system (including 3-way component front door speakers with 10-inch subwoofers) on a new Infiniti G35, by all accounts a very nice car, is a $2,500. For good measure, Infiniti has also thrown in a power sliding tinted glass moonroof, heated front seats, a power tilt and telescoping steering column, automatic anti-glare rearview mirror with HomeLink® Universal Transceiver and compass, heated mirrors and a Bluetooth phone interface.
On the Ferrari F430, the Bose sound system option, all by itself, never mind such niceties as a Bluetooth interface, is a robust $7,250. Ouch! So, maybe you really don’t care all that much about a better sound system. You’d rather listen to the engine anyway. Well, you’d think a car that retails for as much as a house in Cleveland would at least include power seats, but no. In the Ferrari they will set you back an additional $2,653. The ones in my Jeep were only ¼ that much.
The point is that the Ferrari effect is still alive and well in many areas, although the economy looks like it’s poised for a slowdown. When the Ferrari effect goes away, we’re in for some rough sailing ahead. So, take a look at the business section. When the ads for overpriced Ferrari’s disappear, you’ll know we’re really in a lot of trouble.
Have a great, Debt Free weekend.

- Debt to Income Ratio – How to Calculate Your Debt to Income and Why

Your debt to income ratio is one your most important financial statistics. If you've ever bought a home you'll remember that was one of the pieces of financial information your lender wanted. If they were concerned about getting you the best mortgage, they showed you how you could improve it.

Just how do you calculate debt to income ratios anyway? For that matter, after you calculated it, what is an acceptable debt to income ratio? Calculating your debt to income ratio is fairly simple, You merely divide your monthly gross income by your outstanding debt. To calculate the ratio, you have to take your annual gross income and divide by twelve. I know, you were told there would be no math, but it's pretty darn simple, really. This calculation gives you your average monthly gross income. Here's where you wish you'd claimed all those tips and side jobs you've been gloating about. If you haven't reported them, you'll have a harder time getting your lender to believe you really have that level of income.
After you figure out your average monthly income, you'll need to look at two different percentages. If you are going to get a conventional mortgage, you'll use 28% and 36%. If you are getting an FHA or VA mortgage, you'll use slightly higher percentages; 29% and 41%. What do those percentages mean? The first is the percentage of your gross income you can use for housing expenses. That will include your house payment, all your housing associated insurance, and interest. These expenses are abbreviated PITI, for Principle, Interest, Taxes, and Insurance.
If, for example, your W-2 income was $55,291 last year, you'd divide that by 12. The result of that calculation is your average monthly income: $4,607.58. Depending upon the type of mortgage you'll be getting, that will give you the amount of house payment you can be approved for, all else being equal. In this example, you'd be able to afford a house payment of $4,607.58 x .28 for a conforming mortgage. $4,607.58 x .28 = $1,290.12. As you can see, that's not too much house in many metro areas. For example that house payment will allow you to technically afford, at this week's average 30 year fixed mortgage rate of 5.52%, a mortgage with a balance after your down payment of $227,000. You might want to avoid the mistake made by too many people leading up to our recent credit problems, and finance less than that.
Wait a minute, what about that second percentage? What does it mean? That 36% or 41% is the amount of house you can afford according to the standard debt to income calculation, after you include all your other recurring debt. This is where you include your credit card bills, car payments and store charge card payments. This is why your loan officer is telling you to pay down some of this type of debt. You can qualify for a larger mortgage if your recurring debt is lower.
Let's look at the above example, but assume you have only one car, a 2005 Honda Accord LX. That's a nice, sensible, family sedan with a price when it was new of about $22,000, depending upon the option level. Say out the door, with taxes an license, you're into it for $24,000. If you financed this car when it was new, and got 4.9% financing, your monthly payments would be about $450 per month. Let's also assume that you have the national average credit card debt of about $8,500, depending on whose statistics you look at. If you are also paying the national average gold card interest rate of 11.73%, your monthly minimum credit card payment amounts to somewhere around $260. (You can take heart in knowing that if you make only the minimum monthly payment on your cards that it will take only about 15 years to pay off the $8,500 and you'll pay about $4,000 in interest on the $8,500 principle amount!).
If you include your car payment of $450, and your credit card payment of $260, your recurring monthly expenses are $710. $710 added to $1,290.12 gives you a nice, round $2,000. Your mortgage lender will let you have 36% of your monthly gross income be consumed by PITI and recurring monthly expenses. Your current gross monthly income in this example is $4,607.58. 36% of your monthly gross is only $1,658. In this example, you're way too high after adding in your monthly expenses, to qualify for your house. Now you see why you see so many used car ads that read “Must sell, buying house”. With this level of monthly recurring expenses, you can only qualify for a house that's $948/ month. You'll be staying above the garage.

Your Other Largest Household Expense

A few days a go I did a couple of posts on lowering household expenses and how you can attack some of the largest expense to save yourself some money. In case you missed it, here are the largest expense categories of the typical American family from 2005, courtesy of US Department of Labor statistics.

1 - Shelter and associated expenses $15,167 (32.7%)

2 – Transportation $ 8,344 (18.0%)

3 – Food $ 5,931 (12.8%)

4 – Pensions and Social Security $ 4,823 (10.4%)

5 – Health care $ 2,664 ( 5.7%)

6 – Entertainment $ 2,388 ( 5.1%)

7 – Clothing $ 1,886 ( 4.1%)

Something's missing. What is it? Give up. Well for many people it is the largest expense category, for most of the rest, its in the top 3, yet for many people it gets completely overlooked much of the time. What is this major expense? Well, of course, it is taxes. You may just look at you paycheck to see what is taken out every month, but you'd be woefully underestimating how much the “Average American” pays in taxes every year.
Many taxes are hidden. Think about how much is really paid. There is employer matching of Social Security. You think the employer just takes that straight out of their bottom line? Guess again; they pass it on to their customers (you and me). There are gas, fuel and utility taxes, at the local, state and federal levels. Property taxes, which are borne by both renter and property owners. Sales taxes, B&O taxes on businesses, state income taxes, and capital gains taxes; it boggles the mind! There are just so many taxes. All the taxes paid by business are passed on to the consumer in some way or another, so don't be fooled into thinking that this tax or that doesn't, in some way, affect you. They affect all of us to some extent.
The upshot of all this is that there a about a million different tax reform organization, foundations and groups out there. Together they give some kind of picture about how much is paid by the “Average American” in taxes every year. The Tax Foundation has their Tax Freedom Day, the day when you stop working for the government and begin to line your own pocket. In 2007, it was April 30th. That works out to 32.8%. Hey, that's expense number1! Even if you give our taxing authorities the benefit of the doubt and this number is 20% too high, it would still come in at 26%, and fall neatly into slot number 2.
That's why I tend to rail a bit about taxes. The other expenses you can do something about. You can control taxes too, albeit to a lesser extent. but it requires much more effort and planning, in addition to a trip to your local polling place (or post office for a growing number of communities, where absentee is the new voting method of choice). I wouldn't care so much. After all the government provides many essential services that we desperately need, and should pay for. The problem is that they also provide many that we don't and shouldn't, in addition to being the model of inefficiency in many of the things they do.
Have a great, Debt Free weekend.

American Fortune

Americans are unbelievably fortunate. That point was driven home while in the car, listening to Mike and Mike in the Morning on ESPN Radio this morning. They were interviewing basketball coach Ron Hunter of Indiana University-Purdue University Indianapolis (IUPUI). Coach Hunter is working with a charity called Samaritan's Feet, which is dedicated to providing shoes for children around the world who have never owned a pair of shoes. Stop and think about for just a second, please. We are so fortunate, and take so many things for granted, while there are kids who have never known the comfort of walking in a pair of shoes, something Americans (and citizens of just about every other developed country) take for granted.
The coach is dedicating his game tonight, which he'll coach sans footwear, to raise awareness for the charity, with the goal of getting 40,000 pairs of shoes, which he will personally deliver to the kids. Coach Hunter definitely has a knack for publicity, because his campaign appears to be an unqualified success. A Converse executive even appeared on the show to donate 15,000 pairs. LA Gear had earlier donated over 5,000 pairs. If you'd like to help out the kids on this one

Where the Real Superbowl Action Is - It's Not on the Field

$9.07 Billion. That's a positively huge amount of money. What's it for? Well, you could buy 2 Nimitz class nuclear aircraft carriers and have enough left over for 4,250 new Cessna 172 Skyhawks, complete with Garmin GPS, to fly off of them. I don't think you could fit 2,100 Cessnas on each one, but you get the point. In any case, that's about 10% of all such aircraft produced since production began in 1955.
According to cost figures from a University of Kentucky study, you could build your own, private 67 mile long Interstate Highway. Maybe you'd like to do something a bit more charitable. You could buy 30 nice, new, 250 bed, suburban hospital facilities, and locate them in the communities of your choice. You like cars? Well, you could have one hell of a car collection with that much money. In fact you could pick up a couple of motorcycles too. That $9.07 billion would buy just about every vehicle produced by the Honda Motor Corp. for the first 3 quarters of 2007.
What are people spending so much money on? Well, betting on the Superbowl, of course. About $90.7 million was spent on legal betting on last year's Superbowl in Nevada sports books alone. By some estimates, this accounts for roughly 1% of all action seen on the game. Simple math reveals that people drop about $9.07 billion betting on the big game. Wow! How much of that is illegal gambling? The majority of it, although much of this illegal money changes hands in office pools throughout America, and is wagered by people who seldom bet on much else. Gambling has been legalized in many communities throughout the country. The benefit, or lack thereof, of such gaming is a subject for another discussion, however only Nevada has legalized sports betting.
Since Nevada's sports books raked in only $90.7 million, the remainder is illegal. I never knew there were so many crooks in this country. The FBI estimates there may be as much as (are you firmly seated?) $380 Billion bet on sports every year in this country alone. A 10% tax on that would take care of a few things, you can be sure. Cure for cancer anyone? Mars mission? Give it all away to cure poverty? Hold on, are you insane? Giving money away on a regular basis never cures poverty, it only makes people dependent, and in most cases, less likely to ever become self sufficient. Sadly, that huge amount of money would probably only swell state and federal coffers, get the government beneficiaries of such largess accustomed to sucking at yet one more teat, and eventually be frittered away, leaving precious little benefit for you and me.
Have a great weekend, and keep trying to get Debt Free.