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Book report:  The Two-Income Trap
Old 04-01-2005, 07:21 AM   #1
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Book report:  The Two-Income Trap

This is a scary one. Rising income, looser loans, and inflated real estate are stampeding millions into bankruptcy.

Elizabeth Warren is a Harvard law professor who compared over 2000 recent bankruptcy surveys to 1980s studies. (TH, I suspect that she's objective, or at least not funded by biased sources. She covers this subject in other books as well.) In a study that's heavily documented with supporting data & analysis, she found that the #1 predictor of bankruptcy was having kids.

The logic is counter-intuitive. She claims that more women than ever are entering the workplace (a good thing) and raising American's incomes (another good thing). Starting a family translates to finding a home near a good school (whatever that is), so millions of two-income families have fueled a nationwide bidding war that's driven home prices higher than a one-income family can afford. (There's no salvation for them unless they join the two-income ranks.)

Luckily for the two-income families, they can afford it. Before the 1970s banks used to ignore the spouse's earnings in the misguided belief that they'd drop out of the workplace when they started families. Lending criteria were also much tougher, so credit was tighter.

But fair-credit legislation has ended that gender discrimination and one spouse's income counts just as much as the other's. (Whether it'll continue for the duration of the mortgage is irrelevant to the bank.) Fueled by easy credit (more on that later) the family joins the bidding war to put as much as 45% of their dual income toward their home expenses. Note that this amount might exceed one wage-earner's income and that the mortgage is non-discretionary.

Eventually chaos strikes and one of the couple loses their job. Because the mortgage is a non-discretionary expense, it quickly sucks down all cash reserves and becomes delinquent. The bank offers additional equity loans and "debt consolidation". Credit-card companies note the late mortgage payments and raise their own interest rates (legally). As additional charges & penalties pile on, bankruptcy is the best solution to avoid foreclosure.

Ironically, single-income families with frivolous spending habits are much less likely to declare bankruptcy. If one spouse loses their job, the other can usually enter the workplace. Both can cut back on their discretionary (wasteful) spending. Unlike the two-income family, disaster is easily averted.

Lenders used to be constrained by state usury laws until 1970s-80s federal legislation (and loopholes) removed those limits. As home prices took off, banks discovered the subprime lending market. Astute analysts could make crappy loans and triple their default rates while income soared on penalties & fee income. Quickly rising home values enabled foreclosures to stay above the mortgage balances so banks were happy to become temporary homeowners. Forget the 750+ FICO scores-- banks make more money lending to the sub-500 crowd. In fact, bankruptcy filers received a median of 30 unsolicited credit-card and home-equity offers when their filings were recorded (public knowledge).

So a two-income family loses the safety net of the stay-at-home spouse. It's not over-consumption (unless you put a home mortgage in that category). It's not immoral debtors. It's not going to be solved by tougher bankruptcy laws. It's just well-intentioned spending that turns out to be highly leveraged to the slightest drop in income.

Don't even think about the odds for single parents. And it's not caused by deadbeat child-support payments, either.

Warren has no easy solutions. She recommends holding mortgage debt within one income, which may mean saving for many more years to chase a 20% down payment in a rising market. Insurance is another option, especially disability.

She also suggests legislative solutions that might not work, such as interest-rate caps (tied to the CPI) and an end to predatory lending. She claims that public pre-school funding and school vouchers would end the spending frenzy to get your toddlers & kids into the "right" programs.

I could fill another two posts with statistics & quotes. Instead I recommend borrowing from the library, especially if you have adult children embarking upon this bidding war. It's a compelling read.
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Re: Book report: *The Two-Income Trap
Old 04-01-2005, 07:28 AM   #2
 
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Re: Book report: *The Two-Income Trap

I've seen her interviewed by Charlie Rose. She seems to be right on the money. There is no slack in this economy, and to me it looks like a house of cards.

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Re: Book report:  The Two-Income Trap
Old 04-01-2005, 07:34 AM   #3
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Re: Book report:  The Two-Income Trap

Thanks for posting this, so many pre-conceived notions wither under the light of day. The latest bankruptcy bill in congress painted a false picture of the face of debtors. At this point, why don't we go back to debtor's prison and be done with it!

My wife and I made having the house payment payable by one income a priority, they qualified us for nearly twice our purchase price. Insanity.
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Re: Book report: *The Two-Income Trap
Old 04-01-2005, 08:06 AM   #4
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Re: Book report: *The Two-Income Trap

Sounds like a book every Gen-X person should read. * It sounds like common sense, but unfortunately, many people seem to have lost just that.

Just paid off the car loan yesterday! Our mortgage is scheduled to be paid off in just a few years, and is below 10% of gross earnings, anyway.
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Re: Book report: *The Two-Income Trap
Old 04-01-2005, 08:25 AM   #5
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Re: Book report: *The Two-Income Trap

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The latest bankruptcy bill in congress painted a false picture of the face of debtors. *At this point, why don't we go back to debtor's prison and be done with it!
The new change is crazyness. The whole point of high interest credit cards is that it's unsecured debt. Do you think CC interest rates will drop with the advent of this law? I doubt it... it's simply a give away to the credit companies.
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Re: Book report: *The Two-Income Trap
Old 04-01-2005, 10:13 AM   #6
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Re: Book report: *The Two-Income Trap

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Starting a family translates to finding a home near a good school (whatever that is), so millions of two-income families have fueled a nationwide bidding war that's driven home prices higher than a one-income family can afford.
In many areas, good schools are nothing more than schools where your kids will less likely be killed, assaulted, or subjected to the corrosive effects of gang-based coercion and decidedly non-middle class ideas.

Not a lot to ask.

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Re: Book report:  The Two-Income Trap
Old 04-01-2005, 11:08 AM   #7
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Re: Book report:  The Two-Income Trap

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I suspect that she's objective, or at least not funded by biased sources.
I had seen her study on "medical bankruptcies", but not this one. I'll look for it later. I do know that at least some of her funding and promotions have been via groups that were against the recent bankruptcy legislation.

On the whole, its a reasonable thesis. I know a lot of people, almost all of them are paycheck to paycheck paying off bills out the wazoo. A lot of them have opened HELOC's to take up the slack in the huge increase in their homes valuations and then blown the money on toys. An injury, some turn of events, a job loss, long term downturn in the economy...any one of a number of probable catalysts could create one heck of a big mess.

I dont know how or why people get themselves into these situations, but it appears to be more the norm than an outlyer.

Well, once again, if and when the doo-doo hits the air circulation unit, we of all people will be best attuned to dealing with the result...most of us have little debt, plenty of liquid assets and the right mindset...and no jobs to lose!!
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Re: Book report: *The Two-Income Trap
Old 04-02-2005, 01:15 AM   #8
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Re: Book report: *The Two-Income Trap

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Well, once again, if and when the doo-doo hits the air circulation unit, we of all people will be best attuned to dealing with the result...most of us have little debt, plenty of liquid assets and the right mindset...and no jobs to lose!!
th
As you, I don't have a crystal ball about the economic future of this country, "if and when", although I'm pretty much an optomist.
The mindset is the key, the income property, stock, bond, land bought for development 10 years ago and now ready to subdivide, etc which leads to FI means Freedom. And we just have to place Freedom higher on the list than the new Audi/Caddy/6000 sq. ft. home/etc.
From my readings on this site, the people here get it.

Just wish all of my kids got it too!

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Re: Book report: *The Two-Income Trap
Old 04-02-2005, 10:05 AM   #9
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Re: Book report: *The Two-Income Trap

Anyone see the Ben Stein segment on Wall Street Week on PBS last night? Here was a couple with >$100K income and over $100K in credit card debt in addition to a $225K mortgage. They are paying $3300/ month in interest payments alone, and it's hard to imagine how they'll ever dig themselves out of that hole. People have an amazing sense of entitlement, as in, I deserve these fancy home appliances, new cars, etc. that I am putting on credit.

IMHO, it doesn't really matter if it's one income or two, people like this just don't get it that owning all that stuff means that the creditors own them. I felt a little sorry for them, and hope their marriage makes it.
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Re: Book report: *The Two-Income Trap
Old 04-02-2005, 01:56 PM   #10
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Re: Book report: *The Two-Income Trap

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People have an amazing sense of entitlement, as in, I deserve these fancy home appliances, new cars, etc. that I am putting on credit. *
The ones with the real sense of entitlement are Americans. We feel that the world owes us nice homes, nice cars, and nice well paying jobs simply because of who we are. With increasing globalization, the gig is almost up. Will we live to see it in our lifetimes? I believe so.
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Re: Book report: *The Two-Income Trap
Old 04-02-2005, 03:13 PM   #11
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Re: Book report: *The Two-Income Trap

Pay off those mortgages!

Quit refinancing down there!
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Re: Book report:  The Two-Income Trap
Old 04-02-2005, 05:32 PM   #12
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Re: Book report:  The Two-Income Trap

You know, having not read it, I can't be sure, but from the reviews on Amazon, it seems this may be like other books I read. Good points, but they could have said it in a ten page pamphlet. At this point I don't need to read it.....
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Re: Book report: *The Two-Income Trap
Old 04-02-2005, 06:02 PM   #13
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Re: Book report: *The Two-Income Trap

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At this point I don't need to read it.....
Whatever you decide, but I think making that decision from the Amazon reviews is like skipping the year's top Oscar-winning movie because Roger Ebert has told you about it...

I read a lot of books, and this one hit like a 2x4 to the back of the head. I'm not going to try to describe the impact of the statistics coupled with the individual stories. *It's completely changed the way I think of bankruptcy filers.
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Re: Book report:  The Two-Income Trap
Old 04-02-2005, 09:03 PM   #14
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Re: Book report:  The Two-Income Trap

I'll keep it in my cart then.

first I have to read 4 pillars, money or life, and a coupel others I have on order/being shipped! I'm definitely behind on my reading. I'm sure it's a good read, I just meant I think I already know/agree with it's conclusions.
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Re: Book report: *The Two-Income Trap
Old 04-03-2005, 03:31 AM   #15
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Re: Book report: *The Two-Income Trap

Quickies:

"children being a predictor of bankruptcy"........I never
thought much about it, but it makes sense to me.
I love mine and am glad I had 'em. Expensive little
monkeys though, esp. when you indulge them like I did.

Lay off the credit card companies. They are a business
and there is lots of competition there. If they can talk
the morons in Congress into passing favorable
legislation, then they have done a good job. Kudos
to them!

I have no sympathy for people who get into the
"earn/borrow/ spend" trap and can't get out. The world is
full of risks, choices, temptations. People need to take
more responsibility for their own actions, instead
of going on TV wailing "Oh poor me!" (EOR)

JG

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Re: Book report:  The Two-Income Trap
Old 04-03-2005, 06:59 AM   #16
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Re: Book report:  The Two-Income Trap

As Pogo said, " I have met the enemy, and he is us."

With the exception of mortgages and cars, I have borrowed nothing since the 60s. I have not lived from paycheck to paycheck since then, either. DW has worked, but only sporatically, and BTW, when the kids were little, she stayed home. I use a credit card, but pay off monthly. It serves as conveinence and a source of airline miles.

It's very very simple. Pay as you go. LBYM. If the banking/credit card industry needed me, they'd go broke. Oh, and I bought two new vehicles in my lifetime. I had a 1983 GMC truck, which I kept for 17 years, and a 1987 Taurus, which I kept for 16 years. I hated to get rid of either one. I have secondhand vehicles now and won't buy new again, ever.

This book is an attempt, as in other areas, to blame everyone, but yourself. Life is a series of choices, and if you choose to buy it, you can damn well choose to pay for it. May I offer another humble opinion. Anyone, other than a zillionaire, paying $3300 per month interest for other than business needs, is an idiot.

The U.S. consumer-driven economy needs suckers. Just don't be one.
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Re: Book report:  The Two-Income Trap
Old 04-03-2005, 08:02 AM   #17
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Re: Book report:  The Two-Income Trap

A lot of my friends/coworkers are in this situation, lamenting their "poor luck" and always under a lot of stress. Meanwhile they have houses twice as big and drive expiditions etc. But I think I'm starting to make some of them think. They notice I'm the only one of them that never stresses, and they are always shocked when I say, "why, I don't know if this is payday." I've "converted" one friend six months ago(he was on the verge of it anyway), and he too is now showing a lot less stress. Creating a bit of a buzz, we'll see if anyone skips their bi-annual SUV upgrade, though!
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Re: Book report: *The Two-Income Trap
Old 04-03-2005, 01:00 PM   #18
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Re: Book report: *The Two-Income Trap

I do have SOME sypmathy for struggling single parents, or families trying to make ends meet without the training, education, intellegence or opportunities to earn enough for basic needs.

My sympathy rapidly disappears when I see that they "own" (or are paying credit card interest rates for the pleasure of using) $3,000 flat screen tv's, brand new SUV's, boats, toys, etc. etc.

I don't know how many times I've heard people say, "Wow, I qualified for XXX mortgage." Just because banks are willing to loan you money doesn't mean you HAVE TO borrow it. Then layer on a couple maxed out credit cards besides. Then whine and complain that you never have enough money, when it's all going to debt service...

Why has LBYM become an incomprehensible concept to most Americans?

How is it that supposedly intelligent people get themselves into this??

oops. EOR.

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Re: Book report:  The Two-Income Trap
Old 04-03-2005, 01:07 PM   #19
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Re: Book report:  The Two-Income Trap

Because we're programmed to buy stuff and be measured by what we own and how much of it we own. Blame advertising.
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Re: Book report: *The Two-Income Trap
Old 04-04-2005, 11:09 AM   #20
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Re: Book report: *The Two-Income Trap

I feel sorry for two-income wage earner people that need a book to tell them not to spend 45% of their dual income toward their home expenses. * Like... duh!

The figures ive seen are 28% of income max if you have modest additional debt, and 36% of income max if you have no other debt. * My wife and I (we both work) are at about 15% (but on a 30year mortgage).
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