Consumer debt is not your friend

Seth Godin
05/05/2010

Here's a simple MBA lesson: borrow money to buy things that go up in value. Borrow money if it improves your productivity and makes you more money. Leverage multiplies the power of your business because with leverage, every dollar you make in profit is multiplied.

That's very different from the consumer version of this lesson: borrow money to buy things that go down in value. This is wrongheaded, short-term and irrational.

A few decades ago, mass marketers had a problem: American consumers had bought all they could buy. It was hard to grow because dispensable income was spoken for. The only way to grow was to steal market share, and that's difficult. Enter consumer debt.

Why fight for a bigger piece of pie when you can make the whole pie bigger, the marketers think. Charge it, they say. Put it on your card. Pay now, why not, it's like it's free, because you don't have to repay it until later. Why buy a Honda for cash when you can buy a Lexus with credit?

One argument is income shifting: you're going to make a lot of money later, so borrow now so you can have a nicer car, etc. Then, when money is worth less to you, you can pay it back. This idea is actually reasonably new--fifty years or so--and it's not borne out by what actually happens. Debt creates stress, stress creates behaviors that don't lead to happiness...

The other argument is that it's been around so long, it's like a trusted friend. Debt seems like fun for a long time, until it's not. And everyone does it. We've been sold very hard on acquisition = happiness, and consumer debt is the engine that permits this. Until it doesn't.

The thing is, debt has become a marketed product in and of itself. It's not a free service or a convenience, it's a massive industry. And that industry works with all the other players in the system to grow, because (at least for now) when they grow, other marketers benefit as well. As soon as you get into serious consumer debt, you work for them, not for you.

It's simple: when the utility of what you want (however you measure it) is less than the cost of the debt, don't buy it.

Go read Dave Ramsey's post: The truth about debt.

Dave has spent his career teaching people a lesson that many marketers are afraid of: debt is expensive, it compounds, it punishes you. Stuff now is rarely better than stuff later, because stuff now costs you forever if you go into debt to purchase it. He's persistent and persuasive.

It takes discipline to fore go pleasure now to avoid a lifetime of pain and fees. Many people, especially when confronted with a blizzard of debt marketing, can't resist.

Resist. Smart people work at keeping their monthly consumer debt burden to zero. Borrow only for things that go up in value. Easy to say, hard to do. Worth it

Neat resource of vintage ads

Type in a few search terms (like Babies and Airplanes) and out pops one of the millions of ads in this incredible database.

Certain to inspire, or possibly just give you fodder for a great presentation.

Neat resource of vintage ads

Type in a few search terms (like Babies and Airplanes) and out pops one of the millions of ads in this incredible database.

Certain to inspire, or possibly just give you fodder for a great presentation.

Cheap Mobile Calls, Even Overseas

By Joanna Stern

http://www.nytimes.com/2010/01/07/technology/personaltech/07basics.html?pagewanted=1&th&emc=th

Recently, my parents returned from Italy with a few bottles of Chianti and $750 in AT&T calling charges. Buon giorno!

Racking up exorbitant mobile charges is easy to do if you are not careful about using your cellphone internationally. AT&T charges 99 cents a minute to use your phone in Italy (rates vary by country), and that is if you pay for the carrier’s international calling plan. If you do not, the charge goes up to $1.29 a minute.

What my parents did not realize was that they could have nearly eliminated those charges if they had set up their (in this case) iPhone and BlackBerry to take advantage of mobile Internet calling services: That $1.29-a-minute charge would have gone down to a much more reasonable 2.4 cents a minute (or nothing at all if they were on a Wi-Fi network).

The Internet has been used to make calls for some time. One of the largest providers of the service, Skype, was founded in 2003 and has more than half a billion user accounts. And while many people gather around the PC to talk to far-flung friends and family, new apps and services can replicate that experience (and that savings) on cellphones.

To transform your mobile phone into a device capable of making cheap international calls, you need to consider a few things. Ideally, you have a smartphone that can access Wi-Fi, like an iPhone or a Droid. Wi-Fi ensures the best call quality, since it’s carried over a high-speed Internet connection rather than through third-generation, or 3G, cellular networks.

But if you don’t have a Wi-Fi-enabled smartphone, you are not out of luck. There are calling services that use local phone numbers rather than wireless data connections to place calls, making them compatible with a wide range of devices. Applications can dial a local access number as if you were placing a regular call; and your call is routed over the Internet at similarly discounted rates.

There are also free calling mobile applications, each with its own layout, feature list and call quality. In my tests of more than six different applications by calling friends in Europe and Africa, these stood out:

SKYPE FOR MOBILE Like the program for Mac and PCs, Skype Mobile lets you make free calls and send instant messages to fellow Skype users. You can also call non-Skype landlines and cellphones using Skype Credit, a fee-based service that charges pennies per minute for international calls.

Skype offers several mobile versions, including Skype for the iPhone and iPod Touch, Skype Lite for Java and Android phones, and Skype for Windows phones.

The application for the iPhone and iPod Touch most closely resembles Skype’s familiar desktop program. Though I could send text-based chat messages to my Skype-using friend in Belgrade over AT&T’s 3G network, I needed to connect the phone to a Wi-Fi network to make a call. (You currently cannot make Skype or other Internet-based calls on the iPhone via AT&T’s 3G network, though that could change soon.) After a simple tap of the call button, I could clearly hear his familiar accent without any noticeable lag or choppiness.

Similarly, a call I made to a friend’s cellphone in Senegal using Skype Credit was crystal clear in sound and connected in only 15 seconds. We chatted for 10 minutes, which cost me only $2.40. That same call on AT&T, even if I signed on to its international calling plan (which costs $4 a month), would have cost $8.80. Without the international calling plan, the fee would have climbed to $27.80.

For those without iPhones or Windows Mobile devices, Skype provides its Skype Lite application. Skype Lite cannot make calls over Wi-Fi or 3G networks, but instead routes calls through a local cellphone number.

It isn’t as complicated as it sounds: when using a MyTouch 3G phone, I selected a Skype contact in London. The application started the phone’s dialer and automatically routed the call to a local number. My British pal came through clear and static-free.

One thing to remember is that while calls made with Skype Lite are local and your carrier won’t exact a long-distance fee, you are technically making a call. So those calls will count against the minutes in your calling plan.

FRING Picking up where Skype Mobile leaves off, Fring provides an even richer experience on more phones. It supports calling over Wi-Fi and 3G on Android and Nokia devices; iPhone 3G calling is on the way. In addition to free calling to Fring members anywhere in the world, the service connects to Skype, Google Talk and MSN Messenger contacts.

After installing the Fring application from the Android Marketplace on Sprint’s HTC Hero, I tapped into my Skype account to call my Belgrade friend over Sprint’s network. Since I didn’t need to be in a Wi-Fi hotspot, I made the call while walking down a noisy New York street.

Unfortunately, because 3G data networks weren’t built for packets of data as fast-moving as a cellphone call, the connection was weak and kept fading in and out. When I was standing still, the call was slightly clearer but like a dialogue between in-studio anchors and on-the-ground news correspondents, there was a noticeable lag in the conversation.

That all disappeared when I connected the Hero to a Wi-Fi network; we talked for five minutes with no interruptions or delay.

If you are a fan of Skype’s desktop video-calling service, you may be wondering when it will be appearing on its mobile app. Fring’s already beaten Skype to the punch on this feature. The company recently updated its iPhone application with one-way video calling. “One-way,” because the iPhone doesn’t have a front-facing camera — so you can see your caller but your caller can’t see you.

TRUPHONE Truphone, which works a bit differently from Skype and Fring, is available for a number of devices including the iPhone, the iPod Touch and Android, Nokia and BlackBerry handsets.

Truphone doesn’t have a 3G calling option, but offers calling over Wi-Fi for Android, Nokia and iPhone handsets. The company offers Truphone Anywhere, a service similar to Skype’s Lite application that routes long-distance calls first over a local number and then via the Internet for lower rates.

Though Truphone permits you to sign into your Skype account and call Skype users, you can also make free calls to other Truphone users. When I called a Truphone friend in London on his cell using a Wi-Fi network, call quality was decent and there was no background hissing.

Blending the functionality of both Fring and Skype, I discovered the true beauty of Truphone when I ventured outside of Wi-Fi territory and was able to automatically call Truphone users and international numbers by using my phone’s own dialing capabilities. Although I needed to buy Truphone credit, the call was routed over a local number and then to Truphone’s network.

What’s the benefit of that, rather than it switching to 3G like Fring? Much better call quality. Just as with Skype Lite, when I dialed my friend in Israel, Truphone called a local New York City number, and connected me to her cell. Her voice was as clear as if she was sitting right next to me.

Clearly, making a choice about which service to use to reduce the cost of international calling will depend heavily on what cellphone you have and whether you have easy access to a Wi-Fi network.

But no matter which option you select, you will definitely save some money. AT&T may have heavily charged my parents one time for their globetrotting calling habits, but with so many new and cheaper options, that won’t happen again.

A wealth of Tax and property related information for the first time home buyer can be found at:

http://www.irs.gov/newsroom/article/0,,id=204671,00.html

Homebuyer Credit Expanded and Extended

The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts.

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

The new law also:

• Authorizes the credit for long-time homeowners buying a replacement principal residence.
• Raises the income limitations for homeowners claiming the credit.

News release 2009-108 has the details, as do two new IRS videos in English and Spanish.

Members of the military, Foreign Service and intelligence community serving outside the U.S. should also be aware of new benefits in the law that apply particularly to them.

Following is general information for first-time homebuyers who settled on a new home on or before Nov. 6, 2009.

For 2008 Home Purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 Home Purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Added Nov. 12, 2009]

For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting an extension of time to file or by filing an amended return. News release 2009-27 has more information on these options.

General Information

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

The credit is claimed using Form 5405, which you file with your original or amended tax return.

Questions and Answers

More information is available in the question and answer section.

Related Items

• IR-2009-83, First-Time Homebuyer Credit Provides Tax Benefits to 1.4 Million Families to Date
• The American Recovery and Reinvestment Act of 2009: Information Center

Cities where homes have lost the most value

Far-flung suburbs particularly hurt by glut of new housing built during boom

By Francesca Levy

http://www.msnbc.msn.com/id/34644840/ns/business-real_estate

Merced, Calif., is a quiet, residential city an easy drive from Yosemite National Park and Pacific Coast beaches. It's also a perfect case study for the aftermath of the housing crisis.

Homes at the median level in Merced have lost 62 percent of their value from the second quarter of 2006, when they peaked at $336,743, the biggest drop anywhere in the country, according to data provided to Forbes by Local Market Monitor, a Cary, N.C.-based real estate research firm. Earlier, home building and buying grew exponentially in Merced, but the metro now suffers from a whopping 16.4 percent unemployment rate, according to the Bureau of Labor Statistics, reflecting a drop-off in building industry jobs and a grim housing market.

Providence, R.I., where values sank the most in the Northeast; Detroit, the hardest-hit market in the Midwest; and Port St. Lucie, Fla., the biggest loser of value in the South, have also suffered from their local market's slide.

It's not news that Las Vegas, where value has dropped 48 percent, Miami (down 38 percent), and Orlando (down 31 percent) saw a burst of homebuilding fueled by bad loans and rampant house flipping between the years of 2002 and 2006, and that those building bubbles subsequently collapsed. But it's the exurban cities just outside of easy commuting distance from the most desirable West Coast and Sunbelt metros where home values have taken the biggest pounding.

In many of these relatively affordable bedroom communities, subprime lending was rampant. As families clamored to buy homes, prices inflated to match their exuberance. But when the mortgage market disintegrated, these outer-fringe cities were left with a glut of new housing, and the value of these once-desired homes took a nosedive. Bay area satellite cities Stockton and Modesto, where home values have dropped 54 percent and 53 percent respectively, appealed to middle-to-low income buyers — and subprime lenders.

“There was such pressure on housing in the Bay Area that people were being pushed to the outskirts, and prices went up a lot there,” says Cynthia Kroll, senior regional economist at the Fisher Center of Real Estate and Urban Economics at the Haas School of Business, University of California Berkeley. “They were areas where a lower-income population was trying to buy homes, and they were the target for subprime loans.”

To find the cities where home values fell the most, Local Market Monitor (LMM) pinpointed 10 Metropolitan Statistical Areas — as defined by the Office of Management of Budget and used by the federal government to collect statistics — in each census-defined region (Northeast, South, Midwest and West) where the Federal Housing Finance Agency's Home Price Index had fallen the most from that market's peak, to the third quarter of 2009. The FHFA index is derived from data on all mortgages bought or backed by Fannie Mae and Freddie Mac.

The numbers show that housing markets at the heart of the boom on the West Coast and in Florida had much farther to fall than in the Midwest and Northeast, where most of the damage to values was done by rising unemployment and deteriorating business environments in the wake of the financial crisis.

On average, markets on the West Coast have lost 21.6 percent in home values since their peaks, and Florida alone lost 31 percent. By contrast, the Northeast lost an average of 8.6 percent and the Midwest only 5.6 percent. To put it another way, Merced, the biggest loser of value in the West, and in the country as a whole, lost 45 percentage points more in value than the biggest loser in the Northeast, and 32 percentage points more than the biggest in the Midwest.

There is also a broad spread in how early the decline began in different cities. Although the national peak in home prices occurred in the second quarter of 2006, according to Case Shiller, individual markets, such as Ann Arbor, Mich., peaked as early as the second quarter of 2005 and as late as the third quarter of 2009 in a number of Texas and Iowa metros. The tide changed during the same quarter in markets scattered around the South and Northeast, proving that cities underwent housing recessions timed as much by local economic factors as the national climate.

“There are timing differences here,” says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School. “There are regions that went into the recession earlier, and those are coming out earlier.”

The cities that lost the most home value in the South are, unsurprisingly, concentrated in the Sunshine State, where exuberant developers went on a construction binge, unfettered by strict zoning restrictions. Port St. Lucie, the city with the greatest value loss in Florida (46.4 percent), and a striking example of the overzealous building in the state, seemed almost to spring up whole during the housing boom. New homes began, in the 1990s, to occupy what had previously been a desolate tract of sand, and prefabricated communities sprang up in earnest as the housing market heated up. Similarly, the retirement and resort communities of Cape Coral, where homes are down 46.4 percent from their peak and Naples, where they're down 44.6 percent once showed seemingly endless promise to builders. Those metros now feel the pain from that era's speculation.

“In Florida, it's not a pretty situation,” says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. “Without strong job growth it will take a significant amount of time to absorb that inventory.”

In the Midwest and Northeast, however, the loss of home values is a slightly different story. Here, the financial pummeling taken by the entire country sent values sinking, but because subprime lending and overbuilding were less prevalent, home prices didn't shoot up as dramatically, and didn't have as far to fall. Most housing woes here were a result of long-building economic distress and a declining manufacturing industry. That is evident nowhere more than in Detroit, where housing prices peaked early, in the second quarter of 2005, and began a dramatic slide in tandem with its sinking auto industry. Home values there are down 31 percent.

By Francesca Levy

http://www.msnbc.msn.com/id/34644840/ns/business-real_estate

Cool site for state by state tax rebates regarding energy saving efforts: Database for State Incentives for Renewables & Efficiency

http://www.dsireusa.org/

For federal credit allowances and guidelines see IRS form 5695 entitled Residential Energy Efficiency Property Credit

http://www.irs.gov/pub/irs-pdf/f5695.pdf

Of course, the gold mine of IRS forms and info can be found at the IRS Forms and Publications page at

http://www.irs.gov/formspubs/index.html

Don't discount the tax credit yet!

Last week, after the Senate gave its final and fully supportive approval on the homebuyer tax credit extension, the House of Representatives voted overwhelmingly to pass the legislation, sending the tax credit to President Obama who's final sign-off on Friday made it official. The $8,000 first-time homebuyer tax credit, which was slated to expire Nov. 30, 2009, will be extended for contracts signed before May 1, 2010 that close before July 1, 2010. First-time buyers, who are in the process of closing now, no longer have to worry about qualifying for the $8,000 tax credit if they do end up closing after the Nov. 30 deadline. The new legislation also increases the income limit for couples with income up to $225,000, a nearly $55,000 increase above the current level. Buyers who already own a home are also now eligible for a tax credit and the purchase of a home. The $6,500 maximum credit will be available to existing homeowners who have lived in their current residence for five consecutive years of the prior eight years. The legislation does set forth several provision including, limiting eligibility for existing homeowners to homes worth $800,000 or less, as well as making both credits available only for primary residences, not second homes or investment properties. The legislation will take effect December 1, 2009 and is not retroactive. The original first-time homebuyer tax credit jump-started the housing market, driving home sales to the highest level in more than two yeas. The National Association REALTORS® reported sales jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September and are 9.2 percent higher than the 5.10 million-unit pace in September 2008. Home Buyer Tax Credit Extended and Expanded Current New Effective Date · January 1, 2009 · December 1, 2009 Deadline · Close on or before November 30, 2009 · Contract signed before May 1, 2010, must close before July 1, 2010 · Members of the uniformed services, foreign services, and intelligence employees who served an extended service of 90 days will have until April 30, 2011 and June 30, 2011. Amount · First-Timers: maximum of $8,000 or 10% of sales price · Prior Owners: $0 · First-Timers: Unchanged · Prior Owners: $6,500 if lived in prior home for at least 5 years of past 8 years Income Limit · Individual: $75,000 · Couple: $150,000 · Individual: $125,000 · Couple: $225,000 Other Restrictions · Home must be primary residence for at least 3 years. If home is sold or buyer moves before 3 years, must re-pay full amount of credit. · Buyer must be at least 18 years old and not classified as a dependent for tax purposes · Home must cost less than $800,000 · New Home must be primary residence for at least 3 years following purchase. If home is sold or buyer moves, before 3 years, must re-pay full amount of credit. Exception for military, foreign services, or intelligence with extended 90 days service overseas. How to claim · If purchased in 2009, by amending 2009 tax return or claiming on 2010 tax return · If purchased in 2010, by amending 2010 tax return or claiming on 2011 tax return

Seven New Rules for the First-Time Home Buyer

Too many people bought too much house for too many years.

Yes, the financial system almost collapsed because mortgage bankers and brokers told lies about loan terms and loosened standards in dangerous ways, and investment bankers packaged those loans into bonds that were far more toxic than ratings agencies predicted.

But the roots of the mortgage contagion lie with all of us and our desire to own just a bit more house.

So as the one-year anniversary arrives of our near financial collapse, it’s a good time to blow up a long-standing but underexamined maxim of real estate — that you should always stretch financially when buying your first home.

No one is quite sure who came up with this idea, though suspicions rest on real estate agents or kindly parents with the best of intentions who never expected that real estate prices could fall. Whatever its origin, the economists and financial planners I spoke with this week are almost unanimous in their rejection of it.

Here’s how they dismantled the old saw — and a list of seven suggestions they offered up in its place.

START WITH THE BASICS Let’s begin with some other standards, tried and true advice that served banks and borrowers well for years, until they forgot all about them in the race to write more loans and buy bigger houses. Put 20 percent down, so you have less of a chance of owing more than your home is worth if prices fall again. Get a fixed-rate mortgage, so the biggest part of your monthly housing bill remains stable.

If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.

That said, if you end up with an adjustable-rate loan, banks may not be concerned with whether you’ll be able to afford the maximum possible payment when the interest rate adjusts in five or seven years. But you should be worried about it.

CONSIDER YOUR INCOME The best case for stretching for a first house is that first-time home buyers in their 20s and 30s will probably see their incomes grow more quickly than older people buying their second or third home.

Harvey S. Rosen, a Princeton economics professor, finds in a forthcoming Journal of Finance article that he co-wrote with two Federal Reserve Bank economists, Kristopher Gerardi and Paul S. Willen, that the size of a house that someone buys tends to be a good indicator of what their income will be later. “People can, on average, make reasonably good predictions of their future incomes and act on them in sensible ways by buying bigger houses,” Mr. Rosen said.

Indeed, much of the mess in the mortgage market has been because of people borrowing money with loans that they didn’t understand — or betting that housing prices would continue to rise enough that they would be able to refinance their loans before the payments rose. Income overconfidence may have had something to do with it (and high unemployment worsened the problems), but it’s probably not the primary cause.

BOW TO UNKNOWNS This research is all well and good as long as you continue to work. But if you’re buying your first home before you have children, you may feel quite differently about work once you become a parent. And if you do, you may not want a mortgage boxing you in to going back to the office three months after the baby is born.

Bobbie D. Munroe, a financial planner with Fraser Financial in Atlanta, encourages younger clients in this situation to model out their budget, including any proposed mortgage, three ways — with both spouses working full time, one working part time and one staying at home for a few years. She also suggests imagining or even practicing living on one income, to see if it’s truly realistic.

“What people should do is ultimately their own decision,” she said. “But they should do it with eyes wide open.”

Even people who don’t want to have children need to consider this. Besides the obvious possibility of sustained unemployment, what about the need to escape a dying industry or an early midlife crisis that necessitates career change to stave off depression? Even government employees and medical residents who believe that their incomes are set for life ought to consider this possibility.

MAP OUT EXPENSES It stands to reason that anyone tempted to stretch for a house will be inclined to play down the expense of maintaining it. These costs are anything but ancillary, though.

For many years, Dennis G. Stearns, a financial planner in Greensboro, N.C., has been alarmed enough by clients’ unrealistic expectations that he’s maintained a home cost spreadsheet that he shares with clients shopping for houses. He also updates it periodically with aggregate, real-world data based on their subsequent experiences.

Mr. Stearns estimates that owners of a newer home that do some work for themselves but contract major work out to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it’s an older home. So if you own a $400,000 home, your costs will probably hit the five figures each year — and may rise with inflation. These expenses will be another 20 percent or so higher if you live in a severe weather area. He does note, however, that the tax benefits of home ownership can offset half or more of these costs in some areas of the country.

BUY BEST (OR CHEAPEST) All of these caveats have given rise to some unusual strategies. Michael Kalscheur, a financial planner with Castle Wealth Advisors in Indianapolis, suggests buying the dream house you covet (if you can afford it) or an inexpensive starter house but not anything in the middle.

“If people have their heart set on something, inevitably, if they can’t afford what they really want, they buy the next best thing,” he said. “That’s absolutely the worst thing you can do. Not only do you not get what you want, but it sucks you dry.”

Why? Well, if you buy that entry-level home instead of the silver-medal home, you can save a lot more money each month after making the house payment (as long as you’re disciplined) than you would if you were paying a big mortgage toward that next best house. And all of your other housing costs will be lower, too. Then, several years later, you’re in a much better position to buy what you actually want.

STRETCH THE HOUSE Better yet, keep in mind that you don’t ever have to move from that first home — and incur all of the transaction costs associated with selling and buying and moving again.

J. Michael Collins, an assistant professor in the department of consumer science at University of Wisconsin’s School of Human Ecology in Madison, suggests paying less for a home that you can upgrade periodically when your income is stable and your savings or available credit make it possible.

In other words, stretching out your tenure in a home (and the physical boundaries of the home itself) may make more sense than stretching for each successive mortgage in a series of two or more houses.

THE EIGHT-HOUR RULE One rule about all of these rules is that it’s unlikely that every one will apply to every circumstance. Individuals and their income streams are too varied, and real estate markets are themselves unique.

When all else fails, however, you can always fall back on the eight-hour test. Whatever the size of your mortgage, you have to be able to sleep soundly at night. So if an impending loan has you stretching for the Ambien, it’s a pretty good sign that the loan is a bit of a stretch as well.

Source: NY Times

Can you use the Obama 8000 tax credit for your FHA down payment?
Yes, No, Maybe So.

Last month on May 12th, Secretary of Housing and Urban Development Shaun Donovan created a fervor in real estate and mortgage industry when he announced in a speech to National Association of Realtors that FHA was working on an initiative to allow first time home buyers to use the 8000 tax credit created by the American Recovery and Reinvestment Act of 2009 (Obama 8000 tax credit) for their down payment on a new home. This was followed by a mortgagee letter related to the subject being posted on HUD’s website. Immediately real estate and mortgage professionals began to communicate this information to each other and to their clients. Unfortunately, within a couple of days, FHA retracted the announcement as there were a number of issues with the logistics and legality of the 8000 tax credit down payment plan.
In the weeks that followed, many articles were posted on the web with a variety of information regarding whether or not you could use the Obama 8000 tax credit as a first time home buyer down payment.

There was abounding speculation since FHA was quiet regarding clarification of whether or not a first time home buyer could use the Obama 8000 tax credit as a down payment. Finally, on May 29th, FHA re-issued Mortgagee Letter 2009-15 with details on how the Obama 8000 tax credit could be used by first time home buyers in conjunction with an FHA loan.
The following are highlights of the FHA program for the use of the Obama 8000 tax credit for first time home buyers:

Can the Obama 8000 tax credit be used for a first time home buyer’s down payment?
Yes, but only after the first time home buyer has provided the initial 3.5% FHA down payment. After that, additional down payment funds can come from the Obama 8000 tax credit. To be clear, a first time homebuyer can NOT use the Obama 8000 tax credit to meet the minimum FHA 3.5% down payment requirement.

Can the Obama 8000 tax credit be used to pay for the buyer’s closing costs?
Yes, a first time home buyer can use the Obama 8000 tax credit for closing costs that are normally associated with buying a home (e.g. lender fees, points, title fees, inspection fees, etc.).
How does the first time home buyer obtain upfront funds from the Obama 8000 tax credit to use to help buy a house?

FHA will permit FHA-approved mortgagees and FHA-approved nonprofit organizations as well as Federal, state, and local governmental agencies and instrumentalities to purchase the Obama 8000 tax credit anticipated by the first time home buyer. In other words, one of the aforementioned sources can loan the first time home buyer the money they expect to get resulting from the Obama 8000 tax credit for a regulated fee. In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. The source of the loan can securitize the loan as a second lien on the house and may choose to require monthly payments or not. The IRS will not allow the second lien to have a balloon payment under 10 years.

How does the first time home buyer request the Obama 8000 tax credit from the IRS?
After the first time home buyer has bought the house …
the first time home buyer can wait until next year and file IRS form 5405 “First-Time Homebuyer” along with his or her 2009 tax return.
the first time home buyer can file IRS form 5405 with his or her amended 2008 tax return.
if the first time home buyer filed for an extension to the filing of their 2008 tax returs, they can submit IRS form 5405 along with his or her 2008 tax return.
Other resources regarding the Obama 8000 tax credit for first time home buyers.
Explanation of the original 7500 tax credit created by the Housing and Economic Recovery Act of 2008.

Summary of the new 2009 Obama 8000 tax credit created by the American Recovery and Reinvestment Act of 2009.

Answers to Frequently Asked Questions about the Obama 8000 tax credit for first time home buyers provided by the National Association of Home Builders.

Source: Best FHA Lender

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The Tax Benefits of Homeownership
Special Studies, March 27, 2009
By Robert D. Dietz, Ph.D.

Report available to the public as a courtesy of http://www.housingeconomics.com/

Purchasing a home is typically the largest purchase and among the most important financial decision a family makes. There are numerous factors that influence the home buying decision, and among the most important are the tax benefits that help offset some of the cost of homeownership1. Previous NAHB research has discussed the federal government’s (flawed) budget measurement and policy justifications for these housing tax law provisions. This article examines how these tax benefits reduce the cost of ho­meownership for individual homeowners and homebuyers for certain mortgage amounts and income levels.

Using the methods developed in the paper, a household, for example, with $80,000 in annual income who obtains a $200,000 mortgage will save on average $1,765 in the first year of homeownership. By the end of the fifth year of homeownership, the house­hold will save on average $8,607 on taxes, and this amount grows to $19,488 by the end of the average period ownership — twelve years. This stylized homeowner can ex­pect to save $21,650 in capital gains taxation, yielding a total benefit of $41,138 over the expected period of homeownership. Further, the paper provides variants of these calculations if the analysis allows the homeowner’s income to increase with their age and labor market experience. For example, the five-year tax savings for this homeowner increases to $9,723.

The paper also considers how these numbers are increased by the existence of the tem­porary $8,000 first-time home buyer tax credit. In the case illustrated above, the five-year tax savings estimate increases 82% from $9,723 to $17,723.

Homeownership Tax Benefits
There are three major tax benefits for homeowners: deductibility of mortgage interest, deductibility of real estate taxes, and the capital gain tax exclusion for principal resi­dences.2 Taken together, these benefits significantly reduce the cost of homeownership. Each represents a significant provision of law. According to the Congressional Joint Com­mittee on Taxation, for fiscal year 2008 the tax expenditure (approximately the size of the program in terms of tax savings) of the mortgage interest deduction totals $67.0 billion, the real estate tax deduction equals $24.6 billion, and the capital gain exclusion sums to $16.8 billion.

As seen in these estimates, the largest benefit for most homebuyers is the ability to deduct home mortgage interest. The tax code permits homeowners who itemize their
federal income tax deductions to reduce their taxable income by the annual amount of mortgage interest paid on a first (and second) home, up to $1 million in total home mortgage debt. Further, taxpayers may deduct interest allocable to up to $100,000 of home equity loans.4 For the purpose of the Alternative Minimum Tax [AMT], taxpayers may deduct non-home equity loan interest from AMT taxable income as well.5 Itemizing homeowners may also deduct state and local real estate taxes paid on an owner-occu­pied home.

Finally, taxpayers may exclude from capital gains taxation the proceeds from the sale of a principal residence. Taxpayers are limited in the amount of gains that may be excluded from tax: $500,000 of gain for married homeowners and $250,000 for single homeown­ers. Recent changes in tax law reduce these maximum exclusion amounts proportion­ally for the amount of time the home is actually used as a principal residence. Periods of ownership prior to January 1, 2009 are treated as periods of principal residence use under a grandfathering rule included in the law.

Measuring the Tax Benefits of the Mortgage Interest and Real Estate Tax De­ductions
Calculating the net benefits of the major homeownership benefits seems straightforward but can lead to overestimation if not done in the context of other income tax rules. At first glance, the monetary value of the deductions is equal to the sum of the deductions times the marginal tax rate. For example, a homeowner who deducts $10,000 of mort­gage interest and real estate tax deductions and who is in the 25% tax bracket would theoretically realize a tax savings of $2,500 on his/her income tax return.

However, this calculation overstates the benefit on average by failing to account for the fact that the taxpayer must itemize in order to receive a net benefit from these deduc­tions. Unless the sum of the taxpayer’s itemized deductions exceeds the standard deduc­tion (the deduction available in lieu of itemization), it is not to the taxpayer’s advantage to itemize.

This itemization decision implies that a certain amount of the summed itemized deduc­tions yields no net benefit to the taxpayer because of the standard deduction. For ex­ample, if a taxpayer in the 25% tax bracket has a standard deduction of $5,700 and a set of itemized deductions totaling $6,000, the net value of the deductions is not equal to $1,500 (25% times $6,000). Even with no itemized deductions available, the standard deduction is available to reduce tax payment by $1,425 (25% times $5,700). So the true, incremental value of the itemized deductions in this example is equal to the differ­ence between $1,500 and $1,425 or $75. Of course, the marginal value — the value of the next dollar of deductions — is equal to 25 cents, but it is the average net value that is important in determining the realized value of the homeownership tax benefits.

Calculating an Example
We can now estimate the true tax benefits of homeownership for examples of various taxpayers. Consider a homebuyer with gross income of $60,000 who purchases a prin­cipal residence in tax year 2009 with a mortgage of $180,000. Assuming a mortgage interest rate of 5.86%, the first year mortgage interest payment is approximately equal to $10,580.7 Conservatively, assume that the buyer uses a downpayment of 20%, so the purchase price of the home is $225,000. Further assume that property taxes are equal to 1.2% of the market price.8 Thus, this taxpayer also pays $2,700 in potentially deduct­ible state and local real estate taxes in the first year of ownership.

Assuming the taxpayer is married and files a joint return, the household could claim a standard deduction of $11,400 in 2009. Clearly, with $13,280 in itemized deductions from mortgage interest and real estate taxes alone, the taxpayer will not claim the stan­dard deduction, thus itemizing their deductions on Schedule A of their 1040 income tax return. However, to calculate the net benefit of the housing tax deductions, we need an estimate of all the other itemized deductions in order calculate the incremental value.

Using Internal Revenue Service Statistics of Income data for 2006, we estimate the average sum of all non-housing itemized deductions by income class. For this stylized taxpayer, the estimated total is equal to $6,936 in charitable, state and local income or sales taxes, personal property taxes, and all other itemized deductions. With this infor­mation, we can calculate the taxpayer’s taxable income (gross income minus itemized deductions) and marginal income tax rate of 15%.

Now we can estimate the net value of the housing benefits. The net value is equal to the sum of itemized deductions ($13,280) minus the difference of the standard deduction ($11,400) and sum of the non-housing itemized deductions ($6,936) times the marginal tax rate of 15%. This calculation yields a net benefit for the first year of homeownership equal to $1,322.
Using this approach and adjusting the declining annual mortgage interest payment con­sistent with a self-amortizing loan, we can calculate average tax savings for certain in­come classes and mortgage amounts.9 Table 1 provides these amounts for the first year of homeownership.

(Table 1)
The example calculated above is found in the row for $180,000 in mortgage and $60,000 in borrower income. As can be seen in this table, the benefits of the tax pro­visions increase in terms of borrower income and mortgage amount. Nonetheless, as demonstrated in a previous article most of these benefits are claimed by middle-income homeowners ($40,000 to $200,000 AGI).

Summing over the first five years of homeownership, and adjusting for the declining mortgage interest payment over time, yields the following estimates, shown in Table 2. (Table 2)

Previous NAHB research indicates that twelve years is a reasonable estimate for the av­erage duration of homeownership of a single dwelling. Correspondingly, the twelve-year estimates using the method in this paper are shown in Table 3. (Table 3)

Graphing three examples of these results yields the following year-by-year estimates of the tax savings of homeownership attributable to the mortgage interest and real estate tax deductions, as seen in Figure 1. (Figure 1)

Principle Residence Gain Exclusion
The final major housing tax incentive is the exclusion of capital gains for the sale of a principal residence. To calculate the benefit of this tax provision, we must forecast the average price appreciation over the average duration of homeownership. We use the av­erage housing price appreciation rate over the prior 20 years, which includes the historic price declines of 2007 and 2008 as well as the period of unprecedented price apprecia­tion that preceded it. This average is 4.23% according to the Case-Shiller National U.S. Home Price Index. We use a conservative estimate of the capital gains tax rate (15% under present law, despite the likelihood that it will increase to 20% in 2011) to calcu­late the tax benefit of the exclusion. With these parameters and assuming that the home is sold at the end of twelve years of homeownership, we can calculate the tax benefits realized by the capital gain exclusion, which are reported in Table 4. (Table 4)
Summing the benefits of the mortgage interest and real estate tax deductions with the capital gain exclusion yields the twelve-year benefit estimates shown in Table 5, which in most cases represent significant tax savings for the homeowner. (Table 5)

Lifetime Income Growth
One limitation of this approach for calculating the value of homeownership tax savings is that it assumes the homebuyer has a fixed income for the period in which they own the home. Clearly, this is not a reasonable assumption. This is important because while a homebuyer may have a relatively low income — and thus a relatively low marginal in­come tax rate — when purchasing a home, his/her income and tax rate is likely to grow as the homeowner ages and gains experience in his/her career. Assume the average an­nual income increase (at the taxpayer/homeowner level due to aging, as opposed to per capita increases for all workers) is 4%. (Table 6)
Using this approach, re-estimating the five-year table estimated according to initial bor­rower income yields the larger values reported in Table 6. For example, the tax savings are higher in the $80,000 column in Table 6 than they are in Table 2, reflecting hom­eowners who enter a higher tax bracket in the fifth year of homeownership. Consider the graph in Figure 2 which reports the tax savings for a borrower with an initial income of $80,000 who obtains a home with a $250,000 mortgage. In year five, the cumulative savings from homeownership begin to diverge because the value of the homeownership tax incentives increases as the homeowner’s income increases, which is presumably cor­related with the homeowner’s experience in the labor market. At the time of sale, the difference in this example is more than $11,000 in tax savings — all due to increases in the homeowner’s marginal tax rate. (Figure 2)

Conclusion
This article has presented estimates of the financial benefits of homeownership. These savings total thousands of dollars for the period of ownership and are due to the deduct­ibility of mortgage interest and real estate taxes, as well as the principal residence capi­tal gain exclusion. The estimates in this paper account for the lost standard deduction that results when a taxpayer itemizes and thus reflect the incremental or true value of the housing tax incentives.
An additional tax incentive that became available in 2009 is $8,000 first-time home buyer tax credit. Including the effects of this refundable credit increases the estimates in each of these tables on average by $8,000, which represents a significant increase in the tax savings of the first five years of homeownership. For example, for a homebuyer with an income of $70,000 who obtains a mortgage $200,000 the tax savings increase from $7,718 to $15,718 — an increase of 104%. Or as another example, a homebuyer with $80,000 in income and a $200,000 mortgage can expect his/her five-year tax savings estimate to increase 82% from $9,723 to $17,723.

The combination of the standard tax benefits of homeownership combined with the tem­porary tax credit makes 2009 an attractive time period to purchase a home.
For more information about this item, please contact: Robert Dietz at 800-368-5242 x8285 (rdietz@nahb.com)
_________________
Footnotes:
1It should be noted that in this article “benefit” does not equate with “subsidy.” There are tax benefits for owners of rental housing as well, including interest and deprecia­tion deductions, as well as the Low-Income Housing Tax Credit. Previous research on the home buying decision can be found here.
2There are other benefits not considered in this article, including the tax exemption for imputed-owner’s rent, the deduction for mortgage insurance, and the tax treatment of reverse mortgage proceeds.
3Joint Committee on Taxation. 2008. Estimates of Federal Tax Expenditures for Fiscal Years 2008-2012. JCS-2-08.
4 It is important to note that not all cash-out mortgage refinancing is classified as a home equity loan, in contrast to acquisition indebtedness that is subject to the larger $1 million cap. Provided the proceeds of a cash-out refinancing are used for home improve­ment or residential investment, such debt is not home equity debt but the more favor­ably treated acquisition indebtedness.
5 The calculations in this paper do not include interactions with the AMT. For more infor­mation on real estate tax statistics, consult the following article.
6 To the extent that these taxes are in fact fees assessed for a specific, targeted benefit to the home in question, such fees may not be deducted from taxable income.
7 5.86% is the 4th quarter average of 2008 from the Freddie Mac Primary Market Sur­vey.
8 2004 American Housing Survey reported a 1.17% estimated average annual state and local rate residential property taxation.
9 This analysis assumes real estate tax payments and all other itemized deductions in­crease with the rate of inflation.

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Business News- Your Taxes

Changes, Up and Down the Ladder
By EDMUND L. ANDREWS
President Obama’s tax breaks may put money directly into the hands of people at the middle and bottom rungs of the income ladder.


Tax Tips
A Batch of New Tax Breaks on Your Home
By JAN M. ROSEN
The first-time homeowner credit and residential energy credits are among the new provisions.


Suddenly, Retirees Need a Plan B
By J. ALEX TARQUINIO
Advice from retirement planning experts geared toward current retirees and investors of all ages.


Is More Relief Ahead for Small Business?
By CONRAD DE AENLLE
The tax code offers small business owners many tax breaks to choose from, including some recent additions, and others may be on the way.


Some Balm From the I.R.S. for Those 2008 Losses
By CHARLES DELAFUENTE
Some people who lost money in the financial turmoil last year may be able to get a measure of tax relief.


Does the Tax Code Look Grayer in a Downturn?
By ROBERT D. HERSHEY JR
In a severe recession, people may be looking for loopholes in the tax code to minimize the tax hit.

Trying to Help Financially Troubled Homeowners

http://www.nytimes.com/2009/02/06/business/06lend.html

By VIKAS BAJAJ and TARA SIEGEL BERNARD
Published: February 5, 2009

People seem to pass certain milestones on the road of financial desperation. First the unpaid bills pile up. Then the bank forecloses. Finally, they reach the end of the line: bankruptcy court.

Joseph A. Peiffer, a bankruptcy lawyer in Cedar Rapids, Iowa, who has represented both farmers and lenders, favors giving bankruptcy courts the power to modify home loans.
But now policy makers are talking about redrawing this map by putting the bankruptcy court before foreclosure to give people a chance to keep their homes.

It has been done before, on a relatively small scale and with some success. In the midst of the farm crisis during the 1980s, Congress gave bankruptcy judges the power to reduce onerous farm loans to reflect a steep drop in land prices.

The Obama administration and Congressional Democrats are pushing a similar idea to stem the swelling tide of home foreclosure. Yet a close look at the farm experience raises questions about how widespread any relief would be.

While the creation of a special bankruptcy workout for farmers, known as Chapter 12, helped resolve that earlier crisis, many farmers still lost their farms or had to scale them back, according to judges and lawyers who studied the effects.

If a similar allowance is provided today for Chapter 13 filings, which let homeowners keep their property while working out their debts, bankruptcy courts could help a few million homeowners. But millions more would still face foreclosure, especially if unemployment continued to rise. Credit Suisse, for example, estimates that about 20 percent of an expected eight million foreclosures could be avoided by letting judges alter the terms of home loans.

“We are making the best of a lousy situation,” said Joseph A. Peiffer, a bankruptcy lawyer in Cedar Rapids, Iowa, who has represented both farmers and lenders and favors giving bankruptcy courts power to modify home loans. But, he added, “there will still be people losing their homes.”

One of his clients, a farm family in eastern Iowa, sought Chapter 12 bankruptcy in late 1986. The family had borrowed when times were good to pay medical bills, but struggled to keep up with payments when interest rates jumped and crop prices fell. The day before the family filed its case, a lender seized half of its 350 cows. “It was sort of like a perfect storm of bad things,” Mr. Peiffer said.

The bankruptcy court eventually wrote down about 40 percent of the family’s $1.5 million debt, and today, they are still farming, according to Mr. Peiffer.

That type of resolution may help troubled homeowners avoid foreclosure, advocates say. Having a bankruptcy judge change loan terms can solve disputes that bankers and borrowers might be unable to tackle on their own, they say. And some loans could become more profitable for banks in bankruptcy than in foreclosure, where losses can be 50 percent or higher after legal and home repair costs, according to Rod Dubitsky, a Credit Suisse analyst.

Perhaps more important, a bankruptcy judge can also cut through a thicket of legal complications for mortgages packaged into securities and sold to investors, which some banks say they have no authority to modify. Some investors have threatened to sue banks if those mortgages are altered.

But the banking industry fiercely opposes the proposal to amend bankruptcy law. Officials warn that they would have to raise the price of credit to offset the cost of having to wait years to see whether borrowers successfully pay off modified loans — or slide back into default. Only a third to 40 percent of Chapter 13 personal bankruptcy filings are successful, experts say, often because people lose jobs again, become sick or get divorced.

Foreclosure might bring them less, but banks and investors would get some money right away if they seized homes.

In Chapter 12, judges could change interest rates and reduce, or “cram down,” debts secured by farmland, which suffered a boom-bust cycle in the 1970s and 1980s. The amount written down was added to other unsecured debts, like credit card balances, which are repaid cents on the dollar from money left over after living expenses and secured debt payments. Congress made Chapter 12 a permanent part of the Bankruptcy Code in 2005.

Neil E. Harl, an agriculture and economics professor at Iowa State University, found that 85 percent of the first 150 farmers in Iowa who filed bankruptcy under Chapter 12 were still farming in 1995.

But many farmers who encountered distress did not seek bankruptcy protection: from 1986 to 1997, farmers filed 19,216 Chapter 12 cases, according to the Agriculture Department — less than 1 percent of the two million family farms that existed in 1995. “As soon as everybody knew it was there,” Mr. Harl said about cram-downs, “they did the next best thing, which is to sit down and negotiate.”

Nonetheless, bankers say that Chapter 12 resulted in higher interest rates, as lenders passed on the costs of bankruptcy. The Agriculture Department estimated in 1997 that rates on farm loans increased by 0.25 of a percentage point to 1 percentage point as a result of the law.
The Financial Services Roundtable, an industry lobbying group, calculates that cram-downs may increase the cost of mortgages by up to 2 percentage points either through higher rates or bigger down payments. The restrictions on cram-downs “keeps the cost of homes low, and this bill will unravel that,” said Scott E. Talbott, its chief lobbyist.

But other experts say such estimates are inflated. Adam J. Levitin, an associate professor of law at Georgetown University who favors changing the law, said rates may only rise by 0.15 of a percentage point.

Lawmakers and lobbyists in Washington are deeply divided on cram-downs. The opposition includes Senator Charles E. Grassley, Republican of Iowa, who helped create Chapter 12. Banks, with the exception of Citigroup, have vowed to fight cram-downs, though some lobbyists have been pushing for amendments that would limit them to certain loans and would let lenders recoup losses if home prices rebound.

The Obama administration and Democrats, including Senator Richard J. Durbin of Illinois, hope to pass the measure either on its own or as part of another bill.

The measure is eagerly awaited by households like the Benitez family in Palm Coast, Fla., which hopes bankruptcy will help them keep their three-bedroom house.

Rosa Benitez, a real estate agent, and her husband, Carlos, who works in construction, have been unable to pay their mortgage since payments on their adjustable rate loan shot up in early 2008. At the same time, given the housing crash, they are making a lot less money.

“Everything started going down when the mortgage payments went up,” Ms. Benitez said. The couple owes $227,000 on their mortgage and $31,000 on a home equity line of credit, but their home is worth only $175,000. Ms. Benitez said the couple could catch up if their debt was reduced to the current value of the home.

Still, the couple, like many others, is vulnerable to falling behind again as home prices decline further. But Robert M. Lawless, a law professor at the University of Illinois who favors cram-downs, said success should not be viewed simply “in terms of dollars and cents.”

“We forget the human side of the bankruptcy case,” he said. “Sometimes bankruptcy is about the soft landing.”

A version of this article appeared in print on February 6, 2009, on page B1 of the New York edition.

Circuit City to Shut Down
http://www.nytimes.com/2009/01/17/technology/companies/17circuit.html'

By STEPHANIE ROSENBLOOM
Published: January 16, 2009

Circuit City Stores, a bellwether American retailer, said Friday that it would go out of business, stripping the nation of its second-largest consumer electronics chain.

The company, which filed for bankruptcy protection in November but had hoped to emerge in a slimmed-down form, said instead that it would liquidate all its stores and assets.
Most of the chain’s 34,000 store employees will be laid off. Closing sales will begin as early as Saturday and will last until the merchandise is gone or about the end of March.
Just last week, Circuit City, with 567 stores, was in talks with two potential buyers, but it was unable to reach an agreement with its creditors and lenders.

“We are extremely disappointed by this outcome,” said James A. Marcum, acting president and chief executive of Circuit City Stores. He called the liquidation “the only possible path” for the 60-year-old company.

The demise of Circuit City, while not surprising given its declining sales, is part of a radical shift taking place in retailing. Weak chains — unable to weather the freeze-up in consumer spending and choked by tight credit markets — are closing.

The downturn comes after years of growth, when retailers — responding to a flood of demand from consumers spending borrowed money — opened thousands of stores. Now that the housing downturn and economic crisis have turned off the credit spigot and sent frightened consumers into hiding, it is becoming evident that many of those stores are not needed.
“We are incredibly over-stored in many sectors,” said Stacey Widlitz, an analyst with Pali Research. “If you don’t have the balance sheet to really weather the storm for a couple of years, then that’s it.”

Last year, a raft of retailers, including Boscov’s, Sharper Image, Mervyns, Linens ’n Things, Whitehall Jewelers and Steve & Barry’s, filed for bankruptcy protection. This week, Goody’s Family Clothing and Gottschalks also filed.

Many more retailers are expected to follow suit as they run out of working capital or are unable to refinance their debt.

Emerging from bankruptcy is harder than ever because of changes in the bankruptcy code and trouble in the credit markets, which are largely refusing to put new money into troubled companies.

Wall Street analysts said in November that the prospects of long-term survival for Circuit City were bleak. Months of declining sales sent the company over the edge, although its problems go back a decade. They include buying cheap real estate leases in inferior locations and laying off the company’s most experienced sales staff. The latter saved money, but at the price of employee morale and countless customers.

“They basically destroyed all their customer loyalty among all their best customers in one fell swoop,” said Britt Beemer, chief executive and founder of America’s Research Group.
“That was really the beginning of the end.”

The disappearance of the national chain means that in many markets consumers are running out of places to buy electronics, though shoppers are not the only ones being affected. The loss of Circuit City will probably be felt throughout the supply line as electronics manufacturers find themselves less able to negotiate prices.

The biggest electronics retailer left is Best Buy. Circuit City’s liquidation sales are likely to put pressure on Best Buy in the short run, but retailing analysts say the company will ultimately emerge with more market share.

“Even accounting for a softer economy,” said David A. Schick, an analyst at Stifel Nicolaus, “the business will go to specialty players in the sector and it will also go to mass merchant discounters.”

Analysts say they believe the biggest winner will not be Best Buy, but Wal-Mart.
Ms. Widlitz said consumers who shopped at Circuit City were more likely to defect to Wal-Mart than to Best Buy, especially at a time when Wal-Mart has aggressively built up its stable of name-brand electronics at low prices.

“This is perfect timing for them,” Ms. Widlitz said.

More Articles in Technology » A version of this article appeared in print on January 17, 2009, on page B1 of the New York edition.