Laura Rowley Money & Happiness

Housing prices are coming down in my New Jersey town, with properties virtually flooding the market, compared to summers past. This tempts me to surf the local realtor Web sites, trolling for deals.

But I can't bring myself to trade up. The main problem, as I explained to my realtor pal Elizabeth is the taxes. New Jersey's property taxes are, in a word, ridiculous -- especially to someone who grew up in the Midwest.

For example, it's not uncommon to find a five bedroom, two-and-a-half bath residence in my area with $20,000 in annual property taxes. This is three to five times what my siblings in the Midwest pay. The thought of spending $200,000 over 10 years to get a bigger kitchen and an extra bed and bath makes me gag.

The American Way of Life

"Most people don't look at it the way you do," Elizabeth told me. "They just look at whether they can afford the monthly payment."

And therein lies the modern personal finance conundrum. From housing to autos to material goods, Americans are bombarded with the notion that if you can afford the monthly payment, you can afford the thing you're buying. What's never discussed is the princely opportunity cost of living on borrowed money -- and how devastating the monthly mentality can be to long-term wealth. But as a variety of recent reports demonstrate, it has become a way of life for millions of Americans.

The philosophy is obvious in the home market as more buyers stretch to get their piece of the American dream. According to a recent Harvard study, in just two years, interest-only loans went from a relatively obscure product to an estimated 20 percent of the dollar value of all loans and 37 percent of adjustable-rate loans originated last year. Option ARMs, in which the borrowers can pay even less than the monthly interest due on the loan and roll the balance forward, accounted for nearly 10 percent of last year's loan originations.

Mortgage lenders are now offering new-fangled option ARMs to defer the pain for borrowers whacked by paying principal for the first time in a rising interest-rate environment, according to The Wall Street Journal. IndyMac Bancorp., for instance, offers an extended fixed-rate period before interest charges reset, and the ability to defer repayment of principal for a longer period of time. IndyMac's head of mortgage products says it's the bank's fastest-growing new product.

"Manageable" Debt Levels?

Meanwhile, I could wallpaper my entire home with just a month's worth of the home-equity loans and refinance offers that jam my mailbox. These have tempted many homeowners: Mortgage debt rose by $250 billion in the first quarter of 2006, according to the Federal Reserve's Flow of Funds report, as homeowners sucked out more equity out of their properties amid rising real estate values. Overall, household debt rose at an annual rate of 11.6 percent, up 0.5 percent from the previous quarter.

Mortgage delinquencies declined slightly in the first quarter, as the strong economy and job growth offset rising interest rates and higher energy prices. Some 4.41 percent of residential mortgages were delinquent, down 0.29 percent from the previous quarter, according to the Mortgage Bankers Association. About 1 percent of mortgages are in foreclosure, virtually flat from the previous quarter.

Federal Reserve Chairman Ben Bernanke referred to some of this data recently, suggesting "U.S. households overall have been managing their personal finances well. On average, debt burdens appear to be at manageable levels, and delinquency rates on consumer loans and home mortgages have been low."

Maybe I'm a little behind the times, but I have a different definition of "managing your personal finances well". It would include things like paying off your mortgage early -- vs. avoiding delinquency and foreclosure. It would include saving for larger purchases in advance and paying cash -- vs. buying items with "manageable" credit-card debt.

The Fed reported that consumer credit soared $10.6 billion in April, to a record $2.170 trillion -- more than three times Wall Street estimates. Credit grew at a seasonally adjusted annual rate of 5.9 percent -- the fastest pace in a year. (The data exclude home mortgages and other real estate-secured loans.)

Upside-Down Borrowers

The monthly mentality is also evident in the auto market. Some 29 percent of U.S. vehicle buyers were "upside-down" in their loans in May -- meaning they owe more than the trade-in value of their cars. That's the second-highest level in four years, according to Jesse Toprak, executive director of industry analysis for Edmunds.com. The average amount of negative equity was $3,789.

The reason? Borrowers who otherwise can't afford the cars they want are opting for mega-term loans: In January, 2002, the average loan term was 57.3 months. Now it's 63.6 months. Toprak says 72 months is becoming the norm.

"Unfortunately, we still often see people going to the dealer and saying, 'I want to pay $400 a month,' despite the fact that it's a really bad way to buy a car," Toprak explains. "Extended terms become the only way to get the car they want. They don't see the consequences two years down the road."

Toprak says he's seen a new trend in leasing among upside-down borrowers because it allows them to finance up to 115% of the vehicle's sticker price, whereas a traditional purchase only provides 100% financing. Thus, borrowers can trade in their vehicle and add their negative equity to the lease. It results in higher monthly payments, but at the end of the lease the negative equity is gone. Of course, they don't own anything at the end of the lease, either.

Coming Home to Roost

The monthly mentality certainly opens the door to a more comfortable monthly life. But I suspect that deep down, it inspires a level of discomfort about what may happen if the monthly nut can't be paid.

And here's where the monthly mentality finally comes home to roost: When you can't work anymore. A new study from the Center for Retirement Research at Boston College found that 43 percent of working-age households are at risk of not having enough to maintain their standard of living in retirement. Pensions are disappearing, people are living longer, and savings rates are weak. In 2004, the typical household head approaching retirement had only $60,000 in 401(k) and IRA accounts, which translates into less than $400 per month in retirement, the study noted.

The good news: This situation can be turned around if people work until age 67, rather than retiring at 65 or earlier, and if they save more -- putting aside even 3 percent of income can make a difference over time. But making that happen isn't going to be easy in a culture that glorifies the monthly mentality.