The much anticipated rebate checks start going out today. In fact, over the next few weeks $110 billion will be sent out to the American public. This week, only electronic deposits will occur with paper checks being sent out later. There seems to be a contingency of people who believe that this is enough to turn the economy positive and avoid a recession. I’m not sure how that will be the case since our employment situation is precarious at best.

“NEW YORK (CNNMoney.com) — Tax rebates are starting to arrive in bank accounts. But many economists doubt that they will keep the economy from recession.

The stimulus package, passed with overwhelming bipartisan support earlier this year, will give rebates to about 130 million Americans, costing the U.S. Treasury more than $110 billion. Married taxpayers earning $150,000 or less will get up to $1200 while single taxpayers earning $75,000 will receive up to $600.

But since the measure passed Congress, there have been growing signs that the U.S. economy has already fallen into recession.”

Of course given the state of the economy and that we are in an election year, this passed with very little hesitation. Yet the impact of this rebate will hardly do anything since our economy is $13.84 trillion dollars strong. The fact that Americans are spending themselves into the ground will not be stymied by $600 or $1,200. It will feel good no doubt but this is only going to add additional fuel to the already present inflation we are seeing.

The main goal of course from the administration was to get people out there spending since 70 percent of our economy is based on consumption. Yet this may turnout to be a harder goal to achieve:

With the rebate being electronically deposited into taxpayers’ accounts as soon as today, area residents said they are leaning toward saving for a rainy day or paying debt rather than making a big purchase.

“I know what the goal is for the stimulus, but I’m more than likely to invest it and try to make more money that way,” said Pinkie Shuler of Winston-Salem.

Trean Ellis of Denton said that she and her husband are putting their stimulus money toward a down payment for a home they are planning to build in Lexington.

“It may end up being a small part of what we need, but every bit helps in this economy with gas prices being the way they are and both of us commuting to work,” Ellis said. “It would be nice to buy a big-screen TV but we’ve got other priorities now.”

The rebate is part of a $168 billion economic-stimulus plan approved by Congress in February. The amount ranges from $300 to $600 for individuals and from $600 to $1,200 for couples, plus $300 for each child.”

People have larger issues on their mind and will probably use the rebate to pay off debt, save for a rainy day (which given our economy is today), and other priorities. In fact, people are already shifting their purchasing habits to daily necessities. Kroger and Wal-mart are gearing up for incentives to bring in rebate ready buyers to their stores:

“If big retailers have their say, every dime of your tax rebate will be spent. Many retailers are offering incentives to trade in rebate checks.

Grocery chains Albertsons and Kroger and department stores Sears and Kmart are offering consumers an extra 10 percent for every $300 gift certificate they buy.

Home Depot is going green, urging customers to stretch their tax rebate dollars by investing in energy-saving products. Some retailers, like Walmart, are even considering a plan to cash tax rebates checks at no charge.”

So they want you to come in and blow your money on things you’ll already be buying. The only question is, will people respond accordingly. Ironically, the timing couldn’t be worse given the summer driving season and practically dollar for dollar that rebate will be consumed by higher fuel costs:

“Gasoline nationally is in an accelerated upswing, having jumped to $3.58 a gallon from $3.50 in just the past week. In some parts of the country, including New York City and the West Coast, gas is already sporting a price tag above $4 a gallon. There was a pray-in at a Chevron station in San Francisco on Friday led by a minister asking God for cheaper gas, and an Arco gas station in San Mateo, Calif., has already raised its price to a sky-high $4.62.

In Manhattan, at a Mobil gas station at York Avenue and East 61st Street, premium gas is now $4.03 a gallon. Two days ago, it was $3.96. Why such a high price? “Blame the people at STOPEC (he meant OPEC) and the oil companies,” an attendant there told me.”

This is too little too late given the current housing debacle which has already erased $2 trillion in equity. Do people really think that this is going to stop people walking away from mortgage obligations in states like California and Florida where homes have dropped from $100,000 to $200,000 in one year? Enjoy the money in your account but make no mistake that this will do nothing to change the landscape of our economic troubles.

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As the housing market continues to slump forward, there are many unintended consequences cropping up all over the country. For one, the intent of the Federal Reserve to inject liquidity into the markets was to bring back confidence in an environment that is cautious about credit. As we are approaching another 1 percent interest rate policy ala Alan Greenspan, the only difference this time is that mortgage rates are not responding like they did during the earlier easing during the Greenspan tenure. There is a couple of reasons for this including the secondary market which was buying up all kinds of new and creative mortgage products that have now turned on the market. Yet your bread and butter 30 year fixed products are still high priced even after the Fed is attempting to induce lenders to be more willing to lend.

The reason that rates are going up across the board on credit is because there is a legitimate reason to be concerned. For one, all indicators are pointing to a recession. In years past, housing has always fallen during these times. Next, we need to explore the nuanced fact that much of our economy this past decade was built on real estate and all things surround the housing market. Let us take a quick look at some rates for a $500,000 home here in California with a 5 percent downpayment from one of the larger lenders:

Incredibly, the menu is still full of loans that got us into this mess in the first place. The pricing range is anywhere from $3,018 for a 5/1 ARM to $4,170 30 year (10/20) mortgage. Our mainstay 30 year fixed will come in at $3,618 for principal and interest only. Keep in mind that the taxes and insurance on a $500,000 place will run you anywhere from $500 to $650 per month. If we are to assume that a person buying in today’s market will go with a 30 year fixed, the monthly payments work out as follows:

PITI: $4,118

Now how does this factor into the budget of an overall family? First, let us look at some key monthly expenses with national averages:

Healthcare: $500

Gas/fuel: $300

Auto Payments: $400

Food: $500

Utilities: $200

Now the subtotal including the above items is $6,018 or $72,216 per year. Keep in mind that $500,000 does not buy you as much as you think in California although prices are falling drastically across the board. Now you see why such a rapid market correction is occurring. In the above, for essentially basic necessities and a starter home the average family will spend $72,000 per year; which is much higher than the median gross pay for the entire state of California. That is why when prices reached a peak of $550,000 in Los Angeles County it simply was not sustainable. For those of you who don’t think fuel is expensive simply look at this chart:

Regular gas in the United States since November of 2006, less than two years ago is now up by a whopping 58 percent. With oil staying over $100 a barrel and the summer driving season coming up, the only place fuel can go is up. Now why is this a bigger factor in California? For one, many people live driving distances away from their work. One need only look at the congested freeways for this data point. Also, fuel cost in California are higher than national averages. So it is a double hit here. We also did not factor in automobile insurance in the above budget which can cost anywhere from $150 to $300 a month depending on the cars one may have.

As we discussed in the previous article that the current system is setup to punish savers, we are also seeing a system that understates inflation and forces consumers into debt. After all, the elasticity of your driving to work is nearly vertical. You have to get to work. California is notoriously bad in the public transportation market. And just to show you that the previous rate sheet from a large bank isn’t unique, take a look at another rate sheet:

The reason rates are holding steady and not moving downward in the same fashion as when Alan Greenspan took rates to 1 percent historical lows is that many of these products are simply reflecting the actual risk inherent in the market. What is now out, is the teaser intro rates of 1 to 2 percent. Also, we are not seeing the 5 percent mortgages either. Yet we may be seeing more of those 40 year fixed products but they do very little in really denting the monthly payment. I’ve also noticed a trend in some of the auto commercials that when you read the fine print at the bottom of the screen, they are now offering 84 month terms. Absolutely insane and financially imprudent. You’ll be paying a loan for years after the asset is no longer worth much. And how do you think that higher fuel cost is impacting auto sales? Everything is interconnected and nothing is contained. When credit is ubiquitous a contraction in this market hurts everything. When you spend more than you earn, you eventually have to pay the bill and it is coming due quickly.

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