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balor123
Joined: 08 Mar 2008
Posts: 1204
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 Posted: Fri Dec 11, 2009 3:33 am GMT Post subject: |
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| melonrightcoast wrote: |
Possibly. But don't you think that once it starts to decrease that there will be people rushing to buy, as the gov. is indicating that there isn't any more punch in the kitchen to fill up the bowl at the party?
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Kind of like how every time the Fed threatens to not keep throwing increasing gobs of cash at the economy the market soars? I think admin has it right. People may be buying the housing market isn't budging much. Remember that housing rose well past the point of affordability and has only been brought back remotely within reach because of excessive circumstances. We can't afford increasing housing prices except with another bubble, which you could certainly profit from but only with lucky timing.
Leave the credit unchanged for a while and it will no longer provide an incentive. Then take it away and you have withdrawal again. Keep increasing it and people will keep rushing in trying to cash in on the increasing benefit. Unfortunately, even the US government can't keep this up forever and most economists are predicting that 2010 will be the year of rising interest rates. Remember, the primary reason that the government is even supporting the market is because of the belief that it is the cause for the recession. They're just trying to support it long enough for the rest of the economy to decouple itself from housing so that it can fall naturally to its own equilibrium, which will optimistically be 4x median household income with an 8% mortgage rate.
Most of the US isn't far from there at this point and the stimulus is aimed at getting those houses moving. I don't think that most people in Congress are worried about the 15% drop that New England has seen and certainly aren't going to approve spending billions or trillions of dollars to protect the wealth of residents of high cost of living areas like Boston. We are getting second hand bailouts and when it disappears I think the Boston housing market will remain sluggish while the rest of the country recovers.
Boston has a lot of finance and I've also been wondering what will happen to these people when free money from the Fed disappears. I imagine that this industry, in addition to previous bubble buyers, are largely supporting the market. Without a new boom industry, retiring baby boomers, declining population (esp among younger generation), and shrinking businesses what will support the ludicrous prices in nicer neighborhoods. As a friend of mine put, Boston was a great place to live up until the late 90s, when things started to become crazy. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 3:36 am GMT Post subject: |
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| I also wanted to add that I think Frank recognizes this problem, which is why he's pushing for an increase to the FHA limits to $800k. He wants to make sure that Bostoners aren't left out of the FHA driven bubble recovery. Of course, he's not doing anything about the ability of people to afford those homes. He just wants to get them offloaded to suckers so that his constituents can cash out (baby boomers). Someone else will have to mop up the mess for those people once his political career ends. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 3:39 am GMT Post subject: |
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| admin wrote: |
That's interesting. You make a good point - weatherizing the old homes around here should be quite beneficial to home values given the age of the stock.
- admin |
I don't think that will be the case. Our housing got to be this way because people started sacrificing on the houses so that they could afford the land they sit on. Maybe it will increase the assessment of the building but I expect that the land price will go down a bit to make up for it. That's not to say that it's not still a good idea. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 3:41 am GMT Post subject: |
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| mpr wrote: | This would all be quite a convincing argument (that a true bottom
hasn't been reached etc) based on fundamentals. The problem (well
actually its not really a problem - but thats another topic) is that
you're betting against the Feds who can print infinite amounts of
money and have shown a clear willingness to do so - both
monetarily and fiscally. |
Are we talking about the US housing market or Boston housing market here? Because Boston hasn't experienced the correction that other parts of the country had. I think the Fed will only print infinite amounts of money (assuming that they even can for long enough) to help the US housing market, not Boston. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 4:42 am GMT Post subject: |
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| admin wrote: | | Yes, I'm hating it way less than the home buyer tax credit (which is no longer just FT, by the way). It borders on sounding like a decent idea, on the surface anyway (I don't know too much about it yet). |
Here's the part I find fishy about it: without the law, people presumably aren't willing to spend money to update their homes (otherwise it wouldn't be needed), pass a law requiring it and people will be up in arms just as they are about lead paint, but pass a law raising taxes and then using the money to have the government pay for it (minus government inefficiency) and people love it!
I guess people are ok with it because the government is paying for it but they don't have to pay the government. It is either free or someone else will have to pay for it. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Dec 11, 2009 1:24 pm GMT Post subject: |
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| admin wrote: |
I don't think that you can assume that inflation will necessarily cause increases in nominal housing prices, at least not until a lot of inflation has accumulated. Housing prices right now are completely dependent on abnormally low interest rates. If rates returned to even just their historical average, that would put strong downward pressure on prices. Higher inflation will lead to higher interest rates, and thus lower prices, at least in real terms, and possibly in nominal terms too. It's a risky bet to bank on inflation being so high that upward price pressure on houses will exceed the downward pressure from higher interest rates combined with the downward pressure of real prices still being too high all the while assuming your income will keep pace with inflation and not be affected by an unstable job market.
- admin |
I think these considerations regarding interest rates are a little too general.
Its more informative to try to look at some likely scenarios given the Fed's
behavior.
We already know that they are not going to tighten - apparently even a little
- until they see some more serious inflationary threat, and especially
while unemployment is high. However unemployment is now so high that
its very likely you'll see inflation before it really comes down substantially
(supply push inflation).
Now we also know that interest rate increases take a while 12-18 months
really feed through into the economy and the Fed is starting of a
pretty low base. So its quite likely they wont be able to keep control
of inflation very well.
Now there are two scenarios:
1) The burst of inflation is short lived and the Fed manages to keep it
somewhat under control. In this scenario long term inflationary expectations
wont change that much and as a result the change in long term interest rates
will be muted. Sure they will rise, but they reflect long term expectations.
2) Inflation goes on for a longer period. Well in this case those people
with fixed mortgages are in great shape since the real value of the amount
outstanding is falling in real terms.
True, interest rates will go up much more but in this scenario the
economy probably goes through a growth spurt, and in any case
increased inflation makes real estate (or any asset) look more
attractive even at higher rates.
I also dont really buy the opportunity cost argument for people
with a large amount of savings. Those savings will be damaged
by inflation, especially in an environment where real interest rates
are negative as they are now, and the Fed is all but guaranteeing
negative real interest rates for the forseeable future. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Fri Dec 11, 2009 2:54 pm GMT Post subject: |
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| mpr wrote: |
2) Inflation goes on for a longer period. Well in this case those people
with fixed mortgages are in great shape since the real value of the amount
outstanding is falling in real terms.
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Yes, the real value of the debt will be falling, but so will the real value of the home, so they aren't necessarily in good shape.
| Quote: |
True, interest rates will go up much more but in this scenario the
economy probably goes through a growth spurt, and in any case
increased inflation makes real estate (or any asset) look more
attractive even at higher rates.
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Higher rates only make assets more attractive in the sense that they can possibly be a hedge against inflation if they aren't too overpriced to begin with. Overall, I believe that effect is strongly outweighed by the lower prices needed to compete with higher yielding debt instruments. Just look at an historical graph of the P/E ratio for The Dow. The ratio plunged during The Great Inflation, indicating the assets comprising The Dow became less attractive with higher rates, not more attractive.
| Quote: |
I also dont really buy the opportunity cost argument for people
with a large amount of savings. Those savings will be damaged
by inflation, especially in an environment where real interest rates
are negative as they are now, and the Fed is all but guaranteeing
negative real interest rates for the forseeable future. |
Real rates on I Bonds and TIPs are positive and are guaranteed for the life of the security. They would handily beat the leveraged real loss you would assume by using that money for a down payment in the hypothetical scenario we're talking about, hence the opportunity cost. There may be better alternatives, too - these just establish a baseline.
I think you need to consider one more important dynamic when thinking through how inflation may play out: China. Rates aren't low solely due to The Fed. At some point, foreign governments buying our debt are going to get fed up (pun intended) and stop subsidizing our low rates and low inflation. They are already edgy (rightfully so) and any whiff of inflation may be enough to motivate them to begin moving away from the dollar, even if the bout of inflation would have been short lived on its own.
- admin |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Fri Dec 11, 2009 4:11 pm GMT Post subject: |
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| admin wrote: |
Real rates on I Bonds and TIPs are positive and are guaranteed for the life of the security. They would handily beat the leveraged real loss you would assume by using that money for a down payment in the hypothetical scenario we're talking about, hence the opportunity cost. There may be better alternatives, too - these just establish a baseline.
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I Bonds and TIPS are tied to CPI. Whether this is a true measure of
inflation is open to debate. I'm not a conspiracy theorist on this point,
but its worth bearing in mind. The margin over CPI on these instruments is
small and could easily be elliminated if CPI fails to fully reflect "real"
inflation, however you define that.
The leverage in this case works in your favor not against you:
Suppose you pay 100k for a house putting 20k down.
Suppose inflation is a relatively high, but not hyper 8%.
If you'd kept the 20k and get 10% on your TIPS you'd have 2k
(minus taxes).
To break even your house has to rise in value to 102k in nominal
terms - i.e drop in value by no more than 6% in real terms.
Moreover this 2k gets a more favorable tax treatment if you sell
your house since capital gains on your home are not taxable
below 250k.
Apart from that, your low fixed interest rate mortgage has a value
if interest rates rise just like a interest rate swap. Not as good, because
you cant turn around and sell it, but still worth something.
| admin wrote: |
I think you need to consider one more important dynamic when thinking through how inflation may play out: China. Rates aren't low solely due to The Fed. At some point, foreign governments buying our debt are going to get fed up (pun intended) and stop subsidizing our low rates and low inflation. They are already edgy (rightfully so) and any whiff of inflation may be enough to motivate them to begin moving away from the dollar, even if the bout of inflation would have been short lived on its own.
- admin |
This is a common, but I think completely incorrect, paradigm for thinking
about US debt and China. The Chinese need to continually buy US$ to
keep their currency tied to the US$. There are strong domestic reasons
for this - they need to have very strong growth to absorb the workers
moving from the countryside to the cities. Failure to do so could lead
to social unrest and presents a threat the Communist Party power.
These political considerations are likely to out way any financial ones.
That's why I thought it was ironic that the Chinese laughed at Geitner.
It really should have been the other way around.
In the - unlikely - event that they really did stop buying US bonds, the $
would fall dramatically, but this would be a big boost to the US economy so
once again you get a situation which is favorable for asset prices.
Similar scenario if (and this is more plausible) Chinese bond buying
was insufficient to sustain the dollar. The key thing is that while the Fed
cant control the value of the dollar they can control interest rates;
even long term rates if they buy up Treasuries and MBS as they have
been doing. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Fri Dec 11, 2009 5:35 pm GMT Post subject: |
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| mpr wrote: |
I Bonds and TIPS are tied to CPI. Whether this is a true measure of
inflation is open to debate. I'm not a conspiracy theorist on this point,
but its worth bearing in mind. The margin over CPI on these instruments is
small and could easily be elliminated if CPI fails to fully reflect "real"
inflation, however you define that.
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No argument here. However, I'm not too worried about this because the local CPI is also what I use when considering house price changes, so any distortion will be consistent.
| mpr wrote: |
The leverage in this case works in your favor not against you:
...
To break even your house has to rise in value to 102k in nominal
terms - i.e drop in value by no more than 6% in real terms.
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You forgot to include interest payments, which are a direct consequence of that leverage. Say you bought now before the inflationary spike and your mortgage is fixed at 5%. That's another $4K right there. Your house would need to rise to $106K in nominal terms to break even. That is, it would need to fall no more than 1.85% in real terms. Yes, tax considerations would allow for a larger fall, but this is the right ballpark, I think.
I think it is very plausible that the price declines would be much higher than 1.85% in the scenario you presented. With official inflation at 8%, mortgage rates would certainly be higher. A quick search on Google for a graph of the spread between official inflation and mortgage rates suggests that a 4% spread would be a generous low end estimate during periods of high inflation. That would put mortgage rates at 12%. This matters because how much your home appreciates is a function of what the person buying it from you can afford.
Let's be generous and say that your clone will be able to buy your house from you - that is, he will bring the same down payment to the table, adjusted for inflation, and will be able to make the same monthly payment, adjusted for inflation. You would have been paying $424.04 per month, which would be $457.97 adjusted for inflation. Your clone could therefore afford to borrow $46,600. Your down payment of $20K would be $21,600, adjusted for inflation. That yields a total purchase price of $68,200.
That's a real decline of 37% without monthly payments or the down payment changing at all! That is way beyond the 1.85% threshold, to the point that I doubt factoring in taxes would make any difference to the outcome. Of course, that 37% would be a cumulative drop rather than a yearly drop, but it's more than enough to convince me that there is a huge risk that comes with buying when rates are low.
| Quote: |
This is a common, but I think completely incorrect, paradigm for thinking
about US debt and China. The Chinese need to continually buy US$ to
keep their currency tied to the US$. There are strong domestic reasons
for this - they need to have very strong growth to absorb the workers
moving from the countryside to the cities. Failure to do so could lead
to social unrest and presents a threat the Communist Party power.
These political considerations are likely to out way any financial ones.
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You are probably right about their motivation, but what they need is the high growth. The peg to the dollar is a means to that end, but it does not need to be the only means. They have a financial incentive to find other ways.
- admin |
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CC
Guest
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| Posted: Fri Dec 11, 2009 6:10 pm GMT Post subject: |
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Regarding inflation, I think we are in a deflation period now. Except some foods, most products and services are much cheaper than last or few years ago. Even the government and Fed are printing more money than they should, I don't think inflation will come soon.
Actually if you look Japan's bubble in the late 80s and early 90's, their government set the rate so low for so long, prices still got lower and lower. Their stock market or real estates are still lower than 2 decades ago. MORE printed money is one important factor of inflation, but you still have to think about velocity, unemployment rate, baby boomer retiring trend....etc.
Just my 2 cents! |
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Guest
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| Posted: Fri Dec 11, 2009 6:21 pm GMT Post subject: |
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BTW, I don't think bottom hit 9 months ago.... When I saw the thread title, I thought it's a joke. Most of my friends (25-35 years old) can't afford anything, unless we are talking about $200k-300k crapy houses with less than 3 or 4% down. Their credit card bills already killed them, and most of them just DON'T HAVE ANY saving at all. Why would you keep $12000 saving in your bank (4% of $300k) which charges you monthly fee without much interest, but don't repay your $6000-9000 credit card debt which charges you 5-20% interest?
I guessed the $8000 tax breaks somewhat supported 200k-330k houses this summer , but something around or more than 400k are falling more, cause there are simply not enough buyers out there. |
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CC
Guest
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| Posted: Fri Dec 11, 2009 6:22 pm GMT Post subject: |
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| I posted the previous one. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 7:53 pm GMT Post subject: |
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| admin wrote: |
I think you need to consider one more important dynamic when thinking through how inflation may play out: China. Rates aren't low solely due to The Fed. At some point, foreign governments buying our debt are going to get fed up (pun intended) and stop subsidizing our low rates and low inflation. They are already edgy (rightfully so) and any whiff of inflation may be enough to motivate them to begin moving away from the dollar, even if the bout of inflation would have been short lived on its own.
- admin |
I don't believe that rates are low solely because of them. I've seen statistics that foreigners are actually buying less US debt now. In any case, the amount of debt sold far exceeds the amount bought by them so there's something missing: the creation of bonds. The Fed creates some bonds and loans the money from the sale to an investment bank at 0% or near 0%. The bank then uses that loan to buy the bonds from the Fed, pocketing the ~5% difference in the process. I think the rates will rise when the Fed stops issuing bonds. Who knows how the Fed will eventually end up soaking back up all this cash. I think the low interest loans aren't long term though so unless the Fed wants to break the banks again then they better find a way to keep rates somewhat low for a long time (30 years). Then again, rates only have to be lower than 5%, which implies a mortgage rate of around 7%, so they have some breathing room. Let's hope that it hovers around there so that we contain the amount of free money that is just given to the banks playing this long/short arbitrage. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Fri Dec 11, 2009 8:00 pm GMT Post subject: |
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| admin wrote: |
No argument here. However, I'm not too worried about this because the local CPI is also what I use when considering house price changes, so any distortion will be consistent. |
A better bet would be personalized CPI, which you could construct but which wouldn't be exempt from taxes (buying the goods now that you expect to buy in the future). I also wouldn't provide growth but I suppose that i-bonds aren't now anyway. I thought TIPS could go negative?
| admin wrote: |
A quick search on Google for a graph of the spread between official inflation and mortgage rates suggests that a 4% spread would be a generous low end estimate during periods of high inflation. That would put mortgage rates at 12%. This matters because how much your home appreciates is a function of what the person buying it from you can afford. |
Mortgages rates track the 10-year treasuries most closely I think, with about a 2% spread for 30-year mortgages.
| admin wrote: |
Let's be generous and say that your clone will be able to buy your house from you - that is, he will bring the same down payment to the table, adjusted for inflation, and will be able to make the same monthly payment, adjusted for inflation. You would have been paying $424.04 per month, which would be $457.97 adjusted for inflation. Your clone could therefore afford to borrow $46,600. Your down payment of $20K would be $21,600, adjusted for inflation. That yields a total purchase price of $68,200. |
mpr is hoping for a wage driven inflation like we had in the early 80s I think, resulting also from low interest rates. That was before globalization however. The coming rise in cost of goods will likely be driven by a weaker dollar, which won't raise the income of buyers all that much compared to day (it has a long way to fall!). |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Fri Dec 11, 2009 8:03 pm GMT Post subject: |
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| balor123 wrote: | | I thought TIPS could go negative? |
Not in real terms if you hold to maturity (if my understanding is correct).
- admin |
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