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More real estate doom and gloom

ohio

The Fresno Kid
Nov 26, 2001
6,645
6
SF, CA
something something Great Depression something something

And by the way, if you don't own it outright, you don't own it.
Yeah, but you don't WANT TO OWN IT. There's no better place to be under heavy inflation (or hyper inflation) than owing a mortgage. If inflation outruns your interest rate, you make money just by sitting on it even with stagnant demand. And at the end of the process you have a tangible asset with value regardless of exchange rates.

All these folks crying about their property value needn't worry unless they're speculators on VARs. The structural problems with the dollar and national debt are their best friend.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
I don't disagree. That's part of the reason I was okay with buying a car on a fixed rate loan (1.9%) despite my aversion to debt. I am hedged with low rate, but if we inflate I can pay down more with lower value dollars.
I just cant stomach the risk of picking up a large loan given the prices in Bay Area, and the risk inherent to my job.
 

dante

Unabomber
Feb 13, 2004
8,808
9
looking for classic NE singletrack
Yeah, but you don't WANT TO OWN IT. There's no better place to be under heavy inflation (or hyper inflation) than owing a mortgage. If inflation outruns your interest rate, you make money just by sitting on it even with stagnant demand. And at the end of the process you have a tangible asset with value regardless of exchange rates.

All these folks crying about their property value needn't worry unless they're speculators on VARs. The structural problems with the dollar and national debt are their best friend.
This is true *as long as* we actually do experience the inflation that has been predicted. The biggest thing that we learned from the Great Depression is that a deflationary spiral caused by a contraction of the money supply is probably the absolute worst possible outcome. The money supply contracts, prices fall, people don't spend money, prices fall, and it just snowballs. It's why the Fed has been shoveling money into the economy both through TARP and QE, and it's why Obama is scared to death of raising taxes at this point in the "recovery". The tax bill compromise that was just agreed to by the GOP/Obama is virtually "Stimulus Bill II" in it's breakdown of continuing tax cuts and additional spending. It's shoveling money into the hands of EVERYONE whether they're unemployed (UE extension), working (payroll tax cut), rich (income tax cut), rich and dying (low estate tax), etc.

My only concern is that it's apparent that the government is scared to death of something. You can't see that "something", only the efforts that are trying to combat it. It's like watching a bunch of emergency vehicles pull up to the building next to yours, and not knowing whether they're there to fight a fire or save someone from hypothermia because the building is outside your field of vision. However, when they start pulling hoses off of the trucks and dousing the building with water, you've got a pretty good idea that their main concern is a fire.

We can't see the inflation/deflation yet. We're teetering on deflation, as we're above 0% but well below the 2-3% (unofficially) targeted. We don't know what we're going to end up with, but we're seeing the US Gov't is only fighting one foe, deflation, and that's what scares the sh!t out of me. Everyone is talking like inflation is a foregone conclusion, and I hope that they're right, but I'm not taking anything for granted. If it was such a foregone conclusion, why are they still fighting it? It's like a fire chief in the previous analogy telling you everything's fine and the fire's under control, but they still have 5 trucks hosing down the structure and are frantically radioing for more help...

tl;dr - buying a house in an inflationary environment=good, deflationary environment=bad.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
What if you already own a house?
PIF is no issue, as long as you do not plan on selling. If you have a loan, try to get it fixed at a low rate. Even if the value drops, as long as you don't sell, you're fine. Worst case, you end up renting it out and use it as an annuity.
 

KavuRider

Turbo Monkey
Jan 30, 2006
2,565
4
CT
PIF is no issue, as long as you do not plan on selling. If you have a loan, try to get it fixed at a low rate. Even if the value drops, as long as you don't sell, you're fine. Worst case, you end up renting it out and use it as an annuity.
Oh, ok.

Yeah, fixed low rate now.

Sweet, thanks! I try to understand this stuff, but it is mostly over my head. Still enjoy reading these threads because I have learned a lot!
 

dante

Unabomber
Feb 13, 2004
8,808
9
looking for classic NE singletrack
Oh, ok.

Yeah, fixed low rate now.

Sweet, thanks! I try to understand this stuff, but it is mostly over my head. Still enjoy reading these threads because I have learned a lot!
Think about it this way: In an inflationary environment, money is worth less, and products go up in price. So if you buy a house for $100k and we're in a 5% inflationary period, 1 year after you buy it your house will be worth $105k, then $110.25k, then $115.5k, etc. In general your salary keeps pace, and so it's a great time to own a house since it's value is appreciating. The current "low downpayment" idea only amplifies this. Lets say that you put down 10% on the house listed above (so $10,000). The following year it's worth $105k, so you've "made" $5k on only a $10k investment. That's a 50% return on your investment in only 1 year!!

However, if a deflationary environment your house goes *down* in value, and cash is worth more. You bought your house last year for $100k and now it's only worth $95k. Yikes! If you put 10% down, you just lost $5k, or 50% of your investment. For those people who are sitting on the sidelines waiting to buy a house, they start thinking "hey, maybe if I wait till next year the price will go down *another* 5%. We'll just keep renting and maybe buy next year when the prices stop falling..." If enough people do that (on a lot of items), prices will fall because no one's buying, and it's called a "deflationary spiral". Just imagine if every year cars, houses, land, boats, EVERYTHING got cheaper. People would stop buying this year, because they know it'll be cheaper next year. This is what happened during the Great Depression, and it was pretty much apocalyptic for industries in this country. It's what Bernanke has been trying to fight, and it's still not known whether he beat it or not.........

On a personal level if you bought your house to live in, if you can afford the payments, if you're not selling anytime soon, and you didn't buy at the top of the market don't sweat it. A house is something to live in, slowly build equity in, and hopefully retire rent-free. That's about it. The get-rich-quick schemes of the housing bubble are gone for a LOOOONG time.
 

IH8Rice

I'm Mr. Negative! I Fail!
Aug 2, 2008
24,525
493
Im over here now
im about to re-fi my 5.875% rate to 4.5%

im also happy that houses around me are finally selling like hot cakes, for when i do sell.
 

KavuRider

Turbo Monkey
Jan 30, 2006
2,565
4
CT
Think about it this way: In an inflationary environment, money is worth less, and products go up in price. So if you buy a house for $100k and we're in a 5% inflationary period, 1 year after you buy it your house will be worth $105k, then $110.25k, then $115.5k, etc. In general your salary keeps pace, and so it's a great time to own a house since it's value is appreciating. The current "low downpayment" idea only amplifies this. Lets say that you put down 10% on the house listed above (so $10,000). The following year it's worth $105k, so you've "made" $5k on only a $10k investment. That's a 50% return on your investment in only 1 year!!

However, if a deflationary environment your house goes *down* in value, and cash is worth more. You bought your house last year for $100k and now it's only worth $95k. Yikes! If you put 10% down, you just lost $5k, or 50% of your investment. For those people who are sitting on the sidelines waiting to buy a house, they start thinking "hey, maybe if I wait till next year the price will go down *another* 5%. We'll just keep renting and maybe buy next year when the prices stop falling..." If enough people do that (on a lot of items), prices will fall because no one's buying, and it's called a "deflationary spiral". Just imagine if every year cars, houses, land, boats, EVERYTHING got cheaper. People would stop buying this year, because they know it'll be cheaper next year. This is what happened during the Great Depression, and it was pretty much apocalyptic for industries in this country. It's what Bernanke has been trying to fight, and it's still not known whether he beat it or not.........

On a personal level if you bought your house to live in, if you can afford the payments, if you're not selling anytime soon, and you didn't buy at the top of the market don't sweat it. A house is something to live in, slowly build equity in, and hopefully retire rent-free. That's about it. The get-rich-quick schemes of the housing bubble are gone for a LOOOONG time.
Thanks + rep for this!
I know a lot of people who are saying "I'll just wait a little longer to buy".

I bought my house 6 years ago. I SHOULD have sold it at the peak, but oops. Still, I am paying substantially less than if I was renting and hey, I'm paying the loan down (actually making headway).

I bought my house because at the time, I could and I needed a place to live. I had no illusion of becoming rich off it...
 

KavuRider

Turbo Monkey
Jan 30, 2006
2,565
4
CT
That was awesome. I have a love/hate with ZH. Lots of gems like that, but there is also an awful lot of Desmodo/RenegadeRick :tinfoil: talk also, sometimes to the point of being really distracting.
Interesting vid.

Kind of scary when you really think about it...which is why most people probably aren't thinking about it.
 

ohio

The Fresno Kid
Nov 26, 2001
6,645
6
SF, CA
I just cant stomach the risk of picking up a large loan given the prices in Bay Area, and the risk inherent to my job.
Totally agreed, but that's because I think homes in the area are overvalued... to me a separate concern from value of the dollar.

What if you already own a house?
If you already own it outright, you're insulated from either situation. You're essentially on the barter system and don't care what a dollar is worth (except for everything else about your finances, outside of the house). In deflation, value goes down nominally, but each of those dollars is worth more. Assuming demand for your home stays static (there's the same number of folks living in your area working the same type of jobs), it will net out exactly. Same for inflation.

If you DON'T own it outright, but have it mortgaged, it's exactly as Dante described. Inflation good, deflation bad.
 

KavuRider

Turbo Monkey
Jan 30, 2006
2,565
4
CT
If you DON'T own it outright, but have it mortgaged, it's exactly as Dante described. Inflation good, deflation bad.
I'm not really concerned, as I look at it as a place to live, not an investment.

One good thing out of all this mess is that I have learned to be a lot more frugal. I think twice before buying anything.
 

jimmydean

The Official Meat of Ridemonkey
Sep 10, 2001
33,417
6,267
Portland, OR
Totally agreed, but that's because I think homes in the area are overvalued... to me a separate concern from value of the dollar.
That's what made me laugh about Ashland. There are houses there that have been on the market for more than 2 years and refuse to take anything less than $450k. NOBODY makes that kind of money in that area. So unless you are a retired Google employee, good luck.
 

dante

Unabomber
Feb 13, 2004
8,808
9
looking for classic NE singletrack
I'll buy a house in Bend, when a 4 br is < $150k
Hope you can purchase the thing outright with the cash you've been hoarding, as we're looking at much higher bond/mortgage rates in the not-too-distant-future.

It warned that unless Congress gets its act together, it could see a once unthinkable downgrade of the U.S. credit rating on its watch, which could balloon U.S. borrowing costs and make our financing position much more costly.
Of course, if you have a large pile of money to drop on a house, it might work out best for you since housing prices will plummet as interest rates skyrocket. Everybody else, hold on as it might be a long, bumpy ride.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
That is the plan. I also have thoughts of just holding the cash until rates hockey stick, then locking in stupid high rates on long-term bonds.
 

KavuRider

Turbo Monkey
Jan 30, 2006
2,565
4
CT
Hope you can purchase the thing outright with the cash you've been hoarding, as we're looking at much higher bond/mortgage rates in the not-too-distant-future.

Of course, if you have a large pile of money to drop on a house, it might work out best for you since housing prices will plummet as interest rates skyrocket. Everybody else, hold on as it might be a long, bumpy ride.
That's my plan - hunker down, batten down the hatches and ride this out.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
Rates up, prices down. There is a certain 'intrinsic value' to what people will pay for a home, as they look at it on a monthly payment basis. If you are looking at 15% interest, your monthly will be much high based on the same house px, so prices will drop to keep the balance.
 

dante

Unabomber
Feb 13, 2004
8,808
9
looking for classic NE singletrack
Why do you think that? (especially for mature markets not gutted by the bubble)
The amount people are willing to purchase a house for is directly related to their monthly mortgage payment. The actual price they pay isn't that much of a deciding factor. So, if you have $1,000/month to spend on a mortgage, you can buy:

$200,000 house @ 4.5% interest

or

$145,000 house @ 7.5% interest

Both of those have an identical $1,013 monthly mortgage payment (those are mortgage amounts, but you get the idea). The *only* thing that can keep this from happening is wage inflation, meaning that people can continue to spend more and more on a house... Unfortunately, in the past decade wages have barely kept up with inflation. At ~10% unemployment, I'd be shocked if wages came anywhere near keeping up with inflation.
 

dante

Unabomber
Feb 13, 2004
8,808
9
looking for classic NE singletrack
Rates up, prices down. There is a certain 'intrinsic value' to what people will pay for a home, as they look at it on a monthly payment basis. If you are looking at 15% interest, your monthly will be much high based on the same house px, so prices will drop to keep the balance.
BTW, mortgage interest rates hit a high of 18% in 1982... At that rate, if you wanted to keep your monthly payment at $1,013, instead of a $200k mortgage you could afford: $67,000.
 

jimmydean

The Official Meat of Ridemonkey
Sep 10, 2001
33,417
6,267
Portland, OR
Rates up, prices down. There is a certain 'intrinsic value' to what people will pay for a home, as they look at it on a monthly payment basis. If you are looking at 15% interest, your monthly will be much high based on the same house px, so prices will drop to keep the balance.
My first house was 10.25% @ $156k, my second house was 4.25% @ $176k. The payments were much easier the second time.
 

DaveW

Space Monkey
Jul 2, 2001
9,459
1,134
Karori, Poneke Te Ika-a-Maui
My first house was 10.25% @ $156k, my second house was 4.25% @ $176k. The payments were much easier the second time.
My last house (sold in January) was 8.2% on 210k.
Rates are currently vary between 6.1 and 7.8%
http://www.interest.co.nz/borrowing/mortgages/
But the housing market here over the last year and a bit has only dropped about 5-10% and is now moving up again.
 

jimmydean

The Official Meat of Ridemonkey
Sep 10, 2001
33,417
6,267
Portland, OR
wow, when was that??
Oct 1999, My credit wasn't the greatest, but neither was the market. The house was listed for $124k in April, by the time we made up our mind and put in the offer, it was $156k. It went up to $180k before the bottom fell out in 2001. I sold in 2001 for $125k back to the original builder.
 

Pesqueeb

bicycle in airplane hangar
Feb 2, 2007
34,674
9,060
Riding the baggage carousel.
Oct 1999, My credit wasn't the greatest, but neither was the market. The house was listed for $124k in April, by the time we made up our mind and put in the offer, it was $156k. It went up to $180k before the bottom fell out in 2001. I sold in 2001 for $125k back to the original builder.
Ouch. Thats a bummer. One of the things that keeps us pinned in this house is the fact that its value is back down to what we originally paid for it, by the time you factor what it would realistically sell for given the market, plus Realtor fees I figure we'd be out 30-40 grand.
 
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dan-o

Turbo Monkey
Jun 30, 2004
6,499
2,805
Understood, but interest rates effect the amount an individual can spend on a house.

That doesn't necessarily mean that house prices will drop, just that the person in your example will need to purchase a lower priced home to meet their budget.

Unless the interest rate jump drastically reduces the pool of eligible buyers, property values (again not including the mega-bubble areas where home values were fueled solely by easy money) won't drop purely as a result of interest rates.

The price of a TV at best buy is the same whether you pay cash or with a 30% interest credit card.
 

jimmydean

The Official Meat of Ridemonkey
Sep 10, 2001
33,417
6,267
Portland, OR
Ouch. Thats a bummer. One of the things that keeps us pinned in this house is the fact that its value is back down to what we originally paid for it, by the time you factor what it would realistically sell for given the market, plus Realtor fees I figure we'd be out 30-40 grand.
The second house was "A steal". It sold in 2006 for $265k, we bought it in 2009 for $176k, it sold earlier this year for $156k, then again in October for $135k. $135k is what I would call a fair price for that place.

My luck with home ownership has not been a good one. Not sure if I will ever purchase another house at this rate since my timing of the rise/fall seems a bit off. :rofl:
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
Understood, but interest rates effect the amount an individual can spend on a house.

That doesn't necessarily mean that house prices will drop, just that the person in your example will need to purchase a lower priced home to meet their budget.

Unless the interest rate jump drastically reduces the pool of eligible buyers, property values (again not including the mega-bubble areas where home values were fueled solely by easy money) won't drop purely as a result of interest rates.

The price of a TV at best buy is the same whether you pay cash or with a 30% interest credit card.
Different thought process. People don't look at interest when paying on credit, as it's not seen until the bill shows up, and it's too late. When they tell you the monthly payment up front, people are aware of it.
 

stoney

Part of the unwashed, middle-American horde
Jul 26, 2006
17,868
3,206
Colorado
The second house was "A steal". It sold in 2006 for $265k, we bought it in 2009 for $176k, it sold earlier this year for $156k, then again in October for $135k. $135k is what I would call a fair price for that place.

My luck with home ownership has not been a good one. Not sure if I will ever purchase another house at this rate since my timing of the rise/fall seems a bit off. :rofl:
Buy when people say sell, sell when people say buy. the masses are hysterical and stupid. Took me thousands in losses to figure that out.