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A question for the math whizzes


By woppa   Follow   Sun, 4 Mar 2012, 1:14pm PST   11,570 views   61 comments   Watch (0)   Share   Quote   Permalink   Like   Dislike (1)  

How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future. Lets say someone decides to take out a 500,000 dollar mortgage at 5% 30 year fixed right before interest rates start to rise and house prices fall. How much would inflation have to up and over how long a time period for that person to have made a wise choice, compared to renting for ten years after rates go up and prices drop, and buying with cash at a lower price. Not sure how low the price would be though and of course that is a key variable. I am just toying with the idea of housing vs gold. Stash your money in real estate, stash your money in gold? A little bit of both?

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thomas.wong1986   befriend   ignore   Sun, 4 Mar 2012, 2:16pm PST   Share   Quote   Like (1)   Dislike     Comment 1

woppa says

How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future.

Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

Today, you have higher level of global competition and decline in collective bargaining. In places/industries of SV deflation is much much higher due to global competition and unheard of Unions.

Hyperinflation in the future, if that is even possible, will not lead to increase in wages/salaries.

chemechie   befriend   ignore   Sun, 4 Mar 2012, 10:33pm PST   Share   Quote   Like (2)   Dislike     Comment 2

Hyperinflation will only help you with mortgage or other debts IF your income keeps up with inflation - which is a BIG if!
It is widely known that real inflation is higher than reported by the government; I'm sure as real inflation increases, the discrepancy will get worse. Employers, if they can get away with it, will give wage increases at or below inflation (look at the discussion on federal pay - official inflation is over 2% yet federal workers might get a 0.5% increase; then again, they might not get anything).
While this references salaries, it applies to rents also as a landlord - you can't raise rents to keep up with hyperinflation if nobody's salary goes up, so don't count on rental income to keep pace with inflation. Having said that, in some places it may, but don't count on it.

uomo_senza_nome   befriend   ignore   Sun, 4 Mar 2012, 11:29pm PST   Share   Quote   Like (1)   Dislike     Comment 3

woppa says

Many people believe that there is a good chance of hyperinflation in the future.

Yes and these "many people" have a complete misunderstanding of how hyperinflation actually works.

Hyperinflation does not equal inflation on steroids .

What we have going on is a secular deleveraging cycle, which means credit deflation. Credit has to contract from exuberant levels and it is happening as we speak.

If you really want to understand hyperinflation with the background understanding that we have an ongoing credit deflation, consider this link.

Hyperinflation is the after-effect of a severe deflation. Or think of it like a ridiculous political/monetary response to a severe deflation.

Deflation becoming so severe that people lose faith in the currency itself. A complete loss of confidence leads to hyperinflation.

In fact, if you think hyperinflation is likely -- you shouldn't take on any debt because what we will actually face is severe deflation (prior to the hyperinflation) and debt cannot be paid when money is running short in the economy.

Taking on a mortgage makes sense if you think wage inflation will happen in the future. Paying debt more easily means that we have a steady devaluation of currency and commensurate increase in wages as well.

but wages for middle class have been stagnating for more than a decade.

clambo   befriend   ignore   Mon, 5 Mar 2012, 12:16am PST   Share   Quote   Like   Dislike (1)     Comment 4

Stash your money in neither gold nor a house.
Invest your money in 1.growth stocks 2. dividend paying stocks 3. high yield corporate bonds 4. high yield foreign bonds.
If I found a suitcase of cash somewhere I'd buy 1&2 above.
If you seek *safety*, buy a bank account denominated in Swiss Francs. I think you can find them online.
When I first visited Switzerland in early 70's, 1 Franc=33 cents US. Today, 1 Franc=$1 USD.

Dan8267   befriend   ignore   Mon, 5 Mar 2012, 1:45am PST   Share   Quote   Like (4)   Dislike     Comment 5

woppa says

How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage.

You're assuming that the government and banks won't cheat. They will. They always do.

If they decide to inflate the currency at a rate of 30% a year, they will pass an emergency act that raises your mortgage rate, perhaps by forcing a conversion to an adjustable rate. They won't let a middle class peon profit from their debasing of the currency. All profits must flow to the hungry, greedy beast that is our corporate-run government.

TPB   befriend   ignore   Mon, 5 Mar 2012, 2:12am PST   Share   Quote   Like (1)   Dislike     Comment 6

Inflation is not the problem, nor is mortgages, the problem is the ingrained belief that people over 30 today. Think that life just ain't worth living, unless they are living the house the Sapranos were filmed in.

I bought in '10 and am paying less in Mortgage than I did in rent 3 for years prior.

People need to quit fronting like they are Player. Players can afford to be Players, even when they lose their job. Players are their own job. If your finances hinge on the ability to find a job that is comparable to your present job. And that skill isn't a high demand. Then you are living beyond your means. I don't care if you are pop star with a new hit single. If you are going to buy a Mansion, you better be Michael Jackson and can keep the hits coming.

People are always surprised when a once rich guy is broke. That's what happens when you're not Prudent with finances, and reckon your self a bit of a Player.

uomo_senza_nome   befriend   ignore   Mon, 5 Mar 2012, 3:01am PST   Share   Quote   Like   Dislike     Comment 7

Dan8267 says

They won't let a middle class peon profit from their debasing of the currency. All profits must flow to the hungry, greedy beast that is our corporate-run government.

Very true. Rules will be changed if things go to crapper.

California Equity & Loan   befriend   ignore   Mon, 5 Mar 2012, 5:20pm PST   Share   Quote   Like   Dislike (1)     Comment 8

Math question, not a social question.
Use the below assumptions. Build the equation. No talk.

Assumptions:
Purchase price $500,000.
20% down payment.
80% mortgage at 4%.
RE Taxes = $6,000 increasing 2% per year.
HO Insurance = $900*
Annual maintenance specific to the property owner - $2,500*
Down payment funds could have earned a prime minus 2% compounding.
To realize gain, property must liquidate.
Liquidate at 10 years with 7.5% total cost of sale.
At the end of the 10th year mortgage balance will be $315,000.
Income from sale not taxed.
10 year chart of inflation in housing prices:
2012 -5%
2013 -3%
2014 0
2015 +6%
2016 +14%
2017 +12%
2018 +8%
2019 0
2020 -8%
2021 -15%

*These values increase and decline with inflation.

citizen jpp   befriend   ignore   Mon, 5 Mar 2012, 6:30pm PST   Share   Quote   Like (2)   Dislike     Comment 9

In hyperinflation, you would have trouble getting enough food to eat, forget about being able to heat/cool your house. Sounds like you want to prepare for a 1975 scenario -- that is like wishing you were 16 again...

taxee   befriend   ignore   Mon, 5 Mar 2012, 9:25pm PST   Share   Quote   Like (4)   Dislike     Comment 10

In 1975 my lady and I were living in a tepee on top of a mountain in Oregon with three other couples. Worked on tree planting crews for a little money. Skinned and ate road kill deer when we found them and had a good old time. I just don't know what's wrong with our youth these days that they can't enjoy themselves.

Auntiegrav   befriend   ignore   Mon, 5 Mar 2012, 10:44pm PST   Share   Quote   Like (2)   Dislike (2)     Comment 11

The true value of a house is whether or not it puts people where they need to be useful to their own future. Individually and collectively, this is the rub. Whether inflation occurs or not is based on the economics of the culture, because the economy is just data that reflects what people are doing. If everyone is using oil to drive to a job to buy a car to drive to a job, and they plop houses anywhere they have a hankerin' to do so, then basing your assumptions on the value of A: the economy figures and B: the price of the house is simply deluding yourself that the culture itself will continue to function as the consuming beast that it is, and that the availability of resources for it to do so will remain stable.

marcus   befriend   ignore   Mon, 5 Mar 2012, 11:14pm PST   Share   Quote   Like   Dislike     Comment 12

chemechie says

Hyperinflation will only help you with mortgage or other debts IF your income keeps up with inflation - which is a BIG if!

I know what you mean, but I don't agree entirely.

I think too big a mortgage is an unwise risk. And we can't know about inflation. But having said that, debt is a hedge in inflationary times.

Say you buy a 600K house with a 500K mortgage, and an household income of 190K. If 20 years later your household income has gone up to only gone up 350K, but the house is up to 2.4 million then it's a win. You're now paying back dollars on your mortgage that are worth much much less than the ones your borrowed.

The thing is, it's impossible to predict. What if we have a 20 years like japan has had?

Also, if inflation kicks in and prices go down in the short term because of higher interest rates, then you are locked in to a deal that's losing in the short term (although you might be able to rent it out - do the analysis on that).

I think you need to be confident in your long term ability to pay the mortgage and stay in that home (or rent it out), but even then an oversize house commitment is a risk because of the possible japan effect - and resulting opportunity cost of other investments (savings) you haven't done.

CashWillCrash   befriend   ignore   Tue, 6 Mar 2012, 1:31am PST   Share   Quote   Like (1)   Dislike (5)     Comment 13

Always better to buy than to rent. After renting for 30 years your Landlord gives you not even one Penny when you move out. After paying mortgage for 30 years you get every single penny back since prices triple every 30 years. Just make sure you buy with a 3,5% down FHA loan in case house prices drop or things go bad in anything so you can walk away and let Obama eat the loss. And if you're married buy only in one spouses name so that the minute the bank takes your old house the other spouse can get a new 3.5% down FHA mortgage. Remember, mortgages are free at the moment, meaning you only pay around 3-4% just like inflation, that's the same as a free zero percent loan if you include inflation in your financial planning. And if for any reason we should fall into deflation just hand the keys back to the bank, Obama got your back! Most important to remember: never put more than 3,5% down!!!

uomo_senza_nome   befriend   ignore   Tue, 6 Mar 2012, 1:54am PST   Share   Quote   Like (2)   Dislike     Comment 14

CashWillCrash says

that's the same as a free zero percent loan if you include inflation in your financial planning. And if for any reason we should fall into deflation just hand the keys back to the bank, Obama got your back!

This advice represents some serious things that are wrong in this country.

CashWillCrash   befriend   ignore   Tue, 6 Mar 2012, 2:06am PST   Share   Quote   Like (1)   Dislike (1)     Comment 15

uomo_senza_nome: You're absolutely right! And from what I hear from my friends in Europe/Canada/Caribbean: the US seems to be the only country where you can walk from your financial obligations (mortgage) without any consequences even if you got a million bucks cash in your bank account!

rootvg   befriend   ignore   Tue, 6 Mar 2012, 6:42am PST   Share   Quote   Like (1)   Dislike     Comment 16

thomas.wong1986 says

woppa says

How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future.

Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

Today, you have higher level of global competition and decline in collective bargaining. In places/industries of SV deflation is much much higher due to global competition and unheard of Unions.

Hyperinflation in the future, if that is even possible, will not lead to increase in wages/salaries.

Concur. Employers will move jobs to Right To Work states.

That's what the Boeing thing in South Carolina was all about.

rootvg   befriend   ignore   Tue, 6 Mar 2012, 6:48am PST   Share   Quote   Like   Dislike     Comment 17

CashWillCrash says

Always better to buy than to rent. After renting for 30 years your Landlord gives you not even one Penny when you move out. After paying mortgage for 30 years you get every single penny back since prices triple every 30 years. Just make sure you buy with a 3,5% down FHA loan in case house prices drop or things go bad in anything so you can walk away and let Obama eat the loss. And if you're married buy only in one spouses name so that the minute the bank takes your old house the other spouse can get a new 3.5% down FHA mortgage. Remember, mortgages are free at the moment, meaning you only pay around 3-4% just like inflation, that's the same as a free zero percent loan if you include inflation in your financial planning. And if for any reason we should fall into deflation just hand the keys back to the bank, Obama got your back! Most important to remember: never put more than 3,5% down!!!

If you live in Dallas or Atlanta? Probably.

If you live in an expensive coastal area? No...because there comes a point at which buying in safe or even desirable area isn't worth the financial risk or even possible. That's the situation we found ourselves in during the last eight years. Finally, we found an area we liked and a deal we could afford and that made sense. That's the only reason we did this.

As I've said before, a friend of mine in Cleveland bought a home recently and the bank wanted three years of financial statements. The bank wanted three months of pay stubs, an employment certification letter from each of our employers plus our credit reports. That's it. Why? Obviously they know something positive about the area in which we bought that no one here seems to.

Isn't that right?

rootvg   befriend   ignore   Tue, 6 Mar 2012, 6:51am PST   Share   Quote   Like (2)   Dislike (1)     Comment 18

CashWillCrash says

uomo_senza_nome: You're absolutely right! And from what I hear from my friends in Europe/Canada/Caribbean: the US seems to be the only country where you can walk from your financial obligations (mortgage) without any consequences even if you got a million bucks cash in your bank account!

I think it depends upon the state. Texas and California (as far as I know) are non recourse states. You can walk away from a house as long as there's no second mortgage attached to it.

Ohio is a very different situation. It's a different economy and culture altogether...and if you pull that shit up there, the bank will chase your ass to the end of the earth and until your dying day for that money. You'll be very lucky if you don't end up in jail.

ArtimusMaxtor   befriend   ignore   Tue, 6 Mar 2012, 7:44am PST   Share   Quote   Like   Dislike     Comment 19

They make markets fall and rise at their whim. You have to remember. The "Debt" people or "Credit" people are the ones that can print at a whim. Nothing to stop them. No president or anything else. They can make "inflation" disappear. Take the Carter years gas went up to only 1 dollar. That screwed the CPI and sent rates to 19% on a home loan. Gas is now at 4 dollars a gallon. Car prices have gone from 5k to almost 15k and nothing has happened. In those days it was more or less a United States positioning itself against an "Oil Cartel". That very much ment business.

The Auto industry and the Home industry have always been the "drivers" of the economy. Anyone with a Series 7 license that watch CNBC knows that. Deal is the Con Market is at 13k it means absolutly nothing. Because well the "drivers" of the economy that have failed have actually made it go up. Which dosen't defy gravity. It just tells you the Stock Market is Bullshit with a Button.

When you finally realize they could give a crap about 1% overnight lending rates leading to inflation and the CPI and PPI. Then you will realize they pretty do much what they want. When they want.

So for you its a crap shoot. If you know a guy thats a real bigshot with the "paper" then you might have an idea. Barring that (you seem like most people). Next time you put cash in the stock market don't ever, ever take it out till someone tells you to. Or put it in anything till someone says what. That someone better know something or you really had have better have been a "good boy" for somebody. Or they may "forget" to tell you. Theres a lot of bullshit artists (selling stock) that don't know anyone in that game. Some that "kind" of know. Then there are people that, well know the people with the "button". Watching the stock market for most people now means nothing. I don't think they have figured that one out yet. They are way to consumed in their own delusion that we are all that "gullible". In fact many people in here were laughing hysterically pointing at the Google stock figures the other day. I don't know why.

As for gold what they are selling in the United States is more than likely stolen from someone. Just like a lot of the other things they take that does not belong to them. Like oh oil. Stuff like that.

rootvg   befriend   ignore   Tue, 6 Mar 2012, 7:48am PST   Share   Quote   Like   Dislike     Comment 20

Even if it's true, you're not gonna do anything about it.

Once you understand that you can accept that it's an imperfect world, do your best to take care of those you love, move on and live your life.

Or, you can be a martyr...if you live in the Bay Area and have a guilt complex. I have more than one flaw in my character but this isn't one of them.

ArtimusMaxtor   befriend   ignore   Tue, 6 Mar 2012, 8:18am PST   Share   Quote   Like   Dislike     Comment 21

If I was a Russian "Shipping" maven. I guess I would stand a chance. I'll never be that "great" of course.

Some people have their flaws. I believe the future can be really nice without all of the steeling. I mean how much is enough?

oliverks1   befriend   ignore   Tue, 6 Mar 2012, 11:18am PST   Share   Quote   Like (2)   Dislike     Comment 22

thomas.wong1986 says

Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

Hyperinflation did not occur in the 70s. Hyperinflation occurred in Germany in the 1920s. It occurred in Chile in the 1970s. Hyperinflation occurred in Zimbabwe in the 2000's. But it has never occurred in the USA (yet).

In Hyperinflation you do not worry about your house. You don't care about investments. You need two things more than anything else, food and safety. You will trade anything for these. Everything is reduced to what do I need to do today to survive.

rootvg   befriend   ignore   Tue, 6 Mar 2012, 11:22am PST   Share   Quote   Like   Dislike     Comment 23

oliverks1 says

thomas.wong1986 says

Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

Hyperinflation did not occur in the 70s. Hyperinflation occurred in Germany in the 1920s. It occurred in Chile in the 1970s. Hyperinflation occurred in Zimbabwe in the 2000's. But it has never occurred in the USA (yet).

In Hyperinflation you do not worry about your house. You don't care about investments. You need two things more than anything else, food and safety. You will trade anything for these. Everything is reduced to what do I need to do today to survive.

Did you know there's been a shortage of forty five caliber pistol ammunition in California for over two years? Go out and try to buy some tomorrow. Wal-Marts on this side of the hill have stopped carrying it, last box I found was in a sporting goods store and it's not cheap.

You are correct and people are paying attention. The word's out.

drtor   befriend   ignore   Tue, 6 Mar 2012, 1:10pm PST   Share   Quote   Like   Dislike     Comment 24

In any decision problem it is important to clarify exactly what are the alternatives under consideration.

If they are "mortgage + house" vs "rent" then yes the case for mortgage is stronger under inflation. Note that the case for buying is stronger if house prices go up, and it is also stronger as rents go up (assuming fixed rate mortgage). If you want to confirm with numbers plug into NY times buy vs rent calculator. Maybe it is true as some have pointed out that wages won't keep up with inflation, but it is difficult to see a kind of inflation where rents not go up as the money supply increases. In fact owners equivalent rent is a key part of the standard inflation definition.

If the alternatives are "buy house with cash" vs "invest same cash in something else" then maybe if you are a very good stock picker you could do better in the market. But it is difficult to see why market index in general should do better than a house generating (or saving) rent. Why would people make more money selling iPhones, cars, or soda than they would from renting out a house?

I would also mention that taxes play a *huge* role when inflation is big. Suppose you have 10% inflation and you have found a good asset that also goes up by 10%, just keeping your real value constant. But then, depending on how well you manage your taxes you may have to pay income tax, capital gains tax, or no tax at all on the 10% "gain". Owning a house is very good from this perspective.

thomas.wong1986   befriend   ignore   Tue, 6 Mar 2012, 2:31pm PST   Share   Quote   Like   Dislike (1)     Comment 25

oliverks1 says

Hyperinflation did not occur in the 70s

Thanks for the correction.. it was Stagflation...

drudometkin   befriend   ignore   Tue, 6 Mar 2012, 5:53pm PST   Share   Quote   Like   Dislike     Comment 26

oliverks1 says

thomas.wong1986 says

Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

Hyperinflation did not occur in the 70s. Hyperinflation occurred in Germany in the 1920s. It occurred in Chile in the 1970s. Hyperinflation occurred in Zimbabwe in the 2000's. But it has never occurred in the USA (yet).

You need to read up on your early American currency history. google "not worth and continental"

woppa   befriend