patrick.net

One can always buy derivatives as a hedge against inflation or the dollar going down. But if a world wide financial crisis occurs, I wonder whether the derivatives holders will get paid.

The Fed will not fix the inflation problem we have. It is in the interest of the government to have high inflation and lie to use about it. If you used the 1970 CPI numbers, we are running at 10% inflation now.

Some of you may wonder why we are doing such a thing. My answer is taxes. The American people are unwilling to tax themselves properly. Without inflation we will never keep the promises of Social Security, paying back the outstanding Tbills, paying for Medicare, and the gross amount of budget deficit spending. It will not matte that you SS check will be worth a lot less than what you were expecting, the money you were promised is being paid. The money being paid to you is just lost a large amount of buying power.

Imagine a world where we suddenly got smart and stopped this inflation with high intrest rates. Some government puppet would tell us all that there is no money for SS benefits as promised and that we would have to make do with $.20 on the dollar that we put in. The government traded the money for Tbills, which are worthless by now. With inflation we can just inflate the money supply at 10% a year and cut the SS obligation by 50% each 7 years!

America will respond by having the standard of living degrease slowly with time and never catch on to the ruse. Lets all follow Ben's lead and drink our Koolaid and be quiet about it! Don't worry about the money, we can print a lot more of it at a very cheap rate :)

The Fed will not fix the inflation problem we have. It is in the interest of the government to have high inflation and lie to use about it. If you used the 1970 CPI numbers, we are running at 10% inflation now.

The last war debacle was paid for with inflation. What makes you think this current run of government spending will be any different? We are using inflation to solve the problems. Some of you may wonder why we are doing such a thing. My answer is taxes. The American people are unwilling to tax themselves properly. Without inflation we will never keep the promises of Social Security, paying back the outstanding Tbills, paying for Medicare, and the gross amount of budget deficit spending. It will not matte that you SS check will be worth a lot less than what you were expecting, the money you were promised is being paid. The money being paid to you is just lost a large amount of buying power.

Imagine a world where we suddenly got smart and stopped this inflation with high intrest rates. Some government puppet would tell us all that there is no money for SS benefits as promised and that we would have to make do with $.20 on the dollar that we put in. The government traded the money for Tbills, which are worthless by now. With inflation we can just inflate the money supply at 10% a year and cut the SS obligation by 50% each 7 years!

America will respond by having the standard of living degrease slowly with time and never catch on to the ruse. Lets all follow Ben's lead and drink our Koolaid and be quiet about it! Don't worry about the money, we can print a lot more of it at a very cheap rate :)

most (approx~50%) are in foreign market mutual funds. I picked the ones that mostly invest in large cap with low expense ratio. I also have big positions in natural resources funds and a few tech companies. I've been looking into GLD but havent bought any yet. I have approx 15% of my funds in money market.

Now where is that crystal ball....

I doubt anyone here can predict what will happen next enough to know what is best. Personally I bought some FXE a bit ago which is an exchange-traded fund against the Euro. It's doing okay. Like many others I have things spread around in some US and some foreign funds like Emerging Markets.

I stayed out of Chinese funds I think their business/government weirdness is unstable and difficult to understand. Communists may know how to make cheap Walmart goods, but will also run a polluting 50-year old steel mill to death instead of modernizing it. Failure to invest in capital upgrades and R&D eventually bites you. I know a Chinese professor who said no students there want to go into research or PhD everyone is chasing bachelor related to production and then go to work.

However as increasingly interconnected as everything is these days, I can't say that any one thing is safer than another. Now it seems like every time someone sneezes in Norway the international markets catch cold. Money Markets, index funds, CDs those are traditional safe bets. Lately I've been aiming more for things that return high predictable dividends more so than just appreciating stock price. Certain oddball stocks like FRO for example are paying off really well.

The Euro is in a bubble, along with real estate, stocks, gold, classic cars, and art. They will all crash like Beany Babies.

"I know a Chinese professor who said no students there want to go into research or PhD everyone is chasing bachelor related to production and then go to work."

Is this perhaps, where they feel their niche is? If they believe production is their nation's forte, they may feel that the Americans can do th R&D to create the next new consumer essential (a holographic TV maybe), and the Chinese can profit by supplying mass quantities to the world.

"Of course, there is always real estate, but don’t even get me started on that one…"

But isn't Real Estate investement really on the minds of several people on thia blog? Just waiting for home prices to deflate enough to be worth the purchase, either as a residence or investment.

In the mean time, how to invest? I am using a more simple minded approach that the varied stock, futures, and derivitive vehicles I see others on this blog are using. I just keep my US dollars in Credit Union CDs that are insured and paying around 6%, and in 90 day Treasuries that are paying around 5%. I am hoping that from my point of view, my dollars get stronger since I looking mainly to buy houses. CPI and weak foreign exchange in this case do not affect me.

"The Euro is in a bubble, along with real estate, stocks, gold, classic cars, and art. They will all crash like Beany Babies."

Interesting, seems to make sense. Many people here would agree on the real estate crashing. Do have a time frame prediction for the Euro and gold?

I wouldn't touch China's financial market with a mile long pole. The financial/capital market is grossly inefficient. Even the best case scenario requires many boom/bust cycles before they learn their lesson.

I can see taxes as a motivation for creating inflation. As an added bonus, no one seems to be reforming the tax code to reflect that $200K is the new $100K, so everyone's taxes will quietly increase over time without a single change on the part of the government.

In addition, ever since I heard that our foreign debt is denominated in US dollars, I've been pretty convinced that the government wants inflation in order to solve that pesky problem. Given that there are few other options, and given that it is possible to control the value of the dollars in which the debts are denominated, the government would be insane to do anything but inflate their way out of this problem. When Walmart employees are making $100K a year, our government's debts will seem trivial.

"When Walmart employees are making $100K a year, our government’s debts will seem trivial. "

Unless, of course, the gov continues to add to the debt in the meantime.

Unless, of course, the gov continues to add to the debt in the meantime.

Aye, there's the rub. As long as government spending continues to expand as fast or even faster than they expand the money/credit supply, then we're just treading water.

Well, it seems like between the fact that the RE bubble unwind is beyond argument and the extremely looonng time it takes for a message to post, this site is pretty dead right now...

I think the USD sell off is complete in the short term. I am not bullish on US$ but I think it will trade sideways. The question is always - US$ will fall against WHAT ? Gold ? RE ? Other currencies ? Oil ? Once you decide that theory for yourself, then it is easier to figure out where you want to put the money.

For example, if you believe paper money is loosing value all over the world, then commodities seem like a decent bet. But if you believe, only US$ will loose value, and other economies are sound, then invest in FXE or Canadian stocks or whatever.

These days, global stock markets seem quite co-related. In fact, buying stocks of US exporters may give more protection against falling US$.

Using other currencies, commodities, gold, foreign stocks/bonds as a part of overall diversification strategy based on your asset allocation model is OK. Betting on direction of currencies and night-trading is quite different. Most people are better off not dabbling in it.

The unwind is beyond argument, true. And yet I'm just not seeing enough of it yet. The teeny tiny cosmetic fixer down the street in our fairly non-prime area is *still* listed at $650K--though it has been listed at 650K since April, so they might at some point be willing to rethink the matter. Houses in this neighborhood were selling in the mid-$250's in 2000. Sigh.

A couple years ago, I thought the Euro, £, AUD, NZD, and certain other (relatively stable) foreign-denominated investments were a really good bet, and loaded up in my 401k, MFs, etc. However, now that those currencies are nearing multi-year highs vs. USD, I'm not so sure that's such a safe bet anymore. We should also keep in mind that Europe's property bubble is nearly as large as ours (check out Patrick.net newslinks on Spain, UK, Netherlands, Oz, etc.), and that their central banks also have a strong incentive to inflate their way out. For comparison, here are the CB discount lending rates at some of the major players vs. U.S.:

Federal Reserve 5.25%
Bank of England 5.5%
Bank of Japan 0.5%
European Central Bank 4.0%
Bank of Canada 4.25%
Swiss National Bank 2.5%
The Reserve Bank of Australia 6.25%
Bank of New Zealand 8.0%
Bank of China 6.57%

source: http://www.fxstreet.com/fundamental/interest-rates-table/

Outside of NZ, Oz & China, I don't see a whole lot of significant CB-initiated credit tightening going on, though the overall trend seems to be moving towards gradually higher rates. Thanks primarily to the BoJ, the carry-trade *still* appears to be alive and well (for now).

How's it looking on the ground where you guys live?

I'm seeing some decline in the Alameda market, but it's spotty. A sort of nice $1.2 flip just dropped to $1.1, but other sellers are quite stubborn. Houses sit on the market for longer, sure, and maybe they sell below asking, but we don't know that yet. I hear of a lot of potential sellers talking about renting their places out, and it sounds to me as though the asking rents are increasing in some cases--though there are plenty of other options to be had, generally speaking, so no one really has to pay so much for rent unless there is a particular place they just have to have.

One creepy detail: I keep seeing flyers around here that talk about what a great little town this is and what a great value X house is as compared with SF, invariably with a 415 phone number. So SF realtors seem to be trying to sell in the East Bay these days. Are we now prime? Funny, we used to be central nowhere. Our waterfront has a warehouse view. It's downright weird.

It seems a bit slow and I haven't posted for ages, so I am going to ask for some advice from the crowd. My apologies for the off topic post.

My dad is a residential contractor up in Mendocino County. Usually he builds small homes in the $300k range, but last year he had a foray into the McMansion realm and built a 3000 square foot home on an acre. The house has been sitting unsold for the last six months, during which time he's dropped the price from around $800k to under $700k. I've encouraged him to drop the price further but he's holding out.

Now he is considering renting it out, the obvious downside being the house will no longer be new, not to mention tax implications, which he is also considering.

He is carrying about $300k in debt on the house. If he rolls the debt onto his primary residence he can finance the debt (as well as taxes and insurance) for about what he could rent it out for. So he should be able carry the cost of the home indefinitely, in hopes for an upswing. (Of course, he has several hundred thousand in his own business capital tied up in the home, which he will not be able to recover until it sells).

I've pointed out that it could be many many years until a recovery. He seems to think it will be 2-5 years to a recovery.

So, my question, which I understand is vague: how low should he drop the price before it makes more sense to rent it out? $650k $600k $550k?

Also, in general, what are the pitfalls to his plan? I should mention that he is a landlord for several other houses, so he does understand what's involved in that respect. I guess this is really a question regarding opportunity costs. I know my question is very general, so I welcome any and all comments.

Whoa... somebody just punched the "Sell" button on Wallstreet!

Transplant,

I don't understand why your dad doesn't just drop the price to 600k. If it cost him 300k to build, it's still a great return. If it cost him MORE than that, and he's got principal tied up in it, and not just debt, that might affect his selling price.

@Boston Transplant,

If your dad can rent out the place for mortgage carrying costs, then he already has a significant advantage over most other recent "accidental landlords", so I can see why he is in no hurry to cut his asking price. However, if he has $ several hundred grand sunk into the place, he might also want to consider opportunity costs vs. alternative use ROI for that money. Since he is an experienced LL, it's probably safe to assume he is familiar with calculating cap rates, so you could mention that to him. If he plugs in his numbers and gets a cap rate at or above conservative investments (T-Bill or CDs pay out ~5%), then he's probably ok renting it out. If it comes in well below, he might be better off selling now.

Boston Transplant,

I think he should sit down with an accountant and some spreadsheets and crunch numbers. Make different assumptions about housing price down the road and see how it comes out in each scenario. You have to put in a continuum of varying worst cases and see what you risk tolerance is for that.

From previous analyses I have seen, in a declining housing market, it would not be best to hang onto a white elephant. Sell it, get out, put your money to work somewhere where it grows. I have seen plenty of houses wrecked by tenants is another danger. Being upside down, rent less than carrying costs, and the opportunity costs of not putting money to work where it will grow make this a losing proposition most times. But you won't KNOW until you seriously analyze it instead of go with your gut and some back of the envelope calculations.

I bought some Cisco in 1999. I held onto it stubbornly for a LONG time before I sold it for a capitol loss. If I had been smarter I would have sold it when it dropped by 20% and put that money into something else instead of continuing to watch it shrink. Like most people I had to learn the hard way about opportunity cost and the effect of inflation.

"Whoa… somebody just punched the “Sell” button on Wallstreet! "

I heard on the radio this morning that sales data on existing homes is due out today. Wonder if that had anything to do with it.

Boston transplant,

Forgot to mention it doesn't matter so much how many years to a recovery, it's how deep it will be. In many areas prices will have to correct by as much as 50% drop to reach that. If you assume a return to norms, prices will actually dip below median historical values for a while. Is he willing to withstand that? Or do I smell a "soft landing" assumption here, where everyone working at WalMart can find a way to pay their mortgage on a McMansion?

Eliza says:
"When Walmart employees are making $100K a year, our government’s debts will seem trivial."

Vincente says:
"Or do I smell a “soft landing” assumption here, where everyone working at WalMart can find a way to pay their mortgage on a McMansion? "

Inflation, the road to a soft landing? I hope not.

Peter Schiff has been arguing this for years. He suggests investing in utility companies around the world in dividend paying stocks in their own currencies. Unfortunately, every country is printing money, only not as bad as the US.

www.europac.net

Lereah-lite is starting to show signs that he has been learning from his former master:

“‘The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices,’ said Lawrence Yun, the Realtors’ senior economist, in the report. ‘It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.’”

In other words, the problem isn't that housing prices are totally out of whack relative to fundamental economic considerations. The problem is that the prices "flattened out" and lack of "signs of stability". As you can see, the mantra still is that prices can only go UP, and the P/E (price./rent equivalent) does not matter. Larry-boy, you would have made David Lereah proud.

sfbubblebuyer,

$300k is the debt outstanding on the place, including the mortgage on the lot and other debt for building materials, etc. But his cost basis is considerably more than $300k; he had to pay his guys to build it, not to mention his foregone salary. Basically he invested previous years profits from the business into the house. But I don't know at what point exactly he would make a profit or lose money. I suspect by selling $600k he would be losing money.

HARM,

Your point about opportunity costs and ROI is basically what I'm getting at. My suspicion is that the cap rate taking into account his sunk costs would be very low, so I will mention that to him.

Vicente,

The idea of running the numbers carefully is a good one (obviously). As a builder, he is good at procuring materials on the cheap, managing his guys, finishing on schedule, even managing tenants. But he's not good at the numerical analysis, so getting an accountant would make sense.

Bottom line, while he stands to lose some money, at least he's not on the verge of bankruptcy, which some of his peers in the area are. He knows of several multi-home projects sitting idle, presumably burning cash. I'm just glad he didn't leverage himself more than he did.

Okay, if he's got capital locked up in there, and can rent without losing money, but doesn't think he can sell and at least break even, it becomes a pretty tricky calculation.

Many people would rather lose money to inflation and opportunity costs over a few years than to pull the trigger and take a small loss nominal loss now.

If he's 620k into the place, sells for 600k, he's eating a 20k loss.

If he rents it (breaking even) for 10 years, sells it for 700k, he's making 80k in 10 years off of a 300k investment (assuming he pays interest only on the mortgage.) That's a 2.1% return on investment. Assuming inflation of 3%, he's losing money to the tune of almost 1% a year.

Of course, that's a very simplified version of it. If he can rent to cover costs now, one would assume he'd be renting to make at least a little profit in 10 years. And if he's doing more than just paying interest, he'll be getting back more than 400k from his original 300k investment, as he'll have bought down the principle.

If he can rent it in a cashflow POSITIVE way, where it's making enough to cover PITI + repairs if it were rented 11 months out of 12 (To deal with changing tenents) and can stomach the thought of watching the value drop before it climbs again (I.E. wants to be a landlord for 10 years there), he's in a good position to hold the property. Otherwise, I think he just needs to do enough of the accounting to realize that a small loss now is not horrible as he can get much better returns with his money elsewhere, offsetting the loss much more quickly than renting it long enough to sell for a good profit or to make enough money on rents that it's a good investment.

BT,
Median family income in Medocino County is $42,042 according to HomeGain. That stat alone should help light a fire under your dad to get that property out of his hands.

I really like the way this AP economics writer keeps referring to NAR as "the Realtors", like it is some kind of crime syndicate. BTW, everybody, you can relax, the main issue with the market is household formation, not, you know, affordability.
Lawrence Yun, senior economist for the Realtors, noted that household formation had slowed. He said that implied many people had decided to put off buying a home and were doubling-up in rental units or moving back home with parents.

"It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market," he said. "The lack of buyers' confidence is a major factor in the lower sales."

sfbubblebuyer,

Thank you, those numbers make sense and I think I can use them as a general conversation starter with my dad. He is thinking of rolling the mortgage from an interest only on the built property, onto a refi on his primary residence, using a fixed-rate. People on this board talk a lot about the pitfalls of the refi, so I'm just a bit concerned with this aspect of his plan.

EBGuy,

Thanks for the numbers. I'm aware of the low average income in Mendocinco County, having grown up there (though I suspect earnings from, ahem, medical marijuana, are under-reported). My dad envisions someone retiring from the bay area buying the place. I don't know how much of that is fantasy or not. I do wish he had stuck with the lower priced homes more suited to the area though.

What particularly recommends Mendocino as a retirement location?

I think the only reason prices got so out of whack outside immediate Bay area, was crazy pricing that forced people to look further out. Now that demand has collapsed. I mean seriously, look at all the communities in the Central Valley whose prices and development shot up in the last 5 years. Not that many people really want to live on my side of the mountains beyond Napa, they were forced into it.

When it comes to finance, go with the numbers not your gut. Beats some fantasy about a white knight or a lottery ticket.

Neighbor on my street where I rent in LA just gave up on selling also, and is rentin' her out.

Last 3 homes listed in 6 months on my street failed to sell. Two are flop lords, one was simply a fishing seller who still lives there.

I would expect rents to go down if this is a major trend.

Maybe I shouldn't have said "accountant". What I meant was someone competent to run the numbers for you. Could be you with a little study. Should not be anyone in any way connected with banks, mortgage brokers, RealtWhores, etc. Inevitable if they've got something to sell, they will consciously or not distort the numbers.

Heck even my tax accountant at H&R block keeps trying to work me for a home purchase while we're going over 1040 paperwork. They also do mortgage biz so even the best numbers guy will be corrupted by the sales-man pressures of their firm.

I don't know what the best source of impartial analysis would be, perhaps someone here has an idea?

Just when I thought I had already heard it all, seen it all, or read it all, yet another fresh outrage from the REIC fraudsters comes my way:

http://www.ushomeauction.com/terms.php

3. BIDDING AND BUYING AT THE AUCTION

Reserve Price. All Properties have a Reserve Price, meaning the Seller of each Property has established an unpublished, minimum selling price. The starting bid is not the Reserve Price. In order to become the Winning Bidder for a Property, a Bidder must meet or exceed the Reserve Price and have the highest bid. The Auctioneer may open bidding on any Property by placing a bid on behalf of the Seller. The Auctioneer may further bid on behalf of the Seller, up to the amount of the Reserve Price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders. If no bidders meet the Reserve Price, the Seller is under no obligation to sell the Property. The Seller may withdraw a Property at any time prior to the announcement of the completion of the sale by the Auctioneer. Auctioneer is not acting as an agent for any Bidder in any capacity, and is acting exclusively as the Seller’s agent.

Unf--king-believeable. Having a secret (oops-- "unpublished") reserve price was already bad enough. Now the fine print informs us that shill bidding is not only commonplace (which the non-clueless already knew), it's apparently *also* perfectly legal??

If that's true, why even bother with the pretense of a so-called "auction"? How about just randomly picking "winners" from the phone book and mailing them a "congratulations, new homeowner!" notice (along with their six-figure bill)? I haven't checked my mailbox today ---who knows, maybe I already "won" a half-million dollar condo in Modesto!

God bless our beloved state "regulators" once again, for proving that government doesn't work (by example).

Sounds like somebody is having a case of the Mondays

@X,

:lol: We still on for that July 7th blog party?

President HARM

Now, I am become Debt.

Yes we are Sir.

President HARM

Now, I am become Debt, the destroyer of wallets.

Yes we are Sir.