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Ten Reasons It's A Terrible Time To Buy An Expensive House

By Patrick   2015 Jul 11, 12:58pm   ↑ like (17)   ↓ dislike (2)   2,908 links   616,263 views   331 comments   watch (32)   quote     share

  1. Because house prices in expensive areas still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with a 20% downpayment. Landlords say a safe price is set by the rental market; annual rent should be at least 9% of the purchase price, or else the price is just too high. Yet in affluent areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income with tiny downpayments, and gross rents are still only 3% of purchase price. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that affluent neighborhoods are still in a huge housing bubble, and that bubble seems to be getting more dangerous by the day.
  2. On the other hand, in some poor neighborhoods, prices are now so low that gross rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there could still fall yet more if unemployment rises or interest rates go up, but those neighborhoods have no bubble anymore.

  3. Because it's usually still much cheaper to rent than to own the same size and quality house, in the same school district. In rich neighborhoods, annual rents are typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 8% of purchase price, which is more than twice the cost of renting and wipes out any income tax benefit.

    The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too high

    annual rent / purchase price = 6% means borderline

    annual rent / purchase price = 9% means ok to buy, prices are reasonable

    So for example, it's borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a 6% mortgage, that's $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling housing prices. Subtract HOA from rent before doing the calculation for condos.

    Although there is no way to be sure that rents won't fall, comparing the local employment rate (demand) to the current local supply of available homes for rent or sale (supply) should help you figure out whether a big fall in rents could happen. Checking these factors minimizizes your risk.

  4. Because it's a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. When housing falls, you lose your equity, but not your debt.

    The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. To buy an expensive house at a time of low interest rates and high prices like now is a mistake.

    It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

    • A low price lets you pay it all off instead of being a debt-slave for the rest of your life.
    • As interest rates fall, real estate prices generally rise.
    • Your property taxes will be lower with a low purchase price.
    • Paying a high price now may trap you "under water", meaning you'll have a mortgage debt larger than the value of the house. Then you will not be able to refinance because then you'll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.
    • You can refinance when you buy at a higher interest rate and rates fall, but current buyers will never be able to refinance for a lower interest rate in the future. Rates are already as low as they can go.
  5. Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loans. This means most banks are still actually bankrupt. But since the banks have friends in Washington, they get special treatment that you do not. The Federal Reserve prints up bales of new money to buy worthless mortgages from irresponsible banks, slowing down the buyer-friendly deflation in housing prices and socializing bank losses.

    The Fed exists to protect big banks from the free market, at your expense. Banks get to keep any profits they make, but bank losses just get passed on to you as extra cost added on to the price of a house, when the Fed prints up money and buys their bad mortgages. If the Fed did not prevent the free market from working, you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks "extend and pretend" that their mortgage loans will get
    paid back.

    And of course the banks can simply sell millions of bad loans to Fannie and Freddie at full price, putting taxpayers on the hook for the banks' gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore forced into slavery, for the banks to make a profit. If you pay a low price for a house and manage to avoid debt, the banks lose control over you. Unacceptable to them. It's all a filthy battle for control over your labor.

    This is why you will never hear the president or anyone else in power say that we need lower house prices. They always talk about "affordability" but what they always mean is debt-slavery.

  6. Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.

    The simple fact is that the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little. Leveraged housing appreciation, usually presented as the "secret" to wealth, cannot be counted on, and can just as easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in prices, since there is no more fake paper equity from the sale of a previously overvalued property and because the market for securitized jumbo loans is dead. Without that fake equity, most people don't have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you're still making mortgage payments on an underwater house.

    It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's corruption of US legislators. On a $300,000 house, 6% is $18,000 lost even if housing prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

  7. Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling. Prices in the housing market, even now, are entirely a function of how much the banks are willing and able to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property. Banks have been willing to accomodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.
  8. Because there is still a massive backlog of latent foreclosures. Millions of owners stopped paying their mortgages, and the banks are still not forclosing on all of them, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don't like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Right now, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!
  9. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low.
    From The Herald:
    "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."

    House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Your debt is their wealth. Every "affordability" program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it's just pushing the reckoning into the future. To really help Americans, Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even more important is eliminating the mortgage-interest deduction, which costs the government $400 billion per year in tax revenue. The mortgage interest deduction directly harms all buyers by keeping prices higher than they would otherwise be, costing buyers more in extra purchase cost than they save on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra $39,000 in purchase price. Subsidies just make the subsidized item more expensive. Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia have no mortgage-interest deduction for owner-occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.

  10. Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 66. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.
  11. Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.

Next Page: Eight groups who lie about the housing market »




The Housing Trap


You're being set up to spend your life paying off a debt you don't need to take on, for a house that costs far more than it should. The conspirators are all around you, smiling to lure you in, carefully choosing their words and watching your reactions as they push your buttons, anxiously waiting for the moment when you sign the papers that will trap you and guarantee their payoff. Don't be just another victim of the housing market. Use this book to defend your freedom and defeat their schemes. You can win the game, but first you have to learn how to play it.

115 pages, $12.50

Kindle version available

Discuss the book

#housing

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252   Strategist   997/999 = 99% civil   private mesage   2016 Dec 4, 7:16am  ↑ like   ↓ dislike   quote   share  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Bob makes his own rules.

253   bob2356   431/432 = 99% civil   private mesage   2016 Dec 4, 8:52pm  ↑ like (2)   ↓ dislike   quote   share  

Tim Aurora says

bob2356 says

Rule of thumb 100 months rent is the price of the house.

There is no such rule, there is a formula which depends on the interest rates. If your monthly expense is 90% of the income you are good.

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.
https://www.thebalance.com/rental-property-investing-for-beginners-453821
http://affordanything.com/2012/01/25/income-property/
http://samsrealestateclub.com/the-1-rule/
http://www.doughroller.net/real-estate-investing/the-1-solution-to-real-estate-investing/
There a a couple hundred more articles describing the 1% rule. Google them.

Whatever dude, I own enough rental units myself. I always get 1% or I don't buy a rental property. I'm starting to buy in a market now where it's more like 1.7-1.8%. That's crazy out of balance. There aren't many of those markets out there.

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

254   kmail   4/4 = 100% civil   private mesage   2016 Dec 4, 9:42pm  ↑ like (2)   ↓ dislike   quote   share  

yup 1% rule is a quick calc.. those who want higher profit margin/ROI will do well at getting a property at 90% expense rate.. but can be harder to come by thru conventional means (listings) in a seller's market (good luck).

anyone who's gonna spend their money and time on re will really want to put in their dd to ensure their rough/quick calcs check out tho!

but ya, Bob isn't pulling numbers outta his hat ;)

255   RealEstateIsBetterThanStocks   165/165 = 100% civil   private mesage   2016 Dec 5, 2:28am  ↑ like (1)   ↓ dislike   quote   share  

i see some good points, some outdated (written during the bubble era). but 3. seems incorrect. historically there has been no relationship between mortgage rates and home prices.

do you have data backing up your "high-rates -> low prices" rule?

256   05c4     private mesage   2016 Dec 5, 4:36am  ↑ like   ↓ dislike   quote   share  

Thanks for the comments everyone - agreeing or disagreeing likewise.

This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed.

30 years. It's. A. Long. Long. Time. No one is going to live in that house for 30 years. It's a super expensive over-leveraged rental that's got no wiggle room for renegotiation of the terms of contract. I would trust this logical economic fact over the primal fear that "I might be sorry for not buying today".

As for us, the moment we made the decision, I felt almost liberated. I haven't felt so good in quite a few years. I am almost thankful that the size of our mistake was a mere $370K and not $800K. Thankfully, our income has shot up to the point, where I can pay off my current house in just under 3 years if I want to. The mere thought that we could rent and would not have to buy a huge mansion has suddenly opened up a lot of possibilities in our lives. It's a whole subject of discussion altogether.

Maybe it's not the right decision, and maybe all the people who bought mansions today will be millionaires. But, maybe not.

257   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 5:22am  ↑ like (1)   ↓ dislike   quote   share  

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of interest rates. History proves this.

258   05c4     private mesage   2016 Dec 5, 6:28am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

"This blog post has already made a lot of terrific points. The one that stood out to me was: "It's better to buy a house at a low price and a high interest rate than otherwise". It's so counterintuitive and yet, so absolutely bang on money. It was almost a Eureka moment for me when I really understood this. Low interest rates means your future is being screwed, but this is the very thing that nearly everyone is taking on and running away with $800K mansions with. Can you say the world is irrational? Nearly everyone advised me buy a house "because interest rates are low"...no sheep, you buy when rates are high and refinance when they get low. It's almost like someone who buys stocks when the markets are riding all time highs and sells them in fear when the market tanks. This is absolutely not how to make money, and all the people who have $800K houses at 3.5% interest rates are thoroughly screwed."

Except, as Mark said, it's 100% false. Housing prices do not move opposite of ...

Did interest rates go as below as 3.5% ever in the history? As a first generation immigrant who has lived in the US for 16 years, I don't have enough context and I haven't really lived through the experiences of various eras.

I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it.

259   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 7:15am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

Housing prices do not move opposite of interest rates. History proves this.

If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough.

260   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 7:24am  ↑ like (1)   ↓ dislike   quote   share  

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

261   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 7:26am  ↑ like (2)   ↓ dislike   quote   share  

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

262   Strategist   997/999 = 99% civil   private mesage   2016 Dec 5, 7:33am  ↑ like   ↓ dislike   quote   share  

bob2356 says

Strategist says

Bob makes his own rules.

I've known about it for 40 years since I first starting working with managing rentals for someone else. It's called the 1% rule. I guess these guys are just making it up too.

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.
You should know that.

263   Strategist   997/999 = 99% civil   private mesage   2016 Dec 5, 7:37am  ↑ like   ↓ dislike   quote   share  

bob2356 says

In my own place to live I've done very well with renting and banking the difference between the rental amount and cost of owning when owning is really out of line. or buying when it's out of whack the other way then renting when I move on. You can do whatever you want with your money. Sounds like you are one of the people who only asks what the cost per month is.

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

264   05c4     private mesage   2016 Dec 5, 8:18am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

"I can only say this though: Today's rates are tremendously low - made artificially possible by the Fed's prime rate. People have stretched their monthly payment to buy a $800K house that requires a 2 hour one way commute to work. I can logically see if and when rates rise, prices will fall. Maybe the fall won't be as steep as 2009, or maybe the price will just stay flat as interest rates rise very slowly. Whether you bleed in one go or bleed slowly, the bleeding will be there, because I cannot honestly see a $800K-1M house appreciating, or some working family paying upwards of $5K rent for it."

Yes, rates have been very low in the past. The Fed doesn't set prime rate.

Everyone can logically see prices falling when rates rise, because they can't see all the interdependencies at work. Rates don't rise in a vacuum. When rates rise, it's almost always because incomes are rising as well. And the effect of incomes outweighs the effect of rates.

That is totally incorrect. Rates rise because "inflation" rises. True, in a healthy economy, rising inflation would mean people's income rises too. But the US has been printing money for a while now to offset all the junk securities from the 2009 era, and the resulting rising inflation will not necessarily mean rising incomes.

We are due for high inflation and high interest rates, and it remains to be seen if this economy has enough jobs to push people's incomes higher. I hear the minimum wage workers are protesting today on streets for $15/hour...

P.S. 30 year mortgage rates in fact have already jumped by 0.5% - I refinanced at 3.5% just 6 months ago; now that rate is at 4% from the same institution. I will watch closely the summer of 2017 and report the findings on this thread.

265   bob2356   431/432 = 99% civil   private mesage   2016 Dec 5, 8:33am  ↑ like   ↓ dislike   quote   share  

Strategist says

That gross rent multiplier changes from area to area, and property to property. It can only be used as part of an analysis.

You should know that.

That's why I said rule of thumb. It's a place to start. Obviously I don't buy properties for investment or make a rentvsbuy call by just looking at the rent vs house prices in the general neighbourhood. But the grm for overall area market lets me have a general idea if I want have a to look or not bother. When I got out of tx (great returns in late 90's then insurance and property taxes went insane) los vegas was a screaming bargain basement. Now I see some other markets that are much better and will start shifting out of vegas.

Strategist says

I look at the "Cap Rates" much better than the GRM. Even the Cap Rates vary with area, but still a better analytical tool than the GRM.

Maybe, maybe not. It depends on whether the books you are looking are truly reflective of actual expenses or cooked up with capital expenditures to puff up numbers for a sale. Almost impossible to verify just going through a P&L. You would have to dig through the actual receipts, even then it can be deceptive.

Cap rates works much better for commercial buildings or apartment complexes than individual houses for rent. I don't do commercial any more. It's not hard to find a rental property manager that's good. It's very hard to find a commercial property manager that's good. I don't know why that should be. Maybe I know a lot more about the right questions to ask rental property managers and how to review their operations.

266   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 8:36am  ↑ like   ↓ dislike   quote   share  

"That is totally incorrect"

No, it's really not. If money printing were to cause the price of goods to rise, it would be exactly because that printed money reached people's pockets as income. Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

267   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 8:50am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

"If (1) the market is not cheap, and (2) wages do not keep with rates, then rising interest rates will put downside pressure on housing prices. You don't need history to prove this. Common sense is enough."

I'm just saying that it's amazing that common sense has never prevailed for the last 100 years of housing data history. You'd think if something was true, 100 years of data would be enough to show it.

What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising.

268   David9   1/1 = 100% civil   private mesage   2016 Dec 5, 8:52am  ↑ like   ↓ dislike   quote   share  

We have too much debt, interest rates won't rise. And house flipping is too large a part of the economy, imo

269   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 8:57am  ↑ like   ↓ dislike   quote   share  

"What a dumb comment. Tell me when during these 100 years conditions (1) and (2) have been satisfied, and interest rates have been rising"

I think you're missing the point. You are assuming a scenario that doesn't happen.

270   mell   62/62 = 100% civil   private mesage   2016 Dec 5, 9:17am  ↑ like (1)   ↓ dislike   quote   share  

joeyjojojunior says

Supply and demand dictates that prices rise when demand outstrips supply. This can only happen when people have money.

The main driver for house prices besides foreign investors was the downward readjustment of the interest rates so the monthly payments stay the same or don't increase too much. Rates have been artificially extraordinarily low for a while, when the unwinding continues unaffordability will weigh on the market. People don't have 'more' money, their monthly payments have been artificially "deflationed" while the house price itself has been artificially "inflationed".

271   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 9:26am  ↑ like   ↓ dislike   quote   share  

"People don't have 'more' money"

Actually they do.

272   mell   62/62 = 100% civil   private mesage   2016 Dec 5, 9:37am  ↑ like (1)   ↓ dislike   quote   share  

Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase".

273   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 9:49am  ↑ like   ↓ dislike (1)   quote   share  

"Laughable - net net people may barely break even, but likely most will have less money after accounting fort the inflation in housing, healthcare, education and childcare. Most have been SHAFTED by ACA premium and deductible increases, those alone may eat their salary "increase"."

OK fine. Here are real income gains:

http://qz.com/780475/us-census-bureau-real-median-household-income-saw-the-largest-recorded-increase-in-history-in-2015-rising-5-2-almost-3000/

Sure looks like real income has gone up quite a bit since 2012

274   David9   1/1 = 100% civil   private mesage   2016 Dec 5, 9:50am  ↑ like (1)   ↓ dislike   quote   share  

Ask any Realtor about 'cash purchases' it's what they look for. Whatever percentage is reported, I personally would question. IMO, the RE market doesn't even care, currently, about the mortgage customer.

275   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 9:57am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

You are assuming a scenario that doesn't happen.

1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door.

2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?

276   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 10:00am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation.

277   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 10:04am  ↑ like   ↓ dislike   quote   share  

"1. So you admit that the conditions that I specified never existed? Here goes your 100 history argument out of the door."

I don't know. I'd have to go back through history and check all the data. But my guess would be that has never happened in the past and will never happen in the future. The 100 year argument is showing you that the idea that when rates rise, prices fall is absolutely incorrect. Which is what the discussion was about.

"2. Now that we have established 1, we can have a more meaningful discussion - will these conditions exist in the future? Namely, IF rates start rising, is it likely that household incomes will keep with up with them? What effect will it have on housing affordability given it's current level?"

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

278   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 10:05am  ↑ like   ↓ dislike   quote   share  

"joeyjojojunior,

Your graph proves my point. Last time rates were rising, household incomes were keeping with inflation."

That's my point too. They ALWAYS do. Your scenario is nonsensical.

279   mell   62/62 = 100% civil   private mesage   2016 Dec 5, 10:09am  ↑ like (1)   ↓ dislike   quote   share  

joeyjojojunior says

You have it exactly backwards. Rates will NOT rise until income rise first. That's my point--your scenario hasn't happened in the past and won't happen in the future. If you disagree with that statement, please give me one reason why rates will rise if incomes are stagnant.

Because rates are first and foremost a reflection of credit risk - or at least they should be. They have been low because the Fed has the banks back, no matter what they do and how much money they will lose in the next crash. The tail risk has been removed, so why not loan out money for less? Still a profit without risk. It remains to be seen if anything changes wrt the Fed under prez Trump, but as long as the credit market believes the central banks have their back rates may stay low. Any sudden risk dislocations or policy changes and watch the rates explode regardless of income.

280   05c4     private mesage   2016 Dec 5, 10:10am  ↑ like (1)   ↓ dislike   quote   share  

Very interesting graphs joeyjojojunior. Yes, I did underestimate quite a bit how good the economy is doing - I do agree that incomes have shot up from 2012 (I have personal anecdotal evidence for that if it matters any).

Having said that, I have a few reservations. It remains to be seen how much the income will really rise. Secondly, I personally have been very aggressively courted by RE agents and builder's snake-oil salesmen, who relentlessly tried to convince me that the house price/gross income factor could be stretched to 6 at these low rates. As this blog post points out (and as far as back I remember ever since I have been in the US), the recommended factor was 3.

Now, assume someone making $100K bought a $600K house. If the interest rates were to suddenly rise up to their historical norms (ignore how that happens), that person better be making $200K. Will it happen over the large population? Maybe. I don't think real income will rise; it will more or less be a function of the inflation itself. In a way, buying a $600K house now is hedging against increasing inflation if you have a fear it will increase.

Historically, US inflation is between 2 to 3%. For prices to double at 3%, about 20 years have to pass. So it will take 20 years for the person's income income to rise to $200K and the price to income ratio be more normal. But that again assumes house price will remain the same, which is unlikely. I am betting house price will more than double by that time.

I think in a world where population is declining, high inflation is unlikely. Maybe the interest rates will never rise and stay the same. I don't see rising inflation making people's incomes to go higher, and the size of their comparative debt that much lower. I feel a majority of economic crises around the world are simply happening because populations are declining in the West.

Anyway, my last comment - don't have anything to add more. Thanks for the discussion.

281   Ironworker   5/5 = 100% civil   private mesage   2016 Dec 5, 10:13am  ↑ like (1)   ↓ dislike   quote   share  

I agree with the statement that interest rates are going to stay very low for very long time.

So if you want to buy a home, be very patient! Don't jump in. Your oportunity will come - 5 years from now.

In the meantime rent cheaply if possibly and forget housing. When the headline of bad economy makes WJ, start tuning in hopefully with lots of saved up cash.

282   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 10:14am  ↑ like   ↓ dislike   quote   share  

"Having said that, I have a few reservations. It remains to be seen how much the income will really rise. Secondly, I personally have been very aggressively courted by RE agents and builder's snake-oil salesmen, who relentlessly tried to convince me that the house price/gross income factor could be stretched to 6 at these low rates. As this blog post points out (and as far as back I remember ever since I have been in the US), the recommended factor was 3."

I think 3 is a much better guide too. I can't imagine buying at 6--that is ridiculous. I'd also recommend the various buy vs. rent calculators to see how your specific area looks.

283   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 10:17am  ↑ like   ↓ dislike   quote   share  

"They have been low because the Fed has the banks back, no matter what they do and how much money they will lose in the next crash. The tail risk has been removed, so why not loan out money for less? Still a profit without risk"

Nonsense. There was absolutely tail risk as they banks lost HUGE sums of money. Tail risk was there for IndyMac, Countrywide, Bear Stearns, etc. And it is CERTAINLY there now, as I think every bank owner realizes that the current anti-bank/anti Wall St. sentiment would never allow another bailout.

284   mell   62/62 = 100% civil   private mesage   2016 Dec 5, 11:15am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

Nonsense. There was absolutely tail risk as they banks lost HUGE sums of money. Tail risk was there for IndyMac, Countrywide, Bear Stearns, etc. And it is CERTAINLY there now, as I think every bank owner realizes that the current anti-bank/anti Wall St. sentiment would never allow another bailout.

You can't possibly believe yourself. There was ZERO tail risk since the Feds announcement in 2008/2009 to bail out the banks by whatever means possible, print money, buy up debt/MBS and leave the "emergency discount window" open for years. ZERO tail risk, hence the run-up in bank stocks and everything related. Now some tail risk has returned, but nobody believes yet that wall street has lost control over its puppets. Certainly not with the 3 stooges Boosh, Obummer and the Clinton-twins, and even Trump has to prove himself first. Pretty sure that even simply Mnuchin's nomination made the rates retreat a little again. But dislocations may happen all over 2017 which is likely going to be a volatile year, and when big money believes the Fed has lost or is losing control, then they will dump by whatever means necessary and rates may rise drastically.

285   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 11:15am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior,

You have shown inability to think logically. I have a rule to not waste time arguing with people who write more than they think. Therefore, sayonara to you.

To those who understood my argument - the conditions in the 70's were different than now. Women were moving into the workforce then, which helped increase the household incomes (even if individual wages were not keeping with inflation). In addition, more workers were unionised, had better benefits, and education and healthcare were cheaper relative to incomes.

286   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 11:26am  ↑ like   ↓ dislike   quote   share  

"You have shown inability to think logically. I have a rule to not waste time arguing with people who write more than they think. Therefore, sayonara to you.

To those who understood my argument - the conditions in the 70's were different than now. Women were moving into the workforce then, which helped increase the household incomes (even if individual wages were not keeping with inflation). In addition, more workers were unionised, had better benefits, and education and healthcare were cheaper relative to incomes."

OK sayonara. But I don't think I'm not logical--I think maybe my argument is not reaching you?

To those who have any inkling that FP might be correct. Of course things were different in the 70s--that's why interest rates went up! My point is that rates won't go up again until we have similar conditions again, eg, less inequality.

287   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 11:27am  ↑ like   ↓ dislike   quote   share  

"There was ZERO tail risk since the Feds announcement in 2008/2009 to bail out the banks by whatever means possible, print money, buy up debt/MBS and leave the "emergency discount window" open for years. ZERO tail risk, hence the run-up in bank stocks and everything related. Now some tail risk has returned, but nobody believes yet that wall street has lost control over its puppets. Certainly not with the 3 stooges Boosh, Obummer and the Clinton-twins, and even Trump has to prove himself first. Pretty sure that even simply Mnuchin's nomination made the rates retreat a little again. But dislocations may happen all over 2017 which is likely going to be a volatile year, and when big money believes the Fed has lost or is losing control, then they will dump by whatever means necessary and rates may rise drastically."

So, you believe that if there was another Wall St. caused bubble and bust, that the government would bail out the banks and Wall St. again?

288   mell   62/62 = 100% civil   private mesage   2016 Dec 5, 11:35am  ↑ like   ↓ dislike   quote   share  

joeyjojojunior says

So, you believe that if there was another Wall St. caused bubble and bust, that the government would bail out the banks and Wall St. again?

Nobody knows, but the slow rise in rates points to somewhere in between. People are unsure where the economy will go and what the rate of Fed / government bailouts will be going forward. I think the rates are testing the waters right now. If we have a 2008 type dislocation again I would set the chances of another major bailout to at least 50%, Trump being president or not. So far the declining American empire has taken the easy way out each and every time, aiding the slow and constant decline instead of ripping the band-aid off and allowing for a truly organic recovery. I agree there was tail risk until the recession hit and the bailouts were enacted and there is more tail risk now, but it's still relatively low, Wall Street will not cede control that easily.

289   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 11:37am  ↑ like   ↓ dislike   quote   share  

"Nobody knows, but the slow rise in rates points to somewhere in between"

Fair enough-but I would argue the slow rise in rates is more due to the graph I posted earlier showing rising incomes.

290   FP   171/171 = 100% civil   private mesage   2016 Dec 5, 12:51pm  ↑ like   ↓ dislike   quote   share  

Inflation can be caused by factors other than increased economic activity which leads to wage growth. The causality relation is wage growth => inflation. Not the other way around.

291   joeyjojojunior   307/310 = 99% civil   private mesage   2016 Dec 5, 1:09pm  ↑ like   ↓ dislike   quote   share  

"The causality relation is wage growth => inflation. Not the other way around."

OK--that's what I've asked you several times. What would cause inflation without wage growth AND cause rates to rise? Inflation without wage growth would have to be caused by goods with very inelastic demand curves such as oil and food. But a spike in oil prices would likely bring wage growth at this point with all the oil and natural gas potential in the US. And even if all oil were imported, a spike in prices would push then push the US into recession causing rates to fall, not rise.

I just don't see how you can have inflation with no wage growth. Where is this extra demand coming from if there is no wage growth?

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