patrick.net

Jeremy says

the FASB’s suspension of mark to market accounting rules… Millions of non-performing assets are ‘performing’. Losses are ignored, values are severely inflated. You really think hundreds of thousands of mortgages that have not been paid in 180+ days haven’t had NOD’s filed because they are simply backlogged? Yeah right!!

Mark to Market on "certain tradeable investment" securities, not loan or customer receivables. They are two different animals. Many other investment securities are still marked to market. The Banks Accounts Receivables like any other corporate receivable (Intel, Apple, GE, etc etc) are written down after 90+ days. Regardless of if NOD is filed or not the loan itself written off. To state otherwise would inflate the balance sheet. This hasnt changed!

thomas.wong1986 says

Jeremy says

the FASB’s suspension of mark to market accounting rules… Millions of non-performing assets are ‘performing’. Losses are ignored, values are severely inflated. You really think hundreds of thousands of mortgages that have not been paid in 180+ days haven’t had NOD’s filed because they are simply backlogged? Yeah right!!

Mark to Market on “certain tradeable investment” securities, not loan or customer receivables. They are two different animals. Many other investment securities are still marked to market. The Banks Accounts Receivables like any other corporate receivable (Intel, Apple, GE, etc etc) are written down after 90+ days. Regardless of if NOD is filed or not the loan itself written off. To state otherwise would inflate the balance sheet. This hasnt changed!

Well, I don't know much I guess. I can admit that. But I'm really curious how so many 'homeowners' can live in their house mortgage free. It's rampant. It's around 30% of all mortgage holders I know. Just a small sample size, but even if its only 15%, wouldn't every major lender be insolvent??

Jeremy says

thomas.wong1986 says

Jeremy says

the FASB’s suspension of mark to market accounting rules… Millions of non-performing assets are ‘performing’. Losses are ignored, values are severely inflated. You really think hundreds of thousands of mortgages that have not been paid in 180+ days haven’t had NOD’s filed because they are simply backlogged? Yeah right!!

Mark to Market on “certain tradeable investment” securities, not loan or customer receivables. They are two different animals. Many other investment securities are still marked to market. The Banks Accounts Receivables like any other corporate receivable (Intel, Apple, GE, etc etc) are written down after 90+ days. Regardless of if NOD is filed or not the loan itself written off. To state otherwise would inflate the balance sheet. This hasnt changed!

Well, I don’t know much I guess. I can admit that. But I’m really curious how so many ‘homeowners’ can live in their house mortgage free. It’s rampant. It’s around 30% of all mortgage holders I know. Just a small sample size, but even if its only 15%, wouldn’t every major lender be insolvent??

Jeremy, your observation is correct. They are all insolvent because they were leveraged 30x1 prior to the crash, so they could only sustain a 3% default rate, which is not even remotely close to the 15 or 30. But, because of the mark-to-market rule, the gov-t is letting these banks stay in operation, and continue gambling with tax-payers money. So, the new bubble is the shadow inventory bubble, which the banks are hiding from the MLS. When that ultimate bubble is eventually pricked, it will blow up so hard, that the 2008 recession will just seem like a child's play, in comparison. That's exactly why I am saying that prices are going back to 1975. Not because I am expecting a sane and orderly deflation. No, it would have been sane and orderly, if the gov-t didn't get involved, but with all these gov-t manipulation in the free markets, there will be time to pay the piper.

dunnross says

You see Mr. Kevin, you argument for prices not falling to 1975 level is based on a rational idea that prices going to 1975 levels by 2015 or 2020, cannot be supported by any fundamental valuation principles, based on population growth, GDP, etc. But prices of 2005 could not be supported by any fundamental formulas, as well, it was simply the force propelled by greed which drove the prices higher and higher. So, my argument, that 1975, although fundamentally unfeasible, can be a remote possibility, given that the fear factor in humans, is even a stronger driver than greed. This is exactly why all bubbles deflate below the upward moving trend-line, they overshoot on the way down, and this bubble will, most likely, overshoot like no other bubble ever did, just because its extent on the upward moving trajectory was so gigantic.

Whatever you say man. Call me in 2020 and let me know how the apocalypse is going.

Jeremy says

It’s rampant. It’s around 30% of all mortgage holders I know. Just a small sample size, but even if its only 15%, wouldn’t every major lender be insolvent??

Well they can live there forever, just visit Nancy Pelosi office and have a crying session on her desk telling her greedy Banks fooled you into buying, etc etc. Its up to State and Federal Govt who are drag this out! Govt keeps this up, many will think this will be the norm when they buy their first home and cant afford it.

We'll see 15%+ rates within 3-5 years. The inflation is going to get out of hand very very soon. Watch out for the bond bubble to burst which will send rates skyrocketing to the moon. I have warned everyone on this forum that home prices are doomed to collapse beyond anyone's imagination. Just wait and see guys.

Robert Shiller says

We’ll see 15%+ rates within 3-5 years. The inflation is going to get out of hand very very soon. Watch out for the bond bubble to burst which will send rates skyrocketing to the moon. I have warned everyone on this forum that home prices are doomed to collapse beyond anyone’s imagination. Just wait and see guys.

Inflation is going to get out of hand and yet house prices will go in the opposite direction?

Tell me, oh wise one, on what planet such a scenario would ever make any sense whatsoever?

Because, you know, housing prices were just falling off a cliff the last time we had 15% interest rates. Yes, indeed.

You people make no sense whatsoever.

Interest rates will go to 15%, once inflation starts to pick up.

But interest rates are a *response to* high inflation. A way to put it under control.

Right now the fed would desperately like to have inflation. Why do you think everyone is pushing so hard for quantitative easing domestically and trying to get China to let their currency appreciate?

Inflation would save the housing market. All of those people who are on the verge of foreclosure would suddenly find their debts erased, and they had no savings to lose anyway. Their lives would get better.

I'll take bets with anyone dumb enough to argue that the economy is going to have massive inflation without both of the following:

- House prices increasing
- Wages increasing

I'll also take bets with anyone dumb enough to argue that national housing prices are going to crash by a large amount (more than 20%) from present values without both of the following happening:

- Massive deflation
- Total societal collapse

Anyone care to wager?

Greece. BOOOYAHHH!!!
http://www.globalpropertyguide.com/Europe/Greece/Price-History

You live in fantasy land so I'm sure you bought a home recently.

Again, what drives home prices are JOBS. No jobs, no home price increases. Inflation can't make wages rise when unemployment exceeds 25% like it did during the Great Depression.

On the casino comment - I've dreamed of making that one options play that would make me a 10x return on investment. I've probably had a 20% in-the-money success rate, but overall have come out 2x ahead on investment. Not bad...but it is gambling no doubt.

I am invested in gold, but after reading these comments - am thinking of swapping it for silver. That seems to be the better play.

Blasphemy! I will find one and get back to you.

globe33 says

On the casino comment - I’ve dreamed of making that one options play that would make me a 10x return on investment. I’ve probably had a 20% in-the-money success rate, but overall have come out 2x ahead on investment. Not bad…but it is gambling no doubt.
I am invested in gold, but after reading these comments - am thinking of swapping it for silver. That seems to be the better play.

If you want to make 10x return on your investment, simply get some good junior mining shares. If gold bubbles, these things will explode through the roof.

Too many people waiting for it to go "parabolic" for it to do so.

That's what caught my eye in an article Patrick linked to: http://www.zerohedge.com/article/three-horrifying-facts-about-us-debt-%E2%80%9Csituation%E2%80%9D?source=patrick.net#inner-content

… either that or experience hyperinflation. There is simply no other option. We can NEVER pay off our debts. To do so would require every US family to pay $31,000 a year for 75 years.

RE @ 4.5% is looking good right now. It is an asset that will grow inflation-indexed.

I think the "something else nasty" explanation is correct, because salaries are not rising.

Deflation Nation:
The government is expected to announce this week that more than 58 million Social Security recipients will go through a second straight year without an increase in monthly benefits. This year was the first without an increase since automatic adjustments for inflation started in 1975.

"something nasty" translates to me as stagflation. Google is planning on releasing another index that is more in line with inflation statistics. That should be interesting being that, IMO, statistics provided by the government are almost always tainted.

How about biflation: http://en.wikipedia.org/wiki/Biflation

Yes, that Wikipedia description of "biflation" seems to apply to the current situation.

Wage inflation is inevitable. It won't track price inflation, but it'll be there. Just wait.

Silver has been crushing gold, ratio down to under 58:1 from 66:1 just a few months ago. I'm looking to get out of the silver and into a jr miner or two, any reccomendations?

What's the guy from Western Silver doing these days, thomas patton?

rileybryan says

As patrick says, its better to have low principle and high interest to avoid becoming a debt slave.

Well, if you had that choice, that would be true. But in reality your choice is to buy now with low interest rates or wait a long time until those rates are higher. Now figure the cost of paying 2k rent for 5 years = 120k. It's hard to imagine houses being 120k cheaper in 5 years, especially if interest rates are rising suggesting an improving economy. Not to mention the frustration of basing *your* life on macro-economic theory i.e. making your own decisions based on the macro economy sounds like a case of "life is what happens while you make other plans"

It isn't tied to any "recovery." That's nonsense. A clear look at the graphs indicates this most recent meteoric rise began in August/September after the Fed had indicated that a second round of quantitative easing may be required to prop up the impotent "recovery." That moved speculators into hard assets, ag commodities, gold and silver, copper, etc. It's just inflationary positioning - perfectly logical.

Price increases at the gas station and grocery store will just weaken the economy that much further. This is DEFLATIONARY for housing, especially in suburban areas where the cost of oil has a significant impact on family budgets.

Since we've been talking about Argentina lately, let's examine what happened to their real estate market upon devaluation of the peso argentino.

IT COLLAPSED. All bank lending completely seized (nobody is going to loan money that, once paid back in the future, is worth significantly less).

Real estate prices in Argentina (as well as Iceland where another devaluation just happened a couple of years ago during the bust) are still FAR BELOW their pre-devaluation levels.

rileybryan says

Not planning for the macro-economy is REALLY working for those people who bought in ‘06
At least they didn’t let that macroeconomic bully tell them what to do though.

Well, I think the point is not to go entirely by macro-economic theory, but to mainly consider your own personal micro-economic situation.

Most of those who bought between 2002-2007 ignored both.

I have to say that back in 2003-2004 when we were shopping I decided not to buy because I did the simple math calculation of income vs 30 year fixed mortgage payment vs rental rates. No one had to know a damn thing about economics or macro-economic theory, people just had to do simple arithmetic!

rileybryan says

Not planning for the macro-economy is REALLY working for those people who bought in ‘06

Funny that you say that because on a micro-economic scale it worked out nicely for me ;)

rileybryan says

I’m not following you, bert.

So you’re saying that you bought a house, watched it lose 40% of its value, and now you’re jumping for joy?

Or are you saying that your microeconomic perspective worked because you happened to be at a decent place in the macroeconomic cycle when you made the decision?

or what?

We did buy in 2006 (20% down) and have now saved 2k per month in rent payments for almost 5 years while enjoying our digs. We were able to refinance as interest rates went from 6.25% to 3.875%. The interest payment on our new loan is much less than it would cost to rent, and it's tax deductible. In another 5 years time, we will have saved another 120k compared to renting, totalling >200k compared to non-buyers. Our home may have gone down in value, but our home is a keeper and we have no intention of selling anyway and, frankly, the only real affect it's had on us is lower property taxes.
Life is short. Credit helps you get what you want and enjoy it now. The problem with identifying with losers who can't handle credit is that you're a loser too. Think for yourself.

Bert, sounds like you probably did the right thing in your situation. Even during the Bubble Years, there was no hard and fast rule; it always depends on how long you plan to stay and your rent vs. buying, which is always determined by the micro-economic circumstances of your local market.

In LA, if I had bought the same apartment I'm living in right now, I would have had to pay $800,000; with 10% down that's $720,000 @ roughly 6% in 2006=$4,500/mo mortgage. In 2006, I would have rented this apartment for $2,000/mo. So for me, it never made sense to buy vs. renting.

Even if I was able to refi today at 4%, that's still $3,600/mo mortgage--and, yes, I'm still paying $2,000 because rents are not dropping in LA nearly like home values are. I've saved about $75k (and invested it) since 2006 from renting instead of buying. If I had bought that $800k apartment, it would be worth about $700k in today's world (we're talking west LA/Hancock Park/Miracle Mile area). So I would have really lost out on savings, equity, and possibly being underwater on a mortgage since the first 5 years is 99% interest payments. Not to mention the cost of doing that refi to the current rates.

Re: 10% interest rates. I think in the end we pay roughly the same--it's just a matter of paying for an overpriced house with an underpriced loan, or you're paying for an underpriced home with an overpriced loan.

y ... i guess the point i'm trying to make is that i want to encourage Patrick.net readers to look at their own situation and make their own decisions, rather than basing their life choices on the macro economy and/or what they read in this blog. I know people who seem brainwashed in their own actions because they can't seem to disassociate their lives from what's happening in the broader economy. I'm hoping for some good karma by by offering a dissenting opinion that may save people putting their lives on hold just because we all agree the macro economy sucks.

robertoaribas says

bert: interest on a mortgage is absolutley not tax deductable, period. Rather, if you itemized it can be itemized, and only helps you to the amount that you exceed the standard deductions…

I bought in 2006 - i easily exceed the standard deduction ;)

furthermore, you can’t just act like you ’saved the rent’ when you incurred other costs to live: ie everything except principle reduction which has no doubt been negilgile.
bad math and thinking to rationalize a poorly timed decision, that’s all I’m seeing here.

I imagine i'd be much more unhappy living in a house with good maths ;)
I think of my principle payments as my own money that i get to keep.
As for "principle reduction which has no doubt been negligible", i encourage you to open your mind to possibilities - you just may be wrong in your thinking sometimes.

It did occur to me what really bugged me about this thread and encouraged me to write. It's that basing your actions on the macro economy is what got us in this mess in the first place. Basing your decisions on what is happening in the macro economy sounds like bubble thinking i.e. house prices are going up - let's buy now. For all your deriding of the housing bubble - macro thinkers are sounding to me like people just waiting to time the next bubble. Double standard?

bert says

furthermore, you can’t just act like you ’saved the rent’ when you incurred other costs to live: ie everything except principle reduction which has no doubt been negilgile.
bad math and thinking to rationalize a poorly timed decision, that’s all I’m seeing here.

I imagine i’d be much more unhappy living in a house with good maths
I think of my principle payments as my own money that i get to keep.

Until they figure out how to factorize happiness, i'll use whatever maths it takes to make me happy ;)

Bert says:

We did buy in 2006 (20% down) and have now saved 2k per month in rent payments for almost 5 years while enjoying our digs.

Your mortgage payments were $2,000 less than your rent? Equivilant house?

Your mortgage payments were $2,000 less than your rent? Equivilant house?

Good point. I guess my calculations assume a goal of home ownership.
If you buy now instead of waiting for 2 years, you didn't have to spend 2k/month for 2 years trying to achieve your goal. But that's like saying it's worth an extra 2k/month (minus principal + tax benefits) to own your house. I guess i can factorize happiness after all.

bert says

Good point. I guess my calculations assume a goal of home ownership.
If you buy now instead of waiting for 2 years, you didn’t have to spend 2k/month for 2 years trying to achieve your goal. But that’s like saying it’s worth an extra 2k/month (minus principal + tax benefits) to own your house. I guess i can factorize happiness after all

or rather,

ownership premium (i.e. Price of Happiness) = current mortgage + taxes - 2k (equiv rent) - principal - tax deduction benefit