patrick.net

Mark_LA says

People purchase & are qualified based on the monthly payment that they can afford, not the price of the house.

Not everyone.

shrekgrinch says

Mark_LA says

It’s of course foolish to predict with certainty that interest rates will rise in the next 20 years…look at Japan and the 2% mortgage rates they’ve had for the past ~20 years.

1) Actually, it is pretty damn valid to assume they’ll go up as hyperinflation is more and more likely with the Fed printing more Zimbabwean dollars to monetize government debt.
2) Even if hyperinflation doesn’t happen, these low interest rates are not sustainable if growth picks up again. House prices will tank when they do go up.
4) If the Fed was just monetizing mortgage debt like it did before, then at least we’d see direct drops in mortgage rates but that would be unsustainable over the long run.
5) We aren’t Japan.
This isn’t about ’saving’ the housing market. It’s about monetizing government debt Wiemar-style.

You really don't get it at all.

shrekgrinch says

It’s about monetizing government debt Wiemar-style.

You do realize the actual Weimar printing was in response to French occupation of the Ruhr and the ensuing general strikes that shut down 20-30% (SWAG) of the German productive economy right?

And that their hyperinflationary period was a brief interval in the 1920s, that was eventually addressed with new fiscal policies in late 1923?

Our problems are MUCH more similar to Japan's than Weimar Germany's.

WWI Postwar German problems came because they had too much money and not enough stuff.

We, on the other hand, have too much stuff and not enough money.

http://research.stlouisfed.org/fred2/series/TCU

1) Actually, it is pretty damn valid to assume they’ll go up as hyperinflation is more and more likely with the Fed printing more Zimbabwean dollars to monetize government debt.

Hyperinflation happens when people loose faith in a currency and no longer want to hold it. That is extremely far from what is happening now. People are hoarding dollars.

The Fed is not printing money in order to meet government spending needs. The treasury can borrow quite easily at low rates already. If the Fed were printing money because there was no other way to meet spending needs, then I'd agree with you. But again, this is extremely far from what is happening now.

I'm not expecting much from another $600B of long term treasury purchases. Rates are already quite low.

Until the Fed announces an inflation target of 2%, 3%, 4%, and pledges to do WHATEVER IT TAKES to achieve that, then I can only conclude that they are just going to accept credit deflation and high unemployment for the foreseeable future.

Our currency is really a credit based currency. The "Fiat" aspect of it, that the Fed is responsible for is really quite minor in comparison. There is over $50T in credit money, compared to a few trillion in fiat money.

Fiat money - a federal reserve note - is just a piece of paper backed debt. So is a treasury bill, or commercial paper issued by a company, or any other note.

There is nothing really special about a FRN from the Fed, except that it's the most safe and liquid. In fact the the trillions of dollars worth treasury bills and short term GSE debt is scarely distinguishable from a FRN. They are both stores of value, backed by the government, paying little or no interest.

I can hold a $100, or treasury bill that will pay me $100.03 in 3 months. Which would I rather have? I don't care, and nobody else does. They are almost exactly the same thing. This is what the zero bound means. The Fed could purchase all $1.7 Trillion of short term treasury bills, and it would do absolutely nothing because they are just exchanging one piece of paper for another that is it's functional equivalent.

Now watch as the Republicans only allow us to run a deficit of 1 trillion a year as the Democrats scream that reducing government spending doesn't work.

The S&P was awaiting the Fed's announcement much more than the election results.

If rates were going up, you would all be talking about the option ARMS etc that are about to reset.
I haven't seen anyone post a link for that graph for a while now ;)

Yes, nice Fed blip. AAPL seems finally lifting out of it's recent plateau.

bert says

If rates were going up, you would all be talking about the option ARMS etc that are about to reset.
I haven’t seen anyone post a link for that graph for a while now

Those will reset as scheduled.
While the graph was not posted for a while indeed, the present beginning of double dip and associated QE2 by Fed
match the raise of 2nd peak after through on that graph nicely. The reason is,
tt would be great for owners were those just ARMs, but they are OPTION ARMs.
The major problem with re-set is not the reference interest %, but the need to start
paying principal + full interest instead of just (minimum) partial interest in a neg-am. situation.
Lower interest helps of course, but not enough for many and perhaps most.

shrekgrinch says

Last, monetizing the debt is still buying debt that is issued. Say that the treasury simply bypasses the auctions and just writes up a giant IOU and gives to the Fed for the cash. They are still ‘borrow[ing] quite easily and at low rates’, aren’t they?

The treasury has not been borrowing from the Fed (indirectly as you point out), and they don't need to. The amount of treasuries on the Feds balance sheet is still around $800B. The deficits have not been financed by monetizing debt. And look where treasury interest rates are even without Fed treasury purchases: 0%.

Again, this $600B monetization of debt has absolutely nothing to do with the treasuries inability to finance it's debt and deficits. And hence has nothing to do with a hyperinflationary scenario.

bert says

If rates were going up, you would all be talking about the option ARMS etc that are about to reset.

Nobody cares about resetting. It's recasting that is the problem. Option ARMS, interest only loans, etc. recast such that instead of paying off only the interest (or not even paying the interest in the case of option ARMS), you have to pay off the loan over time. Even if rates are lower this can mean a significant increase in payments.

No, what the republicans know, what the economists know, what the democrats know is that they have to get the economy moving at whatever cost. If it stops, we all lose completely.

What the republicans SAID because people are easily fooled is "they're spending money we don't have!" so they would get voted in. Make it look like they're in frugal and won't spend.

They all agree this is what needs to be done. They will all continue doing this, because it's what needs to happen.

MarkInSF says

The Fed is not printing money in order to meet government spending needs. The treasury can borrow quite easily at low rates already.

QE2, even more than QE1 is about monetizing the debt - i.e. helping the treasury issue more debt. At the risk of oversimplification, here is what happens:
1. Treasury issues debt at an auction.
2. Primary Dealers (aka big banks) bid on it. This is effectively a reverse-auction where the PD who takes the bonds at the lowest interest rate "wins". Treasury gets the money, PD gets the bond.
3. PD tries to resell the bonds.
4. With QE2, any bonds that the PD cannot sell to investors, they get to sell to the Fed. The Fed prints new money to buy this.

If the Fed backstop were not in the picture, the PD's would demand a higher interest rate because they would have to sell the bonds on the open market. Since the Fed intends to target a certain interest rate, they effectively provide a gurantee to the PD, who in turn guarantees that the Treasury's debt auction will continue to have a bid.

Like I said before, I oversimplified it a little to show the chain of circle-jerking here - in reality it is much more obfuscated so you and I cannot see that Bernanke is giving Geithner a reach-around. Damn, I need to drink to get that visual out of my head now.

pkennedy says

They all agree this is what needs to be done. They will all continue doing this, because it’s what needs to happen.

What _needs_ to happen is for the pretense to stop, the insolvent entities (banks or others) to be shut down, and the resulting write-downs to be booked. THAT is when the economy will begin to recover.

However, this will be painful to some powerful people - so what _will_ happen will be anything but the above.

How apple manages to convince people to buy their garbage is beyond me.

So shut down lots of banks, close down anything that isn't working. Run unemployment sky high. Cause consumer confidence to fall through the floor. Cause employeers to shutter any job openings they might have had. Get people saving at a mad pace.

Then hope there are people to keep the services industry in business, because that is one of the biggest employers. Just hope that doesn't collapse during this mad rush to shut down everything.

That will simply cause the public to stop dead in it tracks of purchasing services and/or products or cause a massive domino effect through the economy. No that is the worst thing we could do.

Sounds good though! Kill off everything bad in the economy and not worry about the cascading effect that will cause.

Fisk says

On the other hand in other places:

- Houses (and condos) are real buildings of bricks/cement able to withstand dozens of years with no structural problems. Here, including the most expensive SFBA-style areas they are just plywood boxes. And the entire West coast is mostly devoid of high rising apartment buildings so prevalent in Europe.

- And BTW you can hardly grow anything on those 5-8K sqft you get with a house. So you will not be able to feed yourself in case of a crises. Which pretty much devalues the entire idea of owning a house here.

- The last decade or so produced a bubble of historic proportions in which RE prices were inflated by millions of people who had nowhere bear enough money. So in contrast to the rest of the world where mortgages (even if they exist) are not given for no-money-down and only 4% to anybody. Until prices get to historic average levels and, say, 50% downpayment is made mandatory the only reason to buy a 60-year old barn for 800K+ is betting on hyperinflation (provided you have savings to worry about in the first place).

- In America you don't own a house, you rent it from the government for a property tax which could easily be 10K+ (well, unless you bought twenty years ago and enjoy now Prop13). In other places, including your example of Russia, you pay at most a symbolic amount.

Nick says

And the entire West coast is mostly devoid of high rising apartment buildings so prevalent in Europe

On the commercial side, in San Jose and certainly in parts of Santa Clara, many developers built a ton of new high rises only to be left vacant post 2000. Lots of vacancy but no jobs no people and not much demand out there. Sign of the times ahead.

Hmmm, you remind me. I should look into writing puts.

We had 2+ years of low interest rates but no net gain in jobs. Even if the rates goes down 3%, an increase in existing home sale transaction adds nothing to the economy or jobs. It only adds 6% to realtors, 2% mortgage brokers and another 2% to banks. Now no idiot in the world will buy US mortgage bonds except Fed.
All publicly listed Companies hold close to 1T cash.They are not spending to create jobs. What makes Fed to think that this will change when rates goes down from 3.75 to 3.25.

Only new house construction add some value to economy. So give tax breaks for that and tax holiday on payroll and social security for new jobs created. Again, I can't believe US is counting on housing market recovery for Jobs. Actually it is otherwise.

sss says

Only new house construction add some value to economy

And that's debatable. IF you knock down a perfectly livable house and build another you're not really adding much wealth into the system. Plus there's no shortage of houses anyway.

Maybe aggressive rehabbing might be economical, or new houses that are much more energy efficient and space efficient (more people per sq mile of neighborhood) might be worthwhile investments.

I watched this video of Kyle Bass (Managing Partner of Hayman Capital) .. gives great insight on 0% interest rates ... "ZIRP (zero interest rate policy) is a trap," he says ... "we can't afford to have our rates move up" ... start video at 2:20

http://www.cnbc.com/id/15840232?play=1&video=1568273859

And for those who _still_ think "Extend and Pretend" is sound economic policy, please read this as many times as it takes for the fog to clear.

http://market-ticker.org/akcs-www?singlepost=2241037

Don't come back and waste everybody's time until you have understood it.

Troy says

And that’s debatable. IF you knock down a perfectly livable house and build another you’re not really adding much wealth into the system.

Sounds like Cash for Clunkers. I guess it's okay if it protects union contracts.

Berneke: If I can't get those deadbeats to pay their mortgages, I'll make 'em pay at the grocery store and at the pump.

Jesus. I hope this is just an anomaly.

Is this true?

pkennedy says

So shut down lots of banks, close down anything that isn’t working. Run unemployment sky high. Cause consumer confidence to fall through the floor. Cause employeers to shutter any job openings they might have had. Get people saving at a mad pace.

Why does everyone think that having insolvent banks going into bankruptcy, having the bad assets liquidated, and the good assets sold off is the end of the world? Life will go on just fine. The affected banks would continue to operate in bankruptcy while the court sorted things out. In the end the incompetent insolvent banks will be gone, while the well run banks will own any of the assets that have any value. Not having Citibank or BOA around would be a net positive.

This is how capitalism is supposed to work. The young hungry companies create all the new jobs and eat the old doddering ones up. At least until politicians get involved with taxpayer financed bail outs. Oh No Mr. Bill, we can't have the STOCKHOLDERS lose money or bankers fail to get their bonuses, after all they shared the profits with the taxpayers all those years fat profits were being made. Didn't they?

pkennedy says

So shut down lots of banks, close down anything that isn’t working.

Yes - banks that fail deserve to be shut down. FDIC covers depositors to the extent that their deposits were guaranteed. Everything else was subject to risk - liquidate the remaining assets and shut it down.

Run unemployment sky high. Cause consumer confidence to fall through the floor.

Shutting down insolvent banks that have managed risk poorly is NOT going to lead to any of these doomsday scenarios. Stop scaring yourself and go change your underpants.

Yes, it will have a cascading effect on the economy - but other banks - the ones that are not burdened by a decade of fraud and shady practices will step into the void. Businesses that actually deserve to get funded - because they have a viable plan - will be able to get funding at interest rates that reflect the actual risk of the venture.

That is what you need to have a real recovery in the economy, and for people to get employed. This extend-and-pretend nonsense is only going to make it worse.

On a more average scale, people might work off the books. Illegals. Their competitors. Others. So, a void gets created for "money" (IOU/paper trade tool). Today the void is filled by FRN. But Gold Coins from a game and a web account or smartphone could work too. So, while y'all talk about macro effects on the dollar, I don't under-estimate the power of the people. They will use the system which benefits them. Scary for the establishment with their vent as quoted above:

Berneke: If I can’t get those deadbeats to pay their mortgages, I’ll make ‘em pay at the grocery store and at the pump.

FED HAS to do to ZIRP. Its a credit bubble. The only way to keep it expanding is to keep blowing. ZIRP. -> Higher costs and inflation. thanks for the clarification on Hyperinflation. My suggested system above would be the step in that direction. I guess someone could issue gold-backed notes too with so many people holding gold. Not unimaginable for sure.

The big question is when will be QE3?

"The company plans to eliminate 155 to 175 jobs at its Fremont site and cap its workforce at about a 1,000 people."

Native94027 Why would you post an editorial as if it is fact? Then you say don't come back until you understand it. What a joke!

As I've said before, house prices and interest rates are not correlated as you state. If it were true that higher interest rates means lower house prices, then prices would be through the roof right now, but alas they are not because the economy can't support price growth. Conversely, when the economy (hopefully) eventually turns around, and interest rates are increased again, house prices won't fall proportionally. In fact, they will rise, since prices are not inversely proportional to interest rates, only an economy that can support price growth. In reality, again as I've stated before, rising interest rates actually spur buying due to competition among buyers trying to "lock in" the lowest rate possible. Falling rates do the opposite, causing people to sit on the sidelines since there is no pressure to move quickly to "lock in" a rate that is higher than it will be in the future, especially when house prices are not appreciating. All that QE2 will do for housing is cause it to depress further. Housing won't come back to life until the job market improves and the economy can support price growth, at which time the Fed will raise interest rates and house prices will rise, just as they've done so many times before.

fudakas says

Native94027 Why would you post an editorial as if it is fact? Then you say don’t come back until you understand it. What a joke!

WTF are you talking about? It is an opinion. Try to understand what it says.

Ray says

as I’ve stated before, rising interest rates actually spur buying due to competition among buyers trying to “lock in” the lowest rate possible.

I don't dispute that the mathematically-challenged among us would feel compelled to behave as you have outlined... but it really depends on whether you want a low principal, or a low monthly payment.

bob2356 says

Why does everyone think that having insolvent banks going into bankruptcy, having the bad assets liquidated, and the good assets sold off is the end of the world? Life will go on just fine.

How soon you guys have all forgotten reality. Do you not remember only 2 years ago? It's very easy to sit back and Tuesday morning quarterback, isn't it. Even with the bailouts that everyone despises, we had one of the worst downturns since the Great Depression. How much worse would it have been without the bailouts?? Would it have destroyed the whole economy? I'd say the risk was something greater than 0%.

>it really depends on whether you want a low principal, or a low monthly payment.

If you are gonna live there and pay it off, it does not matter. Can you, in today's economy, live in one place for 15/30 yrs? Jobs are very mobile.

Bubble gains have to be given up. It does not matter how that is stored - you bough bonds, stock, real estate, have cash in the bank whatever. Unless that gain is given up, this problem is not going to be solved.

Those who bought bonds and have cash in the bank say they don't want to suffer any loss. Really all that is just claims on the labor and work of the people who you call dumb, sheeple, freeloaders etc. Just because you sold them a crap mortgage and sold it to someone and got cash for it does not mean that you will be able to get stuff or buy stuff for that cash. Converting crap to cash or bonds or stock doesn't produce stuff.

You can get away with such things as one con artist among a million productive people - as a pimple on a dog. The entire economy cannot do this.

This is the crux of the problem - many people who profited or made money in the bubble say they "earned" it. They "deserved" it. The bubble "winners" think the "losers" should honor all the bogus claims they own.

The wealthy seems to believe that these claims are somehow valid because they are denominated in terms of “money”, or are bank bonds. These claims are mostly bunk. They hold these claims on the productive capacity of the masses, and the masses have to be in serfdom to satisfy these claims by the wealthy.

The wealthy argue that the masses should go into serfdom to satisfy their claims. That is, Social Security and other safety net programs that provide a _minimum_ safety net should be busted, and the masses should slog to fulfill the claims being held by the wealthy on the economy. All valid claims - that of those who never gained anything from the bubble, those who aw stagnating wages, those who worked physical labor, yet put aside for their meager retirement in Social security, must be superseded by bubble wealth claims.

This is the vast con of the Teaparty and the right wing.

The only Teaparty senator, Scott Brown - held up the financial regulatory bill hostage, until he got what he wanted. The bill had provisions for making bubble wealth pay for regulation, and for banning government backed banks from gambling. He gutted both of that in exchange for his vote in passing the bill. So much for the Teaparty.

There's no way the Republicans will actually let a default of any scale occur. Wall Street and the USCOC won't tolerate it.

I agree about inflation, of course. I'm not sure that gold is the best hedge there though.

My neighbors aren't going to get wiped out, because inflation is a net win for almost everyone right now. Debt is the biggest problem this country has, bar none.