patrick.net

Just to be clear, I think prices will fall a bit more this year so the plan is to take our time, find the right area, house, and put at least 10 percent down. Maybe buy late this year.

Housing, especially in the Bay Area, is not like other things we buy with our money.

House prices are driven by the consumer surplus we have, after paying life expenses of equal or higher priority.

This is because there is no "producer cost" of land (or housing for the most part) any more -- we simply bid up the price level to what our household can afford.

Now, both home value and gold can serve as a store of value in the face of "inflation".

But the dollar devaluating against other currencies or the money supply growing and chasing fewer goods (price inflation) do not necessarily start pushing up home values.

Eg. if by some miracle the voters vote to increase state taxes the $20B/yr we need, that $20B going to come mostly out of upper-middle class wage income, say 4 million taxpayers paying an additional $400/mo each.

Gasoline might very well go up to $20/gallon this decade. This will push prices down, not up, since we do not produce gasoline here.

Same thing with food. There is no food production here any more (though Salinas and Fresno might start looking better).

Same thing with health services, which generally enjoy pricing power in the market. A minority of health care professionals might find their real incomes not under pressure, but that's not going to help the majority of the market.

So absent a broad WAGE inflation, I don't see prices going up much this decade, even in the face of "devaluing" -- which when not talking about a cross with another currency just means commodity price inflation.

I can't see the future, it is entirely possible we will continue kicking the can down the road and have a $20T national debt soon enough, and the party times of the 1980s and the 1990s will repeat themselves again.

Or "The Party of No" might start walking their talk and insisting on government spending cuts. Without the government spending an extra $3T it didn't tax over the past 2 years, 2011 would be looking like 1931 now.

I am not sanguine about things holding together this decade. Too many idiots running around.

Troy says

Housing, especially in the Bay Area, is not like other things we buy with our money....
...So absent a broad WAGE inflation, I don’t see prices going up much this decade...

... with the exception of Fortress Enclaves in the big cities along the coast that are coveted by wealthy foreigners. As the dollar goes down, these will be even better bargains for those folks.

I do not think we will have inflation. All the ultra wealthy people who have the money would never accept inflation. Inflation for a poor guy expropriates a little bit. Inflation for the rich man expropriates insane amounts.

Expect certain level of deflation this year for prices to return from the bubble. Housing isn't a way to protect your earnings against inflation either. You have to pay interest, housing is still a bubble so you will see its price drop after you buy it, you have to pay repairs, taxes, etc...

Ah! Inflation talk again. Like 20% YOY home price during the bubble years were not enough and that inflation has hardly corrected and talk about inflation again. May be sybrib is right, if dollar is severely devalued against all world currencies, OP you are out of luck anyways. Hope that wealthy Chindians swarm on the west coast of CA for the deals of their lifetime because their wealth in China/India is not enough to make them happy so they need to pack their wealth and relocate to wonderful Lala Land of California. LOL.

>Gasoline might very well go up to $20/gallon this decade. This will push prices down, not up, since we do not produce gasoline here.

actually could push prices and rents up as demand increase closer to jobs.
I process a lot of rental apps for tenants and last year #1 reason for moving was to be closer to work. Many people looking for walking distance to not have to drive at all.

There's no basis for housing prices to track inflation. So all of this talk about reversion to mean is a bunch of bunk.
Prices are dictated by supply and demand.
When jobs come back and If gas goes to $20 prices may go up in some areas down in others.

Thus I wouldn't buy a house simply as a hedge against inflation because there are too many other factors to consider.
If you want to speculate though I'd look in areas where demand is still strong and competition still exists
because once the economy improves those are the areas likely to go up.

bubblesitter says

Ah! Inflation talk again. Like 20% YOY home price during the bubble years were not enough and that inflation has hardly corrected and talk about inflation again. May be sybrib is right, if dollar is severely devalued against all world currencies, OP you are out of luck anyways. Hope that wealthy Chindians swarm on the west coast of CA for the deals of their lifetime because their wealth in China/India is not enough to make them happy so they need to pack their wealth and relocate to wonderful Lala Land of California. LOL.

Well I think it's clear there is inflation. In fact we want inflation but lots of things cost more...gas, coffee. If I'm keeping a house 10 years, and just for arguments sake there's 2percent annual inflation, that means it would cost 20 percent more to buy w/o any change in the price of the home, so if I keep the house at least ten yrs, unless I think the house will depreciate by more than 20 percent, seems like. Good hedge no? I'm still trying to understand why this wouldn't be true.

^ over time, workers have to ask for raises to meet the rising cost of living. Landlords can ride in the background with these raises, generally getting their cut of the added household income, and these increased rents tend to push up home prices too.

So yes, if the rubber side stays down on the state/national economy, there probably will be a return of inflation that pushes up home prices along with everything else.

But I was here in the early 1990s, and housing wasn't a pretty picture then. We are in much worse shape now compared to then, so I am not particularly optimistic that we will see a return of the 1994-1999 good times.

1934-39 is more what I'm thinking.

toothfairy says

When jobs come back

where did the jobs go? and considering where they went what makes anyone think they will come back?

"If this is the case, and I can afford to buy a home within my means in the bay area, at a price where my mortgage is almost what I could rent the house for, isn’t it a good idea regardless just to protect my dollars?"

That's a lot of "ifs".

As far as I'm concerned, the only question you should be asking is, "Will house prices go up or down?" Let's say you're right, and buying a house is a hedge against inflation - If you can get the same house for less money in 6 months or a year, then it's an EVEN BETTER hedge against inflation. So the hedge against inflation part of the argument isn't relevant. The only way it would be relevant is if you're deciding whether or not to buy a house AT ALL, and it would seem you've already made up your mind. The only question is when.

Vaticanus says

toothfairy says

When jobs come back

where did the jobs go? and considering where they went what makes anyone think they will come back?

the jobs didn't go anywhere. Companies downsized to brace for the recession.

what makes anyone think jobs will come back? Look at any historical chart of unemployment.

There's nothing wrong about buying a home, when you can afford it w/in your means, you're financially stable, and you will live there for long time, as you said. Those are right reason's to buy a home for home buyers. If you're one of those investors or speculators, this hedge thingy or protecting money thingy gets in there. So, what's your main reason to buy a home? Home or hedging?

Vaticanus says

toothfairy says

When jobs come back

where did the jobs go? and considering where they went what makes anyone think they will come back?

Jobs won't come back. It is cheaper to outsource to India/China. Technology makes most work obsolete since today almost any worker can be replaced by a machine, and more so in the future. We are only going to have higher unemployment soon.

Capitalism does have its downsides and weaknesses. It doesn't work very well when lifes' necessities can be privatized by a few by the money they print.

ChrisLA says

Jobs won’t come back.

Of course they will come back. Not every one, but unemployment will drop this year, and next year. Here's an article from today's news:

http://finance.yahoo.com/news/Poll-Hiring-plans-top-layoffs-apf-2575460790.html?x=0

just for the "jobs aren't coming back" crowd.
here's a primer on how the business cycle works

http://www.thebluecollarinvestor.com/blog/recession-a-normal-part-of-the-business-cycle/

If this is the case, and I can afford to buy a home within my means in the bay area, at a price where my mortgage is almost what I could rent the house for, isn’t it a good idea regardless just to protect my dollars?

I say yes. Unless your income uncertain.

I'm kind of baffled by your "if inflation continues" statement. Inflation is at 50 year lows.

seaside says

There’s nothing wrong about buying a home, when you can afford it w/in your means, you’re financially stable, and you will live there for long time, as you said. Those are right reason’s to buy a home for home buyers. If you’re one of those investors or speculators, this hedge thingy or protecting money thingy gets in there. So, what’s your main reason to buy a home? Home or hedging?

+1. good advice.

gameisrigged got it. Consider all other economic factors and take a educated guess, if you buy a 500K house now what will be its value 5 years from now? If you think it is going to go down then hold your $ and buy 5 years from now. If you think it is going to go up then buy it now(or you'll never be able to own). :)

here’s a primer on how the business cycle works

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

See that downleg at the end? Where is that in your theory?

Or how about $4T of added debt since the start of the recession?

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

These two items are related -- we abused our personal credit cards to get out of the tech recession and now we're abusing our government credit card to forestall the crash that should have hit in 2009.

Shows we need double the recovery we've had so far to just get back to the average postwar recession levels.

But note that previous recessions were caused and ended by Fed interest rate policy -- tightening money to slow the economy down and then loosening credit to get everybody rolling again.

Something similar happened in 2006 -- the Fed raised interest rates a bit and then everybody started to GTFO the housing sector -- but we were so, so overleveraged on housing -- we had borrowed $4T or so more than we could repay -- that a massive crash-boom-bang was inevitable.

This is not your father's recession.

Of course there's going to be inflation. As Petter Schiff explains in today's Yahoo Finance video, inflation will be the way that the U.S. pays for all the government bailouts and stimulus spending of the past 3 years: http://yhoo.it/fQCRsI .

Borrow $100k today and pay back $50k in real, inflation-adjusted, dollars over the span of your fixed-rate mortgage. Let the bank assume inflation risk by being dumb enough to hand out fixed rate 30 year loans at 5% interest. You profit from their bad business sense.

Mark_LA says

Borrow $100k today and pay back $50k in real, inflation-adjusted, dollars over the span of your fixed-rate mortgage. Let the bank assume inflation risk by being dumb enough to hand out fixed rate 30 year loans at 5% interest. You profit from their bad business sense.

I could make more money shorting bank stocks making these loans then right?

Mark_LA says

Of course there’s going to be inflation. As Petter Schiff explains in today’s Yahoo Finance video, inflation will be the way that the U.S. pays for all the government bailouts and stimulus spending of the past 3 years: http://yhoo.it/fQCRsI .
Borrow $100k today and pay back $50k in real, inflation-adjusted, dollars over the span of your fixed-rate mortgage. Let the bank assume inflation risk by being dumb enough to hand out fixed rate 30 year loans at 5% interest. You profit from their bad business sense.

Worked for Ronald Reagan!

Los Angeles Renter says

I could make more money shorting bank stocks making these loans then right?

You'd have to short the U.S. Government who buys/guarantees these dogs from the banks via the now government-controlled and owned Freddie Mac and Fannie Mae. But you can't because the U.S. owns the Fed's printing press, which they can run full steam as long as they need in order to have you ultimately pay for it all, without most people even realizing it.

Don't go against the grain...just profit from the knowledge. Borrow/leverage as much as you can and buy investment properties in places like Vegas where it's a lot more expensive to rent than to buy. You can buy a Condo that rents for $600/month for $40k there, as an example.

SF ace says

In simple terms, I borrow $10 @ 1% and lend it out at 5% for 30 years.

Yes, this model only works when banks can borrow at 1% from the government. The government doesn't assume any inflation risk, because they in fact are the ones who create the inflation through the Fed's printing presses (or quantitative easing as Tiny Tim Geithner and Uncle Ben Bernanke like to call it).

If banks were forced to lend out their own money (deposits), only adjustable rate loans would be available, where the borrower would assume the inflation risk.

Ace--

Any loan the bank makes at 5% is a loser if rates go to 10%. Whether or not they can roll it over is irrelevant. That money is not being as productive as it could be. It's only earning 5% when it could be earning 10% today.

Think of it this way. Banks that are "smart" and don't make 30 yr. loans at 5% today but invest that money elsewhere will be able to loan it all out later at 10%, thereby earning much more. And potentially driving the banks that are stuck with lots of 5% loans out of business.

Troy says

here’s a primer on how the business cycle works
http://research.stlouisfed.org/fred2/series/CMDEBT
See that downleg at the end? Where is that in your theory?

For one it's not MY theory. I didn't realize there was any debate over whether there is a business cycle. I mean this is pretty common sense stuff.

I dont see any of the charts you posted disproving it either.

toothfairy says

I didn’t realize there was any debate over whether there is a business cycle

http://en.wikipedia.org/wiki/Business_cycle#Explaining

eg:

"One alternative theory is that the primary cause of economic cycles is due to the credit cycle: the net expansion of credit (increase in private credit, equivalently debt, as a percentage of GDP) yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle."

and

"Economists of the heterodox Austrian school argue that business cycles are primarily caused by excessive creation of bank credit - or fiduciary media - which is encouraged by central banks when they set interest rates too low, especially when combined with the practice of fractional reserve banking. The expansion of the money supply causes a "boom" in which resources are misallocated due to falsified interest rate signals, which then leads to the "bust" as the market self-corrects, the malinvestments are liquidated, and the money supply contracts."

~~

The way I see it, in 2000-2001 the US was heading into a cyclical downturn after the heady run-up of the 90s, much like the recessionary times of the 1990-1991 period. We can agree to call this "the business cycle" for the most part, since the Fed felt in control and did in fact tap the brakes, both in 1989 and in 2000:

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

However, AFAICT, due to exogenous political considerations -- not wanting GWB booted out of office like his dad -- the Fed over-stimulated the credit cycle in late 2003, eg. cutting the cost of Fed money in half, from 2% to 1%.

Coupled with this were the 2001-2003 tax cuts and the new lending paradigm of not caring if people could pay back the money they were borrowing.

This resulted in an immense asset bubble in real estate, since real estate was the one "capital good" being offered at such favorable credit terms -- to anyone who could fog a mirror.

That lending bubble gave us the Bush Boom, such as it was, from 2003-2006.

TENS of billions of dollars a month was being injected into the general economy via the housing bubble, both from economic activity of the REIC -- agents, loan processors, construction labor, etc etc -- and people liberating their equity via HELOCs and cash-out re-fis.

Fifty billion dollars a month doesn't sound like much, but that is SIX MILLION $100,000/yr jobs, and around TWENTY million jobs in total once all the secondary wealth effects are fully factored (ie velocity of money effects).

During the peak of the credit cycle 2005-1H07, over $100B/month was flowing into the economy via household debt extension. Stupendous!

1998-2000: +~$500B
2001: +$610B
2002: +$800B
2003: +$900B
2004: +$1.1T
2005: +$1.2T
2006: +$1.2T
2007: +$900B
2008: +$36B
2009: -$240B
1H10: -$140B

The economy lost this stealth stimulus when the bubble burst in 2008. We've been replacing it with over $3T of deficit spending over the past two years, but it is unclear how long this form of fiscal policy can go on.

The electorate gave the control of the nation's fisc to the Republicans, and their position is we need to cut government spending.

If they walk their talk there is going to be an immense crash coming, since so much of the private economy is being supported with this gummint intervention.

The Republicans want to cut a modest $100B/yr. That's around three million jobs lost in the scheme of things -- 2% of the workforce.

No biggie, the business cycle is turning and the private sector is coming back!

Pull the other one.

SF ace says

In simple terms, I borrow $10 @ 1% and lend it out at 5% for 30 years. Ten years later. (inflation) caused the borrowing cost to increase to 5% but that same inflation increase my lending rate to 10%. All that money I received from my first customer at 5% is now rolled over into new customers at 10%. I only lose if I can’t roll over the money.

But if inflation goes up to $5%, and you've got $1B in mortgages, and $1B in deposits, your getting 5% on your mortgages and having also to pay out 5% to depositors. Subtract operating costs and you're operating at a loss from your existing book, and it may be quite a while before new loans can close that gap.

Inflation is a HUGE risk for banks making long term loans. That's why we had GSEs.

toothfairy says

Troy says

here’s a primer on how the business cycle works

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

See that downleg at the end? Where is that in your theory?

For one it’s not MY theory. I didn’t realize there was any debate over whether there is a business cycle. I mean this is pretty common sense stuff.
I dont see any of the charts you posted disproving it either.

I agree with Troy. The credit aspect of the "business cycle" is very overlooked. Huge overhangs of private debt frequently lead to protracted slumps. Just look at Japan, or USA in the 30s.

Mark_LA says

Yes, this model only works when banks can borrow at 1% from the government.

Hmm? Banks lend to the government (they hold treasuries), they don't borrow from it. (Well, there was TARP, but that's pretty much over, and it was a lot more than 1%). Discount window loans from the Fed are small, and besides, the discount rate (and the other similar programs) is a higher interest rate than banks can borrow from each other - or from you and I for that matter.

Banks don't borrow from the government? Har, har. Stop it, you're killing me.

Troy we'll just have to agree to disagree. There's no way I'm getting caught up in theoretical causes of the business cycle. My only point is that it does exist and right now we are in the bottom end of a cyclical trend.
At some point both jobs and inflation will come back.

Probably sooner than later due to the massive amounts of stimulus response and padding of banks balance sheets. The money has to go somewhere.

toothfairy says

The money has to go somewhere.

Ah, that is the $64T question, isn't it?

The Republicans are saying no more stimulus, we need tax cuts instead.

Capacity utilization has recovered somewhat:

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

but it's only back to the bottoms seen during past recessions!

I agree if J6P starts seeing some of this extra money coming his way then we'll get jobs & inflation again.

But more jobs and more wage income are tightly bound -- you can't have one without the other since it takes a tight labor market to put an upward trend on wages.

However, FEWER jobs and LESS income is the normal state of affairs, given the wage differential between the US and the rest of the world.

Part of the reason all recent "business cycles" have had increasingly jobless recoveries is due to globalization of the work force, we didn't have a $30B/mo trade flow with China in the 1970s.

Durable goods employment is back down to the Truman era:

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

Retail's lost about 2M jobs:

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

If the Republicans allow Obama to triple the national debt like St Reagan did, then yeah, we should be OK this decade. Just more can-kicking I guess. I half expect this to happen.

But things can certainly go to Hooverville if all the small-government talk starts getting walked.

toothfairy says

There’s no way I’m getting caught up in theoretical causes of the business cycle. My only point is that it does exist and right now we are in the bottom end of a cyclical trend.

If you don't get the causes of a cycle right, you're not likely to predict it's future with any certainty. The article you posted didn't even mention the word "credit" or "debt" once. Irregardless of your opinion on the affect of debt levels on the business cycle, it pretty hard to argue that we are anywhere near the "bottom" of the debt cycle. Private sector debt levels are still at extremely high levels historically, after rising for two decades.

A couple points are important to me.

1. Business cycles do exist

2. Companies shed jobs bracing for a recession possibly depression

3. Recession officially ended in June 2009

In conjunction with the article I posted
it's enough evidence to tell me that jobs WILL be coming back. Maybe not to levels seen at the peak of the credit bubble (there I said credit)

private sector debt may be historically high level but it was like that during boom and bust so what am I missing?

toothfairy says

In conjunction with the article I posted

The one dated November 23rd, 2008?

The national debt ("Debt Held By The Public") on that day was $6,393,775,797,295.81.

Six months later it was $6,999,376,165,569.64 -- a deficit spending run rate of $100B/month.

Two years later the national debt was $9,205,377,401,824.96, a rise of $2.8T, a run rate of $116B/month.

Talking about "recessions ending" and "business cycles" strikes me as odd when such an immense external intervention occurred and is continuing.

private sector debt may be historically high level but it was like that during boom and bust so what am I missing?

You're missing the run-up of household debt that was allowed to occur (if not encouraged) 2002-2007.

So it was not really "like that during the boom". The run-up in debt -- from $9T in 1Q03 to $13.9T in 1Q08 WAS CREATING THE BOOM.

That was a shower of ONE TRILLION DOLLARS A YEAR entering the economy.

And as for the bust . . .

All we've done since the bubble crash of late 2008 is swap-in government deficit spending -- $120B per month -- for that lost credit stimulus.

We're running in a policy channel first carved out by Japan, 1990-now. Their debt-to-GDP is #2 to Zimbabwe. We'll be right up there if we continue this rate of debt expansion.

At least Japan's national debt is internal, so it's just an accounting artifact. I'm not entirely sure what's going to happen with our national debt -- if the Austerians take over policy we're going to be f---ed one way, and if they don't we're going to be f---ed another.

>> The one dated November 23rd, 2008?

yeah actually I could probably pull up an identical one from 1978. The ideas are nothing new and no it's not different this time.

>> Talking about “recessions ending” and “business cycles” strikes me as odd when such an immense external intervention occurred and is continuing.

again it's not me talking about it.
http://www.nber.org/cycles/cyclesmain.html

are you denying that the recession is over. NBER wrong? lying?

gameisrigged says

“If this is the case, and I can afford to buy a home within my means in the bay area, at a price where my mortgage is almost what I could rent the house for, isn’t it a good idea regardless just to protect my dollars?”
That’s a lot of “ifs”.
As far as I’m concerned, the only question you should be asking is, “Will house prices go up or down?” Let’s say you’re right, and buying a house is a hedge against inflation - If you can get the same house for less money in 6 months or a year, then it’s an EVEN BETTER hedge against inflation. So the hedge against inflation part of the argument isn’t relevant. The only way it would be relevant is if you’re deciding whether or not to buy a house AT ALL, and it would seem you’ve already made up your mind. The only question is when.

I disagree that the only thing you should ask “Will house prices go up or down?”. Might as well play the over/under in vegas. I also disagree that an inflation hedge is the only reason to buy a house. Inflation directly caused maintenance costs to go up. In my opinion if you are ever interested in buying a house the better question is "what kind of house can I get for what I can afford ?" If you are planning on living there and dont need financial trickery to make a purchase, then the price going up and down means little.

toothfairy says

are you denying that the recession is over. NBER wrong? lying?

NBER BCDC is just 9 academic economists doing what they are paid to do. They had more relevance back in the 1920s, back when government spending was not the dominant element it is today.

Calling the recession "over" when we are still well the fuck down from the 2003-2006 period of employment or output is sometihing of a deception, yes.

Things may have stopped getting worse -- perhaps temporarily -- but we are still in recession.

marko says

I disagree that the only thing you should ask “Will house prices go up or down?”. Might as well play the over/under in vegas. I also disagree that an inflation hedge is the only reason to buy a house. Inflation directly caused maintenance costs to go up. In my opinion if you are ever interested in buying a house the better question is “what kind of house can I get for what I can afford ?” If you are planning on living there and dont need financial trickery to make a purchase, then the price going up and down means little.

I think you missed the point and read my post way too literally. I didn't mean "will prices go up or down" is literally the only question you should ask. It goes without saying that you should be able to afford the house you're buying; I certainly wasn't implying anything to the contrary. If you had taken the full context of my post rather than zeroing in on one sentence to the exclusion of all others, it's obvious I was saying that affordability is more important than the concept of a house being a hedge against inflation. Finding a good deal is superior to overpaying for the first thing that comes along just to "get in", and is a wholly separate issue from whether it's a hedge against inflation.

I disagree that "the price going up and down means little". If you buy a house today that costs $500,000, but you could buy an equivalent house in 6 months that costs $400,000, the fact that prices went down would mean a great deal. It would save you $100,000. Just because you "plan on staying there" doesn't mean you should overpay. Money is money.