patrick.net

dublin hillz says

I agree - typically when price/annual rent ratio is over 20 it is a better deal to rent. When it's over 25 it's a sign of a bubble. During the peak, the ratios were pushing 30, now they are in the 15-20 range for the most part.

The historical average mortgage interest rate is 8-9%, or about a couple points above historical bank interest rate 6-7%. With property tax typically running 10-15% of rent, insurance 5% of rent, water and sewer 5% of rent (either town or reserve fund for septic and well), repair and renovation reserve 10% of rent (for roof, furnace etc.), the nominal rent yield needs to be 12-13% in order to be able to pay for the big ticket repairs and beat other forms of investment in the long run, with a net return of about 8% before income tax if exactly on that line. That's assuming 100% occupancy!

Personally I wouldn't touch any investment property with nominal rent yield much below 15% if not 20% . . . i.e. 6:1 or 5:1. The 15:1 "buy-to-let" phenomenon in recent years is utter nonsense due to the artificially low interest environment; may well end badly for the wannabe landlords when major things break, like a roof leak or a furnace break/replacement.

Reality says

There is no intrinsic value, except for people who are economically illiterate

I know what you are saying, but there is a rational value. Call it what you like. You know the point.

Reality says

Using that artificially low interest rate, they get an artificially high PV
(Present Value) for the future rent cash stream discounted forward.

It's not artificial at all. They get a 30 year fixed rate and that PV is correct. Reality says

individuals acting rationally on mistaken information is the cause of bubble.

It's not mistaken!!! The PV is what it is.
Reality says

More importantly, why did you praise "the lending standards of 1945-2000" as if
there were high standards throughout that time period?

Uh, because there were?

Reality says

Personally I wouldn't touch any investment property with rent yield much
below 15% if not 20% . . . i.e. 6:1 or 5:1. The 15:1 "buy-to-let" phenomenon in
recent years is utter nonsense due to the artificially low interest environment;
may well end badly for the wannabe landlords when major things break, like a
roof leak or a furnace break/replacement.

I was referring from the standpoint of a primary residence purchaser, not landlord. A potential purchaser should evaluate buy vs rent for comparable properties. Historically speaking, if the purchase price was 15 or less than what they would pay in annual rents based on that year's prices, it would be a much better deal to buy; 15-20 annual rents - would be competative between buying and renting, over 20 renting would be better usually and 25+ would indicate a bubble. For example if a luxury apartment is renting for $2500 a month, annual rent would be $30,000. From this perspective if the purchase price of a comparable condo is under $450,000 buying wins hands down and if purchase price is between $450,000-$600,000 buying has a good chance of being a successful decision as well. Now if purchase price is $750,000 or more it's a good barometer that a bubble is in the works.

tatupu70 says

I know what you are saying, but there is a rational value. Call it what you like. You know the point.

I know what are trying to say. That's the common mistake made by people who do not have a sharp economics background. The absence of any intrinsic value can be illustrated by this simple thought experiment: What if the town allows a development to take place next door with houses better than yours and charge less rent than yours and can accommodate as people as needed and still have vacancy? What would happen to your house' rent value or PV/"intrinsic value"? As you can see, there's nothing intrinsic about PV, or even rent.

tatupu70 says

It's not artificial at all. They get a 30 year fixed rate and that PV is correct.

That PV is only "correct" at the moment for the present interest rate and present rent. That's all it is, PV is calculated from cash flow and interest rate. As for 30yr fix rate mortgage, that would not help the family much at all because average Americans move every 4-7 years. 30yr mortgages are not assignable. When the interest rates go up, all else being equal, the family would have to sell at steep losses in order to move . . . or not able to move to new jobs at all if they can not come up with the cash difference to pay off the mortgage. In other words, they may well default when need to move out of town for a new job.

tatupu70 says

It's not mistaken!!! The PV is what it is.

Of course it's a mistake: mistake in guessing future interest rate and its impact on PV in the future. Would you deliberately pay up the high price of 2007 if you knew the price would be cut in half in the following 4 years?

There is nothing magical about PV; it's just a mathematical formula assuming unchanging interest rate and unchanging cash flow into the indefinite future. It certainly is not "intrinsic value" unless you think neither interest rate nor rent cash flow would ever change . . . which obviously would be mistaken assumptions.

tatupu70 says

More importantly, why did you praise "the lending standards of 1945-2000" as if

there were high standards throughout that time period?

Uh, because there were?

If you believe that, then why do you think the allegedly high lending standards led to the late 1980's S&L crisis and early 1970's near-bankruptcy of Fannie? That would entirely dash your thesis about low lending standards being the primary or even sole cause of bubble.

dublin hillz says

I was referring from the standpoint of a primary residence purchaser, not landlord. A potential purchaser should evaluate buy vs rent for comparable properties. Historically speaking, if the purchase price was 15 or less than what they would pay in annual rents based on that year's prices, it would be a much better deal to buy; 15-20 annual rents - would be competative between buying and renting, over 20 renting would be better usually and 25+ would indicate a bubble. For example if a luxury apartment is renting for $2500 a month, annual rent would be $30,000. From this perspective if the purchase price of a comparable condo is under $450,000 buying wins hands down and if purchase price is between $450,000-$600,000 buying has a good chance of being a successful decision as well. Now if purchase price is $750,000 or more it's a good barometer that a bubble is in the works.

See, tatupu70, what I said earlier about extended periods of artificially low interest rate cause very rational people to operate on mistaken information regarding long term interest pictures that they have no first-hand experience.

The younger generation is being / has been conditioned to "Asian-like" asset multiples (as in the far east, no Asian Americans) by the FED policy.

Dublin, while it is certainly a possibility that 30 years from now, the 450k condo may be worth 4.5 million largely due to inflation, it's very hard to justify even the 450k valuation in the absence of faith in future inflation. IMHO, of course. A $2500/mo condo may well have a $500/mo association fee . . . and that's assuming the neighbors keep paying their shares instead of defaulting. I have a hard time paying up $450k for any condo, unless it's in a world class metropolis like Manhatten, where there is no other housing option except condos and apartments. In most other places where single family houses exist, condo is a 5-digit proposition for generating $1000-1500/mo rent regardless how many molding strips the builder put in there. $100k can buy a lot of molding strips and radioactive granite counter tops.

Reality says

condo is a 5-digit proposition for generating $1000-1500/mo rent regardless how
many molding strips the builder put in there. $100k can buy a lot of molding
strips and radioactive granite counter tops

How do you then explain that it's basically impossible to find a decent 2 bedroom apartment in bay area for under $2,000 a month and most of them tend to be closer to $2500?

Reality says

That's the common mistake made by people who do not have a sharp economics background

Let's not go there. I'm fairly certain my economics background is superior to yours, but it doesn't matter--focus on the argument, not the background of the individual.

Reality says

What if the town allows a development to take place next door with houses better than yours and charge less rent than yours and can accommodate as people as needed and still have vacancy? What would happen to your house' rent value or PV/"intrinsic value"? As you can see, there's nothing intrinsic about PV, or even rent.

That thought experiment is ridiculous. I could make one up for anything showing that everything is in a bubble, by your argument. What if a meteroite of gold landed in Chicago tomorrow? What if Shell discovered an 100 billion barrel oil deposit in shallow ground tomorrow? You can't base investment decisions or values based on what if thought processes. You base them on your best knowledge today.

Reality says

That PV is only "correct" at the moment for the present interest rate and present rent

Of course--the future is unknown. You can base your PV models around likely future scenarios, however. There are nice calculators here and on NY times websites.

Reality says

When the interest rates go up, all else being equal, the family would have to sell at steep losses in order to move

Like I've said before, all else is never equal. To assume so if folly.

Reality says

Of course it's a mistake: mistake in guessing future interest rate and its impact on PV in the future. Would you deliberately pay up the high price of 2007 if you knew the price would be cut in half in the following 4 years?

You wouldn't. But, unless you have a time machine, you don't know that. Like I said, you estimate PV based on your best assumption of the future.

Reality says

See, tatupu70, what I said earlier about extended periods of artificially low interest rate cause very rational people to operate on mistaken information regarding long term interest pictures that they have no first-hand experience.

No I don't see at all. If anyone is operating under mistaken information it's yourself.

dublin hillz says

Reality says

condo is a 5-digit proposition for generating $1000-1500/mo rent regardless how

many molding strips the builder put in there. $100k can buy a lot of molding

strips and radioactive granite counter tops

How do you then explain that it's basically impossible to find a decent 2 bedroom apartment in bay area for under $2,000 a month and most of them tend to be closer to $2500?

I'm not living in the Bay Area. However, a cursory search on Craigslist seems to show a lot apartments with 2-3 bedroom in the sub-$2000 range. Including some in your area, presumably Dublin. Of course, I did hear that the Bay Area rent has gone up a lot in the past year or so due to money supply increase being funneled into tech companies in the area.

tatupu70 says

Let's not go there. I'm fairly certain my economics background is superior to yours, but it doesn't matter--focus on the argument, not the background of the individual.

My calling the "faith in intrinsic value" a common mistake was simply trying to exculpate my dear debate partner. If someone having a pedigreed economics education makes that mistake, it would be quite inexcusable.

tatupu70 says

That thought experiment is ridiculous. I could make one up for anything showing that everything is in a bubble, by your argument. What if a meteroite of gold landed in Chicago tomorrow? What if Shell discovered an 100 billion barrel oil deposit in shallow ground tomorrow?

Excellent thought experiment. That's exactly the thought experiment an economics professor would use to illustrate to his incredulous students that there is no intrinsic economic value to anything, but only ascribed value. That's precisely the point of my earlier proposed thought experiment too.

Neither thought experiments can prove either house or gold as bubble, but value being extrinsically ascribed. Price crash itself does not indicate bubble. Bubble means the run-up followed by crash giving back all the gains. Just to try as close to your thought experiment on gold, if the gold price runs up dramatically because there's worldwide gold miner strike, then the price crashes back after work resumption, the round trip would have been considered a bubble.

You can't base investment decisions or values based on what if thought processes. You base them on your best knowledge today.

The thought experiment was not brought up as a way of assessing risks in real estate investment, but as a way of showing that house value and rent value are not intrinsic to the house itself. Your gold thought experiment was excellent at showing the same point about gold's value not being intrinsic. While both scenarios have very small chances of happening, their probability-weighted influence on investing in house or gold should be very small indeed. The probability-weighted influence of adverse interest change however is not small, especially near the end of a long linear trend line. One can not invest according to present conditions alone or linearly extrapolate the most recent trend alone. . . that is if one is keen not losing his money.

tatupu70 says

Of course--the future is unknown. You can base your PV models around likely future scenarios, however. There are nice calculators here and on NY times websites.

Taking educated guesses about the future is at the core of investing. Nobody said it's easy.

tatupu70 says

You wouldn't. But, unless you have a time machine, you don't know that. Like I said, you estimate PV based on your best assumption of the future.

Current PV is based on current interest rate and current rent income. Guestimated future PV will have to be calculated based on guestimated future interest rate and future rent income. People do not buy houses exactly at the concurrent PV at that time, because people have different guestimates about the future PV (and front-run it). The different guestimates are what makes a real estate transaction possible; otherwise one wouldn't be selling to the another buying; in fact, the difference between the two parties have to be at least big enough to accommodate the Realtor's 6% the Attorney's $2-5k plus other overhead fees for the transaction. Some guestimate future more accurately than others. . . . just like buying/shorting stocks, bonds, or derivative contracts.

tatupu70 says

See, tatupu70, what I said earlier about extended periods of artificially low interest rate cause very rational people to operate on mistaken information regarding long term interest pictures that they have no first-hand experience.

No I don't see at all. If anyone is operating under mistaken information it's yourself.

The extended periods of low interest rate environment since about 1997 (shortly after Greenspan's "Irrational Exuberence" speech being attacked by many congressional members) has caused a young generation of Americans to assume interest rate will always be around 4-5% . . . hence treating 20:1 buy to yearly rent cost as the line of demarcation. That IMHO is dangerous, because the historical average interest rate is significantly higher than that, about double that.

Reality says

if the gold price runs up dramatically because there's worldwide gold miner strike, then the price crashes back after work resumption, the round trip would have been considered a bubble.

This is where we disagree. I wouldn't call that a bubble. If supply is very short, then price naturally rises. Bubbles require irrational behavior.

Reality says

Taking educated guesses about the future is at the core of investing. Nobody said it's easy.

Agreed. And those guesses are INCLUDED in the rent/buy ratios. And PV of the house. That's my point.

Reality says

Current PV is based on current interest rate and current rent income

See my last statement-current PV includes best guess about future rent rises and future home price movment. If one think interest rates will rise and income will not rise, than I would assume he/she would model home price falling in their PV calculation.

tatupu70 says

This is where we disagree. I wouldn't call that a bubble. If supply is very short, then price naturally rises. Bubbles require irrational behavior.

Bubble just means significant round trip price movement. Investor behavior would appear "irrational" in hind sight but not necessarily while the bubble is on-going. For example, a few decades from now, people looking back may well consider our current time period as a bubble in government . . . would you say everyone working for or work with government now as irrational? I wouldn't. They are just taking what they can based on information as known to them, just like the Union real wage bubble we had in the 50's thru 90's. Postulating fully half of market participants as "irrational" is not economics but rather troubling political rhetoric assuming that somehow people ought to be all-knowing.

tatupu70 says

Agreed. And those guesses are INCLUDED in the rent/buy ratios. And PV of the house. That's my point.

Rent/buy ratio is not a guesstimate about the future but a current number using most recent (backward looking) data . Market price of a house however involve buyer and seller guestimating future rent, future price and future interest rates. That's why Buyer and Seller disagree on these future values, therefore can have transaction. At least one of them will be proven wrong. It would be a mistake to label one or both of them as behaving irrationally.

tatupu70 says

See my last statement-current PV includes best guess about future rent rises and future home price movment. If one think interest rates will rise and income will not rise, than I would assume he/she would model home price falling in their PV calculation.

In most standard PV analysis, PV refers to a simple mathematical formula using current rent and current interest; i.e. in effect producing a "current PV" that assumes constant rent and constant interest rate into perpetuity. It's just the PV formula. That's why people who use PV formula alone to calculate how much a house is worth without realizing they are implicitly making the two assumption will most likely run into problems in a few years if the purchase takes place when the market is in an interest rate induced bubble . . . yet people often do make purchase decisions based on comparing rent payment to monthly mortgage payment alone, which has a similar effect as using current PV alone: i.e. assuming constant or favorably dropping interest rate in the future.

For example, some of the current young generation saying 20:1 as the decision line between rent vs. buy. People able to pop out that number at all are probably already among the more intelligent and financially literate among their generation. Yet that line implies 4-5% or lower interest rate into the perpetuity. I wouldn't call their line as irrational, just misinformed and misguided by the FED policies since 1997, IMHO.

Reality says

Rent/buy ratio is not a guesstimate about the future but a current number using most recent (backward looking) data

OK, bad terminology. I think you knew what I meant, but I'm refering specifically to rent/buy calculators. They include predictions of future prices, rents, inflation, etc.

Reality says

That's why Buyer and Seller disagree on these future values, therefore can have transaction. At least one of them will be proven wrong. It would be a mistake to label one or both of them as behaving irrationally.

Buying a house is not like buying a stock. You live in a house. It's a completely different transaction.

Reality says

At least one of them will be proven wrong. It would be a mistake to label one or both of them as behaving irrationally.

It is not true that one person in the transaction will be proven wrong. Like I said, housing is a unique asset. Of course you would only label one or both of them as behaving irrationally if their version of the future was irrational.

Reality says

In most standard PV analysis, PV refers to a simple mathematical formula using current rent and current interest; i.e. in effect producing a "current PV" that assumes constant rent and constant interest rate into perpetuity

You obviously haven't explored Patrick's site or the Internet. There are LOTS of rent/buy calculators out there. I don't think anyone assumes constant rent or constant interest rate. It's not how the formula works.

Now, it is a little more difficult if you want to assume one rate for the first 5 years, then a different one later, but I think I've seen calculators out there that do it.

Reality says

yet people often do make purchase decisions based on comparing rent payment to monthly mortgage payment alone, which has a similar effect as using current PV alone: i.e. assuming constant or favorably dropping interest rate in the future.

Wrong again. The assumption is that when interest rates rise, incomes will also be rising. Which has historically been the case. You are the one making an assumption that would be a historical outlier. Interest rates very rarely rise without inflation and wage inflation.

tatupu70 says

Buying a house is not like buying a stock. You live in a house. It's a completely different transaction.

How is buying a house different from buying a bond that makes coupon payment or buying a stock that pays dividends? as far as the financial/economic value is concerned. In fact, in investing, the terms are similar: rental yield (including owner-equivalent), (interest) yield, dividend yield.

tatupu70 says

You obviously haven't explored Patrick's site or the Internet. There are LOTS of rent/buy calculators out there. I don't think anyone assumes constant rent or constant interest rate. It's not how the formula works.

Now, it is a little more difficult if you want to assume one rate for the first 5 years, then a different one later, but I think I've seen calculators out there that do it.

PV is an established accounting term. The various caculators that you talk about may call themselves "home value estimator" etc. as they wish, but not a PV calculator.

tatupu70 says

Wrong again. The assumption is that when interest rates rise, incomes will also be rising. Which has historically been the case. You are the one making an assumption that would be a historical outlier. Interest rates very rarely rise without inflation and wage inflation.

You are just rephrasing the assumption that "you can always refinance when the fixed period ends and adjustments begin" How did that assumption work out for millions of people who bought 2005-2007 after the FED chairman himself encouraged people to take adjustable rate mortgages?

Your statement on the tight coupling between interest rate and income assumes perfect timing of FED interest rate policy and instantaneous market reaction. In real life, FED policy makers are far from perfect, and there is typically a 6-18 month delay in the real economy to FED policy. That's more than enough to put someone several months behind in mortgage payment. A 90day late has a statistically likelihood of more than 90% leading to foreclosure. It is in real life where people lose their homes. In your (or anyone else') ideal world, nobody default on loans or lose their homes.

When there's a low ratio between annual rents and purchase prices, something other than interest rates is likely to be at work. Namely, it reflects the fact that majority of the population is poor. So while those of us in Bay Area may think, "wow the purchase price is only 5 annual rents over there" to the people living the reality on the ground, that number is something that they cannot reach. Try saving enough money over there when you can barely pay for cost of living which includes shelter, food, etc. You often find this situation in many regions in latin america.

Bad Advice Cat says:

Reality says

Costco and Whole Foods grind their own ground beef from chunks. Whole Foods even pack their own sausage. They have been doing that for decades, in order to ensure quality.

Walmart uses Pink Slime; aka "Finely Textured Beef". They said they would offer alternatives, but did not take Pink Slime out of their main ground beef products.

Reality says

And your love for regulation plays right into the hands of wannabe monopolists. Regulation creates a power center over-riding consumer choice, and that power center is ripe for capture by the monopolists.

Vigilance and Education is the cost of Freedom and Democracy. It's true there is regulatory capture, but that has more to do with the false equivalence of money and speech. Anybody alive who can write or speak can speak, but not everybody has millions to spend on political donations, attack ads, think tanks, and underwriting scholars-for-dollars.

Reality says

Morally, that decisions should be left to the

individuals consumers instead of some self-appointed know-it-all.

Problem is economy of scale. If corn-fed beef is a bit cheaper, competition will make it become the standard (esp if in real wages, purchasing power is flat or declining over the years), making grass fed beef even more expensive than when it was the standard.

The battle meatpackers have waged against country-of-origin labeling and even extra-FDA voluntary branding is anti-consumer choice, by keeping them deliberately ignorant.

I'm all for transparency over regulation whenever possible, but often profit-making institutions don't want an informed public and band together to keep the public ignorant.

Reality says

That's why disarming a population and relegating protection responsibility to the police (or regulators) lead to much higher crime rate

Not so:

New data presented at the conference by a Dutch scholar, Pieter Spierenburg, showed that the homicide rate in Amsterdam, for example, dropped from 47 per 100,000 people in the mid-15th century to 1 to 1.5 per 100,000 in the early 19th century.

Professor Stone has estimated that the homicide rate in medieval England was on average 10 times that of 20th century England. A study of the university town of Oxford in the 1340's showed an extraordinarily high annual rate of about 110 per 100,000 people. Studies of London in the first half of the 14th century determined a homicide rate of 36 to 52 per 100,000 people per year.

By contrast, the 1993 homicide rate in New York City was 25.9 per 100,000. The 1992 national homicide rate for the United States was 9.3 per 100,000.

http://www.nytimes.com/1994/10/23/us/historical-study-of-homicide-and-cities-surprises-the-experts.html

Some cops suck. Most are okay. Some are great. Like any human endeavor. Compared to the alternative, private justice, as much as it pains me to say as somebody with an anarchist bent, suck balls compared to the modern system of law enforcement.

Private Justice, as practiced by the Vikings for example, was more about showing up to the moot or thing with as many armed supporters as possible, than any kind of justice.

Look, I live in a country where there is almost no regulation. People's houses wash away, there isn't a door that's level, huge home fires are common, nothing is insulated for heat or electrical protection, so god knows how much millions in USD literally goes up in smoke or out the window. It's good in other ways. Anybody can sell liquor and beer without a license, making it possible for average Joes to save, buy a BBQ cart and some chairs, and make a living without a boss.

Which they actually NEED to do, because sex and age discrimination is perfectly legal here. It's almost impossible to find a job after the age of 30-40, many jobs are man or woman only (if a woman applied to be a truck driver she'd get laughed out the door, as would a man applying to be an office assistant).

B-B-But Homo Economicus-based theories say most discrimination is non-sensical, so we don't need regulations, because market is efficient, weeds out the discriminatory, etc..

Theory, meet reality, a five second search of Paraguay's classifieds:

Jovenes - young people only:
http://clasipar.paraguay.com/importante_call_center_busca_j_venes_con_o_sin_experiencia_en_telemarketing_2235601.html

http://clasipar.paraguay.com/busco_empleada_domestica_cocinera_profesional_lavandera_y_limpiadora_1551399.html

I support some regulations, not others, and want more enforcement of yet others. It's why I no longer drink the Libertarian koolaide, nor do I drink the Communist koolaide.

thunderlips11 says

Reality says

Costco and Whole Foods grind their own ground beef from chunks. Whole Foods even pack their own sausage. They have been doing that for decades, in order to ensure quality.

Walmart uses Pink Slime; aka "Finely Textured Beef". They said they would offer alternatives, but did not take Pink Slime out of their main ground beef products.

Knowing that, in a free market it's your own choice whether to eat Walmart meat or Costco meat or Whole Foods meat, or buy from local farmers or raise your own meat.

In contrast, kids in the government-run school lunch program and the prison system didn't have the choice at all.

thunderlips11 says

Vigilance and Education is the cost of Freedom and Democracy. It's true there is regulatory capture, but that has more to do with the false equivalence of money and speech. Anybody alive who can write or speak can speak, but not everybody has millions to spend on political donations, attack ads, think tanks, and underwriting scholars-for-dollars.

Who do you think would be in control of the power to speak if and when speech is "regulated"?

thunderlips11 says

Problem is economy of scale. If corn-fed beef is a bit cheaper, competition will make it become the standard (esp if in real wages, purchasing power is flat or declining over the years), making grass fed beef even more expensive than when it was the standard.

So your idea is to have the government make grass fed beef "standard" and ban corn-fed beef? so most Americans wouldn't be able to afford beef? There is no "standard" in a legal sense (i.e. backed by threat of violence) unless the government makes it so. The very fact that there's plenty grass fed beef on the market proves the point. Furthermore, the ready availability of corn-fed beef actually makes grass-fed beef cheaper not more expensive. Simple supply and demand. What do you think the corn-fed beef eaters would be buying if they want beef but there's no corn-fed beef?

The battle meatpackers have waged against country-of-origin labeling and even extra-FDA voluntary branding is anti-consumer choice, by keeping them deliberately ignorant.

If there had been no FDA, meat producers would be able to disclose whatever info they'd like, so long as truthful. It doesn't take FDA to deal with fraud.

I'm all for transparency over regulation whenever possible, but often profit-making institutions don't want an informed public and band together to keep the public ignorant.

They are able to get away with it largely because of FDA rules preventing other companies telling people the truth and provide competition. e.g. Chlorox being banned by FDA to print their simple cheap topical solution treating athlete foot, so that the drug makers can sell you very expensive pills that ultimately kill your liver and kidney. Then you can buy more pills for your liver and kidney!

thunderlips11 says

Some cops suck. Most are okay. Some are great. Like any human endeavor. Compared to the alternative, private justice, as much as it pains me to say as somebody with an anarchist bent, suck balls compared to the modern system of law enforcement.

Do you happen to know that arbitration and negotiated settlements far out-number law enforcment solutions by the cops?

Private Justice, as practiced by the Vikings for example, was more about showing up to the moot or thing with as many armed supporters as possible, than any kind of justice.

You are talking about warfare, which is a government specialty. The viking bands were their own government.

thunderlips11 says

Look, I live in a country where there is almost no regulation. People's houses wash away, there isn't a door that's level, huge home fires are common, nothing is insulated for heat or electrical protection, so god knows how much millions in USD literally goes up in smoke or out the window. It's good in other ways. Anybody can sell liquor and beer without a license, making it possible for average Joes to save, buy a BBQ cart and some chairs, and make a living without a boss.

You are engaging in magical thinking again. Houses do not get washed away, doors are level, etc., etc., for the same reason that you do not go out and buy pink slime and eat it for dinner: because consumers have other choices. . . unlike in the prison system or the school lunch program where the inmates get whatever the bureaucrats give them, therefore they do eat pink slime for lunch/dinner, effectively by law .

Houses are built the way they are in Paraguay largely because it's located in warm climate, and past bouts of inflation from neighboring Argentina has made the effective discount rate very high when it comes to making business decisions. It literally is cheaper there to build houses with little insulation and pay for higher heating bills later, according to the local people's time preference.

thunderlips11 says

Which they actually NEED to do, because sex and age discrimination is perfectly legal here. It's almost impossible to find a job after the age of 30-40, many jobs are man or woman only (if a woman applied to be a truck driver she'd get laughed out the door, as would a man applying to be an office assistant).

B-B-But Homo Economicus-based theories say most discrimination is non-sensical, so we don't need regulations, because market is efficient, weeds out the discriminatory, etc..

That's a ridiculous take on how market works. Market is not at all perfectly efficient, but just more efficient than bureaucrats. The interventionist magic thinking is that the bureaucrats work for free and have all the solutions for all perceived ills in society. In reality, bureaucrats add on their own cost and because bureaucrats are monopolies, they mushroom and take over the economy. How's the next door Argetina doing? Its regulated economy is far worse than Paraguy's. The two headmistresses are now regulating food prices for the country. How long do you think it will be before the Argetinian grocery store shelves become bare?

Reality says

Do you happen to know that arbitration and negotiated settlements far out-number law enforcment solutions by the cops?

Haha, I bet arbitration does! Negotiated Settlements of course happen because of the threat of going to court.

As for the "Justice" of Arbitration:

Yes. The proof is in the numbers. A survey of arbitration decisions involving credit card customers and First USA Bank, then the nation’s second-largest credit card company, found that the company had prevailed in 99.6 percent of cases that went all the way to an arbitrator.[ii] A Public Citizen study of National Arbitration Forum (NAF) cases in California confirmed the pervasiveness of anti-consumer bias in arbitration, with big corporations winning before NAF arbitrators in 95 percent of claims involving California consumers.[iii] Similarly, in March 2008, the City of San Francisco filed a lawsuit against NAF for operating an “arbitration mill” that favored debt collectors after an investigation revealed that NAF arbitrators had ruled for California consumers in less than 0.2% of all cases (30 out of 18,075) heard from January 1, 2003 through March 31, 2007.[iv] These 30 victories only occurred in hearings where a consumer brought claims against a business; when companies brought claims against consumers, they were successful in hearings 100% of the time.

http://centerjd.org/content/fact-sheet-mandatory-binding-arbitration-corporate-end-run-around-civil-justice-system

Interestingly, whoever initiates arbitration first, tends to win! I wonder why that would be, hmmm?

More:
Trial lawyers
http://www.justice.org/cps/rde/justice/hs.xsl/3043.htm
Credit Card Charges
http://www.nbcnews.com/business/consumer-groups-rip-mandatory-arbitration-ruling-1C7101029

Reality says

You are talking about warfare, which is a government specialty. The viking bands were their own government.

Vikings developed things to mitigate blood feuds, to mixed success.

http://www.thingsites.com/what-is-a-thing
http://www.arild-hauge.com/elov.htm

Germanic and Celtic peoples, pre-government, also developed similar institutions to deal with far reaching inter-clan and inter-personal violence...

Reality says

How's the next door Argetina doing? Its regulated economy is far worse than Paraguy's.

The average Argentinian lives much, much better than the average Paraguayo. About 300% more.

The average Paraguayo makes about $2,314.10
http://data.un.org/CountryProfile.aspx?crName=PARAGUAY
The average Argentinan makes about $7,665.50
http://data.un.org/CountryProfile.aspx?crName=ARGENTINA

Overall GDP:

Original at: https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:ARG:PRY&ifdim=region&hl=en&dl=en&ind=false&q=gdp+argentina

How about rate of growth? You'd think Paraguay would be growing faster, as it's far less developed. Nope.

It's amazing that a country with 1/3rd the GDP of it's neighbor doesn't grow faster than it does. Lack of infrastructure is one reason.

Reality says

That's a ridiculous take on how market works. Market is not at all perfectly efficient, but just more efficient than bureaucrats. The interventionist magic thinking is that the bureaucrats work for free and have all the solutions for all perceived ills in society.

And the market magical thinking is that the market is always more efficient than bureaucrats. Sometimes it is, sometimes it isn't.

I don't recall anybody suggesting government workers are free.

Reality says

If there had been no FDA, meat producers would be able to disclose whatever info they'd like, so long as truthful. It doesn't take FDA to deal with fraud.

Or no information, like they did before there was an FDA.

thunderlips11 says

And the market magical thinking is that the market is always more efficient than bureaucrats. Sometimes it is, sometimes it isn't.

I don't recall anybody suggesting government workers are free.

There is no magic thinking in advocacy for free market: letting you choose what cuts and from what kind of cow you personally prefer. That's it. Do you prefer someone else telling you what you should be eating? How about one of those that used to work for the school lunch program or the prison system?

The cost of running the bureaucracy is usually ignored among people who seek government solutions. The fact that administrators too have to eat, and at 2x the average wages in the private sector and doing a monopolistic job that the customers have no alternative choice, is the reason why the school kids and inmates only get to eat pink slime lunch/dinners.

thunderlips11 says

Haha, I bet arbitration does! Negotiated Settlements of course happen because of the threat of going to court.

You are confusing two private parties going to court vs. forcible law enforcement.

thunderlips11 says

Interestingly, whoever initiates arbitration first, tends to win! I wonder why that would be, hmmm?

Because if they had no chance of winning they wouldn't be wasting time. How hard is that to understand? Why would you want to sue someone if you have no chance of winning?

thunderlips11 says

The average Argentinian lives much, much better than the average Paraguayo. About 300% more.

I liked most of your comment including especially the use of data, but your conclusion suffers from false precision, i.e. the math can be a bit misleading.

For example, Paraguay spends less than 2% of GDP on healthcare, and the average life expectancy is 72. Argentina spends 8% of a larger GDP and the average life expectancy is 76. The USA spends 18% (increasing to 21% with Obamacare) of an even larger GDP and the average life expectancy is 78. The first five presidents spent ZERO on modern "healthcare," they didn't even have aspirin, but they reached a median age of 82. (Washington was the only one to die before 70, and it was because he allowed his doctors to bleed him and medicate him; without those "services", he would probably have recovered.) GDP measures spending, which does not always result in better or longer life.

I have a lot of respect for modern Argentina, including the Kirchners. I'd rather live in Argentina than Paraguay, but I wouldn't assume a 3x difference simply because of GDP.

Reality says

Houses are built the way they are in Paraguay largely because it's located in warm climate, and past bouts of inflation from neighboring Argentina has made the effective discount rate very high when it comes to making business decisions.

When the neoliberal-caused Argentine collapse happened, Paraguay was largely unaffected. Raised hell in Uruguay, though, with their US-influenced banking "reforms". Paraguayan banks are hyper-conservative, and most poor people bank at collectives not unlike credit unions in the States.Reality says

You are engaging in magical thinking again. Houses do not get washed away, doors are level, etc., etc., for the same reason that you do not go out and buy pink slime and eat it for dinner: because consumers have other choices. . . unlike in the prison system or the school lunch program where the inmates get whatever the bureaucrats give them, therefore they do eat pink slime for lunch/dinner, effectively by law .

You are basing your mindset of how it is here based on the USA, which regulates contractors, product quality (through a court system, private orgs like Underwriters Labs, etc.), etc. A combination of government and private pressures to make things high quality. Here, we get the rejected stuff the Dollar Store wouldn't carry for low quality.

There isn't even a standard electric outlet type here, which by the way is NOT efficient. My own place has a mixture of North American, North European/German (two round prongs), and Japanese outlets. If the government passed a standard, it would reduce costs and aid efficiency. Everytime I buy something I have to inspect it and buy an adapter.

Just one small way standards and regulations can help.

thunderlips11 says

The average Argentinian lives much, much better than the average Paraguayo. About 300% more.

That must be why Argentinians with any sort of money park their money in Paraguy. Have you ever thought the possibility that Argentine has far more natural resources than Paraguy? Like vast tracts of arable land and grazing land?

All the charts that you used to praise Argentinian economy just crashed against a brick wall: they are literally experiencing hyperinflation as we type. What good is an Argetine's alleged higher wage at "official" exchange rate that reflected the money's worth a year ago when the money can not buy food now?

Reality says

That must be why Argentinians with any sort of money park their money in Paraguy. Have you ever thought the possibility that Argentine has far more natural resources than Paraguy? Like vast tracts of arable land and grazing land?

Explain Japan. Wealthy Argentinians hide their money like crazy, which is a problem they still need to solve. Big US companies and people like Mitt Romney do the same shit. Paraguay only has a few small banks that are pitifully small compared to other similarly sized countries. They couldn't absorb all that Argie money.

Reality says

All the charts that you used to praise Argentinian economy just crashed against a brick wall: they are literally experiencing hyperinflation as we type. What good is an Argetine's alleged higher wage at "official" exchange rate that reflected the money's worth a year ago when the money can not buy food now?

GDP - real growth rate: 8.9% (2011 est.)
9.2% (2010 est.)
0.9% (2009 est.)
http://www.indexmundi.com/argentina/gdp_real_growth_rate.html

thunderlips11 says

Just one small way standards and regulations can help.

Industries have volunteer standards all the time, without government intervention. The much more sophisiticated components that go into building a computer illustrate the point in spades. Government imposed standards and regulations are either late acknowledgements of reality on the ground or simply ignored and therefore bureaucrats have to rewrite them to conform to reality.

Your home country has various different plugs because the various different governments in the developed world imposed different standards in order to protect their home market domestic manufacturers and keep out foreign competitors. Paraguy doesn't impose a standard because it has no domestic electric appliance manufacturer of significance, and has no political incentive to rig the market place. You can reuse an adapter.

thunderlips11 says

Explain Japan. Wealthy Argentinians hide their money like crazy, which is a problem they still need to solve. Big US companies and people like Mitt Romney do the same shit. Paraguay only has a few small banks that are pitifully small compared to other similarly sized countries. They couldn't absorb all that Argie money.

What about Japan? Japanese bought tons of their own government debt, and that's their biggest problem: the government mal-invested that money, and now their savings (already wasted) are about to hyperinflate away in the accounting books. People parking their savings in other countries are actually doing a great service to their home country: starving the beast, so when the currency hyperinflates away the real savings can be repatriated to rebuild after the fire. In any case, I made a mistake earlier: I was thinking of Uruguy when I said Argetine of any networth tend to park their money there.

thunderlips11 says

GDP - real growth rate: 8.9% (2011 est.)

9.2% (2010 est.)

0.9% (2009 est.)

http://www.indexmundi.com/argentina/gdp_real_growth_rate.html

If you believe those nonsense GDP numbers, you are even more deluded by academic econometrics than I thought. It's like saying a real estate bubble grows the economy and the subsequent correction causes the recession. LOL. With the hyperinflation and currency devaluation coming up, all those GDP numbers in the past few years in Argetina will be shown to be nothing more than fake economic growth by blowing a monetary bubble.

thunderlips11 says

Or no information, like they did before there was an FDA.

That's preposterous. There were tons of ads by the manufacturers touting their goods and what went into making them. FDA labeling requirement was copying what some of the main food producers were already doing, in close consultation with the lawyers of the same big food producers.

thunderlips11 says

Wealthy Argentinians hide their money like crazy....

Why? Are they afraid of confiscation, or kidnapping?

curious2 says

thunderlips11 says

Wealthy Argentinians hide their money like crazy....

Why? Are they afraid of confiscation, or kidnapping?

LOL, exactly! That's exactly all what a government does in a country that doesn't have capital punishment: confiscation and kidnapping. Other governments add murder on top of that.

For those who think government regulation would improve beef quality, we already know that government regulation is the reason why we can not buy unpasteurized fresh milk (because the big milk distributors that cover large distances don't want a much tastier and much more nutritious competition); now the TSA goons apparently arrested a guy for having a jar of old style gourmet peanut butter with peanut oil on top separated from the paste below by gravity, because the bureaucrats had never seen real peanut butter that is not industrially hydrogenized to kill your cardiovascular system.

Reality says

As for life circumstances, are we talking about dummies or people who have a clue and making a pro-active investment decision in real estate?

Are you a dummy if your company transfers you to another state?

Reality says

Glad you are finally getting my point that people do not usually buy or sell houses at PV. People do not actually buy or sell houses strictly based on rent equivalent either. PV in accounting usually use a fixed stream of cash unless the rate of increase is contractually guaranteed; something to do with basic accounting standards.

wtf are you talking about? You're glad I got your point? Your point changes with every post you make as you get sidetracked into who knows where. PV does not necessarily use a fixed stream of cash at all. It discounts future cash flows (whatever they are) back to present value based on your discount rate. But that is completely irrevelant to the dicussion at hand. How you have managed to derail the conversation so far from the topic?

Reality says

Tell that to the folks who bought their houses in 2006-7 on adjustable mortgage and have to refinance in 2009-2010 facing much higher prime rates and Libor rates.

Are you on crack? The 1 yr adjustable rate in 2006 was ~5.5%. The 1 yr adjustable rate in 2009 was ~5%. The 1 yr adjustable rate in 2010 was ~4%. The rates were lower, not higher. Those folks were probably pretty damn happy.

Reality says

You are confusing several different markets, each acting in somewhat mutually influenced but not strictly coupled ways. The bond market tends to lead the stock market by a few months, the stock market tends to lead the real economy by anywhere between 6-18 months. The bond market can indeed front-run FED decisions, because the big bond market participants special access to the FED decision making process. The stock market takes time to propagate their information. The general economy is much slower. Information propagation is not instantaneous, or there wouldn't be a market.

Besides being completely incorrect, it doesn't matter. The bond market sees the same data that the Federal Reserve does and adjusts accordingly. But, the point is that the bond market reacts to the overall economy and rates don't rise until the economy is doing well and incomes are rising.

tatupu70 says

Are you a dummy if your company transfers you to another state?

You are entirely mis-interpreting what I wrote. My point is that people buy and sell houses even when they do not have "family circumstances" but out of economic considerations. Just like people don't have to always stay in their company's 401k matching stocks until retirement or job switching. BTW, job transfer doesn't mean having to buy a house; there's the option of renting. If one's job involves frequent transfers, buying would be dummy indeed, but that's a different issue.

tatupu70 says

wtf are you talking about? You're glad I got your point? Your point changes with every post you make as you get sidetracked into who knows where. PV does not necessarily use a fixed stream of cash at all. It discounts future cash flows (whatever they are) back to present value based on your discount rate. But that is completely irrevelant to the dicussion at hand. How you have managed to derail the conversation so far from the topic?

Because at one point you equated house value to PV. Now you don't. I'm glad you made that change.

tatupu70 says

Are you on crack? The 1 yr adjustable rate in 2006 was ~5.5%. The 1 yr adjustable rate in 2009 was ~5%. The 1 yr adjustable rate in 2010 was ~4%. The rates were lower, not higher. Those folks were probably pretty damn happy.

My bad, the rate shock happened to those who bought in 2003-2005 on adjustable rate mortgages, and had to re-finance in 2006-2008. The cause for the inability to roll over in 2009-2010 was valuation change that makes the collateral inadequate and lending standards change. That's another way buyers at an earlier time were misinformed regarding their future likelihood to refinance and roll over loans.

tatupu70 says

Besides being completely incorrect, it doesn't matter. The bond market sees the same data that the Federal Reserve does and adjusts accordingly. But, the point is that the bond market reacts to the overall economy and rates don't rise until the economy is doing well and incomes are rising.

You talk as if "incomes are rising" were some kind of magic show that makes everyone's income rise by the same percentage. People bought in 2004 on a 3.5% adjustable rate mortgage would have to see a 30-50% income increase by 2007 in order to quality for a 5.5% amortizing adjustable mortgage at that time. Most people not having enjoyed that kind of income rise may well have been what's behind the popularity of interest-only and negative-amortizing adjustable mortgage at that later time, which obviously in hind sight would be a bomb waiting to go off. . . yet even the Money Czar told them taking the nation as a whole real estate prices always go up, just like you insist on income always rising before interest rate does. The folly of averages.

Reality says

Because at one point you equated house value to PV. Now you don't. I'm glad you made that change.

Not that it matters, but I did not. You kept insisting on using PV--I just used whatever term you wanted to call it to try to illustrate my point that using rental equivilent is the best way to approximate a value for a house. Hopefully you get it now.

Reality says

You talk as if "incomes are rising" were some kind of magic show that makes everyone's income rise by the same percentage.

How did I do that? I don't recall every implying that.

Reality says

yet even the Money Czar told them taking the nation as a whole real estate prices always go up, just like you insist on income always rising before interest rate does.

And again--I don't recall saying incomes always rises before interest rates do--just that historically that has generally been the case. If you are betting on rates rising during a period when incomes are stagnant, you are betting against the odds.

tatupu70 says

You kept insisting on using PV--I just used whatever term you wanted to call it to try to illustrate my point that using rental equivilent is the best way to approximate a value for a house. Hopefully you get it now.

PV is not my term. It's a well established accounting term. I have repeated over and over again that PV does not equate to home value. The latter is subjective . . . different to different people, otherwise there wouldn't be a transaction as the seller receives less money than the buyer pays.

tatupu70 says

Reality says

You talk as if "incomes are rising" were some kind of magic show that makes everyone's income rise by the same percentage.

How did I do that? I don't recall every implying that.

Then why did you even bring up "incomes rising" at all? Loans default one at a time when rates adjust . . . there isn't some magical national average income that borrowers / homeowners can resort to in order to keep their homes.

tatupu70 says

Reality says

yet even the Money Czar told them taking the nation as a whole real estate prices always go up, just like you insist on income always rising before interest rate does.

And again--I don't recall saying incomes always rises before interest rates do--just that historically that has generally been the case. If you are betting on rates rising during a period when incomes are stagnant, you are betting against the odds.

So you are pulling a Bernanke: "I" only said historically there had never been real estate price drop across the country. LOL.

Rates rising during a period when a specific family under a specific loan has not seen income rising happens all the time! Loans default and homes get foreclosed one at a time. There is no magical average for the family to resort to.

Reality says

PV is not my term. It's a well established accounting term. I have repeated
over and over again that PV does not equate to home value. The latter is
subjective . . . different to different people, otherwise there wouldn't be a
transaction as the seller receives less money than the buyer pays.

OK--let's forget PV. I know what PV is, and obivously you didn't invent it. You brought it up so I figured I'd try to explain my point in PV terms so you'd understand. I'm not sure if you don't want to understand or if you can't understand at this point.

Reality says

Then why did you even bring up "incomes rising" at all? Loans default one at
a time when rates adjust . . . there isn't some magical national average income
that borrowers / homeowners can resort to in order to keep their homes.

Because loans don't necessarily default when rates adjust if one can afford the new rate. I thought that was pretty obvious.

Reality says

Rates rising during a period when a specific family under a specific loan has
not seen income rising happens all the time! Loans default and homes get
foreclosed one at a time. There is no magical average for the family to resort
to.

Of course. Do you think I was implying that nobody has ever defaulted on a loan before? What is your point?

So, back to the original topic--do you understand how to use rent to get a good approximate of the value of a home?

Reality says

If you believe those nonsense GDP numbers, you are even more deluded by academic econometrics than I thought.

Reality, some numbers come from the UN, others from the World Bank. If you have evidence that they're substantially false, I'd love to hear it.

curious2 says

Why? Are they afraid of confiscation, or kidnapping?

I think it's just culture. S. Americans IMHO are huge on being quietly wealthy; they're the opposite of Americans. For example, Americans will tell strangers how many cars and homes they have, what make/model/neighborhood they are, what stocks they own, etc. South Americans don't do generally do so. Also, there is a lot of property crime, paying by check is rare, and most people use cash exclusively, even for large purchases like cars.

On the other hand, plenty of wealthy Americans and wealthy companies hide billions outside the US, so probably for the same reasons they do.

Reality says

That's preposterous. . There were tons of ads by the manufacturers touting their goods and what went into making them

No it isn't. Sinclair wrote "the Jungle", Teddy appointed a commission to examine Chicago Slaughterhouses because of public outrage. TR didn't like socialists and was suspicious of Sinclair, but the men he sent published a report which confirmed just about everything Sinclair wrote about: filthy meat being swept up and tossed into the grinder, ground up hooves, rotting organs, etc. Needless to say this was not advertised on the packaging.

That's how we got the Pure Food and Drug Act, the Meat Inspection Act, and ton of other laws about that time.

tatupu70 says

Because loans don't necessarily default when rates adjust if one can afford the new rate. I thought that was pretty obvious.

Therefore you assumed that average wage rising would mean almost every household would see wage rising. Also assuming rising is rising, right? a 3% raise somehow would be sufficient to pay a 30-50% increase in interest payment adjustment.

tatupu70 says

Of course. Do you think I was implying that nobody has ever defaulted on a loan before? What is your point?

You failed to realize that "the average income would have risen" doesn't matter in the context of interest payment rising 30-50% due to interest rate change, and statistically significant (in fact may well be the majority of) specific families under existing mortgage may not have seen much wage rise at all despite the average wage going up by a few percentages, especially if the gasoline and food prices rise even faster.

So, back to the original topic--do you understand how to use rent to get a good approximate of the market value of a home?

The relationship between rent and home value is highly dependent on interest rate and interest rate projections by individuals, the latter of which is heavily dependent on FED interest-rate suppression policies in the recent past. That's why individual home buyers were/are often misled by the artificially low interest rates that the FED produces in certain time periods when it is trying to bail out the banks mal-invested in past bubbles, resulting in new bubbles that would/will inevitably burst.