patrick.net

Call it Crazy says

OK, so what is the "real" interest rate today?

Are you talking mortgage rates?

Mortgage rates are about 4%, and inflation is about 2%, so that makes real interest rates about 2%.

Of course, that assumes your income keeps up with inflation. It might not.

Randy H says

That's the power of seniorage.

I've got to admit, I've never heard that term.

I googled seigniorage but I can't say I understand it.

Seigniorage (I always misspell it) is basically the power to print money. If the value of the printed money exceeds or equals the losses incurred by printing it, all considered, then seigniorage power exists. Every dollar printed causes some inflation of the money supply. But the effect is non-linear when variables such as global reserve currency status, velocity of money and efficiency of money are factored in. Most people apply a simple linear devaluation model to the concept which is why everyone was fooled by the prospect of hyper-inflation back in 2008-2009 when we printed quite a lot of money. The truth is that hyper-inflation is a political situation not a monetary one, primarily because some nations have the power to print money which others will value irrespective of the direct inflationary effects.

Or put more colloquially, when you have a lot of trade and the guns to protect it, then you tend to have the ability to mint money as a store of future value which others will demand.

edvard2 says

Not necessarily. The housing market doesn't behave " as it should". Regardless of current prices and their relation to past historical performance, if and when prices do go up then that would be your best indicator that the bottom- aka- the lowest average prices will go- has been reached.

Over the long run, they do, and like Shiller points out using years of data.

We are too focused on here and now and ignore long term fundamental performance to understand the norm.

Cannot ignore simple price to income (or rent) rations which indicate normal prices with low risk. What your proposing is akin to speculation..

Call it Crazy says

Inflation, 2%... I wish.... does that mean if inflation was really 4%, that mortgages would be FREE????

In theory yes. As long as your wages keep up with inflation. Which is a big "if" thanks to the shenanigans of the top 0.1%.

Think of it this way: if inflation is 5%, the value of your debt dollars has decreased by 5% after one year. That's what inflation is: dollars becoming worth less and less every year. That's good if you're borrowing money, not so good if you're lending it. If the interest rate is the same as the inflation rate, it's essentially a "free" loan.

That doesn't mean you should go out and borrow a few million bucks for no reason. If you lose your job, you're in deep doodoo.

But it does mean it is sometimes better to finance than to pay with cash. It all depends on the interest rates relative to inflation.

robertoaribas says

Interest rates won't rise for no reason, they will rise when the economy is clearly recovering, and inflation is seen as the bigger threat. More often than not in history, rates and home prices have risen together, than the reverse.

But since pay isn't increasing, I don't see housing increasing any time soon.

I wish I could say pay isn't increasing given the number of software sorts I have to support in my cost center budget. But the fact is I'm being forced to adjust pretty aggressively right now just to compete for talent. I gave my top 20% performers between 9-15% earlier this year and I'm still losing people to competition. And we're supposedly one of the top 12 highest paying software firms, so I'm reluctantly and disgustingly forced to realize that there is indeed wage pressure in the system. I thought this would last only a few months and was a blip, but it's now a year in the making and only getting worse.

I won't call it the making of a new tech bubble yet. But having been here when the last one formed back in the early/mid 90s, I will say that parts of the dynamic are starting to feel familiar. Interestingly, many of these same housing arguments were going on then as the post Loma Prieta housing slump was yet to truly turn around. We bought our first home in Redwood City for 20% less than the seller paid and the conventional wisdom was that there was no bottom in sight for housing. Capitulation had yet to occur -- although when it did about 2 years later it was too late for most people to take advantage of it.

I like to consider my interest in buying a house much like fishing adventures. the fish just are not biting.

mell says

Funny how this always boils down to predicting where house prices go. The job market in tech definitely has heated up again due to smart investor money parked on the sidelines during the crash and fueled by relentless artificially low interest rates, but mostly for senior positions and the interview process is much longer and harder than during the dot-com bubble. In fact a lot of companies have positions open for 6-12 months, churning though potential candidates and claiming the cannot find any rockstars. If you talk to a few recruiters you will find out that it is very hard to place engineers for them, so they stepped up their game and mass-email anybody who could be a potential match.

House prices may show some swings in the future, but even if they go up temporarily, it will not be sustainable as real wages continue to stall or decline. $120K per year just pays the bills for a 3 person family (1 child), usually you need double income. As soon as the new venture capital dries up and backers remove their support for flailing companies you will see layoffs again. And if the main breadwinner loses their job, they will lose their house unless they have lots of savings/investments. Taking again that $120K per annum salary, any property buy above $500K is financial stupidity IMO and everything over 400K is risky - if you rent, try to stay around $2500 (excl. utilities) or below. What you say?

What do I say? I think you've been snooping around my mind!

Randy H says

I wish I could say pay isn't increasing given the number of software sorts I have to support in my cost center budget. But the fact is I'm being forced to adjust pretty aggressively right now just to compete for talent. I gave my top 20% performers between 9-15% earlier this year and I'm still losing people to competition. And we're supposedly one of the top 12 highest paying software firms, so I'm reluctantly and disgustingly forced to realize that there is indeed wage pressure in the system. I thought this would last only a few months and was a blip, but it's now a year in the making and only getting worse.

I won't call it the making of a new tech bubble yet. But having been here when the last one formed back in the early/mid 90s, I will say that parts of the dynamic are starting to feel familiar. Interestingly, many of these same housing arguments were going on then as the post Loma Prieta housing slump was yet to truly turn around. We bought our first home in Redwood City for 20% less than the seller paid and the conventional wisdom was that there was no bottom in sight for housing. Capitulation had yet to occur -- although when it did about 2 years later it was too late for most people to take advantage of it.

I'm with you here. I am pretty well aware of what is going on at Apple, Google and Microsoft down in the Silicon Valley since I work at one (hardware engineer), and large numbers of my coworkers have been poached by the other two. I got a very large raise, partially as a result of a threat to go to a competitor (gotta play the game, sadly), and I know that my friends that left are getting big stock awards and bonuses from their employers. Considering all the reports about how precarious the job situation is across the nation, the competition by companies here to retain talent seems sort of absurd. I have only been out of college for 5 years though, so maybe it is always that way. It does seem like there is no shortage of engineers, just a shortage of good ones.

A number of my former coworkers that work in software also bailed for various start-ups. The one that went to Zynga 6 months ago must be pissed, based on what I have seen ZNGA's stock price do. I am still largely at a loss when I try to describe what half of the software start-ups actually DO in the valley, but the VC funds seem to be flowing anyway.

"No man, it isn't a server farm offering remote storage, it's the CLOUD SOLUTION man, totally different!"
"No man, it isn't a color balance tweaker and image storage site, it's a SOCIAL NETWORKING PATHWAY and we'll figure out how to make ad money later, totally different!"
"No man, it isn't money from spamming ads that we are after, it is INTELLIGENT TARGETED ADVERTISING WITH HIGH RELEVANCE and people will totally buy stuff once we connect them with the right products. It isn't about making money NOW, it is about making money LATER but IPOing before our awesome technology takes off! It's the new NEW PARADIGM, man!"

The economic theoretical reason is called "wage efficiency theory"...or as I call it, "wage inefficiency theory". It comes down to inertia: companies are most rational to continue to escalate their bets on the known resources even beyond the intuitively quantitative break even point.

More to the point, contact me if you're interested in being poached. My peer who runs the infra division is more desperate than I am right now.

It is taking much less time for the economy to undergo paradigm shifts. If one happens to be in an ebbing industry, there is no way for his conditions to improve just by macroeconomic changes. It is increasingly important that one does just something in the right place at the right time, as opposed to doing something "right".

The world is becoming a giant casino. Or perhaps it already is... we could have been born in Somalia!

Most eloquently described by Taleb in Fooled by Randomness. I think it's always been this way. I'm not a believer that there ever were "good old days".

Call it Crazy says

The old lady has been haunting me to buy a house again

Uh oh.

Call it Crazy says

trying to "guess" which way the economy is going to go...

"Never make predictions. Especially about the future."

You want a "factor of safety" in any major financial decision, so it's good to think of "what if" scenarios. Like "what if the economy goes tits-up?"

Call it Crazy says

My options, put down a good chunk and go the 15 year route (or shorter) to maximize my equity.... or.... totally leverage the sucker and go FHA 3.5% down and go max on the 30 years and keep the cash in my pocket (and bank the difference).
By what you said above, If inflation continues, it also becomes free money to finance, so let the bank hold the tab..

If you have a wife that likes to blow cash on frivolous stuff, it might be best to do the 15 year route and have as much cash as possible "tied up" in the house. ;-)

Where do you live? Do you live in an area subject to wild RE price swings like CA?

Call it Crazy says

But... she loves to "start" home projects that I get to "finish", that's why I bailed on the last house.... I'm getting too old to be doing this crap and be her handyman........

Solution: RENTING!

Call it Crazy says

That is the BIGGEST issue.... I'm in NJ and it looks like there's going to be a big wave of foreclosures this year. You know what they will do to the property values... That's what makes me "gun shy" on buying again until it looks like this area gets close to the bottom...

Not only that, much of the local RE market is probably tied to the Wall Street Casino Economy, right? What happens the next time the bets go bad?

My two-cent advice: keep renting

Call it Crazy says

But, unlike many others that come here, I don't base it just on the dollars to dollars of monthly payment comparison. I also factor in and budget for repairs, upgrades and maintainance (and with my wife, I have to budget HIGH) as well as amoritize the closing costs on both sides (buying and selling) which very few factor into the equation.

Without getting into logic of including upgrades again, that's the right way to do it. But you should also factor in the principal repayment and tax savings as well.

Not sure why you think others that come here don't include repairs and maintenance though. I think almost everyone smart enough to have found this website is also smart enough to factor in maintenance costs...

Call it Crazy says

I also factor in and budget for repairs, upgrades and maintainance (and with my wife, I have to budget HIGH)

It sounds like your situation is somewhat unique. Any house you might own looks like a real money pit for you.

How long will your wife tolerate renting? Are diamonds cheaper than your wife's remodeling projects? If so, buy her diamonds. At least they tend to hold their value. And you don't have to pay property taxes on them.

Call it Crazy says

Then, where is the "safest" place to be when it goes tits-up... in a rental dealing with a landlord and his financial problems or in your own house dealing with a mortgage/bank?

Yeah that's hard to say. Personally, I'd rather be the renter dealing with the landlord. If the economy is tanking, rents might even go down. Unlike mortgage payments.

Call it Crazy says

that's the part of renting that SUCKS!! not having a permanent place year after year.

True, but you might have to move year after year anyway. There is no job security anymore.

bmwman91 says

It does seem like there is no shortage of engineers, just a shortage of good ones.

What would you consider a "good" engineer?

New renter says

bmwman91 says

It does seem like there is no shortage of engineers, just a shortage of good ones.

What would you consider a "good" engineer?

It's pretty subjective in my book, but here's my take.

I'd sum it up with, "you are either born with it, or you aren't." If you work in tech/engineering, you know that there are just some people that can see something once and understand it fundamentally, whereas others have to work really hard at it and may just end up memorizing facts about it rather than understanding it.

On top of that, the individual needs to possess a high level of personal interest in technical subjects and passion for learning and understanding everything around them. It's the only way to keep from stagnating and burning out in this field. If you can't have fun doing it, you probably won't last too long in engineering, which is why I assume that so many engineers go the management-route after 10-15 years.

Call it Crazy says

The other part of my calculations is to make sure we would be able to cover the mortgage payment if one of us loses their job.

That's a very important thing to consider, yes.

wthrfrk80 says

Call it Crazy says

The other part of my calculations is to make sure we would be able to cover the mortgage payment if one of us loses their job.

That's a very important thing to consider, yes.

Nah, buy with 3% down and just squat. At this point your finances are only needed to qualify.

thomas.wong1986 says

Over the long run, they do, and like Shiller points out using years of data.

We are too focused on here and now and ignore long term fundamental performance to understand the norm.

Cannot ignore simple price to income (or rent) rations which indicate normal prices with low risk. What your proposing is akin to speculation..

Maybe and maybe not. Sure- I would agree that on a broad national level that might hold true. I am not totally in disagreement with you but in the case of those numbers it takes decades of result to come to a conclusion. Should potential homebuyers spend several decades waiting for those numbers to "make sense"? I spent over 12 years saving and I am every bit up there on agreeing that the cost of real estate is ridiculous in the Bay Area. I've also lived here long enough to see that despite all forms of reasonable logic, the application of historical data, and all other common sense that this area doesn't at all act predictably and is prone to wild swings up and down.

The bottom line is that everyone has to make that decision. In our case we saved, we waited, and we bought a house that we could afford and did so on a conservative basis: the overall cost is less than 1/4 of our monthly income, or about the same as what we paid in rent. Even the choice of where to live in the Bay Area can be a major point of that decision: For us the East Bay was the right choice financially. Not so much for SF or the Peninsula.

bmwman91 says

If you can't have fun doing it, you probably won't last too long in engineering, which is why I assume that so many engineers go the management-route after 10-15 years.

Yes, that's no different than straight up science. A case of Asbergers syndrome dosen't hurt either.

bmwman91 says

I'd sum it up with, "you are either born with it, or you aren't." If you work in tech/engineering, you know that there are just some people that can see something once and understand it fundamentally, whereas others have to work really hard at it and may just end up memorizing facts about it rather than understanding it.

There must be very few "good" particle physicists then.

New renter says

Yes, that's no different than straight up science. A case of Asbergers syndrome dosen't hurt either.

lol...well, you do also need to have a balance of social skills too. It's hard to get things done when everyone hates working with you, although it isn't unheard of. So yeah, I sort of forgot about the social skills part! I think that I left it out because it seems sort of like a basic assumption, but I can imagine how people might see "engineer" and "socially adept" as being mutually exclusive.

New renter says

There must be very few "good" particle physicists then.

Scientific research is a bit different than engineering. You really can't be a particle physicist with a bachelor's in physics, whereas you can be a pretty good engineer with a BSxE degree if you have the mind and drive for it. Scientific research requires a much higher level of academic rigor than engineering, for the most part.

Finding an engineer who doesn't always think he/she is always right about literally every topic anyone ever brings up is the hard part.

I had an experience where I had to throw one of our engineers out of a meeting because he wouldn't stop trying to argue revenue recognition rules with our accounting team. Another where one of our top engineers-turned-manager decided he could stop following SOX rules simply because he'd deduced they were "wrong".

Randy H says

Another where one of our top engineers-turned-manager decided he could stop following SOX rules simply because he'd deduced they were "wrong".

lol. Wow, that's pretty bad yes.

Randy H says

I had an experience where I had to throw one of our engineers out of a meeting because he wouldn't stop trying to argue revenue recognition rules with our accounting team. Another where one of our top engineers-turned-manager decided he could stop following SOX rules simply because he'd deduced they were "wrong".

yes.. they are a fun group when it comes to RevRec.. its just comedy !

Its better they dont interface with customers.. and make no promises to future products or updates .... "Only when and if available" should be the only thing they should be allowed to say.

The most extreme case im aware of ... was when an engineer ordered, approved without management knowing a ton of equipment to create their own Engineering Lab at their house.. Yes, he build a R&D LAB in his home using company funds.

edvard2 says

Should potential homebuyers spend several decades waiting for those numbers to "make sense"? I spent over 12 years saving and I am every bit up there on agreeing that the cost of real estate is ridiculous in the Bay Area.

They should understand the risks they are taking.. else wait. Certainly thinking that prices ALWAYS go up and never down they committed financial suicide ...

But even today, we are still ignoring that prices go down, with all this talk of RECOVERY, as if prices will swing up like a bubble.

It has been established that engineers have 0 EQ in general.

However, wanting to be "right" is not unique to engineers. This is the primary reason why there are bubble deniers.

EQ?

thomas.wong1986 says

Yes, he build a R&D LAB in his home using company funds

So? I've knows several engineers with machine shops in their garage who used them to manufacture company products. If he's doing primarily company work at home the company SHOULD pay for the equipment.

Its a good solution for engineers with kids at home who might otherwise have to work short hours to take care of their kids.

EQ= emotional quotient for corporate types,
EQ = equalizer for musicos and stereophiles,
EQ = EverQuest for aging gen x mmo gamerz

Also, for Perl...

$eq eq '0'

Randy H says

EQ= emotional quotient for corporate types,
EQ = equalizer for musicos and stereophiles,
EQ = EverQuest for aging gen x mmo gamerz

Got it.

As an engineer I use the term "P-factors" to describe all of the bullshit that can't be reduced to mathematics and science.

I.e. (People, Perception, and Political) factors.

Example: "yeah, everything works fine in our company, save for the goddam p-factors."