patrick.net

Darrell In Phoenix says

Houses depreciate ALWAYS.

NOPE.

My parents paid $60,000 for their house in 1980. Worth more than that now, LOL.

And as for the fixed part, the actual decay of the materials is not "rapid" as you asserted.

The shake roof lasted 25 years for instance.

Darrell In Phoenix says

like ALL manmade items.

"Depreciate" here means goes down in value.

My parents house has not gone down in value, thanks to inflation outpacing the decay of the fixed improvements.

What was $60,000 in 1980 is $150,000 now. That's a 3% pa compounding rate of inflation. With a 50 year service life, that's a 2% pa non-compounding rate of depreciation.

Darrell In Phoenix says

ALWAYS
like ALL manmade items.

Land isn't a man made item. Or did you foget that?

When acquire title, the real value of the title is the power -- backed by the State -- to say who gets to use that real estate.

Darrell In Phoenix says

Considering 95% of the globe is undeveloped, it's essentially worthless. If you're paying more than $500-1,000/acre, you're getting ripped off.

Good point. I'm sure 1 acre lots in the Pacific Ocean are very reasonable.

Darrell In Phoenix says

Considering 95% of the globe is undeveloped, it's essentially worthless.

This guy is the biggest troll I've ever seen.

Or the most reality-challenged.

Yes, land in Gila Bend is going for under $4000 per acre:

http://www.redfin.com/AZ/Gila-Bend/0000-UNDETERMINED-85337/unit-0/home/40366054

this is because the economic potential of that land -- its NPV of all future rents, is around that.

Thing is, until either a virtual economy is perfected, or teleportation technology comes along, land has immense site value.

Site value is simply the value of whatever is OUTSIDE the lot lines. It is the value of the location, what that location can access, plus any scenic views it may possess.

What is the value of a beachside residence? How much would you pay to see the sunset off your balcony every night for the rest of your life?

More prosaicly, people also pay to be able to find work in a given local economy, and also good schools for the kids, safety at night from criminals, etc.

Darrell In Phoenix says

Sure it has. They've merely offset the rapid depreciation by throwing more money in it.

Not at all. Thus far they've put on a new roof, and one new water heater, refrigerator, w & d, sprinkler repairs, garage door, carpets. $20,000 tops.

They'll never get out of it what they have in it.

I've done the calculation of if they'd have been better off investing in the S&P since 1980 rather than buying when they did.

Area rents overtook their mortgage payment in 1988, so they would only have had 6-7 years of investment in the stock market to build up.

Currently my parents cost of housing is $200/mo. Equivalent rent is $1000+ more, $12,000 a year.

At 3% rate of interest, $12,000 in income requires a $400,000 pile of savings. No way several thousand in an S&P fund from the 1980s would amount to that now.

Darrell In Phoenix says

It seems the truth gets in the way of your realtor driven narrative.

Dude, reality is not "realtor-driven". They're just along for the ride, usually.

Peter Schiff sells gold, so he has a vested interest in having an economic collapse.

This is his website.
http://www.europacmetals.com/

The other thing is that gold can always go up. It is purely an emotional purchase.

You can also look at QE3 as a deflationary event. The United States economy has plenty of room to decline.

Darrell In Phoenix says

It must be quite the run down place.

It's livable.

Darrell In Phoenix says

Oh it's realtor driven. And it's so ingrained in your mind you don't even know it.

It is entirely true that realtors have participated in forming the reality we have today.

And you are correct that land is inherently valueless (it takes the state to make it valuable -- Thomas Jefferson recognized as much)

Problem is, the powers that be own a lot of land -- and profit immensely from this ownership, so the bullshit legalities of land economics are simply not going away, and are, thus, reality.

As Philip K Dick said, "Reality is that which, when you stop believing in it, doesn't go away."

60-70% of this nation has been corrupted by the dynamics of land wealth. People do actually think "up is down" -- higher land values are good.

As a quasi-georgist I would love to tax away every last dollar of land value such that all acreage did trade at $1000.

Unfortunately, the only place where any semblance of this reality obtains on this planet is maybe Hong Kong, Taiwan, and Singapore, since these (AFAIK) are the only major land value tax regimes around.

Without a LVT, land will always have immense value. Without tenancy to land, nobody can live much of a life.

And that's the reality we're in now.

Darrell In Phoenix says

Not at all considering acreage can be had for less than $1000/acre in all 48 states.

Sure, economically worthless land out in BFE.

You are clearly impervious to argumentation so having already said what I wanted to say on that that will be all for you.

David Losh says

The other thing is that gold can always go up. It is purely an emotional purchase.

Similar to a house. Question is which holds their intrinsic value better than the other?

zesta says

Lending standards have toughened up considerably since 2006.

No. The FHA is willing to make a loan to anybody for close to nothing down.

Kevin says

If I can refinance an existing debt for half the cost, I effectively have less debt.

That's somewhat true, but you also have less buying power. But it is still potentially a good deal for you (if your financed asset rises with inflation) because the loss of buying power is distributed throughout all (other) people's cash.

mell says

Similar to a house.

A house has an economic viability. There is rental income.

You can peg the value of housing to the rental market, CPI, and wages.

mell says

That's somewhat true, but you also have less buying power

How do I have less buying power in a *refinance*?

Here's an example:

I bought my current home in 2009 for $550,000. I borrowed $440,000 at 5.5%

I refinanced in 2011 at 3.25%.

Over the 30 year duration of the loan, and ignoring the slight difference in principal at the time of refinancing, that refinance effectively saves me $200k in debt.

Aside from the long-term calculation, in the short term my payment went down by several hundred dollars per month, which means more money to spend on whatever I want (the only other debt I have is at 0% interest, and thus not worth paying off early).

The low interest rates are effectively reducing the debt load of american home owners. Every time someone refinances a $100,000 mortgage for 1% lower they are reducing their long term obligations by around $20,000 and their short term obligations by around 10%. That's real money going back into the economy and making that person's life easier.

Now, the effect on purchases is certainly not as pronounced, but the fact remains that low interest rates absolutely are helping ease the debt burden and boosting consumer spending. Until such time as these things are corrected by other means (inflation, new jobs, etc.), the low interest rates are essential.

Darrel, please come back when you actually earn enough money to think about buying the types of homes that I live in.

Yes, I paid $550,000 for a house. That's what a house this size and finish quality costs in this area. I'm going to spend a lot more on my next home.

Darrell In Phoenix says

You paid $550k for a house? Seriously?

$550,000 purchase with a FHA 3.25% loan pencils out to a ~$1500/mo average cost of ownership over 30 years.

Beats renting, LOL.

Total interest paid would be $360,000, less $100,000 tax credit is $260,000 -- over 360 months the interest expense averages $720/mo.

Property tax is ~$400/mo.

Maintenance, opportunity cost of the down payment, etc is another $400/mo.

(at 8.5% all this pencils out at $2600/mo, btw, or, alternatively $1500/mo TCO @ 8.5% interest rate is reached at the $290,000 price point))

Darrell In Phoenix says

There is a big effort to conceal the fact that millions paid massively inflated prices for rapidly depreciating assets. Why?

Because the alternative is renting, of course.

Renting might be a good tactical move in the short-term (like in the 2005-2008 housing market), and, who knows, maybe the wheels will come off and our economy crash through the basement this decade.

Don't get me wrong, I'd love to see taxes doubled in this country like they need to be, since I am pretty sure that will utterly slaughter rents and land values.

But the chances of that happening have to be less than the system just trying to print/borrow our way back to prosperity, so I certainly wouldn't bet on it.

The worst thing that can happen with a house purchase (in a non-recourse state) is that you just give it back to the bennie.

A house is a perfect hedge against future inflation.

. . . Historically, that can change . . . like if Romney had been able to cap itemized deductions at $17,000 (or whatever number he pulled out of his er, hat) that would have kneed the California housing market in the balls.

My mortgage is $1900 a month.

Please show me where I can rent a 3500 square foot home with high end finishes within walking distance of a top tier school for $1000 or less. I'd love to make that trade!

Houses around here rent for $3000 minimum. Please stop making bullshit claims that you can't back up.

I'm guessing you've never actually visited another state. You probably also think $550000 is a lot of money.

Darrell In Phoenix says

Don't be silly. Depreciating assets are NEVER a hedge.

http://research.stlouisfed.org/fred2/series/CUUR0000SEHA

they are when the reality -- only alternative -- is dealing with that trend.

Darrell In Phoenix says

$2400/month in principal and interest alone.

principal repayment is, historically, a form of savings

that was the mistake I made in my rent-vs-buy analysis ca. 2001, I was comparing a $2000/mo PITI vs my $800/mo rent.

Unfortunately, had I bought in 2001 my PITI would now be more like $1200/mo (thanks to interest rates falling from 8% to 3%), and my rent is now $2000/mo.

So I screwed myself but good not buying in 2001.

I suspect the system has another screw job awaiting me this decade, sigh.

As for "realtor math", as of now interest is tax-deductible (even on the AMT). $550,000 mortgage at 3.25% has $18,000 in interest, and at the 28% marginal bracket that's a ~$5000 tax credit, over $400/mo money back from Uncle Sam for carrying that insane mortgage.

David Losh says

mell says

Similar to a house.

A house has an economic viability. There is rental income.

You can peg the value of housing to the rental market, CPI, and wages.

Gold does have intrinsic value as well and does not deteriorate as fast (less upkeep but you need to keep it safe).

Kevin says

How do I have less buying power in a *refinance*?

I didn't mean that with regards to your refinance, that is always a deal if you can lower your rates, but those rates are only made possible by constant debasement of the dollar which affects everyone, so you likely still come out ahead.

mell says

but those rates are only made possible by constant debasement of the dollar

our "strong dollar" is killing us.

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

we need a lot more "debasement"

plus we need to get off of our petro-economy, at least for transportation.

The true economic crimes were made 1999-2007:

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

That graph should be at $24T now not $40T.

Bellingham Bill says

mell says

but those rates are only made possible by constant debasement of the dollar

our "strong dollar" is killing us.

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

we need a lot more "debasement"

plus we need to get off of our petro-economy, at least for transportation.

The true economic crimes were made 1999-2007:

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

That graph should be at $24T now not $40T.

The dollar is not strong it is very weak, it's just that the Euro i(and others) is equally in the toilet. Tons of countries with strong currencies still have balanced trade or better. Trade deficit does not come from a strong currency, it comes from mission manufacturing and deteriorating quality as well as a public focused on consumption. Also, I wouldn't call data about the strength of the dollar from the st louis fed unbiased research ;)

Billybigrig says

Darrell In Phoenix says

"Mark D."??? lmao

http://en.m.wikipedia.org/wiki/Internet_Sock_Puppet

you mean he didn't already know the meaning of that?

Goran_K says

Right now the market is basically investors/speculators, foreign buyers, and FHA'ers. Two of those sources are going to be seriously constricted within the next year. One of those is going to be left holding a stinky bag.

more BS from the resident negative nancy. you can tell this person has never attempted to apply for a mortgage before.

dude, learn how to fucking read first.

the interest cost (net tax benefits) roughly compares to the rent in the renting case.

your talent of producing counterfactuals is clearly immense.

3.25% (fixed!) rates are not "inflated borrowing costs".

QUITE the opposite.

$550k at 3.25% interest is a $1500/mo borrowing cost.

My rent is more than that, and that doesn't even figure in the MID.

AND that borrowing cost goes down as the principal is paid down.

rents, on the other hand, have not been going down for me lately, alas.

Bellingham Bill says

principal repayment is, historically, a form of savings

This is true only if the dollar and the house both hold values compared to other assets. Remember, low interest rates cause a higher house value, and hence a higher principal. Interest rates are also in historic lows. Of course, you may assume that will go lower or stay there forever.

mell says

Gold does have intrinsic value

Economic viability is different.

There is no purpose, or use for gold. It makes jewelry usually to hold diamonds which are about to sink in value.

Darrell In Phoenix says

Paying $1.67 for every dollar borrowed to buy a depreciating asset is a massive loss.

Thing is . . . homes haven't been "depreciating" in my lifetime.

http://research.stlouisfed.org/fred2/series/SPCS10RSA

Your thinking on home purchasing is utterly destroyed by the reality of wage inflation, population growth, and falling interest rates pushing up the price of housing in this country

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

shows since 1982 mortgage rates have been on a downward trend.

Now, things might change for the worse in this country, and housing crash along with everything else.

The fixed good turns to dust over time, but the land component does not.

And in high-cost areas like California, people are paying for the land, not the house per se.

Same thing with landlords charging rent. In my old complex in Sunnyvale, rents used to be $700/mo back in the 1980s, but now they're $1700 and up.

It's the same apartment, the rise in rent has been due to the rise in area wages since then, and the generally tight supply of housing vs. demand.

(demand fell a bit 2001-2005 during the downturn but that didn't affect rents much)

gsr says

Remember, low interest rates cause a higher house value, and hence a higher principal. Interest rates are also in historic lows. Of course, you may assume that will go lower or stay there forever.

my thinking on that is we will only see higher interest rates -- courtesy of the Fed at least -- to combat wage inflation.

ie never, unless something exogenous happens

Darrell In Phoenix says

Houses, like ALL manmade items depreciate, ALWAYS.

LOL. They, along with all other assets, INFLATE, too.

My parents' 1500' place that was purchased for $60,000 new has a replacement cost of $150,000 now. Inflation!

With minimal maintenance -- call it $1000/yr -- my parent's place is still providing the services comparable new houses in the area are (they sell for $250,000 on up).

The bundle of services we generally need are -- keeping the weather, bugs, and criminals out, providing privacy and some space of one's own to relax in (both inside and outside), a place to stash our stuff, utility hookups, and ready access to the community for work and buying more stuff.

Even though my parent's place is 30-plus years old, it is still providing all of these services just as well as new homes in the area, which is why it hasn't "depreciated" at all. Hell, with the 30 year old landscaping it's gotten better over the decades, and if & when I do get a home in this area it's going to be an old home in an established neighborhood, not some barren acreage with nothing but snakes and scrubgrass for miles like you seem to want to live on.

Homes built in the 1920s in this area are also still around.

Homes don't "depreciate" like you think they do, LOL.

Bellingham Bill says

my thinking on that is we will only see higher interest rates -- courtesy of the Fed at least -- to combat wage inflation.

ie never, unless something exogenous happens

Here is the problem. Record low interest rates will continue to boost asset prices until it cannot. Of course,it has just started in Japan. But the problem here can happen before that, if the people get fed up of high debt, and the increasing gap between CPI and wage inflation.

gsr says

Record low interest rates will continue to boost asset prices until it cannot.

Japan's interest rates are 2% now. There's no reason the Fed can't pull that gun out.

Low interest rates are simply because our economy has too much money in it!

This is counter-intuitive, I know, but the more money gets pushed into the economy the lower interest rates will be pushed.

The only way to reverse this is to get some velocity --and wage inflation -- in the lower 95% of the economy.

But our economy is structured to pull money from the 95%, not keep money within that sphere.

gsr says

if the people get fed up of high debt

Debt vs. the LL's rent increase. That's the gauntlet the masses have to run this decade and next.

Darrell In Phoenix says

Don't be silly. ALL manmade items depreciate. ALWAYS.

Not in nominal terms. Inflation can and does outpace any depreciation.

Like i've said and demonstrated about 10 times to you already.

We don't really know how long modern houses in California can last. Plenty put up in the 1920s through 1940s are still soldiering on fine.

Where's the "depreciation"? The roof might last 30-40 years, carpets need replacing, paint needs redoing, all the appliances will certainly need replacing. But on the whole, houses in California are pretty durable. And inflation in land values can easily outpace any depreciation of they physical components.