patrick.net

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.

Darrell In Phoenix says

But do try. It's quit entertaining to watch you

me and the rest of the planet, LOL

it's safe to say that you are the most bizarre person I've ever come across on the internet.

I happen to agree with you that real estate valuations are a "construct" of the system as-it-is and not fixed in stone.

Should mortgage interest rates rocket to 20%, taxes double, unemployment explode, and/or gasoline triple, all that will take a big bite out of present valuations.

But should present conditions continue as they are, inflation is the order of the day.

Bellingham Bill says

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.

This is mainly due to similar problems in other countries, and our reserve currency status. No one should expect the Fed increase rate, given the increasing amount of debt.

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.

And this is why I said it cannot stay that way forever. It will have a reset. It is hard to say when and how it will happen. Contrary to the popular belief, lower tax rate did not cause this, and increasing taxes on 5% won't cure this.

I disagree that it will stay this way for another decade. This is not Japan. People are less docile.

Darrell In Phoenix says

unless you suspend the 2nd law of thermodynamics.

That's the nutiest thing you've posted, but.....

Bellingham Bill says

it's safe to say that you are the most bizarre person I've ever come across on the internet.

Darrel is a very normal, and predictable troll.

You address him, or her, and she responds with an attempt to hijack the thread.

Some trolls are paid, others just have a screen up for amusement.

gsr says

I disagree that it will stay this way for another decade. This is not Japan. People are less docile.

yes, one thing is certain is that we are not Japan. They're in semi-crisis in that they posted a $6B trade deficit for September, even though their ~$3T net asset position brought in $12B to compensate it. (Our trade deficit is ~$50B/mo and we're the #1 debtor nation by far)

It is Japan who owns $1T+ of our national debt, not the other way around.

I cannot pretend to see our future AT ALL. I don't know what's going to happen next month or next year politically.

I do think I have some larger understanding of the general trends involved.

But what can happen should we allow it is a "virtuous" debt/print cycle taking hold, where we maintain some semblance of an economy via the $40B/mo QE3 accreting into more massive money creation as borrowing/spend/saving cycle counteracts the general deflation going on.

The government's upcoming baby boom payments are going to be massively stimulative! 80 million people getting $20,000+ in free money from the government! Yowza!

Darrell In Phoenix says

Kevin says

My mortgage is $1900 a month.

And you're monthly costs are twice that. Stop lying about it.

Huh? P+I is $1900. Taxes are $400. Insurance is $85.

Tax deductions save me $600. So my total comparison vs rent is $1700.

I spend less than $1000 a year on maintenance if you want to count that too.

Now put up or shut up. Where is the home I can rent for half the cost? If you can find a single home of comparable quality (even a much smaller one!) In a comparable neighborhood that is renting for half of that I will give you $100. Or buy you a two year premium membership. Or never post again. Your choice.

Hell, I'd be impressed if you could find one renting for less than my total monthly costs, never mind half the cost.

By the way, confusing depreciation with entropy is hilarious. As certain things become more rare they absolutely increase in value, even if they technically are rotting or eroding.

You're clearly just arguing for arguing sake. Reality doesn't agree with anything you say.

Bellingham Bill says

But what can happen should we allow it is a "virtuous" debt/print cycle taking hold, where we maintain some semblance of an economy via the $40B/mo QE3 accreting into more massive money creation as borrowing/spend/saving cycle counteracts the general deflation going on.

Remember, with each recession, the economy will require increasingly higher doses of "stimulus".

Currently, very few people have enough cash available to make a sizable down-payment. Investors have been buying up a lot of houses lately. Next, they will have to rent them to the so called 95%. This will cause oversupply of rental units, and they won't be able to get more than the market rate in the long run. Without wage inflation, it is virtually impossible to have a strict rent inflation. When this happens, there will be another "crisis".

Darrell In Phoenix says

Darrell In Phoenix says

And you're monthly costs are twice that. Stop lying about it.

And worse yet, you couldn't find a buyer for it for a fraction of what you paid.

K. Let me know when you actually see an account balance with more than $50 in it.

But hey..... I'll be happy to build you another retail product for $400/sq.

Send me your drawings.

rjb.sitecivil@gmail.com

I'd rather have someone who actually knows what they're talking about do it for $200.

gsr says

Without wage inflation, it is virtually impossible to have a strict rent inflation.

while I agree (rents in real terms went down quite a lot in the 1970s) the higher the proportion of the housing stock being rented the more market power the landlords have to squeeze more rent out of their tenants.

And demographically we have the peak of the baby boom echo turning 20 this year.

Darrell In Phoenix says

$20k replacing $60k in wages.... yeah. Mighty "stimulative".

No, SSA income is additional personal income in the national accounts.

Either people who retire leave that job for the next person, or still work and collect SS and Medicare benefits.

SSA checks (and Medicare) are going to be an IMMENSE flow into the consumer economy later this decade.

Bellingham Bill says

SSA checks (and Medicare) are going to be an IMMENSE flow into the consumer economy later this decade.

I don't see how it's a net positive. Every dollar that comes out just came out of somebody else's taxes. If it was coming out of useless marginal dollars that might be a different story, but given how regressive these taxes are it seems unlikely.

Darrell In Phoenix says

$20k replacing $60k in wages.... yeah. Mighty "stimulative".

LOL

I was thinking the same thing. I can't wait to see the geriatrics buying up the LCD TVs, and Maserati's on their fixed income from the government. Good times coming.