patrick.net

Strategist says

It's normal for the middle class to get hit during bad economic times, but that changes as the economy improves. As the stock market jumps and confidence sets in, corporations start adding capacity, and hiring employees which directly benefits everyone, poor, middle class and the rich. It just comes with a lag.

I disagree with this, unless you call "bad times" the past 30 yrs. Most people are not getting better, they are getting worse. They work more and get less. They get hit but things never come back in the following expansion.

Strategist says

The conclusions are normally the same......trade benefits both countries involved.

I personally disagree with economists on this point, for obvious reasons: most wages are anchored down because of international competition. You can say "the country benefits" who is "the country"? Those at the top benefit hugely yes, but 80% of the population suffers. People can buy cheap crap but they don't have jobs, and the things they actually need are unaffordable. This was masked to some level by growing debts but the last recession removed that illusion and what we see now if the reality: the result of economic globalization, and it's disastrous for developed countries.

Maybe in 20 more yrs it will turn out for the better, but you can't plan on this scale. Too many things can change.

What we have done with underdeveloped country is essentially send them our technology, our capital and our jobs (after transforming these jobs in slave labor positions).

People at the top were bribed into thinking this was a good thing. I don't see any return from it.

We would be much better off with cheap houses and expensive TVs.

Strategist says

IF the middle class is poorer its certainly not because Warren Buffett is richer.

I sort of agree. The question is what would re-make a Middle Class.

There are a few key areas:

Housing Costs
College Costs
Transportation Costs
Job Opportunities and Income

Housing and rents need to be brought down. At the same time, we can't all live in prime urban land. We need to add land, and build more single family homes for cheap or price the existing bank owned properties much lower

College Costs

People are squeezed with too much overhead for needed education.

Transportation Costs

While I am in favor of transit, we still need cars. Cheaper, and automated ones and hydrogen fueled.

Income/Jobs

This is the lynchpin. We need raises at the lower ends of middle class work. Maybe even doubling of salaries. It wouldn't have to bankrupt the rich to do this.

Strategist says

Housing is how the middle class build up a nest egg, John. Let it gradually go up.

Only because they're not disciplined and need someone to force them to do it, namely a bank giving them a mortgage. If you're middle class but not high earning, you can save 10% of your income and have a great retirement, and if you're upper middle/high-earning, you can save 20% and have a great retirement and still have enough to live on in both cases.

Expensive housing gets in the way of that for people who are prudent. In addition, in most of the country, housing doesn't appreciate by much more than inflation in the long run.

Hmmm. so you don't budget at all for toilet paper?

Diva24 says

So Buffet "rejected" the idea that the stock market is rigged? Yeah, and I shit $100 bills...

corntrollio says

Expensive housing gets in the way of that for people who are prudent. In addition, in most of the country, housing doesn't appreciate by much more than inflation in the long run.

That's true, so here's a question.....
What's better for the average person:
1. An average priced home in low cost Mid West that barely increases in value over 20 years.
2. An average priced home in high cost Coastal California that increases well above inflation over 20 years.

Strategist says

Housing is how the middle class build up a nest egg, John.

This belief doesn't make sense.

The only way it "builds a nest egg" is if housing goes up faster than inflation. That, in turn, means it goes up faster than incomes, and this can only be followed by a fall, crushing a "nest egg" that was always illusory.

Please explain why economists believe this can work.

If housing was cheaper, people could save and invest that same money.

Strategist says

What's better for the average person:

1. An average priced home in low cost Mid West that barely increases in value over 20 years.

2. An average priced home in high cost Coastal California that increases well above inflation over 20 years.

Obviously 1.

Heraclitusstudent says

Strategist says

Housing is how the middle class build up a nest egg, John.

This belief doesn't make sense.

The only way it "builds a nest egg" is if housing goes up faster than inflation. That, in turn, means it goes up faster than incomes, and this can only be followed by a fall, crushing a "nest egg" that was always illusory.

Please explain why economists believe this can work.

If housing was cheaper, people could save and invest that same money.

1. You could get a tax write off. Saves you money.
2. Paying off principal balance is a forced savings. Many households are just not able to save.
3. Any increase in value due ti inflation is your tax free equity.
4. Over time your payments remain the same, but incomes generally increase. You will be able to save more.

Heraclitusstudent says

Strategist says

What's better for the average person:

1. An average priced home in low cost Mid West that barely increases in value over 20 years.

2. An average priced home in high cost Coastal California that increases well above inflation over 20 years.

Obviously 1.

Not really. Just look at people who purchased their homes in Coastal Cal where prices have been going up roughly 6% annually. They have lots of equity. You can take that equity and retire in Florida or Vegas and live pretty well.
Those who have purchased in the Mid West don't have a home that is worth much.

It is free.
Via any smartphone and data plan.
The diploma that said you read it is not free.

Strategist says

Education is going up because public funding is going down. You don't just "bring down" the cost.

Needs to be free, period. Knowledge is priceless and an answer to our problems. Not making it free is the same as withholding knowledge, which should be a crime.

Strategist says

1. You could get a tax write off. Saves you money.

2. Paying off principal balance is a forced savings. Many households are just not able to save.

3. Any increase in value due ti inflation is your tax free equity.

4. Over time your payments remain the same, but incomes generally increase. You will be able to save more.

1 - a tax write off just means spending less. It doesn't "save" money.
2 - Why does it make sense to force saving when at the same time authorities do everything they can to punish saving, including tax deductions on debt, interests at 0%, high prices of anything you could buy with savings, etc, etc....
3 - Stocks on average increase more than inflation and are a better investment.
4 - this would be true too if the price was lower. You would have free cash flow to spend on other things or save.

Strategist says

Obviously 1.

Not really. Just look at people who purchased their homes in Coastal Cal where prices have been going up roughly 6% annually. They have lots of equity.

Someone is paying for this equity: the new entrants buy it with money they earn.

Explain why this is not a ponzi scheme: the "equity" of people who are in is paid by new entrants.

This scheme becomes less and less interesting until the whole scheme chokes off and collapses under its own weight. Then these people who have "a lot of equity" discover that they don't, and those that paid all they earned for it will wish they had purchased in the Mid West.

Heraclitusstudent says

Strategist says

1. You could get a tax write off. Saves you money.

2. Paying off principal balance is a forced savings. Many households are just not able to save.

3. Any increase in value due ti inflation is your tax free equity.

4. Over time your payments remain the same, but incomes generally increase. You will be able to save more.

1 - a tax write off just means spending less. It doesn't "save" money.

2 - Why does it make sense to force saving when at the same time authorities do everything they can to punish saving, including tax deductions on debt, interests at 0%, high prices of anything you could buy with savings, etc, etc....

3 - Stocks on average increase more than inflation and are a better investment.

4 - this would be true too if the price was lower. You would have free cash flow to spend on other things or save.

1. If it saves you taxes you have more money to save or spend.
2. Most people who live hand to mouth just can't save. They need a push.
3. Stocks do a lot better than homes in the long run. But what use are stocks to you if you don't have much money? If you have a little bit to put down on a house you have an opportunity to build a nest egg over time.
4. In high priced areas your benefit comes from appreciation - forced savings.

Heraclitusstudent says

Explain why this is not a ponzi scheme: the "equity" of people who are in is paid by new entrants.

When did it become popular to call every investment a Ponzi scheme?

Strategist says

3. Stocks do a lot better than homes in the long run. But what use are stocks to you if you don't have much money? If you have a little bit to put down on a house you have an opportunity to build a nest egg over time.

If you can pay more for the coastal CA house, then you can afford to invest in the stock market and live in the Midwest.

Strategist says

1. If it saves you taxes you have more money to save or spend.

2. Most people who live hand to mouth just can't save. They need a push.

3. Stocks do a lot better than homes in the long run. But what use are stocks to you if you don't have much money? If you have a little bit to put down on a house you have an opportunity to build a nest egg over time.

4. In high priced areas your benefit comes from appreciation - forced savings.

1 - again. When you have a tax break on interests, this still means you pay more interests than the tax break. It is not saving, it is a disbursement. There is no logic in what you are saying: If you want to give people tax breaks, give them tax breaks, don't subsidize them for buying something.
2 - At this point pushing poor people in debt to buy expensive housing is just cruel. It's a policy that produces debt slaves, that are over-extended and in a fragile position. They will struggle all their lives to pay for a commodity that has been deliberately over-priced. Cruel. Again there is no logic in this. If you really wanted to force people to save, force a larger contribution to some 401K type account.
3 - What use are stocks to you? The same use as any saving.
4 - This should be obvious and I don't know why economists think it is not: In the long term housing prices cannot appreciate faster than inflation. Therefore there is no appreciation, and when prices have already appreciated they are likely to lose ground. It's worse than no saving. It's value destruction.

I still don't see any argument that looks reasonable.

Strategist says

2. An average priced home in high cost Coastal California that increases well above inflation over 20 years.

Let's put real numbers on this so we can see what this is, btw. Also, let's assume best case scenario -- you buy near a bottom and sell near a top. Look at this 50s shitbox in Menlo Park, 2/1 under 1000 sqft, and listed for $1.195M:

http://www.zillow.com/homedetails/2051-Valparaiso-Ave-Menlo-Park-CA-94025/15598473_zpid/

Let's assume it sells for asking. The 1995 sale was 339K, which was close to the bottom of the market. That's 6.9% in the best case scenario, i.e. buy low, sell high.

You can look at the reverse too:

http://www.zillow.com/homedetails/2025-Santa-Cruz-Ave-Menlo-Park-CA-94025/15598869_zpid/

It has now been re-built into a 2800 sqft 4/3.5, but it was once a lowly 2/1 with 980 sqft. It sold for 920K in 2011 and 820K in 2006. That is 2.3% annual appreciation.

And now let's look at something in a different town that's non-peak/non-trough on both sides:

http://www.zillow.com/homedetails/838-Flin-Way-Sunnyvale-CA-94087/19614918_zpid/

3/2, 1300 sqft, sold for 898K in 2012 and 732.5K in 2004. That's 2.6% and barely above inflation (2.5% according to CPI).

Timing clearly matters on this one, as it does for everything.

tatupu70 says

Heraclitusstudent says

Explain why this is not a ponzi scheme: the "equity" of people who are in is paid by new entrants.

When did it become popular to call every investment a Ponzi scheme?

By definition, an investment where the gains of people already in come from what new entrants put in is a ponzi scheme.

Otherwise explain why it is not.

Heraclitusstudent says

By definition, an investment where the gains of people already in come from what new entrants put in is a ponzi scheme.

Otherwise explain why it is not.

That's not the definition. In order to be a Ponzi scheme, there must be an ever growing pool of people paying in to pay out the returns to the earlier investors.

By your definition, all assets are Ponzi scheme-stocks, art, etc.

tatupu70 says

In order to be a Ponzi scheme, there must be an ever growing pool of people paying in to pay out the returns to the earlier investors.

... or as many people paying an ever increasing amount as a share of their income.

Heraclitusstudent says

or as many people paying an ever increasing amount as a share of their income.

Nope--that's not a Ponzi scheme

Strategist says

Not really. Just look at people who purchased their homes in Coastal Cal where prices have been going up roughly 6% annually. They have lots of equity. You can take that equity and retire in Florida or Vegas and live pretty well.

Well, careful there.

Let's take my example above:

http://www.zillow.com/homedetails/2051-Valparaiso-Ave-Menlo-Park-CA-94025/15598473_zpid/

Assume they put 20% down in 1995, or $67,800 and then got 6.9% appreciation/year for 19 years. Using Submedian's calculator, which includes interest costs, tax benefits, maintenance, insurance, etc. and assumes a sale at $1.204M, I get a net number of under $426K as "profit" when you include real costs. Anything else is the forced savings component. And Submedian's calculator actually assumes a lower property tax number than under Prop 13, so the running costs over 19 years could run another $700/year on average.

$426K isn't nothing, but at 4% withdrawal, that's $17K/year. Add that to your Social Security, and it's probably fine for somewhere cheap, but it's not a huge amount of money.

If you compare that to living in the Midwest and putting all the excess money into investments, you could easily come out ahead. For example, assume you lived in a $150K house with a $800/mo mortgage payment (7%, 120K principal). You could put the extra $1200/mo or so into investments making 7%/year and have $572K at the end, or almost $150K more.

corntrollio says

Assume they put 20% down in 1995, or $67,800 and then got 6.9% appreciation/year for 18 years. Using Submedian's calculator, which includes interest costs, tax benefits, maintenance, insurance, etc. and assumes a sale at $1.204M, I get a net number of under $426K as "profit" when you include real costs. Anything else is the forced savings component. And Submedian's calculator actually assumes a lower property tax number than under Prop 13.

$426K isn't nothing, but at 4% withdrawal, that's $17K/year. Add that to your Social Security, and it's probably fine for somewhere cheap, but it's not a huge amount of money.

Not fair. You can't use interest to deduct from the net. If you do, you would need to add back rent from 1995 increasing over time.
Now what do you get?

Strategist says

Not fair. You can't use interest to deduct from the net. If you do, you would need to add back rent from 1995 increasing over time.

Now what do you get?

That's a fair point if you are comparing to renting -- you still have to live somewhere; however, I'm talking about pure profit, out of pocket costs are out of pocket costs.

I suspect, in this best case scenario where you managed to buy low and sell high, you would probably have something more than my Midwest investment example mentioned above, but it's hard to say without knowing what the rents are.

In my buy high, sell low example, you probably would come out behind, but it depends on specific years and also holding time -- e.g. if it's 1991 to 2010, you probably easily made money in investments, but didn't make as much on the house.

tatupu70 says

Nope--that's not a Ponzi scheme

Definitions. It comes down to the same fatal flaw: the input can't keep growing forever.

corntrollio says

In my buy high, sell low example, you probably would come out behind, but it depends on specific years and also holding time -- e.g. if it's 1991 to 2010, you probably easily made money in investments, but didn't make as much on the house.

Timing can throw you off, I agree. The last 2 years you could have gotten 60% to 100% in some areas. Solution:
1. Use a linear regression model.
2.OR Keep it simple and go back 50 years.
3. Use the median prices. Individual homes could vary in price just by it's condition or needed repairs, especially if there is mold or serious earthquake cracks. Case Schiller index for a region would be good if they go back 20 years+.
I think in the costal areas of California, you will see a historical 6% or so long term growth rate in prices.

Strategist says

I think in the costal areas of California, you will see a historical 6% or so long term growth rate in prices.

So let's say wages grow 2% a year. In other words you are telling us that coastal California prices will increase forever 4% faster than wages.

So 20 yrs from now prices will double what they are now relative to wages.
In 100 yrs they will be 10 times what they are now, relative to wages.

No offense but this is a ridiculous belief.

The only way this could happen is if an increasingly narrow sliver of ultra-rich people bought the entire coastal California.
Which I'm not sure why they would. Coastal California is a big place.

The current housing system has stopped serving the interests of most of the population.

Heraclitusstudent says

Strategist says

I think in the costal areas of California, you will see a historical 6% or so long term growth rate in prices.

So let's say wages grow 2% a year. In other words you are telling us that coastal California prices will increase forever 4% faster than wages.

So 20 yrs from now prices will double what they are now relative to wages.

In 100 yrs they will be 10 times what they are now, relative to wages.

No offense but this is a ridiculous belief.

The only way this could happen is if an increasingly narrow sliver of ultra-rich people bought the entire coastal California.

Which I'm not sure why they would. Coastal California is a big place.

The current housing system has stopped serving the interests of most of the population.

That is what has been happening in the last 50 years. Look at New York, London, Paris, Hong Kong, Mumbai, Shanghai? It's a phenomenon that has been very consistent.
The rich move in and crowd out the less rich, who end up with smaller homes, condos, rougher areas, or out of the city.
Take the example of coastal Orange County. Very expensive, so what do the middle class do? Buy condos or move out towards Riverside and drive long distances to work.
If you are implying a relationship with average incomes, it just does not apply to specific areas.

Strategist says

That is what has been happening in the last 50 years.

Yeah... at the very least this is not a promise of future performance. And one would argue this is precisely why it can't continue for much longer.

And this didn't happen in a vacuum. There are a precise set of macro economic circumstances that allowed this to happen. Including hundreds of millions of new workers courtesy globalization. Including constantly decreasing in interest rates. etc...

You think this will continue long term? You believe in Santa Claus?

Strategist says

Look at New York, London, Paris, Hong Kong, Mumbai, Shanghai? It's a phenomenon that has been very consistent.

Do you realize "coastal California" is a much larger place than NY, London, Paris etc... Coastal California includes cities like Santa Cruz, San Diego, etc... that are not nowhere on the global radar in terms of industries or global attraction.
The rich alone cannot make it work.

Do you realize that many people who want to buy now are stretching to the max to make it work? Many young people just delay buying or are forced to double up. How do you think this will work in 20yrs, after a doubling of prices?

Heraclitusstudent says

4 - This should be obvious and I don't know why economists think it is not: In the long term housing prices cannot appreciate faster than inflation. Therefore there is no appreciation, and when prices have already appreciated they are likely to lose ground. It's worse than no saving. It's value destruction.

Finally, some common sense in a sea of delusion.

Diva24 says

So Buffet "rejected" the idea that the stock market is rigged? Yeah, and I shit $100 bills...

What he meant is that it's not rigged in your favor, because you aren't him and thus not eternally backstopped by the taxpayer.

Strategist says

IF the middle class is poorer its certainly not because Warren Buffett is richer.

No that's exactly it. The upper middle class and upper class (not to be confused with wealthy, rich, or 1%) pays for all this bullshit criminal bailouts that helped Buffet, AIG and some TBTF banks to avoid bankruptcy.

I heard an interview w/David Cay Johnston, and in reference to income inequality and the USA, he was saying that with such a heavily armed population, if real revolution ever broke out, Pol Pot would be reduced to a historical footnote.

I don't think most posters here have any idea about what's going on out there in the greater USA.

monkframe says

I don't think most posters here have any idea about what's going on out there in the greater USA.

And you do?

Call it Crazy says

Current 30 year rates are around 4.25%, so there is still plenty of room to push rates down further if needed...

It depends on inflation and growth. I don't think we can assume this will go down.

New Renter says

monkframe says

I don't think most posters here have any idea about what's going on out there in the greater USA.

And you do?

I doubt it.

Heraclitusstudent says

Strategist says

That is what has been happening in the last 50 years.

Yeah... at the very least this is not a promise of future performance. And one would argue this is precisely why it can't continue for much longer.

And this didn't happen in a vacuum. There are a precise set of macro economic circumstances that allowed this to happen. Including hundreds of millions of new workers courtesy globalization. Including constantly decreasing in interest rates. etc...

You think this will continue long term? You believe in Santa Claus?

In all fairness, your response could have been written, verbatim back in 1990 just as easily as it could have been written today. Point being, just because something is unsustainable, does not mean it cannot continue "much longer".

In point of fact, Robert Shiller believes the overperformance of coastal ca will revert to the mean not via crushing price declines, but instead as new cities are built (envision "Pelosi, CA" being built right in the middle of the bay) which serve as a pressure relief valve. If so, SF will become more affordable not by out and out price declines, but slightly more anemic price growth for the next 20-30-50-100 years.

Bottom line, don't be so sure you can time this any better than someone penning your exact same argument 25 years ago.

CDon says

your response could have been written, verbatim back in 1990

I don't think people were nearly as stretched back then as they are now.

It's not just poor people: even people in the top 10% are stretching in order to live in decent areas.

Further there are deep changes taking place now: household debts is pretty much saturated if we don't see actual wage growth (which seems unlikely), consumption in developed countries can no longer be the driver of global growth, tons of money has been printed and won't be taken back easily, on the other side of this salaries in China are growing double digits, etc....

CDon says

Robert Shiller believes the overperformance of coastal ca will revert to the mean not via crushing price declines, but instead as new cities are built (envision "Pelosi, CA" being built right in the middle of the bay) which serve as a pressure relief valve.

- I don't think Bay Area prices will go down much if at all. It could go up a lot more: The argument about rich people works there.
- I don't think real-estate in California will go down quickly. There is just a lack of it right now, and a lot of demand.
- I don't think rates or inflation will rise quickly in the US. Growth will stay slow.
- I think it will take a couple of decades at least to revert the past 30 yrs. This will happen slowly.
- But I doubt on balance real-estate in California will keep up with inflation.
- In any case the idea that coastal California will continue to gain 6%/yr seems crazy.
People will just be forced to leave if this happens.

Strategist says

I think in the costal areas of California, you will see a historical 6% or so long term growth rate in prices.

That's possible, but it's also possible that growth could be lower going forward because it has been so high for the last few years. Hard to tell in the short-term vs. long-term what will happen. For certain houses that I've seen, if the growth from Year 2014-X to 2014 continued until 2014+X, then some of them would have 8-figure prices, which seems somewhat implausible.

Strategist says

That is what has been happening in the last 50 years. Look at New York, London, Paris, Hong Kong, Mumbai, Shanghai? It's a phenomenon that has been very consistent.

Some people have studied Paris, in some cases going back to 1200. I don't read French well enough to know all the conclusions, but Paris dipped well below par according to the data from 1914-1965, so it had a lot of room to come back up. Whether anything is "consistent" or not seems questionable, at least.

http://www.cgedd.developpement-durable.gouv.fr/house-prices-in-france-property-a1117.html