patrick.net

komputodo says

Are you serious??? If a person can afford payments on a 400k loan at 4%, what can they afford at 8%?..

You misunderstood my point. The effect of the Fed is overrated--ie., interest rates wouldn't be much higher absent any intervention. This seems obvious as rates haven't moved much as the Fed has reduced its influence.

Obviously the effect of rate changes is pretty well understood.

tatupu70 says

What makes you think they will stop absent a reduction in unemployment and gains in wages? That's the point.

So a reduction in unemployment and gains in wages would increase rates, which would slow the economy and inflation, which in turn, would lower rates.

i.e. rates will not go up much.

tatupu70 says

This seems obvious as rates haven't moved much as the Fed has reduced its influence.

You have to look at what share of the treasury bond market the central bank is buying. The government reducing its deficit means less bonds and lower rates. It's not just the central bank.

tatupu70 says

What makes you think they will stop absent a reduction in unemployment and gains in wages?

What makes you think reduction in unemployment and gains in wages would be sufficient to warrant the extra cost in interest rates if they go up.

A 4% raise would do very little to compensate for the double digits gains of housing prices over several years, especially with rates were 4% higher.

leo9 says

Is this thinking wrong ? Let assume all other factors are same - employment, flat wage, etc

You can't assume that.

The tech sector in the bay area is thriving, and it's bringing people here from outside the area, increasing housing demand, and people are cashing out of bubble-level tech valuations and seriously bidding up the price of housing. This is a huge part of demand that can't be discounted.

Credit buyers who are buying the maximum monthly payment that they can afford are also a big factor, however, there's evidence that they don't matter so much. For example, about a year and a half ago, interest rates were about 1% lower than they are today, however, the house prices were lower as well, and there was a bit more inventory.

You have the following factors.

1) The Fed makes cheap credit, which makes loans cheaper, driving up the price of housing in a tight market, _and_ this loose credit makes companies borrow for stock buybacks and speculative market bets, which also drives up local valuations, incomes, stock options, and less directly, housing.

2) Tech is booming. There is social bullshit that will crash when the bubble pops, but Mountain View has Google, Menlo Park has Facebook, Cupertino/Sunnyvale have Apple, etc. When the social bullshit pops, some air will come out of the market, but the employees at the giant, growing tech companies will still bid up housing.

It's impossible to predict if rates going up will cool the market, but all things being equal, they should. However, all things are not equal, and Apple, Google and friends are growing. Will that continue? Will it reverse?

Housing here is chaotic right now. Don't buy anything for investment.

leo9 says

The bay area market went up a quite a lot and because of low interest rate houses are selling for very high price. For ex - A house which was selling for $650k might be selling for $800k now because of interest rate.

In the Bay Area, housing has little to do with interest rates on mortgages.
I think the 2 key factors:
- not enough new building compared to the population growth (so you have enough people who are desperate to buy)
- the industry in right under the monetary tap. A lot of the money printed goes into tech stocks, and from there into SV housing.

Rates would limit this only if they are high enough to destroy stock prices.

Heraclitusstudent says

What makes you think reduction in unemployment and gains in wages would be sufficient to warrant the extra cost in interest rates if they go up.

A 4% raise would do very little to compensate for the double digits gains of housing prices over several years, especially with rates were 4% higher.

I don't think I made this assumption to begin with, but the flaw in your thinking is assuming that houses were appropriately priced a few years ago. After a bubble, prices typically correct well below where they should be and then there is good appreciation to get them back to par. These gains happen even without wage growth because they are just coming back from the over-corrected levels.

Heraclitusstudent says

So a reduction in unemployment and gains in wages would increase rates, which would slow the economy and inflation, which in turn, would lower rates.

i.e. rates will not go up much.

Historically, that hasn't been the case as an economy comes out of recession. It's possible, if rates go up too quickly, but I'd say it's unlikely.

tatupu70 says

After a bubble, prices typically correct well below where they should be and then there is good appreciation to get them back to par.

Not on the peninsula. Prices corrected maybe 15% and stayed very high compared to before the bubble. They certainly didn't undershoot. Then they bounced back strongly, in many cases higher the bubble top.

The only difference, is back then it was a housing bubble, whereas now it's a 'recovery'.

leo9 says

For ex - A house which was selling for $650k might be selling for $800k now because of interest rate. If the interest rate goes up then most likely home price will go down. If house prices goes down then the people who bought at higher price will see home equity shrinking or negative home equity. This will put lot of downward pressure.

Is this thinking wrong ? Let assume all other factors are same - employment, flat wage, etc

It's wrong because you are thinking textbook math vs. applied math.

In the real world, wealth, supply, demand, yield, consumer confidence, alternatives, lending policies plays a larger role than just interest rates flux.

plus who is to say fixed rate mortgage can't go down from here and we have low rates again next year and thereafter. The money has to go somewhere and it has nowhere to go other than equities, bonds and homes.

Heraclitusstudent says

tatupu70 says

What makes you think they will stop absent a reduction in unemployment and gains in wages? That's the point.

So a reduction in unemployment and gains in wages would increase rates, which would slow the economy and inflation, which in turn, would lower rates.

i.e. rates will not go up much.

this "reasoning" sounds a lot more like:

"the kid looks like mom. the kid also looks like dad. therefore, mom looks like dad."

only at patrick.net that economists of this "calibre" exist

leo9 says

Is this thinking wrong ?

what "thinking" ? all i see from your posts are fantasies (i.e housing still over priced, crash coming soon, rates go up soon, or something bad will happen soon, don't buy (so i can buy when it goes down low enough)).

why don't you do some research and find out why mortgage rates go up in the first place? unless you only want to be agreed and comforted by the majority of posters here who are all tunnel-visioned perma-bears.

komputodo says

why are rates at historical lows and savers are only getting 1% or less?

China has been expanding its money supply to keep its currency cheap compared to ours to maintain the trade surplus they need.

This is a win-win for them as they suck capital out of our country -- not financial capital but the hard capital of physical plant and a [less un-] skilled workforce to operate it.

Blue is the US money supply, red is China's

So China wants to be #1 and we don't know how to deal with this.

Having a nation of a billion people willing to import our inflation has been a pretty good deal for us -- they've given us so much wealth -- trying buying a durable good that wasn't made in China, good luck! -- in return for our FRNs.

This has been great unless you're in manufacturing of course.

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

shows we've lost 1 out of 3 mfg jobs since 1990

US mfg had the same challenge with Japan, but they were a nation 1/3 the size of us, not 3X . . .

Plus since NAFTA we've run a large trade deficit with Mexico, too. 1990-94 we were in trade balance, but 1995 was -$16B, 2000 -$25B, 2005 - now has been $50B to $60B annual trade defiits.

Clearly we want or are ignorant of these trade deficits; I watched a few Republican primary debates and this topic wasn't mentioned once.

But these deficits create trillions of what was called the "Global Saving Glut" last decade -- trillions ripped out of the paycheck economy (a deflationary effect) and now seeking yield (which pushes down interest rates)

I don't know where I'm going with this, other than our politics are utterly detached from the reality of our situation. Lambs to the slaughter, maybe.

komputodo says

tatupu70 says

You misunderstood my point. The effect of the Fed is overrated--ie., interest rates wouldn't be much higher absent any intervention. This seems obvious as rates haven't moved much as the Fed has reduced its influence.

Obviously the effect of rate changes is pretty well understood.

ok, so if it's not the fed, why are rates at historical lows and savers are only getting 1% or less?

He doesn't know, he's just making stuff up. Never mind the Fed behind the curtain, it's just there for entertainment value and has no influence, the FOMC minutes are just fiction and nobody really listens to them, oh wait... ;)

Bellingham Bill says

I watched a few Republican primary debates and this topic wasn't mentioned once.

Republicans or Democrats, they are all for free trade.

Bellingham Bill says

these deficits create trillions of what was called the "Global Saving Glut" last decade

"global saving glut" is not so global. It's the enormous US lack of savings, and the enormous Chinese national saving rate.
The US deliberately punish savings. China makes sure savings are recycled to the US. It's organized this way, and there is no debate. Only mentions are to explain to you that trade benefits everyone, and so you (well it does if you are in the top 2%).

http://www.nytimes.com/2014/07/20/upshot/income-inequality-is-not-rising-globally-its-falling-.html?ref=economy

An other piece explaining that, yes you're poorer, but it's for the greater good since in the process some undemocratic communist countries are made richer and more powerful. It's ok that their workers are working in slave like conditions because someone there is making money. It's ok too that the top 1% is screwing you because on the whole the world is richer - just not you.

And if you can't sell your overpriced house, fear not: the rich Chinese are going to come with the cash they took and save you from your bad investments. Of course your kids will be homeless in the country their ancestors conquered, but who gives a shit, really?

http://www.washingtonpost.com/business/corporations-cant-stop-gobbling-up-their-own-stock/2014/05/09/83c8ddb0-d6e6-11e3-aae8-c2d44bd79778_story.html

Your argument is stupid. Nobody said the mortgage rate was EXACTLY the same as the federal funds rate. You are ridiculously oversimplifying the issue. It's tantamount to an evolution-denier arguing, "If we came from apes, why are there still apes?" Or like global warming deniers arguing, "We had one day that was cooler than normal, therefore global warming doesn't exist."

Heraclitusstudent says

Taxing takes money away from other spending or investments.

. . .

Is there any shortage of investment capital now?

At any rate, Economics ignores the TIME element which is annoying. Government takes a bite, then spends that money right back into the economy.

The $2T the gov't spends on entitlements isn't thrown into a furnace, it re-enters the economy immediately.

Gov't isn't 'taking away' anything. It redirects the flows, but they soon return to "the 1%" who own everything.

tatupu70 says

Do you agree that wealth disparity has been increasing over the last 30-40 years? And interest rates have been generally decreasing over that same period?

blue is inverted Gini (down is higher disparity), red is prime rate

in this chart we *do* see where the Fed has input into the economy, when they were raising their overnight rates, the prime rate also rose.

So the Fed has brakes, but its gas pedal is pretty wonky.

Bellingham Bill says

Is there any shortage of investment capital now?

At any rate, Economics ignores the TIME element which is annoying. Government takes a bite, then spends that money right back into the economy.

No, but my point is in 2009 the government was trying to compensate a reduction of (deficit) spending by the private sector with deficit spending by the government.

Bellingham Bill says

The $2T the gov't spends on entitlements isn't thrown into a furnace, it re-enters the economy immediately.

Gov't isn't 'taking away' anything. It redirects the flows, but they soon return to "the 1%" who own everything.

yes, and it would be (and have been) better to tax the 1% than to borrow from them at 2.5%.

Heraclitusstudent says

with deficit spending by the government.

yes, it's truly stupendous to me that we were able to borrow $1.2T in CY08 and another $1.5T in CY09 . . .

The Fed started buying treasuries in 4Q10 so it wasn't them . . .

Lotsa money out there, looking for yield . . .

shows the money stock has doubled in GDP terms since the Volcker era.

Heraclitusstudent says

t would be (and have been) better to tax the 1% than to borrow from them at 2.5%.

yup! Funny how we have an entire political party controlling Congress now who is vehemently opposed to this.

Tho to be fair, Leviathan has gotten pretty big these days!

Blue is real per-fulltime worker .gov expense (not counting SS and Medicare)

Red is real per-fulltime worker DOD expense (counted in the above too)

Federal government service is costing everyone $1500/mo, $500 of that is DOD

tatupu70 says

Wealth disparity. When a few people have SO much money, there just aren't enough places for them to put it. Especially since there is so little demand that there isn't much need to build more factories or invest to increase capacity. So there is a lot of money fighting for safe havens like treasury bonds. And high demand equals low rates.

In my opinion, this is simple apologism for the one percent. Most opinions I have read on the subject are that monetary policy ENABLES wealth disparity. If you are arguing the other way around, you leave open the question of what caused the wealth disparity.

Here is the discount rate vs. mortgage rates:

The discount rate has been at an all time low for the past 5 years, as have mortgage rates. Who sets the discount rate? The Fed, right? So how can you argue that mortgage rates and the discount rates are both reacting to other factors?

tatupu70 says

But, more important, IMO, are the effects of globalization and productivity increases in driving down the value of labor and increasing the return on investment. Real wages have stagnated, while corporate profits are increasing exponentially. This leads to the rich getting richer and the working Joe going nowhere.

I disagree. If that were the deciding factor, then we would see this effect as a smooth curve over time. Globalization and changes in productivity do not rapidly fluctuate, yet income distribution does. Certainly the things you mention have an effect, but they cannot entirely explain what we see in this graph:

I wish I could find a chart that goes all the way to the present, because you would see that red line spike up again. You can see that as the various financial ponzi schemes collapse, income distribution briefly becomes more equitable, only to widen again as Wall Street manipulates monetary policy to again widen the gap between rich and poor.

tatupu70 says

-the Fed changes the discount rate because of economic factors. And as I wrote earlier, they usually follow the market rather than set it.

That doesn't make any sense. The entire PURPOSE of the Fed's actions is to influence markets, not mimic them. If the Fed were simply blindly following whatever the markets do, what would be the point of even having the Fed?

Homeboy says

Certainly the things you mention have an effect, but they cannot entirely explain what we see in this graph:

Interesting graph. I think it confirms my hypthothesis rather than refutes it. The top 10% really takes off in the early 80s, right as Reagan takes over and mucks up the tax code, and as manufacturing begins to go overseas.

It won't be a straight line because the top 10% earns their money from corporate stock values. Their income will go up and down based on the stock market... But as you pointed out, it's trending up while Aveage Joe is flat.

tatupu70 says

Interesting graph. I think it confirms my hypthothesis rather than refutes it.

Seems like you think EVERYTHING "confirms your hypothesis", whether it does or not.

tatupu70 says

The top 10% really takes off in the early 80s, right as Reagan takes over and mucks up the tax code, and as manufacturing begins to go overseas.

Actually, that's wrong. Reagan's tax act wasn't until 1986, after that spike has already ended. What DID change in the early 80s was the Fed discount rate - see my previous chart. Hmmm...very interesting, that.

tatupu70 says

It won't be a straight line because the top 10% earns their money from corporate stock values. Their income will go up and down based on the stock market..

Right, and the Fed influences the stock market PROFOUNDLY, to the point that even a whisper of the notion that the Fed is planning to change any of its policies can cause wild swings in stock prices. So no, none of that supports your position. Right now, the Fed is holding rates so low that banks can essentially get free loans (and keeping them there for so long that it can't reasonably be considered a temporary measure anymore), and wealth disparity just happens to be at an all time high. You really don't think there's any connection there?

Homeboy says

Seems like you think EVERYTHING "confirms your hypothesis", whether it does or not.

Well argued.

Homeboy says

Actually, that's wrong. Reagan's tax act wasn't until 1986, after that spike has already ended. What DID change in the early 80s was the Fed discount rate - see my previous chart. Hmmm...very interesting, that.

Is your argument that lower interest rates cause wealth disparity? I think it's probably true that stocks perform better under lower interest rate environments--but I disagree that the Fed is the cause of lower rates. The market sets the rates that matter.

Homeboy says

Right, and the Fed influences the stock market PROFOUNDLY, to the point that even a whisper of the notion that the Fed is planning to change any of its policies can cause wild swings in stock prices

True--as Bill said earlier, they do have control of rates on the high side to put the brakes on an economy. Any whiff that they are raising rates to slow things down will cause stocks to fall. And, similarly, if folks are expecting the Fed to raise rates and they don't, that could cause stocks to rise.

Homeboy says

Right now, the Fed is holding rates so low that banks can essentially get free loans (and keeping them there for so long that it can't reasonably be considered a temporary measure anymore), and wealth disparity just happens to be at an all time high. You really don't think there's any connection there?

I don't. Disparity has been rising for 30+ years. I don't think a condition that has only been happening for 5 years could be the cause. And, I don't see a mechanism despite all the crony nonsense that is spewed here.

tatupu70 says

And, I don't see a mechanism despite all the crony nonsense that is spewed here.

You don't believe being able to borrow as much money as you like at effectively zero interest, and invest that borrowed money, is a mechanism to increase wealth?

I don't think that's the only way wealth disparity increases - lowering the capital gains tax is another obvious one. But I think it is one way, and you seem to completely dismiss it out of hand.

Why do you say "crony nonsense"? It's a fact that wealthy members of the investor class move freely from key Wall Street positions to government positions and back again to Wall Street, and have a huge amount of influence on government monetary policy. Tell me what exactly is "nonsense" about that.