patrick.net

First!

From time to time I've thought this blog approached group thinking. Mostly it manifests itself by attacks on pro-RE rookies, who immediately get characterized as trolls and perma-bulls and then rained on. Fuzzy Math on the last thread was kinda middle of the road compared to Confused Renter. The counter-points were valid, but the negative emotions displayed can easily be attributed to a bunch of JBRs.

Anyway, I believe there is a bubble (and a huge one in the Bay Area), but it's hard not to notice that many patrick.net posters have memorized the exact same argument. Which can be summarized with, "It's in the bag. The crash is guaranteed to be huge. The dollar will tank and we'll buy McMansions for dimes on the dollar. We're already picking through the rubble." And so forth. Such 'arguments' are really just an inversion of the realtor propganda. I've seen plenty of people take projected data and work themselves into a frenzy for one political party or the other... the group "psyche up" on a blog is no different.

The exceptions are Randy H and a few others who are actually able to provide a meaningful analysis based on real financial theory. I come here for the factual stuff and real anecdotes, but sometimes the rah rah is a bit much. I mean, if the bubble pop is so predictably in the bag, then I expect to see several millionaires come 2008/2009.

Just my two cents.

The decline of the USD is irrelevant as a direct factor vis-a-vis house prices in the US. It is only relevant insofar as inflation. Unless you already have or will earn foreign currency, you will be buying dollar-denominated houses with dollars. If the Fed elects to defend the dollar, then interest rates will rise, making debt-financed owning more expensive. If the gov't decides to defend the dollar (with fiscal policy), then your taxes will go up, effectively meaning you lose tax-deduction power, raising the cost of debt-financed owning.

If inflation rises then owning a home becomes progressively more valuable ceteris paribus* because (a) real estate is a historical safe haven from inflation; it is at worst uncorrelated to inflation cycles; (b) having fixed-rate amortizing loans is valuable in a rising inflation environment. And when the inflation finally breaks, it will be due to rising interest rates, which also rewards the fixed-rate debt holder.

These are the very real factors working against savers and in favor of smart debtors. Unlike many here, I continually harp that debt itself is not a bad thing. Debt can be very powerful if used appropriately and smartly. Simply; it can be beneficial when you can afford it.

Monday's FT: the wealthy top 10% of America have well over 50% of all US personal debt on their family balance sheets. Why? Because their professional wealth managers determine their capital structure and tell them that buying a $20M mansion with borrowed money is cheaper than using cash. Better to put that cash into a VC/HF/PE fund.

Meanwhile saves subsidize that activity, because of inflation.

...how's that. I await calls for my head...