patrick.net

The problem with waiting for inflation is that in the post-NAFTA world many wage earners have to compete with low-wage countries, wage competition that did not exist in the 1970s, when India might as well had been on the Moon wrt providing labor services. China and Eastern Europe was also not integrated into our economy until the NAFTA timeframe.

We hid this new underemployment problem last decade with a debt orgy, more than doubling both the national debt and household debt loads while most of the income gains have accrued to the top 1% of the population.

Nobody in the top 1% of the population is interested in buying your condo, alas.

I don't have the first clue if we're in the Japan model of deflationary decline or heading into the Argentinian/Weimar model of wage-price inflation; I strongly lean toward the former but the latter wouldn't surprise me given my imperfect understanding of the situation we're in.

I do think the PTB will try more things to at least stabilize home values where they are, eg 3% interest rates, which would certainly help borrowers pay more for your condo.

I think any wage inflation here will just drive jobs away to lower-wage competitors, either other places in the US or overseas.

If you haven't refi'd, you still have a purchase money loan and should be able to just let the bank take back the property. Their money, their problem.

If "walking away" is so bad, why does the gov't now not tax the debt forgiveness?

http://www.ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml

I've come to the conclusion that no one really knows. There are economic experts who study economics as a living who are certain of hyper inflation. There are other experts who think they will be deflation . Another thing to consider is we are in a global economy and while the U.S. currency may have to compete with other currencies when buying commodities. The consumer in China, India, Europe, etc, is not competing with the US for real estate in the U.S. Hence if no one is buying the housing market may continue to deflate while everything else goes up. Personally I don't think things will spin out of control any time soon. No matter what happens I think it will be slow and painful.

Experts claiming hyper inflation:
Marc Faber
Peter Schiff

Experts claining hyper deflation:
Robert Prechter

Someone who is good to follow with the inflation/deflation debate is James G Rickards. He seems to be attuned to many of the nuances . He has interviews on King World News www.kingworldnews.com , posts on twitter and has interviews in other media outlets. At the moment he thinks deflationary forces are the strongest, but there may be a brief hyperinflationary period first on the way to a deflationary depression.

The recent Zulauf interview on King World News is the most intriguing to me . He feels there will be deflation first for maybe 2-7 years, and then a rapid hyperinflationary collapse.

In essence, I guess, no one really knows for sure, but I try to follow these 2 people closely since I trust their views the most. Rickards is in the media often, and seems willing to share any changes in his ideas based on the latest information.

Both of these people advise physical possession of precious metals.

I think something to consider outside of the inflation/deflation debate is the area itself. Some parts of the bay have taken a less drastic hit. Every area has fallen, but some areas less than others. Your home may fall a lot more in the next few years if you are in an area like Oakland, but if you are in Palo Alto, for example, you may not fall as much. Look at Detroit, you can buy a house for a buck. Detroit will never rebound, and if it does it wont be for many moons to come.

Before you make a drastic move you should try to plead more with the bank. We have tried everything with our lender, but they are unwilling to help, so we have to make a big decision. You may be able to bargain with them and work something out before you decide to walk.

I also think that even in a hyperinflation scenarios there will be little or no wage inflation in the US. There will be a lot of it in India and China though.

In my opinion you'd be making the same mistake twice. Buy at the top and default at the bottom.
Both were probably emotional decisions and not strategic at all.

if you can afford the payments I would at least wait until recession ends and the job market is stronger
then decide wether or not to default.

The downside to waiting is if you do decide to default you could potentially be a renter with bad credit in a competitive rental market.
In times of uncertainty personally feel much better owning even if prices are going down. That's a much less painful scenario
than if you are stuck renting in a period of high inflation.

what ever you do, DONT refinance yet. That will turn your (hopefully) non-recourse loan into a recourse loan.

Inflation happened in the 70s because women went to work outside the home. Unless you've got extra wives or your kids are going to stay home and contribute to your household forget about it.

I came to this view on the backend of your position. In 2007 I made the strategery decision to buy a larger home in the attempt to hedge against upcoming inflation. I now believe that won't happen, even with a helicopter dropping bags of money to rich people. Unless wages increase for eveyone its not going to happen, and that's not going to happen because wages aren't going up and taxes ain't coming down.

There should be wage inflation because right now the average wage is artificially suppressed due to 9.5% unemployment (actually higher if you go by unofficial statistics). The average wage will increase as unemployment comes down.

Troy says

The problem with waiting for inflation is that in the post-NAFTA world many wage earners have to compete with low-wage countries, wage competition that did not exist in the 1970s, when India might as well had been on the Moon wrt providing labor services. China and Eastern Europe was also not integrated into our economy until the NAFTA timeframe.

Not to worry on that one. Candidate Obama PROMISED that he would make it one of his "first orders of business" to renegotiate NAFTA. I'm sure this problem is being solved as I type. LOL!

wow.. tough group!

I am not in favor of a deliberate default unless you are simply unable to make your payments. now that said you have tried the Obama route (and that has been almost universally unsuccessful despite billions paid into the program and thousands of giovernment workers who were paid all those billions [maybe that's why so little went to help mortgagees?]) and tried refinancing... so at least you can justify it in that you tried hard not to default.

Cheaper dollars... that was the mantra in the 70s... you bought everything on credit (10%+ for any collaterlaized loan) and the idea was as you paid for it your income would rise by (over say 3 years) 30% and by then even at 10% you were paying back with cheaper dollars.

But the likihood of inflation of wages at that level are remote at best... even as some point out with high inflation in our competing labor markets... that will not spill into the US the way it could have in the past. We are certain to see hyperinflation... either caused by the Fed's loose money policy that eventually gets companies to bite and borrow... or from the Chinese getting tired of a 1% return on a gradually devaluing dollar... and forcing much higher interest rates in order to buy our debt, thus causing the dollar to fall further in value and actually ramming our national debt ever higher to chase the ever higher returns demanded by foreign investors. A hopeless spiral that may actually not help you with your debt unless you have offsetting cash to invest at interest rates well above your mortgage (and if you did you would probably not be looking at a default option).

I think you have to either sit tight and hope for an Obama Change miracle... or walk away and be prepared for a potential deficiency notice....

RayAmerica says

Not to worry on that one. Candidate Obama PROMISED that he would make it one of his “first orders of business” to renegotiate NAFTA. I’m sure this problem is being solved as I type. LOL!

US trade has evolved passed Latin America into Asia. FWIW, NAFTA is pretty much dead anyway.

After reading Allen Greenspans book, I realized that the media isn't going to publish anything that isn't dramatic. HYPER INFLATION! HYPER DEFLATION! Those are interesting things to publish. What do in case of HYPER INFLATION! Buy stocks, Buy GUNS you need GUNS to protect yourself from the hungry! Sell Stocks! Buy houses! Sell Houses buy guns!

Hard work, and 5% a year is boring. No one would watch an economic report that says "Investing in T-bills or the stock market will gain you a few percentage points above inflation. " BORING. Super boring! We want INSTANT gratification! Double up your investment in 6 months!

Greenspan showed what boring was like. It was fascinating to me, because he showed how you pull one string too hard, and 3 other things collapse. You pull another string and 2 other things collapse. It's a juggling act to keep things running smoothly, and digging yourself out of a hole doesn't have any one solution/string to pull. HYPER INFLATION! will not save us. It also won't kill us, because we'll stop the process.

People shouted that housing would go down to pennies on the dollar but it didn't. They *would* have been correct had the government and other investors done nothing, but that isn't how the world works. When you're heading towards a disaster you scream about the horrors, when you're in it, you actually start doing things to fix it. We screamed about the horrors of housing and when it hit us, we dropped nearly 1T on it's head. Was it bad? sure. Could we have been at pennies on the dollar if no one did anything? sure. But we intervene. And there are investors out there who say "Ok it's 5% off peak, I'm buying!" then there are more that say it's 10% off peak I'm buying! and more when it's 15% off, and it keeps going. We're semi-stable now, because there are enough investors saying "This is a great place to buy!" and if anything drops in too low they grab it.

The only way we'll see housing prices tank from here is if those investors become scared, real scared. They need to actually go and hide for 6 months. They aren't currently scared though. Something global needs to happen (perhaps a chinese housing market bust + stormy US elections + something bad in europe).

That being said, being 20% under water isn't all that much. The re-entry point to buying again might be a lot higher the next time you try. You might need to put down 10%. How long will it take you to get 10%? How much might housing appreciate during that time? Will your loan rates be as good as they are today with this blemish on your report? If not, you're not going to be able to afford as much next time around. You'll pay the same amount, just that you won't have as much to buy with. You could be selling yourself short here. Adding in moving costs, house hunting costs, closing costs, etc, it all adds up. You might find the difference is only a few hundred dollars a month and you might be "restarting" your home loan in 5-7 years, adding 5-7 years to your loan end date.

If things get a *lot* worse, do it then. If they start getting better, then within 4-5 years you'll likely not be underwater and you'll win. 20% doesn't seem like enough to screw around with.

Not to mention -- if your loans have been re-financed, in 5 years the banks might turn around and sue you. When they find out you've got enough saved up for another home. What better time to go after you! Don't do it now, when you're "broke" do it when you're back on your feet. If you need to declare bankruptcy then... well you're looking at several more years before you're buying a house.