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Interest Rates Must Rise Before They Can Fall


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2008 May 29, 12:54am   23,357 views  236 comments

by Patrick   ➕follow (59)   💰tip   ignore  

Hi Patrick,
thought it would make for an interesting write up if
someone highlighted the difference between the housing
downturn in the early 80's vs today.

Back then, inflation was rampant and the only way to
stamp it out was through very high interest
rates--which subsequently pummeled the housing market.

Once inflation began to improve, it would have been a
great time to buy property as interest rates
dropped--spurring cheaper credit and ultimately
raising the value of real estate. (As opposed to the
NAR propaganda of "now being a great time to buy"
because interest rates are low)

Fast forward to today. Real estate is in a downward
spiral while inflation rages. The only way to contain
inflation will be a return to Volker-esque interest
rates.

Problem is, housing is in free fall. I suspect what
the Fed is trying to do is create a floor under
housing through inflation, then raise interest rates
to tamp it down.

While many economists see a recovery after another
10-15% devaluation of real estate, no one has touched
the potential long-term implications of current(and
near term) monetary policy and its effect on long term
price appreciation (or lack thereof) in the US market.

The net effect of this policy will be a long,
sustained bottom of prices that will not appreciate
again for years due to necessary increases in interest
rates.

It will not be until AFTER interest rates have been
raised substantially and then begin to reduce again
will we see another substantial increase in the value
of real estate in the US.

Any thoughts on why this hasn't been covered yet?

Best,
Bill A.

#housing

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144   Paul189   2008 Jun 4, 1:18am  

Richmond,

The point is made in the video but maybe without specifics that the cost needs to be compared against building more runways at airports and adding lanes of traffic on the highways. If you compare all three you will find that the train is the least costly.

145   Peter P   2008 Jun 4, 1:25am  

Public transportation is feasible only if it can be expected to make a profit on its own.

Just look at the light rail system in Santa Clara county. Few people are using it. Whose great idea was that?

146   Peter P   2008 Jun 4, 1:29am  

America's airports has more runways than those of any other country. This is because we pioneered general aviation. Private plane ownership is the highest in the world.

America is the only country in which regular folks can realistically own and fly small planes wherever they want whenever they want. (Even my worker-bee co-worker has a plane, which costs less than an SUV when bought used.)

147   DennisN   2008 Jun 4, 1:35am  

Back when BART was on the drawing board and methods of finance were being worked out, it was decided that a 1/2 cent sales tax increase would fill the coffer. San Jose and County didn’t want it. It was voted down.

Actually this is not correct. Santa Clara county DID approve the BART tax back in the 1960's, as did SF county. It was San Mateo county who pissed in the punchbowl and prevented BART going down the peninsula. Santa Clara county ended up spending the 1/2 cent sales tax on a bus line since they couldn't spend it on BART.

148   Peter P   2008 Jun 4, 1:42am  

I hate 1/2 cent sales tax increases. Before long, it will become 19% like Paris!

I wonder why counties don't talk about sale tax cuts.

149   Richmond   2008 Jun 4, 2:04am  

Then why didn't they shoot down the East Shore out of Alameda Co.? Hell, you can throw a rock from the Alameda County line to San Jose city center. It would look ridiculous on a map for a south bay commute until you look at todays commute times and population, then it doesn't look so bad.
Although, given the demographics of the day, busses were probably more economically viable.
I do appreciate the correction. I knew that some municipality had their BVD's in a bunch. I thought it was Santa Clara. Ooooops.

150   Peter P   2008 Jun 4, 2:22am  

It would look ridiculous on a map for a south bay commute until you look at todays commute times and population, then it doesn’t look so bad.

But in a train, you are potentially stuck with criminals or other threatening individuals.

Unless there is a point-to-point mode of public transportation, I think driving still makes more sense for most people.

151   Richmond   2008 Jun 4, 2:57am  

Peter,

Look where I live. Thugs on a train are a step up. :)

But, you are right. When I worked in downtown S.F., I could drive it in twenty five minutes where BART took forty five to fifty. However, BART was cheaper when I took into account fuel, parking and wear and tear.
It was about even with the wage offset for travel time unpaid.

152   Peter P   2008 Jun 4, 2:59am  

Even with thugs, traveling by train is probably still statistically safer than driving.

153   HeadSet   2008 Jun 4, 3:10am  

America is the only country in which regular folks can realistically own and fly small planes wherever they want whenever they want. (Even my worker-bee co-worker has a plane, which costs less than an SUV when bought used.)

From 1956 - 1985, over 35,000 Cessna 172s were built. This was in addition to other small pison planes from Cessna, along with those from Piper, Beechcraft, Mooney, Rockwell, and others. These planes were affordable new, since some cost about the same as a good sports car.

That changed when Legalman reared his ugly head and and product liability suits from inept pilots killed the affordable General Aviation industry. Cessna stopped making piston planes completely in 1986. Not until after the General Aviation Revitalization Act of 1994 did Cessna restart manufacture of small piston planes. Even so, $20,000 was added to the price of a new Cessna to cover liability suits. Of course, the higher price meant less sales and thus more expensive individual units. Today a new Cessna 172 is about $150,000. The Cessna 152 was discontinued, although last year Cessna introduced a new two seater entry level plane (still over $100,000).

154   Peter P   2008 Jun 4, 3:10am  

Will Clinton run independent? :)

155   Peter P   2008 Jun 4, 3:16am  

Small planes are very simple machines. I would say the average small plane has a lot fewer moving parts than the average small car.

Entry-level jets cost about the same as a Palo Alto McCraftsman, and they can fly infinitely faster.

But I thought aircrafts tend to appreciate in (nominal) value. :)

We really need to limit product liability suits. Caveat emptor. Why can't people learn to take responsibility of their own decisions?

156   justme   2008 Jun 4, 3:34am  

The mismatch between California and rail transit is all about building patterns. Rail transit requires high-density (high-rise) residences along the transit corridor for economic/efficiency reasons, and dense enough housing elsewhere to support a high-utilization and therefore efficient feeder-bus system.

Until the people of CA get smart and make the right moves to build 20-story condo/apartment towers next to Caltrain, rail will have a limited impact. It is not technically impossible nor prohibitively expensive to build 20+ story buildings for an 8.0 earthquake, but we have to force it to happen.

Then we have to make the changes that will make people want to live there.

--oil taxes must increase
--gun control must be implemented
--overly concerned parents have to calm down about imagined and imaginary safety threats against their children
-zoning laws and practices must change to promote more mixed residential/commercial land use (e.g. residential high-rises with commercial space in the first floor and basements.
-don't forget underpasses and overpasses across Caltrain, the rail is going to be very busy

People want to live in safe, drug-free and gun-free communities. Much of the sprawl in California is driven by cheap oil combined with a desire to distance oneself both horizontally and vertically from ones fellow citizens, for "safety", privacy" rand "vanity" reasons.

This has to change, by stick and by carrot. I guess that means the school system has to change as well. Altogether a pretty tall order, but given the rise in energy prices the change will eventually take place, although many years and many dollars too late.

157   Peter P   2008 Jun 4, 3:45am  

...get smart and make the right moves to build 20-story condo/apartment towers next to Caltrain... ...but we have to force it to happen.

Shaking my head...

Yes, it is all about pattern. If we want to accelerate our downfall, that is not a bad idea.

158   Peter P   2008 Jun 4, 3:47am  

People want to live in safe, drug-free and gun-free communities.

Let's un-invent guns. If we cannot do that, let's allow every non-criminal to carry guns.

159   Peter P   2008 Jun 4, 3:51am  

This has to change, by stick and by carrot. I guess that means the school system has to change as well.

The worst possible motivation for changes is smug. Some group in Germany tried that a few decades ago. History be the judge.

160   EBGuy   2008 Jun 4, 4:26am  

I posted about this celebrity flipper last year. Here's an update. Evidently experiencing some downward pricing pressure.

-- Real-estate-savvy Frankie Muniz, the Emmy-nominated star of the hit TV series "Malcolm in the Middle," has relisted his five-bedroom, four-bathroom Hollywood Hills home for $3,695,000, down from $3,875,000 last fall. Muniz, 22, purchased it in January 2006 for about $3.5 million. The 4,000-square-foot, two-story house, built in 1941 and completely remodeled in 2005, has hardwood floors, three fireplaces and an entertainment patio area with an outdoor fireplace and a pool. Muniz has been dabbling in Los Angeles real estate for a few years. When he was 19, he owned two houses on Los Angeles' Westside - one with a nifty fingerprint-recognition front door.

161   HeadSet   2008 Jun 4, 4:28am  

Justme,

I understand that your theory is that high gas prices will cause people to reconsider high density living, perhaps finding solutions to the real or imagined dangers of clustered residences.

We may see some other effects of high fuel prices, such as increased telecommuting, 4 day/10 hour work weeks, staggared shifts, and organized ride sharing. The irregular-route transit industry has already perfected algorithims for running dynamic routes (pickup adresses, dropoffs and times vary with each run). Maybe we will see a new service where a commuter, on his turn to drive, will download into his Garmin-like device the addresses and times of his pickups. This, along with other possible ride-share database methods would cut down on number of cars on the road as well as costs.

162   Richmond   2008 Jun 4, 4:33am  

Justme,

You hit it right on the head. The pattern of thinking in California caters to the support of sprawl. That has come to a head in terms of dollar cost and time spent getting somewhere. Vertical infill is a great place to start. From a planning standpoint, you need high density population to make rail and other forms of public transit work properly. Low to medium density residential is not very efficient on so many levels. However, I must admit, I love my wasteful lawn and garden. Old habits will be hard to break.

163   Peter P   2008 Jun 4, 4:37am  

We may see some other effects of high fuel prices, such as increased telecommuting, 4 day/10 hour work weeks, staggared shifts, and organized ride sharing.

I agree. Free Market can always find the best solutions.

I still think public transportation turns people into lemmings.

164   Peter P   2008 Jun 4, 4:43am  

London has medium density in many areas yet they have a sprawling (pun intended) subway system. However, people don't look happy there. They drink and they puke everywhere. Happy people don't resort to alcoholism.

165   Richmond   2008 Jun 4, 4:53am  

Something about living in a city and being able to survive without a car sounds very appealing to me, something that I would like to try for a while. Maybe not forever, but for a while.

With regards to the puking everywhere: what do you expect, the beer is warm.:)

166   PermaRenter   2008 Jun 4, 4:58am  

About 36% of the people who tried to trade in a large SUV in May owed more on the truck than it was worth, according to data from the Power Information Network. That's up from just under 33% a year ago. (It's worse for large pickups. Recent PIN data suggests 40% of large pickups traded during May fetched less than the loan balance.)

A three-year-old large SUV today is worth about $2,000 to $3,000 less at trade-in than a three-year-old large SUV would have been in 2007, before gas prices began to soar, according to Marc Cannon of Inc., the largest U.S. auto retailer. A three-year-old Chevy Tahoe that might have fetched $19,700 in September 2007, he says. Today, a three-year-old Tahoe might be worth $16,400 at trade-in.

In other words, folks who bought a big SUV in 2005 are discovering that they were making a bet that oil prices would remain stable. They were wagering $30,000 to $40,000, not the billions certain U.S. auto makers stand to lose from making a similar wager. But the pain of losing that bet is still real. There hasn't been such a significant collapse in demand for a class of vehicles since the oil embargoes and inflation of the 1970s slaughtered muscle cars.

For the past several weeks, I have passed an increasingly common sign of the times: a Hummer H2 parked at the front of the owner's driveway with a "For Sale" sign in the window. I don't know the seller's motives, but it's doubtful they'll get what they want for the truck, given that Hummer dealers have a glut of unsold new vehicles that will probably leave their lots at fire-sale prices.

Within the past few days, a number of experts in the used-car market have recommended that owners of large SUVs should probably just hang on to their rigs rather than sell into the current collapse.

"If you've got one two- to three-years-old and you're working on a five-year loan, you will be upside down," says Jack Nerad of Kelley Blue Book/KBB.Com. "That's exacerbated by the fact the dealer doesn't want that vehicle right now. It's going to be an ugly scene."

167   HeadSet   2008 Jun 4, 4:59am  

Something about living in a city and being able to survive without a car sounds very appealing to me, something that I would like to try for a while.

You can. Millions of New Yorkers and DC residents have embraced the car-free lifestyle for years.

168   Peter P   2008 Jun 4, 5:02am  

Perhaps it is time to get a used Land Cruiser. :)

169   HeadSet   2008 Jun 4, 5:05am  

Within the past few days, a number of experts in the used-car market have recommended that owners of large SUVs should probably just hang on to their rigs rather than sell into the current collapse.

Acoording to a local news report, many dealers in my area will not take an SUV as a trade in at all.

170   HeadSet   2008 Jun 4, 5:56am  

I always thought SUVs were more for fashion than utility. The best selling SUVs (Explorer, Darango, Trail Blazer) have no more room in them then thier respective company's minivans.

The new fashion statement is now Hybrid. But see how the Prius got it right? It will always outsell a Hybrid Camry, Hybrid Accord, or Hybrid Civic. That is because the Prius looks like a hybrid. What's the point of being fashionable if nobody can readilly see it? If GM is smart, they will make the Volt or other eco-car look distinctively different, and avoid hybrid variants of current models that are hard to distinguish from the non-hybrids.

171   Richmond   2008 Jun 4, 6:00am  

Bap,

I wonder what the profit margins will end up being. High demand, less raw material, fewer parts in the hybrids. This could be a real ripper for the auto companies. This change will be a good one to study.

172   Richmond   2008 Jun 4, 6:04am  

GM has had a fully developed electric car for years. Have you guys seen,' Who Killed the Electric Car'. Neet story. Slanted, but still good.

173   Peter P   2008 Jun 4, 6:18am  

all that is going on is the sheeple are now being steered towards Pirus’. Nothing more, nothing less.

Are you speaking against the Pious? How dare you? ;)

I saw a whole truck-load of Smug Fortwo's while driving to work today. Sigh.

174   Peter P   2008 Jun 4, 6:21am  

That is because the Prius looks like a hybrid.

And it sounds like "pious."

175   EBGuy   2008 Jun 4, 6:24am  

Headset,
Any hybrids in your fleet?

176   Peter P   2008 Jun 4, 6:29am  

I want a diesel car instead. The environmental impact of batteries in hybrid cars can be a problem.

177   Richmond   2008 Jun 4, 6:42am  

A friend of mine had an Audi 4000 diesel back in the 80's. I think it had the VW 1.6L. It was a fully loaded four door that got 55 MPG on the highway. You wouldn't win any races, but it cost nothing to run at the time. Great car. Another friend had a Chevy Sprint with the Suzuki 1L triple and got 50 MPG or better.

The car companies can give us milage with a normal four stroke engine. I wish that they would.

178   Peter P   2008 Jun 4, 6:47am  

I heard the BMW 535d gives close to 40 mpg.

I am very adverse to large battery arrays.

179   Peter P   2008 Jun 4, 6:49am  

My friend is going to put used vegetable oil in his diesel. We will see how that goes.

I afraid high gas price may *not* produce higher living densities. Thank God.

180   Richmond   2008 Jun 4, 6:52am  

Yeah, I'm not at all thrilled about batteries either. The environmental impact far outweighs any gains.

40 MPG is pretty good. The 535's not a tiny car.

181   Peter P   2008 Jun 4, 6:54am  

Too bad a 535d is going to cost a lot.

Perhaps Toyota will produce a large (2-ton) family sedan with a powerful diesel engine. Hopefully one with 300 lb-ft torque and 40 mpg.

182   HeadSet   2008 Jun 4, 9:53am  

EBGuy,

No hybrids in our taxi fleets. We are nearly 100% Impala, with a few Venture vans. However, I did see a gas problem years ago and conviced the owners to use Impalas instead of Ford Crown Vics.

I do know the owner of Discount Cabs in Phoenix, he recently put 200 Prius Hybrids in his fleet. He already had natural gas powered Crown Vics.

183   HeadSet   2008 Jun 4, 9:54am  

Perhaps Toyota will produce a large (2-ton) family sedan with a powerful diesel engine. Hopefully one with 300 lb-ft torque and 40 mpg.

Don't forget the tail fins!

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