patrick.net

Just to do the math I ran:
30 year fixed at 4.875% for a $500,000 loan. After 30 years, total interest paid is $452,574.80
Compare against the same but with 9% loan (where I think loans will go as soon as the recession is over) and you get interest of $948,320.71, which is $495,745.91 more than the first loan. It is also the same in difference as the entire pricpal of the house.
So, for those planning to buy and hold - no moving, no losing your job, no trading up, etc. The math looks pretty interesting.

@OO
Have you checked Fremont Bank recently? A few years ago my husband and I used them to get a no fee loan with a slightly higher interest. It worked well for us because we only needed the loan for a short period of time.

Compare against the same but with 9% loan (where I think loans will go as soon as the recession is over)

Duke,

Are you kidding? 9% home loans?

Duke Says:
Just to do the math I ran: 30 year fixed at 4.875% for a $500,000 loan. After 30 years, total interest paid is $452,574.80. Compare against the same but with 9% loan (where I think loans will go as soon as the recession is over) and you get interest of $948,320.71

The arithmetic is only one part of the math. :-)

With rates at 9%, that 500,000 loan (and your down-payment) is going to buy you a nicer house than when the rate is less than 5%.

Also, by buying now, you are putting your down-payment directly at risk- especially if you expect rates to go to 9% or if you expect more layoffs in the area.

If you already have a loan at a higher than 5% rate - i.e. you are stuck with a principal already - this is a great opportunity to lower your rate. But if you are holding cash and looking to buy, it isn't very tempting.

Anyone with a decent down-payment in savings should be praying for a high mortgage-rate environment to bring prices down. :-)

[not investment advice]

sa Says:
Are you kidding? 9% home loans?

Wells-Fargo's 30-year-fixed Jumbo was at 9.875% a month ago. And you needed a proctological exam of your finances before they gave you the loan.

It has dropped now to 8.625, but is not too far south of 9%.

Conforming rates are below 6%, but in the parts of the Bay Area that Surfer-X likes, a conforming loan won't buy you much.

I doubt that mortgage rates will go up in the next year or so. But once we start to see inflation from the current policies rates could go up a lot.

As SP points out, when rates get higher than normal prices tend to get depressed further. So, buy when prices are depressed, even if you must pay high interest rates. Then refinance a few years later at lower rates, and you get the best of both worlds (low price and low rate). This strategy worked well for me in the early 1980s and the 1990s. It should work again.

So.....Volker, eh?
Interesting choice. Hope he lives long enough to do some good.

Right now, obama can do no wrong. He can take in a puppy and name it something, the stocks could go higher. Bush that bad?

There are so many arguments against buying now. . .

I just wanted to throw out to some the view that with the govt intervening in the mortgage market, that a run-out loan cost compared to principal destruction is pretty interesting. Especially for those who feel that this period of deflation is going to be followed by a period of inflation.

Given how fast home prices are collapsing it looks like the gummint has no qualms throwing the speculators under a bus. Which is as it should be.

A friend who short-sold his house for $500k just found out it got short-sold again for $370. Talk about knife catching!

I'm actually curious exactly *how* anyone could prop up home prices.

How do you entice/force someone to overpay for something? And if the banks are doing loan modifications, why not just stop paying every six months and force another cram-down?

Um, Kewp. I would think the period from 1997 to 2006 is a pretty good example of how to get someone to overpay for something. . .

Well, that's kinda my point. Once that incentive is gone, whats left?

Nobody wants to be a bag-holder.

Say, weren't rates at this level like 6 months ago?

It didn't seem to help housing then.

I don't see this development as being anything significant for the general public. It was just another way to stuff money into the banks. If they actually wanted to help the people, and the economy, they would force the banks to cram down a certain number of mortgages (with shared future profits) for every government program they participate in.

By the end of this mess we're going to have some rich ass banks, and zero middle class. Woopee!

Here is one scenario that you'd be better off buying now. Not applicable to a whole lot of people. Location is only confined to desirable areas that everyone wants to get into.

1) you have lots of cash, at least 25% down, or even more.
2) secure jobs, no fear of job loss, can easily support payment with one income.
3) can lock in a low, long-term FIXED rate
and most importantly
4) you believe (which is what I believe) that the government will do everything to reflate, including trashing the USD. If they don't give a damn to dollar, then it becomes an asset allocation issue, it is no longer about buying a home.

Most people cannot satisfy the first 3 criteria, so 4) is mute. But for those who have a big wad of cash with no exposure to real estate at all, it may not be a bad time, especially if the government is really able to get the long-term fixed rate down. 5.25% is not good enough, 4.25% will be very enticing.

kewp,

just theoretically speaking, not that I believe it will happen, hyperinflation or high inflation (15-30% a year) can absolutely hold up the nominal housing price, if not propping it up.

It is again based on your belief that the government is capable of releasing rampant inflation, I believe that they can, and they will.

Bernanke is not doing it right.

The whole problem of wasted $2 trillion so far is because they didn't stimulate from a bottom up approach, but it seems that Obama is getting it. You cannot just sprinkle the money to the banking system which will just distribute money among themselves. You need to sprinkle money through tax rebate, stimulus checks, government job creation, and FDR projects.

Inflation is also about expectation. The key here is get everyone to buy into the "vision" that things will get more expensive nominally, then people will not hoard money any more, making inflation or stagflation a self-fulfilling prophecy.

SP,

if you expect the inflation rate to be 30% a year for another say, 5 years, it will be a no brainer to buy a home now at 5% locked in rate. If I expect 100% inflation a year, I will max out my borrowing at every single bank to buy as many houses as possible at FIXED rate.

The problem for most of us is, we are not sure if inflation rate will run that high, and we are not sure how long it will last. Some are not even sure if the current deflation will be followed by inflation.

It is again based on your belief that the government is capable of releasing rampant inflation, I believe that they can, and they will.

They can't do that without a massive, fundamental change to our banking system. The paradox of our fractional reserve system is that the more the Fed prints, the more debt Americans take on and ultimately, the bigger the deflationary collapse when it ultimately hits.

It's pretty amazing when you think about it, but in the long term printing makes our currency stronger once deflationary pressures begin to manifest themselves.

Anyways, I only see two paths to hyper-inflation.

One, the government starts stimulating right from the printing press. Someone here had the idea that the Fed just circulate debit cards to everyone with a social security number and they just credit them as needed to stimulate the economy. Sad to say that's not too far fetched an idea.

Two, the dollar falls enough to cause a run on it and all our cash circulating abroad gets shipped back home. Again, not likely but not impossible either. Thank God the rest of the world is apparently more screwed up than we are (which really surprises me).

There is an interim solution that I actually like, where the Fed just socializes one large bank that issues low-interest loans (@ the Fed Funds rate) to citizens regardless of credit score. Defaults would be made up via the printing press.

Our currency cannot be stronger, because as our currency gets stronger, we will have to default, period, no other alternatives. We cannot pay our debt off as our currency stands today, if we do not print and devalue, default is the only option, and once we default, our currency is game over.

I don't like hyperinflation and don't believe in it. But I think the best scenario for us to have a soft landing is to have USD devalue 15-20% a year, which means we have a 15%-20% inflation (inflation not uniform across all sectors, some more, some less) each year for a period of, say, 10 years. So in the end, USD will have devalued to 20% of its current value, all problem solved. I believe that is the most likely plan of the government as well.

The only issue is how do we do this gradually and simmer USD bag holders like frog in a pot of lukewarm water, so that they don't get startled and jump out all at the same time.

I disagree.

Keep our currency strong, keep deflating overpriced assets, cut our federal spending and balance our budget.

Clinton did it, so will Obama.

See: http://zfacts.com/p/318.html

Reversing Dubay's tax cuts for the elite will go a long ways to solving this problem.

OO,

The bagholder frog has no choice. Who is going to dump their foreign reserves which are almost solely in USD ? And convert to what ? In the crowd of fiat currencies the USD stands tall.

All fiat currencies will devalue. Against food, energy and eventually real estate. Gold is also a likely beneficiary.

The problem is - now it's going to be much harder to preserve the buying power of current savings and future earnings. It's not that easy to store wealth in form of food and water. Real estate is still deflating. Energy will always remain tied to supply-demand and political whims.

Gold is a logical bet. But that doesn't mean much. The world is inherently irrational. Gold may remain stuck in this range and actually devalue against food.

Gone are the easy days when one could simply invest in FXE or FXA. I enjoyed the ride up on MERKX, got out in time. And now dabbling in GLD. But not as sure now as I was while putting money in other currencies.

# OO Says:
for those who have a big wad of cash with no exposure to real estate at all, it may not be a bad time, especially if the government is really able to get the long-term fixed rate down. 5.25% is not good enough, 4.25% will be very enticing.

You forgot one thing - for those with a big enough wad of cash, the how-much-a-month means nothing - no mortgage means no interest payment, so a lower rate does no good. In fact, it is all the more reason to want higher interest rate (ergo lower prices), so the wad-o-cash goes even farther.

Even if you needed a mortgage on top of the wad-of-cash down-payment, the equation is the same. I see your point about getting your wad-of-cash caught in a hyperinflationary currency-collapse situation, which is a risk. But there are _other_ ways of mitigating that risk than buying a house in a low interest-rate environment. IMO.

OO said:
if you expect the inflation rate to be 30% a year for another say, 5 years, it will be a no brainer to buy a home now at 5% locked in rate. If I expect 100% inflation a year, I will max out my borrowing at every single bank to buy as many houses as possible at FIXED rate.

I see the point in theory, but there are two counterpoints to that:
1. Even in an inflationary environment, will _housing_ inflate? Inflation in house prices has already run well ahead of wages and other supports, so it is possible that houses will tread water while everything else inflates.

2. There are other ways to protect against hyperinflation, than to put all your eggs into immobile assets like houses.

Again, just IMO, and probably biased by my personal circumstances. YMMV. NIA.

The whole recession, stimulus and rescue situation really is only about ONE matter:

***WHO is going to be assigned the losses caused by the falling asset prices, and WHEN are the losses going to be recognized.***

All the actions being taken at the public/government, corporate and personal level really are about this one matter. My statement may seem overly simplified, but the effective assignment and timing of loss recognition will have profound effect on who will be the haves and who will be the have-mores for many tens of years to come.

I wonder if Obama and his economic team thinks of the situation in this way.

justme,

they have already clearly answered that question.

Let's put it this way... who has footed the bill for all the bailout/stimulus? Who is being foreclosed upon? Who are losing jobs?

Now, on the other side of the coin...
Who is having lavish parties and trying to hide them? Who has to make a huge public announcement that their CEO is only going to recieve a $1 salary for the next 2 years because they were about to get mobbed?

And as for when, they have already made that clear as well. NOT NOW.

Fuzzy,

I'm not going to disagree with you all that much, Clearly much if what is going on is the stalling of the loss recognition and also re-distribution of the losses.

For now, the redistribution has mostly been at the expense of the taxpayers, and there is more to come if the inflation scenario plays out.

Recessions and depressions are all about who is going to pay for the party. It appears that it rarely is the people who held the party in the first place. I think the Great Depression of the 1930s was no different.

I think the Great Depression of the 1930s was no different.

At least the Wall Street types had the decency to take a swan-dive out of their penthouse offices.

I guess golden parachutes hadn't been invented yet?

Wall street employs hundreds of thousands of workers on work visas and off-shores many other jobs. IMO, any company that is receiving a taxpayer bailout should be required to eliminate all off-shoring and work visas and instead provide jobs to the very people who are bailing them out.

Inflation is absolutely NOT a possibility for years to come. The financial system is broken and might not be repairable. When inflation does start to return, it will be gradual and we'll have plenty of time to act.

Personally, I think every company that is getting a bailout should have all the management fired and their jobs re-opened with a 150k salary cap. I bet those positions would get filled in no time.

And hey, the new hires can't do any worse, can they?

It's downright insulting, that's what it is. And they get more outrageous by the day recently it seems. Combine this with rising unemployment, further home depreciation and higher taxes and I see a revolution in our future.

We cannot possibly go on deflation for more than 2 years. Next year our deficit will be more than a $T, without printing, nobody can buy that many Ts from us.

We are just kidding ourselves thinking that we can ever repay this debt even if there is NO interest. We are looking at a debt burden of $200K per household, without taking into consideration SS and Medicare at all! In deflation, the whole economy is going to contract and the debt servicing capacity of any government or individual entity will seriously deteriorate, which means USD collapse, which also means hyperinflation in USD terms.

If we want to avoid hyperinflation, the only solution is high inflation.

I don't have problem with the government bailout, I have a problem with them not doing it correctly. I don't want to see all the business shutting down in massive scale abruptly and crime rate going through the roof.

They should just start to send every family $100K, ok, perhaps $10K to begin with, all retailer coupons that will expire within 6 months, and adjust upwards later. Inject liquidity from bottom up.

Not sure whether this has been seen here. Interesting read. Gotta love that photo.

http://tinyurl.com/5s5w2b

"The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong."

They are "printing" as fast and as much as they possibly can right now. Money supply is through the roof in the past 2 months. However there isn't much (or any) traction. Debt destruction is also much greater. Deleveraging is just beginning and every action they've taken so far has only succeeded in slowing it down.

It's not until the de-leveraging is near complete that things can tilt to an inflationary slant.

I'm not saying it can't be two years. I find that unlikely though. Japan fought against deflation for over a decade and they were a much stronger country (economically speaking) going in than we are today.

Japan faces deflation again in the near future...

http://www.iht.com/articles/2008/11/25/business/yen.php

"Japan is facing the biggest threat of deflation among industrialized nations next year, the Organization for Economic Cooperation and Development predicted Tuesday, warning that the global financial crisis could further damage an economy already in recession."

No, the problem is not because they are not printing fast enough, it is because they are not printing at the right place, and it seems like they are getting message.

They cannot print at the top of the pyramid. They have to print at the bottom. Sending rebate checks, buying down the mortgage rate, they are moving in the right direction.

If the Fed can (not that I think it can do so without causing collapse of the USD right away) buy down the mortgage rate to 1%, we are back to 2003 right away, and deleveraging will stop.

It has to be a combination of rebate checks, government projects, and entitlement programs that are ONLY paid in coupons that expire within a short period of time. It will be more powerful if they can buy down the mortgage rate, if not, the above combination will work much more effectively than the alphabet soup lending programs.

I meant to say "credit destruction" rather than "debt destruction" above but both apply.

deflation,

Japan had savings, trading surplus, budgetary surplus and the government was NOT in debt in 1990, it was in fact the world's largest creditor. We are exactly the OPPOSITE of everything that Japan was in 1990.

We don't have two years. We may even collapse within 12 months. we just committed $800B this week, on top of the $500B deficit we have for FY2009. Who the hell is going to give us $1.3T?

OO, I think there is a flaw to your 1% thinking. That would work to fix prices in place today. However, unless the government guaranteed that 1% interest rate forever, eventually the rate would rise, putting downwards pressure on home prices. They can prolong the painkillers, but they can't cure the disease.