People are really stuck on the bubble prices. That goes for buyers and sellers.
OC Register had that article all about the happy new homeowners who bought foreclosures. The buyers kept yakking about how much "off" the previous price they bought their places. Sure, the prices they paid are lower than the older prices, but that doesn't mean much except the previous buyers overpaid by more. It's like a sale that induces you to buy something at 20% off. What the retailer doesn't tell you is that after the sale the new price will be 30% lower.
Yet these sales always seem to bring out the buyers.
Nobody's getting an $800k house for $600k. They're getting a $300k-$500k house for $600k that the previous owners paid $800k for.
I'll be an accidental landlord next year when I graduate from school. I paid 65K (20% down, 15 year fixed) for the house, but it's probably only about 45-50K. At the time of the purchase, I knew that I had overpaid, but I came from a city where even a dump was about $120K. I should have no problem renting b/c it's in a neighborhood where there are a plenty of long-term renters. I don't even mind losing about $150/month because the house will be paid off in "only" 12 years.
Even though I know a decent property manager, it still kind of sucks to have to deal with the rent. On the other hand, because the house is 1950s w/ solid brick with hardwood floors, the lowest replacement cost that State Farm would allow was 100K. Does anyone know if that's the value I get if it gets destroyed by a hurricane or something? Just asking...
I make my living in the property rental business. These 'accidental' landlords are idiots. One bad tenant can do thousands in damages. A slow month after month loss will eat you alive. These are th sort of people who will complain about $4 gas, but sit back and eat a $2000 per month loss on their rental. I wish there was a course in high school that covered basic business principles.
A little off topic -- Bay Area Bank of America in nice neighborhood had brand new cash counting machines for each teller. The clerk said they previously had only one for the whole branch. Apparantly they are expecting people to be either depositing or withdrawing cash involving a large number of bills, like in countries with hyper inflation. Whee!
The clerk at BoA was desperate to get me to buy a CD with my bank acount. She clutched my already counted cash in her fist while we had this discussion. Finally I persuaded her that no truly meant no. Pressure to get money out of FDIC accounts into CD's to boost earnings for the quarter? Seem to recall BoA has a high rate of brokered CD's, is something happening to them?
Meanwhile Wachovia did not have enough hundreds to cash my check for getting travel funds. It took them 15 minutes to scrounge up almost enough and then they gave me the rest in smaller bills.
I think Mr Valence is making a good call. It depends on a few unknown factors, but we can make some educated guesses.
He's spending about 1800/month (on the high end) on interest, insurance and taxes for his west orange house. He can surely rent out the house for this much. he can even probably get at least $2000 which gives him a little extra to cover vacant periods and capital depreciation )
And since his place in mahattan is probably at least 2500-3000/mo, his income is likely in the top 20% - and he would still be eligible for the home interest deduction, (i'm not entirely sure about this part) which is a substantial savings for him.
He has the cash flow and position to hold onto the home indefinitely. So he has the ability to hold on for price appreciation (which will inevitably occur if you time horizon is 10-20 years). In his particular case, it makes sense as part of a diversified investment scheme.
There is another very interesting article in tomorrow's NY Times real estate section. Unfortunately, it's a regional edition story and not posted online for a link.
It's about $2 million+ McMansions under construction in the exclusive surburb of Westport, CT that are being offered for sale at cut rate, half finished. The builders went bust. The article says there is little interest in them. Other builders won't touch them. If they sit unfinished for a winter, they start to rot. Most homeowners don't have the stomach for spending up to another half mil to finish them up in this market. Custom builders want premium rates to finish them up on contract for private buyers, because there's so many risks, like not having accurate blueprints.
The article is pretty negative on the idea of buying half-finished McMansions. Looks like the banks will get most of them and probably tear down many. But no orange groves in Westport.
Ran into this really interesting post over at the blog Credit Slips - relating part of the severity of the foreclosure rate to the bankruptcy 'reform' that passed in 2005...
Credit Cards and the Mortgage Meltdown
posted by Elizabeth Warren
The role of subprime lenders in inflating the housing bubble, then bringing down the whole economy has received plenty of headlines. But there has been little attention paid to the role of credit card lending and BAPCPA in the current home foreclosure crisis.
A new academic paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address. Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.
The house I rented from Aug '06 to Jul '07 would probably have sold for somewhere in the $510 range when we moved in, but the "accidental landlord" was holding out for the closer to $550 he thought it was worth. Similar houses are now going begging in the low-mid $400s.
The house we moved into in '07 was on the market at $530 or so but wasn't selling, so it went on the rental market. A nicer place down the street is currently at $475, the only places selling are in the low $400s.
That's two accidental landlords, whose properties have depreciated by more than I've paid them in rent while I've been there. But people don't think that way.
Three years ago, [Dr. Lorena Siqueira] bought as an investment a two-bedroom condominium on Brickell Key, a gated island in downtown Miami. I would rather take a loss on the rental and wait for the market to stabilize, Dr. Siqueira said.
Everyone who keeps paying on a mortgage when they are underwater is just helping to subsidize the rest of us.
Imagine the decimation if everyone who was underwater by say $50K told the bank to go screw...
Given compound interest, these people are conservatively throwing away $250K+ for their retirement. The poorer they are, the longer deflation lasts and the richer I am..
It's all relative.. You don't need to outrun the bear, but you do need to outrun your friend..
Get a "friend" and get comfy.. this will take years!
Tell that to the Japanese. Prices still haven't gotten back to the late 80's peak.
We aren't Japan... we don't save; we spend like drunken sailors... public, private and everything 'in between'.
As a result we are VERY likely to see nominal prices rebound a lot faster than the Japanese did... not overnight but faster than Japan... the question is will the opportunity cost of having that money tied up make the 'real loss' even worse. While houses might recover to nominal - other assets might explode in price... depends on just how much debt gets monetized via bailout & 'reform'.
My guess is a whole shit load of monetization occurs before this game is over. Fannie & Freddie are the warm up act.
Yeah, I have a client who owns a unit in a tower. But she can't walk away because this will affect other parts of her life. Apparently her family has loads of money and doesn't care.
I don't get it, except for the very important other issues.
I grew up in a tough neighborhood, and learned to watch my back. I was always skeptical of things. When my granddad told me that he was going to get a small pension, my first thought was why would the company do that? After all, he wasn't working for them anymore. I must have been 9 at the time.
I guess most people are just not lucky enough to grow up in tough neighborhoods!!!
We stayed in that neighborhood because my grandmother, who had inherited some money and ruled the roost, refused to move. Everybody else wanted to move, when she finally died, the house was sold for a pittance. It had a full basement, hardwood floors, and was really solidly built. It's still there tho a wreck. Built in the 1890s I believe.
The rationalizing of "accidental landlords" will be tragic when job loss occurs. They will have depleted their savings just when it is most needed. My heart goes out to them.
A lot depends on the cash flow of the rental too - if you own the place with little debt & it cashflows - who cares? I have a friend who owns seven places - all would have sold for 50% more two years ago than now... my buddy doesn't care as he owns them outright and easily cashflows. He has owned these properties through ups & downs & has no intention of selling them until he retires.
I'm guessing most of the 'accidental landlords' don't cashflow...
dryfly writes: While houses might recover to nominal - other assets might explode in price... depends on just how much debt gets monetized via bailout & 'reform'.
Which assets specifically? I'll save the comment so we can track your forecasts.
That's the new Paulson Plan. Bank failures every other week. Bank failures last week, bank failures next week, but never bank failures this week. And we have always been at war with Eastasia.
Mr. Paulson is not confident this plan will work, but Mr. Bush assures him it is foolproof. Mr. Bush has learned that the citizens can't remember little things like bank failures for a whole week, because they are born and bred American dopes.
I know at least three people--two here in Seattle and one in Miami--who are renting out places they couldn't sell. Also, a friend just started renting a condo from a real estate agent/flipper who can't sell the unit she bought. No question--there's a huge shadow inventory out there.
No decline in money supply equals deflation. Miami & condos equals decline in prices.
Miami condos don't control money supply - sovereign gov'ts do - ask Zimbabwe.
Same mistake deflationist EVERYWHERE make, confusing deflationary pressure (declining prices) with deflation (decline in actual money supply).
When I see the gov't tell fannie & freddie to take a hike instead of promising to backstop THEN I'll start believing deflation is possible.
Not until.
So which asset will go up? Who knows - right now anything commodity related is on a tear... in my part of the world farm land has gone up about 200% over the last 3-4 years. Yes - land that sold for about $2000 an acre is now going for about $6000.
Oh and there is a lot of it in my area of the 'world'... 500 miles by 500 miles area.
I can understand the desire to hang on to a house even when it may make no sense from a purely financial perspective. I've got a 100 year old house in AZ that's probably lost $100,000 in value. That leaves me at the break even point, maybe a little better. I know that it will depreciate further in the next few years, and that even if rent covers my PITI I'll still be out a bit of money every month to hang on to it. The thing is, I love the house and I'm moving to Ireland for 5 or 10 years and I want to have something I love to move back to. I figure 1 good day's pay as an IT contractor in Dublin should cover the monthly nut. Bad business decision? Sure. Sometimes with houses emotion really is more important than financial planning. Oh, it also helps that my family is in real estate and property management, so being a long distance (very long distance) landlord is both possible and essentially free.
My landlord is losing about $5,000 per month net of my rent. But he doesn't see because he thinks cash flow and not opportunity cost. It's likely that nominal real estate prices will go down for at least another 2 years and then flatten out for at least another 5, then rise with the rate of inflation. So a would be landlord should decide when in the future he will get the price he wants. Then discount that price by say 4% per year. If Mr. Vallance wants $400k and he thinks he will get it in 6 years, then he should put it on the market for $316k now. But he thinks he can get $340 so go for it, sell it now. Don't these people understand simple present value calculations? Answer: no.
I know your views on deflation well- I hope this blog's still kicking, awa them here participants, in 2012 so we can see whether consumer prices + assets (not inflation) have (1)increased at much higher rates, (2)increased/decreased at similar rates, (3)decreased at higher rates. I vote 3 Reasons? Higher savings rate + Aging Population + Overcapacity = Lower Consumption = Lower Prices
But he doesn't see because he thinks cash flow and not opportunity cost.
The thing about 'opportunity cost' is you do have to have another 'opportunity' that is better. If your landlord really IS running positive cashflow he quite likely IS better off hanging on to the place... then the NPV is not only a PV, FV & disc rate but all those 'monthly annuity' contributions as well (positive cashflow from your rent).
That is exactly why my buddy doesn't sell his rentals - he doesn't have opportunity, he doesn't understand anything else except dropping the money in a CD or MMF. He knows nothing about stocks, bonds, etc. But he knows how to fix plumbing, paint houses & quickly evict dead beats.
My guess is the accidentals don't know any of that - they'll learn the hard way.
No, Mr. A. Zarkov, most people don't understand present value calculations. Most people over the last thirty years have only experienced nominal price increases in real estate. (Even previous bubble crashes in the mid-seventies, early eighties, and early nineties were masked in nominal terms by the higher inflation of those years.) The remember their parents buying a house for 100,000 in 1974 and then selling the same place for $200,000 in 1987, and think their parents doubled their money.
This is what is meant as "conventional wisdom." Most people think the long term "reality" is that real estate only gets more expensive. Its going to take several years of agony to break this myth.
This is also one of the many problems with the housing bill working its way through Congress in that it tries to sustain and support that myth.
Inflation in the rest of the economy will eventually raise the nominal prices of these places to the point where the owner will feel "right" about selling it. It will probably not occur to them that $400,000 in 2013 will be less then the $340,000 they could received now in 2008.
Again - consumption isn't JUST big screens & trips to Orlando. Consumption is also military expenses, medical (like medicare), energy, food... etc.
You have to look at ALL consumption = private and public.
So you could see 'pre-retirees' & retirees cut back & increase savings and still see gov't via fiscal measures (say to monetize the liability embedded in SS & Medicare promises or rebuild the 'deterrent capability' of our armed forces) blow the doors off the money supply.
for me, its deflation ahead. Nothing takes care of high prices, like high prices. But those foreclosures remove plenty of money out of the system, permanently. If your in debt, your out of luck. Just my 1 cent.
Rebound to what? 2005 bubble prices, mid 90's or late 80's?
ron | Homepage | 07.19.08 - 11:42 pm | #
Oh I am certain we'll see nominal bubble prices again... How soon? What will they be in real 'inflation adjusted' terms? I have no idea.
A lot of that (I believe) will depend on how TPTB monetizes debt & resultant money supply creation. If they monetize quickly - we'll see those prices again quite soon. If not, then no where near as fast (and I sure hope that is the case).
But I doubt we have to wait 15 years to see bubble prices in nominal terms again. In real terms - we might never see 'bubble prices' again in our lifetime.
Although I think the ST outlook is bleak, I also think that that prices will come back sooner than some people think. Bubbles are hard to figure out (look at the antique furniture bubble in the 20s), but, necessities, like housing, are apt to bounce back quicker than old desks. Give it 15 years.
I'm about to become a accidental renter/house sitter to a family member. She bought at almost the peak for our market after cashing out on a starter home. I'm going to rent out my cash flow positive place and move into hers.
I keep hearing the same story over and over again. Usually there's a huge amount of unrented time, either from waiting for the market to go up, or not having any real plan to rent the place.
There are also the "accidentally evicted" when the "accidental landlord" gets "accidentally foreclosed on".
But the US is not printing a lot more money. The US Monetary base, as published by the St. Louis Fed (and by Barron's every week) is pretty flat--up 2% over the past year.
The US is to Zimbabwe is like the a thoroughbred is to a one-legged burro. Drawing similarities or probabilities between the two is humorous yet worthless.
There are so many ways to look at this. But what really strikes me is that we all seem to have just become "traders" in our mentality. Looking at averages and data points and losing sight of any intrinsic analysis of anything.
Housing prices are by necessity a function of the income available to purchase "housing" The government can tell you that "inflation" has gone up 10% a year but if incomes have not followed, I fail to see where the money is coming from to spend more on houses. Further is other expenses go up even more, what does that leave for buying "housing."
I am truly struggling with the inflation/deflation scenarios. The government can certainly pump up the money supply. We can see in Zimbabwe that that this creates "inflation" However, it seems to be some rule of thumb "inflation" increases, then housing should also "increase" but is that necessarily true? Certainly the costs associated with owning a house will increase. But will the demand then also increase? Obviously not. In fact, as the cost soars, the "demand" may actually fall because of the increased costs of ownership. That is the costs per square foot may skyrocket but the "value" of the asset may not budge because no one wants to buy bigger houses.
The value of an asset is determined by its ability to produce something of value. Inflation is not like some magic sea that lifts all boats. It has an impact on asset values as costs render certain assets less productive and profitable.
Likewise, there is certainly no guarantee that "inflation" will likewise give everyone more money in terms of higher wages. What if it is all concentrated?
What if all the increase in the money supply is because banks trade tulips back and forth with each other at astronomical prices? I guess that is "inflation" at work. But what if that also means no money for the rest of us to use? Wouldn't that be "deflation"
What about the increase in interest rates that will inevitably occur if true "inflation" finally takes hold? What then for asset prices?
So many questions. I understand all of the concepts but I just am not sure how this all works. While the broader concepts do have validity it seems that the markets can work in mysterious ways to shuffle money to different areas. (the "bubbles").
It all seems fraught with the possibility of unintended consequences Worse. It all seems to move based upon ill defined sentiments. One day tech stocks, the next day housing, after that who knows. It would be easier if the money flowing into the system really did spread itself evenly. But that does not seem to be the case.
The problem is that each wave of money flows brings a wave of over-investment in the "bubble" asset class which only ends in a deflationary spiral later on. Instead of promoting true "investment" in productive capacity, it becomes almost an utter waste of capital. Which would not be as horrible if it were not tied to the inevitable debt that fueled it. It eaves the debt without creating any productive item to repay it.
I need to look at this more carefully, but it certainly seems that with the debt "explosion" much of the increase on money "supply" merely reflects the debt. Once these "assets" get destroyed, it would seem that the "inflationary" trends should turn into a deflationary spiral. After all, if everyone is saddled with debt that cannot really be repaid, what fuels the inflation? (unless there is more debt allowed).
El Cliffo writes:
But the US is not printing a lot more money. The US Monetary base, as published by the St. Louis Fed (and by Barron's every week) is pretty flat--up 2% over the past year.
El Cliffo | 07.20.08 - 12:15 am | #
Not yet - just wait.
Consider all those dollar 'assets' offshore in SWFs... all those future liabilities waiting to get monetized.
I agree - we don't HAVE to have inflation but we will have it. We won't have the political will to tell the young they have to pay for the old nor the will to tell the old to die. So we'll print money & let 'God sort it out'.
Seriously.
Add that same kind of reasoning across the board - bailing GSEs, rebuilding infrastructure, single payer medical costs, military 'rebuilding', etc.
It is so easy to just print a little more & a little more after that. And all those so called restrictions on 'borrowing against good collateral'... well we're seeing how those held up. Sure TOMOs counter act - wait 'till GDP goes neg to see how long that lasts.
It is possible we'll have another Volcker someday and let him do his job - but I doubt we see him until we are WAY past NASDAQ 5000 and nominal bubble RE prices.
I'm with dry- just pay attention for five minutes to our former Comptroller and you understand it will be inflation.
Real value will be lost in house prices, but the value of the money used to pay back that debt will be much less than it was when the money was lent.
If you have long term fixed rate financing, and you can leg through this downturn you will win big time on the other side as inflation rips the value of a dollar.
However, it seems to be some rule of thumb "inflation" increases, then housing should also "increase" but is that necessarily true? Certainly the costs associated with owning a house will increase. But will the demand then also increase?
Prices would increase but not necessarily REAL prices & not necessarily as fast as other 'stuff'. So the house may reach the bubble price in nominal terms but still be below replacement cost (considering the inflated cost of inputs at that time).
That is why trying to game this thing real vs nominal is so difficult. It really is about the money supply vs the inventory of 'stuff' available to buy with that money supply and BOTH the supply of stuff & the supply of money are variable & dynamic.
I'm as big as a bear of housing as anyone on this blog, but, I also understand long term population growth will fuel demand for housing. Those who don't understand infrastructure limits, building fees, and development costs will never understand the cost of new construction. Right now all those are too high, but, as LT demand comes back, the price of new homes (and existing) will increase accordingly.
Elvis writes:
The US is to Zimbabwe is like the a thoroughbred is to a one-legged burro. Drawing similarities or probabilities between the two is humorous yet worthless.
Elvis | 07.20.08 - 12:19 am | #
Agreed - but the point is if anyone thinks a gov't can't print faster than the speed of debt - all they have to do is look at the Big Z to see that isn't categorically true.
The Fed prints money, but every dollar is offset by a corresponding dollar of debt issued by the Treasury. The Treasury, I believe, last printed money directly in the early 60s--those United States Notes with the red seal.
I'm not sure how extreme, but directionally -- yea.
By the way, shouldn't decreasing housing prices lower imputed rents and thus the cost of housing? And shouldn't this moderate the cost of living?
Ziggurat | 07.20.08 - 12:35 am | #
Sure. It isn't going to be all stone soup.
BTW - even though I give the deflationists crap... I give them credit on one major point... the deflationary pressure from this debt destruction is really severe - they got that right for sure... my only bone to pick with them is that money supply pumping is so damned easy in a fiat system I have little doubt but that the end result will be inflation (more money than stuff to buy with the money).
There's a term absent from this discussion: velocity of money. It explains why nominal GDP can barely hang on to a 4 handle, despite 2% FF and 300billion $ fiscal gifts. So then in dryfly's reasoning Gov't will carry nearly all the velocity. He figures Gov't'll bypass sending us checks and just spend it on foreign made crap and minimum wage services while we're sleeping. Gov't'll go to the movies for us and buy our next Chevy. Gov't'll bid up NASDAQ and houses between itself. Why not? It's perfectly logical.
El Cliffo writes:
The Fed prints money, but every dollar is offset by a corresponding dollar of debt issued by the Treasury. The Treasury, I believe, last printed money directly in the early 60s--those United States Notes with the red seal.
El Cliffo | 07.20.08 - 12:43 am | #
Then let the treasury issue more debt. And more debt after that - and stash it in 'lock boxes' for 100 years like social security.
Explain to me PHYSICALLY - as in laws of nature - why gov't can't print more fiat. There isn't any - it is all based on laws & gov't self-discipline and both can change at the stroke of a pen.
There's a term absent from this discussion: velocity of money. It explains why nominal GDP can barely hang on to a 4 handle, despite 2% FF and 300billion $ fiscal gifts. So then in dryfly's reasoning Gov't will carry nearly all the velocity. He figures Gov't'll bypass sending us checks and just spend it on foreign made crap and minimum wage services while we're sleeping. Gov't'll go to the movies for us and buy our next Chevy. Gov't'll bid up NASDAQ and houses between itself. Why not? It's perfectly logical.
Anoy - did you know that during the latter part of WWII that one seventh of all the power produced in the US was used to power the Manhattan Project alone? Not talking other defense projects included but Manhattan alone? Towns blew up from nothing to 100K in the middle of nowhere almost overnight.
Read Rhodes - 'The Making of the Atomic Bomb'.
Gov't can increase money supply velocity - believe me - if they so decide.
Huh? Have you guys actually figured out what is money and what isn't?
I think we're going to have expand our definition, because in addition to bank deposits and bills in circulation and cd's and repo's and eurodollars, people are beginning to barter more and more.
Cliffo: if you limit the definition of what money is, then you can tell your citizens that the supply is stable or even declining. If you don't then the sky's the limit. But we do.
dryfly, you seem to propounding the Bernanke helicopter theory, which he borrowed from Friedman. The problem is that, once we get off campus and into the real world, people eventually stop playing along. They demand much higher interest rates. They buy gold and silver.
For that matter, why can't the Federal government simply declare that the $10 trillion national debt will be paid off immediately with printed money, instead of borrowing it? But they don't. They borrow.
Antidotal evidence provided by the those two 'sit tight' sellers suggest that they have no concept of the dynamics of a housing cycle. The chart accompanying the "A Housing Cartoon from 1993" says it all. In LA (and here in New England) a housing boom peaked in late 1989/early 1990 - as clearly shown on that chart. Note that it took close to 6 years to bottom and another 5 years before prices approached those of the boom peak. Aiding the recovery was the leading edge of the current housing bubble along with low interest rates - without those factors I suspect that the cycle would have been somewhat protracted. I see no reason to expect housing prices to recover to the bubble highs of the past few years in less time than the previous cycle. In fact in contrast with the past cycle we see tightening lending standards and higher interest rates (along with housing over supply) coming into play. Therefore I would expect a slower recovery...
Bonzai,
You are right but don't you account for human psychology. I suspect MI land will continue to suffer but LT markets like Phoenix, Las Vegas (yes), and CA, will bounce back much quicker than a lot of the real housing bears think. Fear to greed.
A nony non: My wife works to support my blogging so I feel like it's the right thing to do. That plus she's a REALLY bad cook. I think she does it on purpose.
For that matter, why can't the Federal government simply declare that the $10 trillion national debt will be paid off immediately with printed money, instead of borrowing it? But they don't. They borrow.
Or they could just default - the result would be the same - the gov't would have to go pay-go because NOBODY would lend to them.
But the funny thing is do it slow enough and you get away with it for a real long time... and in the minds of men a 'long time' is equal to 'forever'.
Friedman was right - he was also terrified by the thought and rightfully so. The only defense of fiat money is a disciplined central bank and treasury. With deflationary pressure they don't even have to be that disciplined... its a get out of jail free pass for them to print... while the deflationary pressures last, it won't last forever.
First, don't call it a hedge fund. Call it a fund. Secondly, be careful. 1 in 300 know the right time to buy. Buying on the downswing is dangerous even at a 70% discount.
Mistah Bonsai - you are more optimistic than I am as that chart is in REAL terms. I'm guessing it will take something like 10 years to get to NOMINAL bubble prices... I'm not sure if we'll see a peak like this in REAL terms again in our lifetime.
That is exactly why my buddy doesn't sell his rentals - he doesn't have opportunity, he doesn't understand anything else except dropping the money in a CD or MMF. He knows nothing about stocks, bonds, etc. But he knows how to fix plumbing, paint houses & quickly evict dead beats.
Don't forget taxes and recapture on depreciation. When my partner got a look at the potential tax bill after our first sale (accidental, someone made us an offer we gladly took) we had a crash course on 1031 exchanges. We ended up buying some property in a hurry in San Diego that we didn't want, but luckily sold into a still rising market and got property we did want,...on Oahu. That's where my partner is planning on moving to in about five years.
He is well aware of that - he almost sold a couple rentals at the peak two years ago but decided not to due to the tax bill. The 'annuity' of having steady income from rents makes more sense for him now - at some point he'll sell, or his heirs will, but not now.
trust fund,
Remember, the best advice is not to worry about LT capital gains tax if you can make a profit now. (Despite what your investment advisor would say.)
Future value is what gets me excited, i.e, one needs a few stars to align properly, e.g, one needs an agreed upon material-like thing, like a camera, car, metal, bead, house, land, etc -- by agreed upon, we need to set up arms-length information in regard to basic value and agree upon a basic starting point.
From there, we negotiate quality, supply, demand, and other stuff... I can't focus..I'm going blind .. ahhwahljgh;fr3;ogu i1g5 i
I have some sympathy here, as an accidental landlord. Paid $135 in 2002 for a 3bed/2bath in Alexandria, VA. At one point, it was theoretically up to $320k in 2006.
Currently there are 13 units identical to mine on the market for $183 to $250k. Most are bank owned.
I need $160k to walk away clean- and I would do it in a heart beat. Or even $150. However.
NOBODY IS BUYING.
At any price in the building.
So I'm going to lose $200 a month renting it out. Or I lose $2000 a month trying to sell it, with it being on the market for roughly forever.
I moved to the mid-west for an employer relocation, and am happily renting an apartment for $950 a month including heat. People keep asking me why i didn't buy in new midwestern city.
You can hear my laughter back in DC.
But I got a managment company, and I pay them $ to make the headaches of landlording- which I don't want to do, go away.
No, I'm not Elvis, Elvis is a character which belongs to someone else. This would be hard to prove and I see your point, but I have a much different writing style which is somewhat like Ernest hemmingway and a touch of that dead guy in Aspen (not Ken lay) ... hmmm not wolfe, ahhh, Fear and Loathing...
You see, no way to prove which is which. This is like when Spock lost his brain and then was placed on a device which spun him in circles, no that was Kirk, but same thing, e.g:
I'm not Dr. Vacation, But I wish my doctor would prescribe
No, I'm not Elvis, Elvis is a character which belongs to someone else
I find that when someone wants to compare their writing to an icon (whether it deserves an icon status or not), they think way too highly of themselves and deserve to be mocked relentlessly.
No More Games. No More Bombs. No More Walking. No More Fun. No More Swimming. 67. That is 17 years past 50. 17 more than I needed or wanted. Boring. I am always bitchy. No Fun for anybody. 67. You are getting Greedy. Act your old age. Relax This won't hurt
Funny, I am a landlord and almost became an accidental landlord. Since there was no way to buy a cashflow rental in San Diego county, we got the bright idea to build a spec home. No one would even look at it, didn't matter what the price was. Then something happened and a couple different offers came in, they fell through, no financing. We thought we were going to rent it out to cover the carrying cost but luckily we got an offer, for a greater than 30K loss to us. We sold. I never thought I'd be so happy to take a loss.
Hunter S. Thompson was a drunk and a thug (in his younger years). I appreciate his writing, but, I cannot worship his life. I don't get why people worship cultural icons. Except for the fat, stoned 70s Elvis jumpsuit wearing man.
Paid $135 in 2002 for a 3bed/2bath in Alexandria, VA. At one point, it was theoretically up to $320k in 2006.
My sister also bought a 3/2 hometown in Alexandria in 2002 for $135K. In 2004, she sold it for about $280K when she was relocated to Atlanta. At the time, she hated the relocation; now, she doesn't mind so much.
Thoughts:
Can't have true inflation, without increase in wages.
We are not like Japan, when times are bad we layoff workers.
Southern California Real Estate:
In Past downturns Condo's faired worst - as much as 90% down.
The larger the home the lower the price/sq ft.
Also much smaller premium difference from good to bad area's.
IMHO the goverment keeps tossing billions away at symptoms of problem and hopes everything will get better.
Instead we are now in danger of spiraling down. Companies lay off, so ppl buy less, so companies lay off more... This is how the great depression occured.
It can cost the goverment over 1 trillion dollars to save Fannie Mae and Freddie Mac.
Indy Mac failed and it had 30 Billion in assests.
Other Large Banks in trouble:
Washington Mutual: 300 Billion
Wachovia: 600 Billio
dryfly writes:
Mistah Bonsai - you are more optimistic than I am as that chart is in REAL terms....
Seeing as how you bring that up..well..yeah that's what I was thinking but didn't wanna be accused of being a 'gloom and doomer'. Therefore I relied on history minus speculation. The 2006 peak went well beyond any previous housing booms in terms of short term 'appreciation'. I seriously doubt that the financial (and emotional) conditions that drove it will be coming back anytime soon (within a few generations assuming that we make it through the current crisis financially intact). Bottom line is that if those folks (and those like 'em) believe that they will need to sell within the next 7 years or so they should jump in while the market is still hot.
FWIW: My assessment is not based solely on charts - I unfortunately earned 'the tee shirt' to back up my claim. You see I contracted a new custom built (rather lavish) contemporary home in a prime location in very desirable neighborhood back in December 1989. Price was no object... I sold in June 1999 for a 25% loss over the initial purchase price. And that was after meticulously replacing any split clad boards, detailed repaint/stain, driveway sealing, etc prior to placing it on the market.
Can't have true inflation, without increase in wages.
In aggregate that is probably true - incomes and wages in aggregate would likely rise with money supply - though not sure there is a natural law physically requiring both universally across the board.
But even then that isn't to say that 90% of the population could have flat or even declining wages and the remaining 10% capture all the growth in money supply to more than make up for it. That is after all how banana republics 'inflate'.
People create all these conditions just because it happened before and then say it has to happen that way again - big mistake. Keep the concepts separate - money supply growth from isolated price increases. There are correlations but not necessarily universal causation.
Wars are good for the economy. I expect Israel to bomb Iran at some point - What a mess that will make!
But, there is no way that Israel will allow Iran to have the bomb.
Dryfly, babe, love your work, but you are giving 'way too much credit to the political classes.
I do not think we have any politicians currently in leadership positions who have the nerve or the foresight to start any type of project that will turn out to be a reasonably efficient money transmission mechanism on the scale you are talking about. Even if they give us $600 every three months, that's less than one month's mortgage payment for the folks in trouble. The government will definitely not start a project to build anything useful on the scale necessary to keep things moving.
I see deflation outstripping inflation for at least the next 18 months, and then the Republicans will succeed in blaming the Democrats for things getting worse, and then we will have divided government until they can figure out a way to impeach Obama. Etcetera, etcetera, etcetera.
FWIW, my grandmother just got her settlement check for my grandfather's cancer caused by working up at Hanford. He died in 1974. Before he died he said he considered himself pretty lucky compared to the guys who got killed in the war. Different mind set among all classes of society.
In southern cal about 50% of the market is foreclosure. A lot of the ppl buying are still buying to flip and if they can't flip then rent it out.
As a recession drags on this will put pressure on rents to go down.
In Orange County houses could fall 50% from now just to get to current 150 times rent. There will be many houses that dropped more than 80% of value before this is over.
If the Fannie & Freddie eventually fail, the run on the $ can easily cause an inflation scenario of upwards of 10% p.a. (Inflation during 1970s was much higher in less severe economic conditions - we were not TOTALLY dependent on imported capital for consumption). Those idiots may come out ahead if real value of $ drops by 50% in 5 years.
albrt,
Problem is politicians are more concerned about getting re-elected than solving the problem. Its easier to toss a few hundred billion at a symtom and make it look like your really doing something.
"Can't have true inflation, without increase in wages."
Not True; True inflation, mainly due to imported goods & services, combined with stagnant or falling real wages is the ONLY way we as a nation become poor enough to become competitive in the new economic order where we are capital poor.
Keep the concepts separate - money supply growth from isolated price increases. There are correlations but not necessarily universal causation.
If we can't determine how much of the rise in energy + food results from global S/D, then using CPI as a measure of inflation is pointless. Fed tightening would strengthen the dollar, but dissuade lending.
This is like a perversion of the early part of the decade, when low cost manufacturing in China kept the CPI artificially low, therefore not giving any reason for the Fed to tighten.
Mr. Vallance charges $1,900 a month to rent his house; the tenants also pay for utilities and water. Still, the rent covers just 90 percent of his monthly expenses, and so he expects to write off any losses on his tax return, along with expenses associated with the property.
While tax deductions are an advantage of being a landlord,...
So we have a tax system where taxpayers pay for other people's stupidity/their personal decisions about how much money they want to lose. You could not make this stuff up.
That run in with Elvis -- it reminded me of the Bjork video @ the airport -- same deal with Elvis and me; which is why I don't fly these days... too much uncertainty! Did we go over The Uncertainty Principal? I think not, but it is related to Brownian Motion and airports, to be sure!
Hmmm, Im not sure if Mr. Vallance can deduct his loss. I have been meaning to look this up.
Isn't this a passive loss - so he needs a passive gain to offset the loss.
I know when you sell a house you are taxed on the gain, but can not deduct the loss.
I thought rental income was passive income. I expect you could carry over passive loses to the next year.
I see deflation outstripping inflation for at least the next 18 months.
I agree with that - but inflation is like a flood, the water just keeps rising as long as the money's raining.
I do agree gridlock could tip the balance in favor of the deflationary pressures longer - that would just ensure a real nasty backlash mid-term and some SERIOUS monetary stimulus (tax cuts and programs)... but regardless of party the flood will eventually win.
BTW - on Hanford, a good friend of mine was on the clean up there... and Rocky Flats, and Los Alamos, and Savanna River and now is back at Oak Ridge.
I myself was recruited out of college to work at Savanna but turned them down - just didn't want to do it not that I was morally superior. My buddy who later went in to be part of the clean up said it was the smartest thing I ever did staying out of that place. My sincere sympathies to your family.
argento,
Thanks, Its about what i thought.
So the way I understand it:
If i hire a company to manage the property then I am not actively partipating so I can't deduct from my my income.
If I am the Landlord I may be able to deduct upto $25,000 max depending on my income. $25,000 if modified AGI is less than $100k - phased out..
no deduction if modified AGI > 150k.
What has happened over the past several years has very little to do with inflation/deflation, and the fact that so many people see it this way is astounding.
The point about Zimbabwe is (1) deflationist camp say deflation is inevitable, that gov't CAN'T print enough money to over come current deflationary pressures (2) rebuttal is to look at Zimbabwe for what a gov't can do when it wants to print money. Not saying Z is doing beacon of light but it does castrate argument that deflation is inevitable. In a fiat system gov't can print & print.
"Can't have true inflation, without increase in wages."
Well, we have for the past several years... fueled by an easy credit explosion. But in a world where credit is controlled and priced for risk you are 100% correct.
We are going to suffer a haircut to standard of living as inflation for consumer goods and staples devastates the bottom 80% of income earners.
Fiat is a wierd word. "Let it be done" A decree. The latin for "let there be light" is "fiat lux."
Having a fiat currency means that you are legally obligated to accept payment in that currency. I wonder if this will be an issue as its value drops. Has anyone gone to jail yet for refusing to accept payment in dollars?
As a kid I visited Zimbabwe. Upon arrival at our hotel, I saw a large portrait of the the president. In large letters at the bottom was written: His Excellency, President Banana. I started laughing so hard It hurt. I was shushed by the very nervous desk clerk. He informed me that they had made it illegal in Zimbabwe to laugh at the President's name.
They also confiscated my Kruggerands. We had come from S. Africa. Upon arrival the customs people informed me that I was not allowed to bring S. African gold into the country. They confiscated it and told me I'd get it back when I left. But when I left they said they couldn't find it.
Sorry, from an old thread, but my service has been spotty.
A rise on diesel taxes would be a death knell to every O&O truck driver, they're getting killed as it is.
I know a guy who is a manager at Swift who used to drive a rig and tries to explain to drivers that they'll make more money as a contract driver than an O&O(no insurance, discounted fuel, but most of them don't want to hear it. And Swift thanks their LDS gods every day that they don't listen.
Most of these ham n eggers view it as the first rung on the american dream being an O&O, next they'll have 2 rigs, then they'll be as big as Swift.
Thanks Argento. Will look into the law(s) tomorrow. Here's something to chew on as we drift off to a sleep:
"there is no such thing as fiat money, that governments can create fiat currency, but that the amount of money is determined by the valuation of the market place, and that attempts to create fiat currency beyond the demand for money generate inflation. In the words of Keynes, Money doesnt matter, meaning that control of the money supply beyond limited boundaries will be adjusted for in the marketplace"
(some shadowy wikipedia author)
"Its easier to toss a few hundred billion at a symptom and make it look like you're really doing something."
My point is that we do not currently have a politician in a leadership position who is capable of designing a "few hundred billion" project that would actually transmit the money into the real economy in a productive manner that results in a multiplier, and would also get passed by congress. Giving or lending a few hundred billions to insolvent entities so they can appear solvent doesn't get the job done. Maybe Obama can come up with a program, maybe he can't.
Dryfly, thanks. It's a long time ago and I would be inclined to take him at his word as to how he felt about it. To most of the rest of the family it's just money at this point, to pay for the care of my grandmother who has no idea what's going on.
But we still aren't done paying for the Manhattan Project yet, and we are not in a very good political position to get anything productive done this time around. I am not at all confident that the U.S. government can even implement an effective "print" order. Then they have to find a national guard unit with functioning helicopters that aren't busy surging in Iraq, they have to get the helicopters to a target location where people who will actually spend the money will grab it out of the sky faster than the bankers who are trying to shore up their balance sheets, etcetera, etcetera, etcetera.
Once deflation gets a head start, inflation has a hard time catching up. At that point they can make the currency worthless, but they can't necessarily get the economy going again so that there is a buyer for your house who can pay an acceptable price denominated in something you want.
agree that "Inflation is anywhere and everywhere a monetary phenomenon." - but i think it's also fair to assume that the US govt doesn't go completely off the rails too. Which leaves them desperate trying to control a system nobody truely understands, and which arguably defies control in any case.
Imho, the debt impact on the money supply has already occurred to a large extent, and we're now into the cascading de-leveraging part of the problem. Even if the government did turn on the printing presses, the problem would then become a systemic conflict between the effects of generalised inflation, versus the effects of asset inflation - which would be messy. Entertaining no doubt, but messy.
Inflation in the rest of the economy will eventually raise the nominal prices of these places
Only wage inflation supports house prices. Consumer price inflation without wage inflation is negative for house prices.
By the way, shouldn't decreasing housing prices lower imputed rents
No.Imputed rent is what a house would rent for on the open market. It has nothing to do with the market price of the house.
Rents are falling in some of the areas with major busts,such as Phoenix and Florida, but that's due to an oversupply of rentals, not declining house prices.
"Owners should analyze the rent or sell decision based on current prices"
I highly recommend Dan Ariely's book "Predictably Irrational" (the chapter titled "The Fallacy of Supply and demand") to understand why this is so hard for so many to do (for both buyers and sellers).
Simply put, people got used to prices being high and even made rationalizations for it..."this area is being bought up by rich baby boomers", "this area will never be affordable again", "houses just cost that much". The new, higher prices became 'anchored' in their minds as the "reasonable" price of a house...and once that's set, it's hard (even PAINFUL) for them to take a price 20%, 30%, 40% less than that "reasonable" price.
We are now seeing a phase where house prices will be "re-anchored" at lower prices as the pain of actual financial loss (negative cash flow, foreclosure, etc.) trumps the psychological pain of reducing selling prices (aka "I don't just want to give the house away!").
I'm seeing Sarasota's rents beginning to fall in distant suburbs and bedroom communities, though I too would have expected this long before now.
We have a number of luxury towers at or near completion which I'm watching with interest but, so far, no Biscayne Boulevard prices - either purchase or rental.
"If your rental property shows a loss for the year (when you figure your property's income and expenses), you may be able to deduct this loss on your tax return. If your adjusted gross income is less than $100,000 and you actively participate in managing the property, you're allowed to deduct your losses on operating rental real estate up to $25,000 per year. Limited partnerships and properties in which you own less than 10 percent are excluded.
If you make more than $100,000 per year, you start to lose these write-offs. At an income of $150,000 or more, you can't deduct rental real estate losses from your other income. People in the real estate business (for example, agents and developers) who work more than 750 hours per year in the industry may not be subject to these rules."
Seriously. It directly affects what I do all day and my bottom line and not in a good way.
Some areas are more horrific than others. The towers will eventually be lost for failure to pay taxes, some sooner than others. That is years down the line.
We could have a hurricane and get a lot of destruction, but I doubt that the insurers will pay.
The best possible scenarios is if fuel oil gets so expensive we will get okies from the frozen north who can't afford to live there any more. But house prices would have to seriously drop for those people to afford it. I suppose they could go to C.C. where I understand capitulation is happening. I don't thing capitulation will happen for single family for another year. In the meantime, nobody is lending, so even if you reduce your sale price drastically, you can't sell. For people with low mtges, eventually the buyers will "illegally" assume the mtg, the due on sale clause be damned. If the banks have any brains, they will ignore this breach, and accept the stream of income. Or, if they are lazy, a more reasonable hypothesis. Also, people with paid off mtges are gonna have to finance the transactions themselves.
I don't see loans happening here for institutional lenders in any quantity for years no matter what happens to Fannie & Freddie.
If prices get low enough and rates go high enough, you might get some hard equity lenders here in enough quantity to form a bottom.
others believe as you do, and I am one of them. First we get monetary deflation, and then monetary inflation
itulip has a similar theory about this that they call "Ka-POOM"
we are in the deflationary (or disinflationary) period now. by this, I mean that we have credit destruction that is overwhelming the paltry monetary creation.
Yes, prices of SOME THINGS are going up (food, gold, necessities) but many other things are going down (houses, cars)
if the govt "prints" then we get POOM, or an explosion of inflation. I agree with you and am worried about this. (not to put words in your mouth)
another way to get explosion of inflation is if we get dollar repatriation from other central banks.
I suspect MI land will continue to suffer but LT markets like Phoenix, Las Vegas (yes), and CA, will bounce back much quicker than a lot of the real housing bears think. Fear to greed."
California maybe, but I doubt Phoenix/LV will bounce back too quickly.
if one believes that energy going forward will be a problem, then Phoenix/LV are some of the worst places to move to. High high energy costs (cooling) coupled with an overly suburban environment do not bode well for those two cities. Granted, they'll do better than OH and MI, but they will still fare poorly.
same with florida. Why would midwesterners move there? there are few good jobs down there. FL and AZ and NV are places you move to retire. my suspicion is that they will revert to what they once were: low cost places where people can retire. key word: low cost.
so yeah, heating will kill a lot of northerners... but it's the slow bleed... no way they're going to be able to sell their house and then move to an area that costs 2-3-4x as much for a job that pays less. besides: a lot of northerners will do what they've always done when heating oil gets expensive: wear sweaters and build a fire.
I think people in LV/Phoenix and SoFl started to believe their koolaid just a little too much. even now they have this idea that tons of people will flock there. during the boom times, people saw RE going up quickly and assumed it's because people wanted to move there. The higher it went, the more that people did want to live there. But now with prices falling it will cause a negative feedback loop, at least for a while.
the people who moved to LV/Phoenix were primarilly from california and the californians need to save their own RE, they're not saving anybody else. And the midwesterners can't sell their current houses to move down there
it'll be rough for Phoenix/LV. but I'm' ok with that, there is no reason why we should be building cities there anyway.
Yes, prices of SOME THINGS are going up (food, gold, necessities) but many other things are going down (houses, cars)
But the cost of manufactured goods cannot drop below the cost of making them. There is only so much the price can go down. Because of the short product lifetime the market price cannot drop below cost of manufacturing for any significant period. And the cost of inputs to manufacturing are mostly globally priced and the products are sold globally. You are not going to get a cheaper BMW if someone in Saudi or Russia is willing to pay more for it.
Houses have no such floor. Remember that land cost is completely endogenous - it will drop all the way down to zero as the market price of the house declines. Labor and material costs for housing are also highly endogenous. And the market is local.
The people in the article are clueless but what can you expect? It takes a long time to reach capitulation.
My brother in law bought a house to live in in Naples, FL in 2003 for $280,000 in a new development of cookie cutter houses in a bad school district. He like everyone in Naples was starstruck by real estate at the time.
At the peak there were several homes in the 800 house development that did sell for in excess of $500,000 and he thought he had struck it rich. He put it in the market in 2005 for $550,000 and let it sit there for over two years.
Even after two years of not selling he was bragging about his "500 thousand dollar house" when I would go down to visit. Totally clueless.
The last update I got is that the neighborhood is now loaded with foreclosures with the next door neighbor having just listed his house for $240,000. My brother in law put it on craigslist for what they paid for it and will not be able to even get out with that.
It took three years for him to reach the stage of total capitulation and lower the price. His mortgage payment reset in March 2008 and they are barely hanging on since his overtime was cut due to the Florida near depression like conditions in his area.
my statement is not incongruous to yours. I stated that house prices are going down.
that said: I disagree with your argument. the price of manufactured goods is often lower than the price in producing them. and this can persist for some time.
It happens especially when we have a "subsidy". for instance; The US Govt subsidizes US farmers to make a crop. the farmers then sell said crop for LESS than the cost of production, flooding the world market with that crop dropping its price.
nobody wants to be completely dependent on imports for FOOD, so almost every government subsidizes this.
right now, many countries are subsidizing oil as well.
the list goes on and on. thus, your calculation is in error. a product can be sold indefinitely at a price below it's cost to make so long as it has a subsidy.
houses can obviously have a price subsidy as well.
A penny is now worth two cents and here is mine on inflation deflation. Think of it as becoming poor. The stuff you can sell ain't worth squat and the stuff you need is worth a lot of squat. The ultimate question will be if we are going to see declining levels of food production. It takes what one farmer to feed 130 people in the US and if that starts going down we have a great deal of adjsutment to do.
tg:
the US has a lot of problems. we could likely see depression-like circumstances.
however, I also believe that we will pull through "ok". during our depression we will live better than 90% of "boom-time" Chinese peoples.
there are so many natural resources here in our country that we could fare quite well...
the way I envision a worst case scenario:
we hyperinflate or default on our debt or whatever.
Interest rates thus skyrocket. We go into massive depression. lots of job losses etc. energy costs soar.
due to this, we start making hard choices. We start using more wood and coal for fuel. price to us= cheap in terms of $$$ but high in terms of pollution.
price of imported food skyrockets. Thus our agribusiness explodes.
we have to rework our infrastructure because the car-centered city will no longer be tenable. thus massive public works must be done tearing down SFHs and putting up the Parisian-stle of urban density (5-6 stories tall, business on first floors, central markets and gardens, etc)
a lot of people out of work=a lot more workers for agriculture and coal/lumber and infrastructure products.
everybody works for less, and more hours. a lot of these enterprises would be nationalized. so nationalized food, nationalized energy, etc... it is possible that the rich will abscond with this national wealth, but I believe that if we truly get to this point that we will have the rich's heads on spikes if they try to export food to the rich countries around the world while US citizens starve.
Dryfly, half the things you say are gibberish, full stop. You certainly wouldn't qualify as even a Jr. Analyst at my fund.
The poster who called you out by citing opportunity cost is absolutely right.
My current landlord could easily have sold the house I am in today for $2.5m+ and put the money in fixed income. Instead he thinks he's getting a deal from the $80,000 per year of rent he gets from me and from there you have to subtract $2,000 per month of property tax and $1000 per month of maintenance CAPEX.
The "alternative" investment in the boom years and even today is bonds, which in many places still yield higher than rents.
Furthermore, printing works only so far as it can stimulate the real economy. The Zimbabawean dollar is not fungible into other currencies, the USD is and the excess dollars can easily travel outside the US market just like the JPY did in the 1990's when Japan printed. In many respects, this is what has happened today in commodities.
I do not doubt that given the intelligence of the posters on this board, by the time it gets to the monetization stage, many of the people on this blog will have bought.
Lastly, at the end of the day, I find any comparisons to the United States and a 3rd world dictatorship in the heart of Africa to be utterly ludicrous even if for comparison purposes.
This is the greatest country in the world. I've been to all of these so-called Emerging Markets and none of them hold a candle to the USA. Switzerland is the only other country I would live in.
oh:
but our children won't be text messging each other 100x a minute and the coolest new Apple product will be a Granny-Smith and cars will be for rich people and flying only for the ultra rich.
to us it would seem like a depression... but probably not much different than life in the early 1950s
can you read? nobody is comparing the US to Zimbabwe.
the ONLY reason we discuss Zimbabwe is because some deflationists say things like
"the government can never print money faster than credit is destroyed"
but this statement is not true. Zimbabwe shows us that. so does Germany. there are several examples of hyperinflation throughout history, where govts did print money faster than credit is destroyed. the US govt COULD also do this. they don't. but they could.
in other words, there is no reason why the US cannot face hyperinflation.
so step away from the mike, re-comb your hair, and put your USA Flag pin back on your lapel. it'll be alright big feller.
I'm with you on inflation. There's plenty of evidence that governments respond to debt deflation by printing money. Most emerging markets have gone through this process. It involved not just monetizing deficits, but also increasing the velocity of money through perverse incentives.
The deflationists are a little scared of that body of evidence. I think they're not quite sure what to do with it. So they end up arguing that either 1) "we are not Zimbawe"; or 2) the government won't shoot itself in the foot by causing hyperinflation. Both arguments are strawmen.
No one is saying we are Zimbawe, only that we have accumulated debts that cannot be repaid out of income. Those debts must be either written off (causing devastating unemployment); or nominal income must be boosted much higher (causing inflation). The choice is purely a political one, as the government is in charge of nominal spending. Inflation is always and everywhere a POLITICAL phenomenon.
The second argument also fails under examination. No politician sets out to create hyperinflation. Hyperinflation is the unintended destination of path taken. It is the result of a bias in political decision making. That bias is easily described: avoid the pain of recession, accept the pain of a little inflation. Haven't we been on that path since, probably, 1998?
A decade of inflationary bias. A Fed Chairman that always thinks inflation will moderate, "in the next few quarters." A default towards always avoiding pain through bail outs, interest rates, stimulus, etc. Is this a government that thinks it is producing hyperinflation? Obviously not. But it is also exactly the type of government that does produce it.
Elvis writes:
"I find that when someone wants to compare their writing to an icon (whether it deserves an icon status or not), they think way too highly of themselves and deserve to be mocked relentlessly."
OK...the bubbles in iconisity also rise. Elvis, you lost your icon status when Michael Jackson became your son-in-law.
"to us it would seem like a depression... but probably not much different than life in the early 1950s"
Family of four in a 3/1 of 1100 square feet, 1 bathroom, one car, one phone, one TV. Most vacations within 200 miles, or involve camping. Yes, that would seem like poverty -- and would be, comparatively, when things like TVs and telecom service are so much cheaper now.
On the other hand, what the '50s had was serious security: unions, pensions, near-full employment, confidence in the financial system, and low inflation. We getting back that part of it? If not, it wouldn't be "just like the 50s." It'd be much worse.
Even in the most affluent suburbs of NY City, where many houses sold for $1 million+ in 2006, we are seeing Realtor signs with a "For Rent" board on top. This never used to happen.
There are two big problems with renting top-end houses, in addition to those CR described.
The rents have to be very high to make sense. I've heard $8-10k per month. That market is very limited.
They tend to require more maintenance, especially for grounds. What renter is going to spend weekends weeding out your rose garden?
This is a sign of desperation. Realtors must be desperate to put these FOR RENT board up on homes listed for $1 million+.
We are not using Zimbabwe as a comparison to the USA. we are only using zimbabwe to prove that something can exist. nothing more, nothing less.
It is like the black swan. For decades anglo-scientists felt that there was no such thing as a black swan, since no anglo-scientist had seen one. then one day someone saw one and got a picture.
it only took one black swan to prove that black swans exist.
By showing that the black swan exists we can prove that the black swan exists, WITHOUT comparing the black swan to the USA.
in the same way, there are some deflationists that feel that inflation CANNOT occur because it can NEVER overcome credit destruction.
I use the example of germany and zimbabwe to prove that this statement is in error.
I am not comparing zimbabwe or germany to the US at all.
I am simply showing proof that something can occur.
just like the black swan.
the black swan has nothing to do with the US. but its presence proves that it exists
Hyperinflation in zimbabwe has nothing to do with the US. but its presence proves that hyperinflation can occur.
=====
there IS a comparative argument that uses zimbabwe, but it is a different argument all together
Some people on this blog talk about how the US is in "hyperinflation" right now. so other posters use Zimbabwe's hyperinflation to compare with our inflation.
our inflation is high, but nowhere near as high as the hyperinflation seen in zimbabwe.
3rd world dictatorship in the heart of Africa
wasnt zimbabwe one of the african countries which actually had a good standard of life and actually exported food to their neighbours? and first when the dictators power was in danger he destroyed countrys economy so he can remain in power.
scary parallel indeed, and maybe not that far away
Yearning To Learn, you forget that this nationalization of yours could be done by chinese and japanese companies and swf. i mean state would need money it doesnot have.
PUT YOUR AMERICAN FLAG PIN BACK ON YOUR LAPEL AND STOP SPREADNG SUCH NONSENSE.
the US is the free-est most wonderfullest country on the earth. We have a benevolent leader who would never interfere with our civil liberties in order to expand his power.
we have a well functioning system with checks and balances to ensure that no branch gets too much power.
we are known around the world for our unique ability to look out for the poor, and give due process to all criminals, no matter how heinous their crime might be
in fact we have set up freedom camps for this express purpose in Cuba. And we have other more secret freedom camps around the globe as well.
I mean, sometimes you need to get to freedom covertly, you know. I remember one day I was walking through the airport and then BAM! Freedom just snuck up on me when I went through security!!! I did find it interesting that freedom really only snuck up on young to middle aged men-of-color... but hey freedom works in mysterious ways.
dryfly writes:
...wondering the same thing - rate of cash burn & estimated time to burn out.
Hard to say - probably depends on the quality of their job. If Job goes POOF then Houston we have a problem... right now.
And that is exactly how history will misinterpret these events. We've never had a housing led recession before and the Sebastians of the world will point out the US economy muddled along with low positive growth until unemployment started rising. California smashed through 6% on Thursday.
Like many, you confuse "won't work" with "won't try it".
Deflationists think their opponents are all making a normative judgement: that we should have inflation because that is the solution. Deflationists are so hung up on this normative judgment that they can't think straight.
Most people are not saying we SHOULD have inflation. They are saying we WILL. It is not a judgment that inflation will work, it is a forecast that the political process can, and probably will, produce inflation.
Really, the deflationist counterargument to the "political inflation" thesis boils down to: 1) we are not Zimbawe; 2) politicians don't want hyperinflation; and 3) inflation won't produce real growth. Can't you come up with something better?
The easy credit vultures are out there waiting to pick over the carcass of the dead american economy. It's just about time for the rest of us to see the "financial services" industry for what they are: Blood suckers. It was all OK when they were pillaging subprime slime, but look - they've been screwing the middle class all along too. They're not providing services - it's just an extortion racket. Pay up or else.
Yearning To Learn, you forget that this nationalization of yours could be done by chinese and japanese companies and swf. i mean state would need money it doesnot have.
I disagree. we have all the money we want. we don't have wealth. but we have money
The Japanese and chinese have money too. but we can make more money than they have. their money is worth no more than we let it be worth.
we are not russia or japan. our debts are in OUR currency.
if we started running 10-20% inflation YoY we could wipe out a lot of our debt, no?
after that of course we'd lose our reserve currency, and borrowing in the future would be at high rates (20%? 30%?)
our currency would be worthless, so we'd get the nuevo dollar. and then the rebuilding would occur using the new currency. people are surprisingly willing to jump from one currency to another as long as it's done slowly enough.
yes, I hear all the gold bugs screaming "All fiat eventually goes to zero!!!!" And indeed it does just that. But there's an equally powerful corrolary: All gold currencies eventually go to fiat!
that said: there are many possible outcomes to this. right now we have an interesting symbiosis between us and the Asians/Middle Easterners. It serves all parties. Only when it no longer serves all parties will havoc ensue.
You nailed the key point about what is different this time - historically, housing has lagged economic distress and foreclosures rose as increasingly stressed 'homeowners' couldn't meet their mortgage nut, sell or refi - historical trend data, indicator comparisons and other relationships would seem to be skewed in some fashion by things going cart first this time...
does anyone else have problems
downloading economic comentary from the Northern Trust website? Does
one need an account now to view
Kasriel and Banglore's commentary?
Electricity in PHX is cheaper than NY/NJ, can't speak for Vegas.
SRP flat rates are something like .12/Kwh, variable is .05-.07 off peak, .15-17 peak(sorry I don't have exact #s, they just raised rates & I don't have quality net access.
Zimbabwe is tragic...hard to remember that Mugabe was elected, when SA was still in upheaval. Rhodesia/Zimbabwe was the breadbasket of southern Africa...most of the white farmers stayed on after the transition. Land grants to impoverished black citizens became land grabs, and descended to murder. As white farmers where chased out or killed, they took their ag skills with them, and even knowledgeable black farmers were left with ever smaller plots, which they had to defend from theft themselves, in chaotic conditions, without fertilizers and equipment now impossible to import with a destroyed currency.
the US is the free-est most wonderfullest country on the earth.
and thats why you have the freedom to be terorized by HOA and are taxed to dead while the feudals incomes (HF folks) are taxed by 15%
if we started running 10-20% inflation YoY we could wipe out a lot of our debt, no?
good morning, you runned 10-20% inflation since 2000, and it wiped out your debts really great. by debasing your currency from 0.8 to 1,6 EUR/USD
after that of course we'd lose our reserve currency, and borrowing in the future would be at high rates (20%? 30%?)
not necessarily. just make Final Fantasy guarantee explicit and P&B (PBOC, BOJ) will not care, i mean whats another 100b on top of the current interest the US government pays, just from 300b to 400b, who cares, its just peanuts. or maybe the entire budget deficit?
PUT YOUR AMERICAN FLAG PIN BACK ON YOUR LAPEL
heh? why should i wear an american flag pin here in europe? i mean nothing against you guys i like you but i would loook kind of out of place here with an american flag pin ...
besides i could accidently meet Jas on vacation and then had to endure a lection about "born and bred dopes" or whats the name of university course he teaches
Zimbabwe is truly a tragedy, kind of what Stalin did to Ukraina.
My current landlord could easily have sold the house I am in today for $2.5m+ and put the money in fixed income. Instead he thinks he's getting a deal from the $80,000 per year of rent he gets from me and from there you have to subtract $2,000 per month of property tax and $1000 per month of maintenance CAPEX.
The "alternative" investment in the boom years and even today is bonds, which in many places still yield higher than rents.
Not in my world.
My buddy owns seven houses - combined they wouldn't sell for a million dollars at the peak. That's all of them combined.
Yet he pulls in about $1000-1200 per unit per month. These units are 100% paid for though not 100% depreciated (the schedules are pretty long I understand).
Assuming about $1100 per unit per month... that makes $92400 per year gross. Looking at my bills (one of his rentals in next door) I'd guess he pays about $10K taxes & insurance. He does his own maintenance - he loves it, its like a hobby for him. he has his regular job and then landlord.
I'd guess he easily nets $80K from my rough guestimates. He might even squeeze out more - he's pretty frugal.
And 'yes' the rents are that high relative to owning. We have a lot of temporary folks who just have to live here for work but are reluctant to put down roots (they can't easily sell to get out again fast). So even with high rents his places are always occupied. I've never seen one of his places sit idle longer than a month. He's plugged in & knows whose moving in out & about the town.
At peak prices two years ago he might have received $1MM on all of them combined... thats an 8% cap rate I figure. Today he wouldn't get $800K for them if he could sell them at all so at todays valuation he makes 10%.
Doesn't matter though he bought most of these properties about the time I bought my home... his real out of pocket cost is more like $400K. Based on that he's getting about 20% - yes/no?
If he were to sell he'd pay capital gain & transaction fees - and then he'd have to decide where to put the money to do better than 8%. I don't think he knows a consistent & safe place that will provide that. I'm not sure I do either. Meanwhile his rents behave like an 8% annuity.
So the original point was - if the accidental landlord can make the property cashflow - holding on to it isn't a bad deal - still applies & makes sense. I said up front I don't know if these folks do cashflow - I doubted they all or even many did BUT if they did then sitting tight isn't terrible.
So while I might flunk the interview to be an analyst at your fund - I don't think you'd cut it as a landlord in fly-over either. Good thing we stick to the world we each know and understand.
Alo and orangeman - that is my understanding on how Schedule E works, too. Over the $150,000 income level then the losses are "suspended" until either owner's income is below $150,000 again or property turning a profit or selling either that property or another one and using the loss to offset the capital gain.
I wonder if Canada will get dragged down with us, or if they'll be able to implement more sound fiscal policies?
Man-moth | Homepage | 07.20.08 - 11:28 am | #
Ontario will get beat up very badly - especially the strip along the 401-402-403... its so closely coupled to Detroit.
Up North & Out West should do well (global resources)... but do the folks in Brampton want to move to Flin Flon for work? And there are places a lot farther north than Flin Flon.
Grande Prairie looks like the big city when you drive down the Alcan... course that's after the 300+ km stretch of absolutely nothing but wilderness before Ft. St. John...
Not surprised that decoupling from Detroit is nigh impossible. Do you have a sense of how the Canadian banks are responding to the FED's actions? I've been nosing around, but haven't been able to find anything really descriptive or satisfying on the subject.
Cash flow is the lesser part of the analysis. An amatuer with a cash flow model will take ARM financing or a 40 year mortgage.
I always recommended people take a Schedule E and put it into Excel with 10 years or more for columns. Don't forget to add in an hourly rate for your time spent landscaping, painting,court fees, etc. Now, look at your bottom line vs your total purchase price. If that percentage makes sense for a non-diversified investment, it makes sense financially.
Ontario will get beat up very badly - especially the strip along the 401-402-403... its so closely coupled to Detroit.
Up North & Out West should do well (global resources)... but do the folks in Brampton want to move to Flin Flon for work? And there are places a lot farther north than Flin Flon.
dryfly | 07.20.08 - 11:34 am | #
Almost 40% of Canada's population lives in Ontario, and the majority of those people live in the GTA and surrounding areas. The heart and soul of employment in these areas is manufacturing, especially manufacturing for export to the United States.
If manufacturing is significantly harmed, Canada is significantly harmed, no matter what the price of Fort McMurray oil, Brandon wheat, and Sudbury nickel is going for. I know Carney and Flagherty have recently told us that the world isn't that bad; I'm just curious how they're planning on finding jobs for the untold numbers in southern ontario whose livelihoods are directly or indirectly influenced by the flow of exported goods? The rapid appreciation of the CAD, combined with the economic slowdown in the USA, is just beginning to be felt in manufacturing, and is going to give us in Ontario an echo recession that's going to be pretty darned close to what's going on in the USA.
Unless, of course, Alberta wants to flow us over some cash to offset that loss. Say 60% of oil revenues?
Not surprised that decoupling from Detroit is nigh impossible. Do you have a sense of how the Canadian banks are responding to the FED's actions? I've been nosing around, but haven't been able to find anything really descriptive or satisfying on the subject.
I don't know much about the banks - there were some comments a few days ago (maybe even weeks) but it went in one ear out the other - no skin in the game for me.
All I can recall was that most Canadian banks were supposedly 'better regulated' and smaller & more focused than big US banks & not as susceptible to the SIV & CDO bug so should do better.
Sounds a lot like "Containment - The Canadian Edition" to me.
An alternative title to this article might be: "How to ruin your finances with emotions".
I was trying to help a client sell a photo shop. The place was making him about $50k/yr. He could have made the same money working for others with the hours he put in. He wanted $100k. Someone offered $80k, which was much more that it was worth.
Quote: "Hey, if I can't get my price, I'll just close the place"...and so he did. He lost $80k due to ego based judgement.
Unless, of course, Alberta wants to flow us over some cash to offset that loss. Say 60% of oil revenues?
noob goldberg | 07.20.08 - 11:50 am | #
That's kinda what I thought but my view of Canadian biz is kinda schizoid... I get up into Manitoba and everything is honky dory - I go over to the 401 & its EOTWAWKI.
Ontario is at greater risk than 'Michianio'at least until the CAN$ falls vis-a-vis the USD... and with Alberta exporting like it is - that might take awile.
One question I have is... how will Quebec do? Does anyone in Canada (other than the Frankophones) care?
All I can recall was that most Canadian banks were supposedly 'better regulated' and smaller & more focused than big US banks & not as susceptible to the SIV & CDO bug so should do better.
Sounds a lot like "Containment - The Canadian Edition" to me.
dryfly | 07.20.08 - 11:52 am | #
Banks are also supposedly better capitalized here as well, but we all know how quickly that can change. Canadian banks are quick to trot out the fact that they have relatively minimal exposure to sub-prime and alt-A. Indeed, it was quite a bit more difficult to approve marginal loans here than it sounded like in the USA. However, pretty much all the banks got involved in the asset-backed commercial paper market in a pretty big way, and the housing market in many parts of Canada followed a similar parabolic run as was seen in parts of the USA. A strong reversal in national housing prices would still significantly harm the banks, but as of now the doom and gloom scenario in the USA has been held at bay.
On the flip side, as far as I know the USA never experienced a year-over-year national housing price decline since the 30's; Canada experienced a brief one in 1999, so hopefully that lesson was still fresh and prevented the most egregious of poor lending actions.
One question I have is... how will Quebec do? Does anyone in Canada (other than the Frankophones) care?
I heard Charest speak at the Conference de Montreal and he's probably one of the most free-trade oriented premiers I've ever heard out of Quebec. Not that I've heard very many, mind you.
Charest is focussed on interprovincial trade barrier removal, and increasing labour mobility. I'm sure that's all Alberta wants; a flood of unionized francophone welders and pipefitters descending on the oilfields.
I've also begun hearing some pretty protectionist rumblings coming out of other channels in Quebec; my impression is that during tough economic times popular opinion begins to turn inward and a bit of xenophobia sets in. But I'm too far removed from the situation to provide any decent intel on public perceptions in Quebec.
Dry,
With the price of energy, they're doing fine with all the hydro-power they sell to the Northeastern US. That is a huge part of their economy. Lumber has obviously fallen off. I haven't heard of any catastrophes la bas.
I think the message is the same for Canada as it was for the US two years ago: Sell your real estate! Sell it now!
I hope your message gets through; I've got some dry powder waiting for the sell-off. I just hope I have the patience to wait it out for the next couple of years.
With the price of energy, they're doing fine with all the hydro-power they sell to the Northeastern US. That is a huge part of their economy. Lumber has obviously fallen off. I haven't heard of any catastrophes la bas.
Quebec's agriculture sector is skewed toward hog production. While not a large portion of provincial GDP, it's definitely a rural catastrophe for them.
I always think that economic growth happens in Quebec in spite of their best efforts. It seems that, in the midst of an economic decline, they tend to implement some sort of policy that makes things even worse. It's like a guy with a broken arm shooting himself in the head to dull the pain.
First, I would like to be clear that if you read my only two posts to this blog, nowhere did I state that hyperinflation can't occur. It would be a ludcirous statement to make, given the fact that it has occurred many times in history and is occurring in a few places today. Furthermore, for you to insinuate that deflationists dispute that hyperinflation can't occur is insulting to them, I would think. The Fed can simply press a button, and increase the money supply by 100x. Deflation solved, problem not, so it's a USELESS THEORETICAL discussion that you should quit obsessing about if you actually want to make money.
I can easily bring up the example of Japan to dispute your Weimar example as a country that pursued a stated objective of "quantitative easing" with little or no success. So the evidence is not concrete that "printing" can lead to an (immediate) resolution to deflation.
If there is demand for the currency, which in a deflation occurs in order to pay down debts, then deflation can occur longer than one can stay solvent.
For the record, I think there is currently inflation, but it is not because of dollar printing (which can easily be observed by looking at the money supply figures). The U.S. is currently in a DEFLATION (that's what a credit crunch does), which is actually being exacerbated by the rise in fixed costs (food and energy).
The reason the world is experiencing inflation today is simply because of dollar pegging. Other countries are required to "print" in order to pursue monetary policy that is not in accordance to their internal economic conditions. In other words, global monetary policy is causing overheating.
The U.S. imports this inflation thereby negating the effectiveness of Fed monetary policy in stimulating credit expansion.
It's Econ 101, big country vs. small country. The U.S. is no longer the big country.
When the pegging stops, interest rates will rise and put an end to this crap.
When the pegging stops, interest rates will rise and put an end to this crap.
HedgeFundAnalyst | 07.20.08 - 12:24 pm | #
Isn't that like saying 'when deficit spending stops'?
I'm not trying to be cute or smart ass - but that sort of defines the 'trivial solution'. Its like saying we'll have overall deflation once inflation stops and inflation will stop when it stops.
I agree that the pegs & resultant CAD are the root of the problem - I don't see them going away anytime soon, either as real pegs like PBOC or FX manipulation like BOJ. Deflationary pressures just jack up the ante, the cost of maintaining them - they seem more than willing to pay.
So while I might flunk the interview to be an analyst at your fund - I don't think you'd cut it as a landlord in fly-over either.
Not all hedge funds make money, not all landlords do either. My view of hedge funds and real estate is probably skewed by recent news reports.
I wouldn't make it as an analyst either, but the eternal chase after the maximum yield seems to have backfired and resulted in loses.
Treasury Secretary Henry Paulson sought to reassure an anxious public Sunday that the banking system is sound, while also bracing people for more troubled times ahead.
"I think it's going to be months that we're working our way through this period clearly months," he said.
Paulson said the number of troubled banks will increase as they struggle to cope with big losses on bad mortgages. The government this month took over IndyMac after a run led it to become the largest regulated thrift to fail.
"Monetizing" debt is great. But, and in like kind, inputs get "monetized" as well.
No one is printing money. Nor are they likely to. How the hell are the Feds going to artificially increase the monetary base (helicopter drops) w/ input (commodity) prices soaring w/o it?
The housing market is suffering from a "one-two punch," said Richard Moody, chief economist at Mission Residential.
Poor economic fundamentals are beginning to weigh on the sector.
"You've got seven months of private-sector job losses. You've got wage growth that is not keeping pace with inflation, you've got sagging consumer confidence," Moody said.
Data on June existing and new home sales, to be released on Thursday and Friday, will show declining sales, large inventories, and many more miles to go before prices bottom, economists said. See Economic Calendar.
Of course, you also could look at the health of the Silicon Valley job market: According to the state Employment Development Department, the unemployment rate in Santa Clara and San Benito counties (well, mostly Santa Clara County) jumped to 6.1 percent in June, up from 5.6 percent the month before and 4.8 percent in June 2007. Silicon Valley gained 3,000 jobs in June, but that was only half the usual seasonal gain. Total employment hit 923,200, up just 800 or 0.1 percent from a year earlier.
No one is printing money. Nor are they likely to. How the hell are the Feds going to artificially increase the monetary base (helicopter drops) w/ input (commodity) prices soaring w/o it?
The fact that the fed hasn't raised rates in the face of stiff input & commodity prices tells me they aren't too concerned about about them... so why would that matter? That isn't much of a constraint it appears - so far anyway.
Shoulda added...no one in THIS country is printing money.
Agree hedgefundanalyst, it's been the rest of the world that has been printing...for some time.
And, I don't subscribe to the view that there is some conspiracy under way to destroy our country by debt, etc. It's just very hard to know what is the appropriate amount of money there should be in a rapidly growing industrialization effort and they've obviously erred on the side of loosy-goosy.
Argentina's Debt was in dollars
Germany's Debt was in Gold
Zimbabwe?
Our Debt is in dollars. Big Differnce. We can have inflation when we monetize trillions of dollars of debt. But currency should stabilize after.
This process can cause a world wide depression. I don't believe in decoupling.
I suspect they're concerned (about input inflation). But, there's a lot of fires, and you gotta tackle the biggest one first. I read the past year as Bernanke trying to subtly monetize, but it ain't working as well as his Princeton thesis predicted.
And, outright printing would crunch real purchasing power to an unmanageable degree (dollar crisis).
Since we've been off the gold standard, we've relied on the Fed (and our trading partners) to fix the value of money via interest rates. When they are low, the actual value of money goes down (inflationary).
So, in a sense, I guess I agree w/ you that they've tried to monetize w/o outright printing, but the currency markets are repricing (have been for the last ten years) down to reflect this and we're still getting squeezed in much the same way we did when we were on the gold standard.
Bernanke is in a box. Which means we all are, of course.
I'd add that commodities are gonna keep rising to forestall a dollar crisis, which I think would cause a world trade crisis. And the only reason I feel this way is because China can't dump their Treasuries and Agencies any more than Bill Gates can throw over a billion shares of Microsoft.
IOWs- there is market liquidity but not owner liquidity and "new" commodity and finished goods prices will keep rising to offset the declining intrinsic return on our sovereign debt.
PS- always appreciate your insight and wish you had your own blog covering our manufacturing sector!
So far I believe we are chasing the Japan scenario. I don't see interest rates going up without the economy improving. As more workers are layed off there will be more pressure to lower interest rates.
China's number 1 concern is the goverment staying in power. It's also its no. 2 and no. 3 concern.
China does not have a problem if the dollar drops in value as long as they stay in power.
China needs to keep growing so more peasants can move to the cities to increase their standard of living.
Tenants should be very careful about renting from "accidental landlords," as many of them don't know what they're doing. There are a fair number of homeowners who, knowing they'll face foreclosure eventually, rent out the house to unsuspecting tenants and let the tenants deal with the fallout.
In addition many of them don't know that yes, the landlord is responsible for fixing things that break and tenants will not appreciate a landlord who tries repeatedly to fix it himself, rather than hiring competent help.
And most people who take up landlording as an occupation know that single-family homes are lousy investments. (The only time it works is when grandma dies and the kids decide to rent out the house and split the income.) A month's vacancy can throw off the cash flow for a year.
I keep seeing the same thing around here in Austin, which is just starting to wake up to the r/e bust. People are asking $160K for condos that sold 2 years ago for $95, just because a couple idiots in the building paid over $150K last year. These folks feel like they are losing money just because prices are going down, regardless of how much they actually paid.
Inventory is stacking up and anyone who does not price agressively better head to the library to get on the list for Accidental Landlording for Dummies (I know, it's redundant). I'd consider paying $90K for some of these places, but you just get a spiel about how Texas real estate is different (I thought Tex r/e was famous for it's boom bust cycles, but the conventional foolery around here is that Texas can't go bust). It's just the Kool Ade talking, I know.
PS- always appreciate your insight and wish you had your own blog covering our manufacturing sector!
moo goo the majik money maker | 07.20.08 - 1:50 pm | #
Thanks - I've thought about it - someday maybe. If I did, I'd want it collaborative from the get go - a couple different industrial perspectives, maybe even international (find Asian & European co-bloggers w/ mfg insights - we are so coupled, why pretend otherwise). I'm no where near there yet.
And I do think we agree on the monetary stuff more than the 'argument' would indicate. Bernanke really is in a box... the question is which end of the box will he try to bust out from... the inflationary end or accept the deflationary out presented him. I think you know my bias but I sure could be wrong.
"This is not South America, where hyperinflation was part of the landscape, this is the end of what most people would consider even the barest rudiments of a functioning society."
And the only pity is that there isn't an American to blame it on.
With regard to re values and a reduced living standards as being a likely scenario in the "out years", My wife and I now live on Connecticut Avenue in Washington, DC. Our real estate taxes are subject to a "senior citizen" haircut and a "homestead deduction" haircut. I have no idea what the re tax reductions will amount to, but likely they will be significant. So in point of fact, our big housing expense will be the condo fee, which is constantly being adjusted upward due to energy costs as well as needed infrastructure repairs/replacement in a 50-year-old building.
My guess is it may be cheaper living here with a small or no mortgage than it was in rural Virginia where we formerly hung out (as renters). Down there, I had to drive 100 miles round trip for dentist and doctor visits, and 50 miles for a haircut. Here everything is within walking distance or an easy bus ride. In addition, the bus costs me $0.60 per trip.
We own two cars and it is obvious we only need one (or none, actually, if we wanted to give up spur-of-the-moment trips). I'm thinking it will be quite easy to pare costs here if needed, whereas in the country you just had to have at least one car, and two were highly desirable.
Add that up, and I would say real estate values in the country can only go down further, whereas values in a well-policed city (someone across the avenue has 24-7 police protection and the protections around an embassy complex on Van Ness Street a few blocks away are beyond description) with excellent transportation options (I didn't mention the subway, which is an excellent value as well). A ton of federal money is available for whatever. DC is no place to raise a family due to lousy schools and parks and recreation, but for adults it seems to me it will be hard to beat in a tough economy, if that indeed occurs.
All these advantages, plus the excitement/turnover of a new administration coming into town next year will provide a floor under current re values in this city. Don't cry for DC, Argentina.
Dryfly, I do not know how to directly respond to you, as I am technologically incompetent, so hopefully you get this.
I do not think that it can last forever. The increase in food and energy is a nuisance for us in the West, but it's life threatening to Asia and Africa. Inflation ultimately causes revolutions and brings down governments. China has had that happen plenty of times in its history.
Either way, the best solution is to not get into the problem in the first place, but it's too late.
Emerging Markets must accept painful interest rates and revaluation or collapse.
This will obviously hurt us as with any banana republic. Risk Premium will explode and the current account will have to correct itself.
When the current account of the U.S. is at 0, this whole charade is over, just like the early 1990's accept many-fold worse.
You say that wages don't have anything to do with money supply, so wages could stagnate (while money supply increases and inflation occurs).
However, if wages don't increaase, then people can't pay higher (nominal) prices for houses, so how will home prices (nominal) increase? They will stagnate - or drop in real terms. This will exert feedback pressure that will remove the need for the money supply to be expanded.
Haven't we gone vertical on unfunded liabilities? Like, already?
Yes, inflation scenarios start with fiat and the Fed's means to monetize about any obligation. And just what they monetize can become progressively more extravagant. We know all about this because we're lucky enough to see it in real time. But isn't this how currency units become artifacts of history?
As children I'm sure we've all concluded a game of Old Maid, guffawed a bit, collected the cards and re-shuffled. As to how the PTB will handle our present fix, we subjects will just have to ponder, because in those outer limits anything goes until it doesn't. They're seeing the slippage that albrt raises soon enough.
Manhattan project idea: reactors for B-1 bombers, unmanned drones, android security officers! Full spectrum force projection without that pesky petroleum. Yeah, that's the ticket...
I really think the "class cues" in the video are just too heavy-handed to miss.
There you go again, Tanta. I didn't see any such class-cues in the video. I saw a middle class person, a smoker, yes, but with a nice tidy suburban home. She could be everywoman.
Perhaps you being a woman makes you read so many cues into that video that average geek men like me just don't see.
A number of people keep referring to inflation eventually causing house prices to rise after a continued period of decline and stagnation. What they fail to understand is that inflation won't cause house prices to rise unless INCOMES increase as well. This is the problem with the ongoing and future economy. Incomes have been stagnant for over a decade and they are going down currently. I don't see this changing anytime soon and any asset that is based on borrowing will continue to have downward pressure because of high interest rates and a small group of borrowers that can afford houses 3 times their income. This will be the norm in addition to high downpayments. Home prices can and will continue to decrease far into the future while other prices continue to go up.
"Grande Prairie looks like the big city when you drive down the Alcan"
My old stomping grounds. The best part of Grande Prairie was that you didn't live anywhere else near there.
Alberta (less so Grande Prairie these days) is still in the throws of the oil boom. However, to put it in perspective, it's a boom for ~3 million people. That's half the population of just the immediate SF Bay area, and less than 10% of Canada as a whole.
First?
My landlord is doing this very thing...listed for 580K at the peak...now worth 430k and dropping like a stone.
Sta
People are really stuck on the bubble prices. That goes for buyers and sellers.
OC Register had that article all about the happy new homeowners who bought foreclosures. The buyers kept yakking about how much "off" the previous price they bought their places. Sure, the prices they paid are lower than the older prices, but that doesn't mean much except the previous buyers overpaid by more. It's like a sale that induces you to buy something at 20% off. What the retailer doesn't tell you is that after the sale the new price will be 30% lower.
Yet these sales always seem to bring out the buyers.
Nobody's getting an $800k house for $600k. They're getting a $300k-$500k house for $600k that the previous owners paid $800k for.
I'll be an accidental landlord next year when I graduate from school. I paid 65K (20% down, 15 year fixed) for the house, but it's probably only about 45-50K. At the time of the purchase, I knew that I had overpaid, but I came from a city where even a dump was about $120K. I should have no problem renting b/c it's in a neighborhood where there are a plenty of long-term renters. I don't even mind losing about $150/month because the house will be paid off in "only" 12 years.
Even though I know a decent property manager, it still kind of sucks to have to deal with the rent. On the other hand, because the house is 1950s w/ solid brick with hardwood floors, the lowest replacement cost that State Farm would allow was 100K. Does anyone know if that's the value I get if it gets destroyed by a hurricane or something? Just asking...
I make my living in the property rental business. These 'accidental' landlords are idiots. One bad tenant can do thousands in damages. A slow month after month loss will eat you alive. These are th sort of people who will complain about $4 gas, but sit back and eat a $2000 per month loss on their rental. I wish there was a course in high school that covered basic business principles.
A little off topic -- Bay Area Bank of America in nice neighborhood had brand new cash counting machines for each teller. The clerk said they previously had only one for the whole branch. Apparantly they are expecting people to be either depositing or withdrawing cash involving a large number of bills, like in countries with hyper inflation. Whee!
The clerk at BoA was desperate to get me to buy a CD with my bank acount. She clutched my already counted cash in her fist while we had this discussion. Finally I persuaded her that no truly meant no. Pressure to get money out of FDIC accounts into CD's to boost earnings for the quarter? Seem to recall BoA has a high rate of brokered CD's, is something happening to them?
Meanwhile Wachovia did not have enough hundreds to cash my check for getting travel funds. It took them 15 minutes to scrounge up almost enough and then they gave me the rest in smaller bills.
I think Mr Valence is making a good call. It depends on a few unknown factors, but we can make some educated guesses.
He's spending about 1800/month (on the high end) on interest, insurance and taxes for his west orange house. He can surely rent out the house for this much. he can even probably get at least $2000 which gives him a little extra to cover vacant periods and capital depreciation )
And since his place in mahattan is probably at least 2500-3000/mo, his income is likely in the top 20% - and he would still be eligible for the home interest deduction, (i'm not entirely sure about this part) which is a substantial savings for him.
He has the cash flow and position to hold onto the home indefinitely. So he has the ability to hold on for price appreciation (which will inevitably occur if you time horizon is 10-20 years). In his particular case, it makes sense as part of a diversified investment scheme.
There is another very interesting article in tomorrow's NY Times real estate section. Unfortunately, it's a regional edition story and not posted online for a link.
It's about $2 million+ McMansions under construction in the exclusive surburb of Westport, CT that are being offered for sale at cut rate, half finished. The builders went bust. The article says there is little interest in them. Other builders won't touch them. If they sit unfinished for a winter, they start to rot. Most homeowners don't have the stomach for spending up to another half mil to finish them up in this market. Custom builders want premium rates to finish them up on contract for private buyers, because there's so many risks, like not having accurate blueprints.
The article is pretty negative on the idea of buying half-finished McMansions. Looks like the banks will get most of them and probably tear down many. But no orange groves in Westport.
So he has the ability to hold on for price appreciation (which will inevitably occur if you time horizon is 10-20 years).
Tell that to the Japanese. Prices still haven't gotten back to the late 80's peak.
I'd say their time horizon better be a bit longer than that.
Ran into this really interesting post over at the blog Credit Slips - relating part of the severity of the foreclosure rate to the bankruptcy 'reform' that passed in 2005...
Credit Cards and the Mortgage Meltdown
posted by Elizabeth Warren
The role of subprime lenders in inflating the housing bubble, then bringing down the whole economy has received plenty of headlines. But there has been little attention paid to the role of credit card lending and BAPCPA in the current home foreclosure crisis.
A new academic paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address. Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures. If more families could use bankruptcy to deal with their credit card debts, more could avoid foreclosure on their homes.
{snip}
The house I rented from Aug '06 to Jul '07 would probably have sold for somewhere in the $510 range when we moved in, but the "accidental landlord" was holding out for the closer to $550 he thought it was worth. Similar houses are now going begging in the low-mid $400s.
The house we moved into in '07 was on the market at $530 or so but wasn't selling, so it went on the rental market. A nicer place down the street is currently at $475, the only places selling are in the low $400s.
That's two accidental landlords, whose properties have depreciated by more than I've paid them in rent while I've been there. But people don't think that way.
-Jaso
Three years ago, [Dr. Lorena Siqueira] bought as an investment a two-bedroom condominium on Brickell Key, a gated island in downtown Miami. I would rather take a loss on the rental and wait for the market to stabilize, Dr. Siqueira said.
Bwahahahaha for word of the year.
Everyone who keeps paying on a mortgage when they are underwater is just helping to subsidize the rest of us.
Imagine the decimation if everyone who was underwater by say $50K told the bank to go screw...
Given compound interest, these people are conservatively throwing away $250K+ for their retirement. The poorer they are, the longer deflation lasts and the richer I am..
It's all relative.. You don't need to outrun the bear, but you do need to outrun your friend..
Get a "friend" and get comfy.. this will take years!
I was promised bank failures
Tell that to the Japanese. Prices still haven't gotten back to the late 80's peak.
We aren't Japan... we don't save; we spend like drunken sailors... public, private and everything 'in between'.
As a result we are VERY likely to see nominal prices rebound a lot faster than the Japanese did... not overnight but faster than Japan... the question is will the opportunity cost of having that money tied up make the 'real loss' even worse. While houses might recover to nominal - other assets might explode in price... depends on just how much debt gets monetized via bailout & 'reform'.
My guess is a whole shit load of monetization occurs before this game is over. Fannie & Freddie are the warm up act.
Yeah, I have a client who owns a unit in a tower. But she can't walk away because this will affect other parts of her life. Apparently her family has loads of money and doesn't care.
I don't get it, except for the very important other issues.
I grew up in a tough neighborhood, and learned to watch my back. I was always skeptical of things. When my granddad told me that he was going to get a small pension, my first thought was why would the company do that? After all, he wasn't working for them anymore. I must have been 9 at the time.
I guess most people are just not lucky enough to grow up in tough neighborhoods!!!
We stayed in that neighborhood because my grandmother, who had inherited some money and ruled the roost, refused to move. Everybody else wanted to move, when she finally died, the house was sold for a pittance. It had a full basement, hardwood floors, and was really solidly built. It's still there tho a wreck. Built in the 1890s I believe.
The rationalizing of "accidental landlords" will be tragic when job loss occurs. They will have depleted their savings just when it is most needed. My heart goes out to them.
A lot depends on the cash flow of the rental too - if you own the place with little debt & it cashflows - who cares? I have a friend who owns seven places - all would have sold for 50% more two years ago than now... my buddy doesn't care as he owns them outright and easily cashflows. He has owned these properties through ups & downs & has no intention of selling them until he retires.
I'm guessing most of the 'accidental landlords' don't cashflow...
dryfly writes: While houses might recover to nominal - other assets might explode in price... depends on just how much debt gets monetized via bailout & 'reform'.
Which assets specifically? I'll save the comment so we can track your forecasts.
Miami + Condo = Deflation
We're through the looking glass people!
"I was promised bank failures"
That's the new Paulson Plan. Bank failures every other week. Bank failures last week, bank failures next week, but never bank failures this week. And we have always been at war with Eastasia.
Mr. Paulson is not confident this plan will work, but Mr. Bush assures him it is foolproof. Mr. Bush has learned that the citizens can't remember little things like bank failures for a whole week, because they are born and bred American dopes.
So you see, somebody was listening to Jas.
dryfly,
Let's be fair to the sailors - they are only blowing their own cash - and might even spring for a round!
I know at least three people--two here in Seattle and one in Miami--who are renting out places they couldn't sell. Also, a friend just started renting a condo from a real estate agent/flipper who can't sell the unit she bought. No question--there's a huge shadow inventory out there.
Miami + Condo = Deflation
No decline in money supply equals deflation. Miami & condos equals decline in prices.
Miami condos don't control money supply - sovereign gov'ts do - ask Zimbabwe.
Same mistake deflationist EVERYWHERE make, confusing deflationary pressure (declining prices) with deflation (decline in actual money supply).
When I see the gov't tell fannie & freddie to take a hike instead of promising to backstop THEN I'll start believing deflation is possible.
Not until.
So which asset will go up? Who knows - right now anything commodity related is on a tear... in my part of the world farm land has gone up about 200% over the last 3-4 years. Yes - land that sold for about $2000 an acre is now going for about $6000.
Oh and there is a lot of it in my area of the 'world'... 500 miles by 500 miles area.
I can understand the desire to hang on to a house even when it may make no sense from a purely financial perspective. I've got a 100 year old house in AZ that's probably lost $100,000 in value. That leaves me at the break even point, maybe a little better. I know that it will depreciate further in the next few years, and that even if rent covers my PITI I'll still be out a bit of money every month to hang on to it. The thing is, I love the house and I'm moving to Ireland for 5 or 10 years and I want to have something I love to move back to. I figure 1 good day's pay as an IT contractor in Dublin should cover the monthly nut. Bad business decision? Sure. Sometimes with houses emotion really is more important than financial planning. Oh, it also helps that my family is in real estate and property management, so being a long distance (very long distance) landlord is both possible and essentially free.
My landlord is losing about $5,000 per month net of my rent. But he doesn't see because he thinks cash flow and not opportunity cost. It's likely that nominal real estate prices will go down for at least another 2 years and then flatten out for at least another 5, then rise with the rate of inflation. So a would be landlord should decide when in the future he will get the price he wants. Then discount that price by say 4% per year. If Mr. Vallance wants $400k and he thinks he will get it in 6 years, then he should put it on the market for $316k now. But he thinks he can get $340 so go for it, sell it now. Don't these people understand simple present value calculations? Answer: no.
dryfly,
I know your views on deflation well- I hope this blog's still kicking, awa them here participants, in 2012 so we can see whether consumer prices + assets (not inflation) have (1)increased at much higher rates, (2)increased/decreased at similar rates, (3)decreased at higher rates. I vote 3 Reasons? Higher savings rate + Aging Population + Overcapacity = Lower Consumption = Lower Prices
Tanta will love this... her favorite NYT writer in this front page story on "The Debt Trap"
- NY Times
But he doesn't see because he thinks cash flow and not opportunity cost.
The thing about 'opportunity cost' is you do have to have another 'opportunity' that is better. If your landlord really IS running positive cashflow he quite likely IS better off hanging on to the place... then the NPV is not only a PV, FV & disc rate but all those 'monthly annuity' contributions as well (positive cashflow from your rent).
That is exactly why my buddy doesn't sell his rentals - he doesn't have opportunity, he doesn't understand anything else except dropping the money in a CD or MMF. He knows nothing about stocks, bonds, etc. But he knows how to fix plumbing, paint houses & quickly evict dead beats.
My guess is the accidentals don't know any of that - they'll learn the hard way.
Higher savings rate + Aging Population + Overcapacity = Lower Consumption = Lower Prices
Again - consumption isn't JUST big screens & trips to Orlando. Consumption is also military expenses, medical (like medicare), energy, food... etc.
You have to look at ALL consumption = private and public.
So you could see 'pre-retirees' & retirees cut back & increase savings and still see gov't via fiscal measures (say to monetize the liability embedded in SS & Medicare promises or rebuild the 'deterrent capability' of our armed forces) blow the doors off the money supply.
Betting against fiat in a republic is crazy.
dryfly writes:
As a result we are VERY likely to see nominal prices rebound a lot faster than the Japanese did... not overnight but faster than Japan..
Rebound to what? 2005 bubble prices, mid 90's or late 80's?
for me, its deflation ahead. Nothing takes care of high prices, like high prices. But those foreclosures remove plenty of money out of the system, permanently. If your in debt, your out of luck. Just my 1 cent.
Rebound to what? 2005 bubble prices, mid 90's or late 80's?
ron | Homepage | 07.19.08 - 11:42 pm | #
Oh I am certain we'll see nominal bubble prices again... How soon? What will they be in real 'inflation adjusted' terms? I have no idea.
A lot of that (I believe) will depend on how TPTB monetizes debt & resultant money supply creation. If they monetize quickly - we'll see those prices again quite soon. If not, then no where near as fast (and I sure hope that is the case).
But I doubt we have to wait 15 years to see bubble prices in nominal terms again. In real terms - we might never see 'bubble prices' again in our lifetime.
dryfly,
How long 'til NASDAQ 5000 again? Be specific.
If we can't have Bank Failures,can we have snacks?
Our local newspaper published just today an article "Rental houses are multiplying", see under
Rental houses are multiplying | StarTribune.com
Bottomline of the article: Supply and demand for single-family homes are both significantly up (difficult to say which is up more).
Although I think the ST outlook is bleak, I also think that that prices will come back sooner than some people think. Bubbles are hard to figure out (look at the antique furniture bubble in the 20s), but, necessities, like housing, are apt to bounce back quicker than old desks. Give it 15 years.
How long 'til NASDAQ 5000 again? Be specific.
Anonymouse | Homepage | 07.19.08 - 11:55 pm | #
I'd be surprised if we don't see it in the next five years.
I also would expect a new high on the Dow in that time frame.
But that doesn't mean they'd be a good investment. We might see $10 gasoline and $15 value meals at the sametime.
Its about money supply & not deflationary pressure. If we get a Volcker - no way we see NASDAQ 5000.
I don't see anyway the pols in DC make the 'mistake' of letting another Volcker in charge of money.
I'm guessing most of the 'accidental landlords' don't cashflow...
which kinda makes you wonder just how close to the (financial) edge some of these people might be.
The real estate market will never come back. Or it will feel like never.
For example, Gold reached its all-time high in the year 1492, at a real price of $2,400 an ounce (in 1998 US dollars.)
Debt deflation destroys dollars faster than they can print them.
Give it 15 years.
You f*cking slay me!
which kinda makes you wonder just how close to the (financial) edge some of these people might be.
RayOnTheFarm | 07.20.08 - 12:04 am | #
I was wondering the same thing - rate of cash burn & estimated time to burn out.
Hard to say - probably depends on the quality of their job. If Job goes POOF then Houston we have a problem... right now.
Debt deflation destroys dollars faster than they can print them.
El Cliffo | 07.20.08 - 12:05 am | #
You really need to check out what's going on in Zimbabwe.
You really need to check out what's going on in Zimbabwe.
dryfly | 07.20.08 - 12:07 am | #
You mean this?
Effective Demand: Rookies
Money with an expiration date is cool!
Money with an expiration date is cool!
Effective Demand | Homepage | 07.20.08 - 12:11 am | #
Oh man, that takes the cake.
You f*cking slay me!
Anonymouse
You are a mouse. I step on you.
I'm about to become a accidental renter/house sitter to a family member. She bought at almost the peak for our market after cashing out on a starter home. I'm going to rent out my cash flow positive place and move into hers.
I keep hearing the same story over and over again. Usually there's a huge amount of unrented time, either from waiting for the market to go up, or not having any real plan to rent the place.
There are also the "accidentally evicted" when the "accidental landlord" gets "accidentally foreclosed on".
But the US is not printing a lot more money. The US Monetary base, as published by the St. Louis Fed (and by Barron's every week) is pretty flat--up 2% over the past year.
The US is to Zimbabwe is like the a thoroughbred is to a one-legged burro. Drawing similarities or probabilities between the two is humorous yet worthless.
For example, Gold reached its all-time high in the year 1492, at a real price of $2,400 an ounce (in 1998 US dollars.)
But, remember, we don't live in gold, eat gold, or use gold to fuel our engines.
There are so many ways to look at this. But what really strikes me is that we all seem to have just become "traders" in our mentality. Looking at averages and data points and losing sight of any intrinsic analysis of anything.
Housing prices are by necessity a function of the income available to purchase "housing" The government can tell you that "inflation" has gone up 10% a year but if incomes have not followed, I fail to see where the money is coming from to spend more on houses. Further is other expenses go up even more, what does that leave for buying "housing."
I am truly struggling with the inflation/deflation scenarios. The government can certainly pump up the money supply. We can see in Zimbabwe that that this creates "inflation" However, it seems to be some rule of thumb "inflation" increases, then housing should also "increase" but is that necessarily true? Certainly the costs associated with owning a house will increase. But will the demand then also increase? Obviously not. In fact, as the cost soars, the "demand" may actually fall because of the increased costs of ownership. That is the costs per square foot may skyrocket but the "value" of the asset may not budge because no one wants to buy bigger houses.
The value of an asset is determined by its ability to produce something of value. Inflation is not like some magic sea that lifts all boats. It has an impact on asset values as costs render certain assets less productive and profitable.
Likewise, there is certainly no guarantee that "inflation" will likewise give everyone more money in terms of higher wages. What if it is all concentrated?
What if all the increase in the money supply is because banks trade tulips back and forth with each other at astronomical prices? I guess that is "inflation" at work. But what if that also means no money for the rest of us to use? Wouldn't that be "deflation"
What about the increase in interest rates that will inevitably occur if true "inflation" finally takes hold? What then for asset prices?
So many questions. I understand all of the concepts but I just am not sure how this all works. While the broader concepts do have validity it seems that the markets can work in mysterious ways to shuffle money to different areas. (the "bubbles").
It all seems fraught with the possibility of unintended consequences Worse. It all seems to move based upon ill defined sentiments. One day tech stocks, the next day housing, after that who knows. It would be easier if the money flowing into the system really did spread itself evenly. But that does not seem to be the case.
The problem is that each wave of money flows brings a wave of over-investment in the "bubble" asset class which only ends in a deflationary spiral later on. Instead of promoting true "investment" in productive capacity, it becomes almost an utter waste of capital. Which would not be as horrible if it were not tied to the inevitable debt that fueled it. It eaves the debt without creating any productive item to repay it.
I need to look at this more carefully, but it certainly seems that with the debt "explosion" much of the increase on money "supply" merely reflects the debt. Once these "assets" get destroyed, it would seem that the "inflationary" trends should turn into a deflationary spiral. After all, if everyone is saddled with debt that cannot really be repaid, what fuels the inflation? (unless there is more debt allowed).
I waffled on a bit more than anticipated.
El Cliffo writes:
But the US is not printing a lot more money. The US Monetary base, as published by the St. Louis Fed (and by Barron's every week) is pretty flat--up 2% over the past year.
El Cliffo | 07.20.08 - 12:15 am | #
Not yet - just wait.
Consider all those dollar 'assets' offshore in SWFs... all those future liabilities waiting to get monetized.
I agree - we don't HAVE to have inflation but we will have it. We won't have the political will to tell the young they have to pay for the old nor the will to tell the old to die. So we'll print money & let 'God sort it out'.
Seriously.
Add that same kind of reasoning across the board - bailing GSEs, rebuilding infrastructure, single payer medical costs, military 'rebuilding', etc.
It is so easy to just print a little more & a little more after that. And all those so called restrictions on 'borrowing against good collateral'... well we're seeing how those held up. Sure TOMOs counter act - wait 'till GDP goes neg to see how long that lasts.
It is possible we'll have another Volcker someday and let him do his job - but I doubt we see him until we are WAY past NASDAQ 5000 and nominal bubble RE prices.
I'm with dry- just pay attention for five minutes to our former Comptroller and you understand it will be inflation.
Real value will be lost in house prices, but the value of the money used to pay back that debt will be much less than it was when the money was lent.
If you have long term fixed rate financing, and you can leg through this downturn you will win big time on the other side as inflation rips the value of a dollar.
Just wait and watch.
Someday this war's gonna end...
FAIR GAME; Borrowers And Bankers: A Great Divide - NY Times
GM's at it again. This one is a real nothing burger.
However, it seems to be some rule of thumb "inflation" increases, then housing should also "increase" but is that necessarily true? Certainly the costs associated with owning a house will increase. But will the demand then also increase?
Prices would increase but not necessarily REAL prices & not necessarily as fast as other 'stuff'. So the house may reach the bubble price in nominal terms but still be below replacement cost (considering the inflated cost of inputs at that time).
That is why trying to game this thing real vs nominal is so difficult. It really is about the money supply vs the inventory of 'stuff' available to buy with that money supply and BOTH the supply of stuff & the supply of money are variable & dynamic.
I'm in the inflation camp also.
I'm not sure how extreme, but directionally -- yea.
By the way, shouldn't decreasing housing prices lower imputed rents and thus the cost of housing? And shouldn't this moderate the cost of living?
Lawyerliz: The one part that is missing from your story -- did your grandpa get his pension?
I'm as big as a bear of housing as anyone on this blog, but, I also understand long term population growth will fuel demand for housing. Those who don't understand infrastructure limits, building fees, and development costs will never understand the cost of new construction. Right now all those are too high, but, as LT demand comes back, the price of new homes (and existing) will increase accordingly.
Elvis writes:
The US is to Zimbabwe is like the a thoroughbred is to a one-legged burro. Drawing similarities or probabilities between the two is humorous yet worthless.
Elvis | 07.20.08 - 12:19 am | #
Agreed - but the point is if anyone thinks a gov't can't print faster than the speed of debt - all they have to do is look at the Big Z to see that isn't categorically true.
The Fed prints money, but every dollar is offset by a corresponding dollar of debt issued by the Treasury. The Treasury, I believe, last printed money directly in the early 60s--those United States Notes with the red seal.
Ziggurat writes:
I'm in the inflation camp also.
I'm not sure how extreme, but directionally -- yea.
By the way, shouldn't decreasing housing prices lower imputed rents and thus the cost of housing? And shouldn't this moderate the cost of living?
Ziggurat | 07.20.08 - 12:35 am | #
Sure. It isn't going to be all stone soup.
BTW - even though I give the deflationists crap... I give them credit on one major point... the deflationary pressure from this debt destruction is really severe - they got that right for sure... my only bone to pick with them is that money supply pumping is so damned easy in a fiat system I have little doubt but that the end result will be inflation (more money than stuff to buy with the money).
There's a term absent from this discussion: velocity of money. It explains why nominal GDP can barely hang on to a 4 handle, despite 2% FF and 300billion $ fiscal gifts. So then in dryfly's reasoning Gov't will carry nearly all the velocity. He figures Gov't'll bypass sending us checks and just spend it on foreign made crap and minimum wage services while we're sleeping. Gov't'll go to the movies for us and buy our next Chevy. Gov't'll bid up NASDAQ and houses between itself. Why not? It's perfectly logical.
El Cliffo writes:
The Fed prints money, but every dollar is offset by a corresponding dollar of debt issued by the Treasury. The Treasury, I believe, last printed money directly in the early 60s--those United States Notes with the red seal.
El Cliffo | 07.20.08 - 12:43 am | #
Then let the treasury issue more debt. And more debt after that - and stash it in 'lock boxes' for 100 years like social security.
Explain to me PHYSICALLY - as in laws of nature - why gov't can't print more fiat. There isn't any - it is all based on laws & gov't self-discipline and both can change at the stroke of a pen.
There's a term absent from this discussion: velocity of money. It explains why nominal GDP can barely hang on to a 4 handle, despite 2% FF and 300billion $ fiscal gifts. So then in dryfly's reasoning Gov't will carry nearly all the velocity. He figures Gov't'll bypass sending us checks and just spend it on foreign made crap and minimum wage services while we're sleeping. Gov't'll go to the movies for us and buy our next Chevy. Gov't'll bid up NASDAQ and houses between itself. Why not? It's perfectly logical.
Anoy - did you know that during the latter part of WWII that one seventh of all the power produced in the US was used to power the Manhattan Project alone? Not talking other defense projects included but Manhattan alone? Towns blew up from nothing to 100K in the middle of nowhere almost overnight.
Read Rhodes - 'The Making of the Atomic Bomb'.
Gov't can increase money supply velocity - believe me - if they so decide.
All asset cycles move in broad cycles from greed to fear and back again.
All asset classes
Huh? Have you guys actually figured out what is money and what isn't?
I think we're going to have expand our definition, because in addition to bank deposits and bills in circulation and cd's and repo's and eurodollars, people are beginning to barter more and more.
Cliffo: if you limit the definition of what money is, then you can tell your citizens that the supply is stable or even declining. If you don't then the sky's the limit. But we do.
dryfly, you seem to propounding the Bernanke helicopter theory, which he borrowed from Friedman. The problem is that, once we get off campus and into the real world, people eventually stop playing along. They demand much higher interest rates. They buy gold and silver.
For that matter, why can't the Federal government simply declare that the $10 trillion national debt will be paid off immediately with printed money, instead of borrowing it? But they don't. They borrow.
If they print it, go long tar and feathers.
Antidotal evidence provided by the those two 'sit tight' sellers suggest that they have no concept of the dynamics of a housing cycle. The chart accompanying the "A Housing Cartoon from 1993" says it all. In LA (and here in New England) a housing boom peaked in late 1989/early 1990 - as clearly shown on that chart. Note that it took close to 6 years to bottom and another 5 years before prices approached those of the boom peak. Aiding the recovery was the leading edge of the current housing bubble along with low interest rates - without those factors I suspect that the cycle would have been somewhat protracted. I see no reason to expect housing prices to recover to the bubble highs of the past few years in less time than the previous cycle. In fact in contrast with the past cycle we see tightening lending standards and higher interest rates (along with housing over supply) coming into play. Therefore I would expect a slower recovery...
OT: YouTube - Naomi Klein vs Fox Business News
Mistah: add to that the fact that we used to be savers, and now we're not, and lending guidelines have been getting tighter...
It's going to take quite a while.
UB,
How was dinner? Why do you have to cook?
Bonzai,
You are right but don't you account for human psychology. I suspect MI land will continue to suffer but LT markets like Phoenix, Las Vegas (yes), and CA, will bounce back much quicker than a lot of the real housing bears think. Fear to greed.
A nony non: My wife works to support my blogging so I feel like it's the right thing to do. That plus she's a REALLY bad cook. I think she does it on purpose.
Buy low from the RTC II, sell high.
Elvis: I'm putting together a little hedge fund for just this purpose. Are investors still paying 2 and 50?
Wait, I didn't write that. No profit from real estate ever. Buy syrup futures and sunlight easements.
For that matter, why can't the Federal government simply declare that the $10 trillion national debt will be paid off immediately with printed money, instead of borrowing it? But they don't. They borrow.
Or they could just default - the result would be the same - the gov't would have to go pay-go because NOBODY would lend to them.
But the funny thing is do it slow enough and you get away with it for a real long time... and in the minds of men a 'long time' is equal to 'forever'.
Friedman was right - he was also terrified by the thought and rightfully so. The only defense of fiat money is a disciplined central bank and treasury. With deflationary pressure they don't even have to be that disciplined... its a get out of jail free pass for them to print... while the deflationary pressures last, it won't last forever.
That Crazy Uncle Billy Who Is Serving 20 To Life,
First, don't call it a hedge fund. Call it a fund. Secondly, be careful. 1 in 300 know the right time to buy. Buying on the downswing is dangerous even at a 70% discount.
Mistah Bonsai - you are more optimistic than I am as that chart is in REAL terms. I'm guessing it will take something like 10 years to get to NOMINAL bubble prices... I'm not sure if we'll see a peak like this in REAL terms again in our lifetime.
Elvis: But it's not my money... I just want to profit from others' greed.
dryfly-
That is exactly why my buddy doesn't sell his rentals - he doesn't have opportunity, he doesn't understand anything else except dropping the money in a CD or MMF. He knows nothing about stocks, bonds, etc. But he knows how to fix plumbing, paint houses & quickly evict dead beats.
Don't forget taxes and recapture on depreciation. When my partner got a look at the potential tax bill after our first sale (accidental, someone made us an offer we gladly took) we had a crash course on 1031 exchanges. We ended up buying some property in a hurry in San Diego that we didn't want, but luckily sold into a still rising market and got property we did want,...on Oahu. That's where my partner is planning on moving to in about five years.
Uncle Billy Is a Molester,
If you want to profit from others greed, talk to the ethonal plants.
Don't forget taxes and recapture on depreciation.
He is well aware of that - he almost sold a couple rentals at the peak two years ago but decided not to due to the tax bill. The 'annuity' of having steady income from rents makes more sense for him now - at some point he'll sell, or his heirs will, but not now.
Elvis, are you Doc Holiday too?
Ethanol? Yah, that doesn't seem to be working out too well for us. But I'll have to talk to Naomi Klein to firm up my opinion on this.
trust fund,
Remember, the best advice is not to worry about LT capital gains tax if you can make a profit now. (Despite what your investment advisor would say.)
I'm not Dr. Vacation, But I wish my doctor would prescribe a 2 week vacation. I'd go to Akron and relish the fact I don't live there.
Money, so they say, is the root of all evil...
Future value is what gets me excited, i.e, one needs a few stars to align properly, e.g, one needs an agreed upon material-like thing, like a camera, car, metal, bead, house, land, etc -- by agreed upon, we need to set up arms-length information in regard to basic value and agree upon a basic starting point.
From there, we negotiate quality, supply, demand, and other stuff... I can't focus..I'm going blind .. ahhwahljgh;fr3;ogu i1g5 i
I have some sympathy here, as an accidental landlord. Paid $135 in 2002 for a 3bed/2bath in Alexandria, VA. At one point, it was theoretically up to $320k in 2006.
Currently there are 13 units identical to mine on the market for $183 to $250k. Most are bank owned.
I need $160k to walk away clean- and I would do it in a heart beat. Or even $150. However.
NOBODY IS BUYING.
At any price in the building.
So I'm going to lose $200 a month renting it out. Or I lose $2000 a month trying to sell it, with it being on the market for roughly forever.
I moved to the mid-west for an employer relocation, and am happily renting an apartment for $950 a month including heat. People keep asking me why i didn't buy in new midwestern city.
You can hear my laughter back in DC.
But I got a managment company, and I pay them $ to make the headaches of landlording- which I don't want to do, go away.
No, I'm not Elvis, Elvis is a character which belongs to someone else. This would be hard to prove and I see your point, but I have a much different writing style which is somewhat like Ernest hemmingway and a touch of that dead guy in Aspen (not Ken lay) ... hmmm not wolfe, ahhh, Fear and Loathing...
Nora,
I'm sorry you now live in the Midwest. 'Nuff said.
You see, no way to prove which is which. This is like when Spock lost his brain and then was placed on a device which spun him in circles, no that was Kirk, but same thing, e.g:
I'm not Dr. Vacation, But I wish my doctor would prescribe
No, I'm not Elvis, Elvis is a character which belongs to someone else
You see, who can know?
"Or I lose $2000 a month trying to sell it, with it being on the market for roughly forever."
How would you lose money if you priced it right?
I find that when someone wants to compare their writing to an icon (whether it deserves an icon status or not), they think way too highly of themselves and deserve to be mocked relentlessly.
Hunter S. Thompso - Wikipedia, the free encyclopedia
I blew out my brains. Please worship me.
Please.
Elvis take pity on me, it was just a cross between a a metaphor and a algorithm, I meant no harm and place myself upon the mercy of the court
Hunter S. Thompson Suicide Note:
No More Games. No More Bombs. No More Walking. No More Fun. No More Swimming. 67. That is 17 years past 50. 17 more than I needed or wanted. Boring. I am always bitchy. No Fun for anybody. 67. You are getting Greedy. Act your old age. Relax This won't hurt
...and that was while the bubble was still inflating!
Wow, speaking of death:
YouTube - Naomi Klein on Democracy Now, 7/15/08 (1/5)
Elvis,
Sorry I set you off, relax dude, take it down a notch and mellow out with Naomi!
El Cliffo writes:
"....For example, Gold reached its all-time high in the year 1492, at a real price of $2,400 an ounce (in 1998 US dollars.)
i must disagree, gold reached its all-time high in the year 2042 when one ounce equaled $9,500 per ounce.
how do i know this
time travel has already been invented... in the future
Funny, I am a landlord and almost became an accidental landlord. Since there was no way to buy a cashflow rental in San Diego county, we got the bright idea to build a spec home. No one would even look at it, didn't matter what the price was. Then something happened and a couple different offers came in, they fell through, no financing. We thought we were going to rent it out to cover the carrying cost but luckily we got an offer, for a greater than 30K loss to us. We sold. I never thought I'd be so happy to take a loss.
Hunter S. Thompson was a drunk and a thug (in his younger years). I appreciate his writing, but, I cannot worship his life. I don't get why people worship cultural icons. Except for the fat, stoned 70s Elvis jumpsuit wearing man.
afk watching Naomi Klein reality porn.
Paid $135 in 2002 for a 3bed/2bath in Alexandria, VA. At one point, it was theoretically up to $320k in 2006.
My sister also bought a 3/2 hometown in Alexandria in 2002 for $135K. In 2004, she sold it for about $280K when she was relocated to Atlanta. At the time, she hated the relocation; now, she doesn't mind so much.
Thoughts:
Can't have true inflation, without increase in wages.
We are not like Japan, when times are bad we layoff workers.
Southern California Real Estate:
In Past downturns Condo's faired worst - as much as 90% down.
The larger the home the lower the price/sq ft.
Also much smaller premium difference from good to bad area's.
Bank account money is fun. Home equity money is fun, too, but without the impact.
YouTube -
Elvis clip
Goodnight now.
IMHO the goverment keeps tossing billions away at symptoms of problem and hopes everything will get better.
Instead we are now in danger of spiraling down. Companies lay off, so ppl buy less, so companies lay off more... This is how the great depression occured.
It can cost the goverment over 1 trillion dollars to save Fannie Mae and Freddie Mac.
Indy Mac failed and it had 30 Billion in assests.
Other Large Banks in trouble:
Washington Mutual: 300 Billion
Wachovia: 600 Billio
dryfly writes:
Mistah Bonsai - you are more optimistic than I am as that chart is in REAL terms....
Seeing as how you bring that up..well..yeah that's what I was thinking but didn't wanna be accused of being a 'gloom and doomer'. Therefore I relied on history minus speculation. The 2006 peak went well beyond any previous housing booms in terms of short term 'appreciation'. I seriously doubt that the financial (and emotional) conditions that drove it will be coming back anytime soon (within a few generations assuming that we make it through the current crisis financially intact). Bottom line is that if those folks (and those like 'em) believe that they will need to sell within the next 7 years or so they should jump in while the market is still hot.
FWIW: My assessment is not based solely on charts - I unfortunately earned 'the tee shirt' to back up my claim. You see I contracted a new custom built (rather lavish) contemporary home in a prime location in very desirable neighborhood back in December 1989. Price was no object... I sold in June 1999 for a 25% loss over the initial purchase price. And that was after meticulously replacing any split clad boards, detailed repaint/stain, driveway sealing, etc prior to placing it on the market.
Can't have true inflation, without increase in wages.
In aggregate that is probably true - incomes and wages in aggregate would likely rise with money supply - though not sure there is a natural law physically requiring both universally across the board.
But even then that isn't to say that 90% of the population could have flat or even declining wages and the remaining 10% capture all the growth in money supply to more than make up for it. That is after all how banana republics 'inflate'.
People create all these conditions just because it happened before and then say it has to happen that way again - big mistake. Keep the concepts separate - money supply growth from isolated price increases. There are correlations but not necessarily universal causation.
This is how the great depression occured.
orangeman | 07.20.08 - 1:56 am | #
And lasted until the Manhattan Project came along... they might bump that milestone up this go around, ya think?
Uncle Billy,
Thank for starting that fight -- what the hell happened? Maybe I should go back to pirate island and my mates back there?
Wars are good for the economy. I expect Israel to bomb Iran at some point - What a mess that will make!
But, there is no way that Israel will allow Iran to have the bomb.
Dryfly, babe, love your work, but you are giving 'way too much credit to the political classes.
I do not think we have any politicians currently in leadership positions who have the nerve or the foresight to start any type of project that will turn out to be a reasonably efficient money transmission mechanism on the scale you are talking about. Even if they give us $600 every three months, that's less than one month's mortgage payment for the folks in trouble. The government will definitely not start a project to build anything useful on the scale necessary to keep things moving.
I see deflation outstripping inflation for at least the next 18 months, and then the Republicans will succeed in blaming the Democrats for things getting worse, and then we will have divided government until they can figure out a way to impeach Obama. Etcetera, etcetera, etcetera.
FWIW, my grandmother just got her settlement check for my grandfather's cancer caused by working up at Hanford. He died in 1974. Before he died he said he considered himself pretty lucky compared to the guys who got killed in the war. Different mind set among all classes of society.
In southern cal about 50% of the market is foreclosure. A lot of the ppl buying are still buying to flip and if they can't flip then rent it out.
As a recession drags on this will put pressure on rents to go down.
In Orange County houses could fall 50% from now just to get to current 150 times rent. There will be many houses that dropped more than 80% of value before this is over.
If the Fannie & Freddie eventually fail, the run on the $ can easily cause an inflation scenario of upwards of 10% p.a. (Inflation during 1970s was much higher in less severe economic conditions - we were not TOTALLY dependent on imported capital for consumption). Those idiots may come out ahead if real value of $ drops by 50% in 5 years.
More proof that doctors make too much money -- so much that they can afford to make really stupid decisions about their personal finances.
And since they are so well paid it might be nice if doctors worried more about being good doctors and not so much about real estate speculation.
albrt,
Problem is politicians are more concerned about getting re-elected than solving the problem. Its easier to toss a few hundred billion at a symtom and make it look like your really doing something.
"Can't have true inflation, without increase in wages."
Not True; True inflation, mainly due to imported goods & services, combined with stagnant or falling real wages is the ONLY way we as a nation become poor enough to become competitive in the new economic order where we are capital poor.
Keep the concepts separate - money supply growth from isolated price increases. There are correlations but not necessarily universal causation.
If we can't determine how much of the rise in energy + food results from global S/D, then using CPI as a measure of inflation is pointless. Fed tightening would strengthen the dollar, but dissuade lending.
This is like a perversion of the early part of the decade, when low cost manufacturing in China kept the CPI artificially low, therefore not giving any reason for the Fed to tighten.
From the article:
Mr. Vallance charges $1,900 a month to rent his house; the tenants also pay for utilities and water. Still, the rent covers just 90 percent of his monthly expenses, and so he expects to write off any losses on his tax return, along with expenses associated with the property.
While tax deductions are an advantage of being a landlord,...
So we have a tax system where taxpayers pay for other people's stupidity/their personal decisions about how much money they want to lose. You could not make this stuff up.
If Fannie and Freddie fail and the goverment guarenteed the bonds we would have inflation if this did not cause a depression.
UB,
One more thing,
That run in with Elvis -- it reminded me of the Bjork video @ the airport -- same deal with Elvis and me; which is why I don't fly these days... too much uncertainty! Did we go over The Uncertainty Principal? I think not, but it is related to Brownian Motion and airports, to be sure!
Hmmm, Im not sure if Mr. Vallance can deduct his loss. I have been meaning to look this up.
Isn't this a passive loss - so he needs a passive gain to offset the loss.
I know when you sell a house you are taxed on the gain, but can not deduct the loss.
I thought rental income was passive income. I expect you could carry over passive loses to the next year.
orangeman:
Passive Activity, IRS and Tax
Zimbabwe,
Their dictator will do what ever it takes to stay in power. After all, if he lost power how long would he live?
I see deflation outstripping inflation for at least the next 18 months.
I agree with that - but inflation is like a flood, the water just keeps rising as long as the money's raining.
I do agree gridlock could tip the balance in favor of the deflationary pressures longer - that would just ensure a real nasty backlash mid-term and some SERIOUS monetary stimulus (tax cuts and programs)... but regardless of party the flood will eventually win.
BTW - on Hanford, a good friend of mine was on the clean up there... and Rocky Flats, and Los Alamos, and Savanna River and now is back at Oak Ridge.
I myself was recruited out of college to work at Savanna but turned them down - just didn't want to do it not that I was morally superior. My buddy who later went in to be part of the clean up said it was the smartest thing I ever did staying out of that place. My sincere sympathies to your family.
[Right now all those are too high, but, as LT demand comes back, the price of new homes (and existing) will increase accordingly]
Not going to catch up with inflation. Period. Globalization keeping a tight lid on wages is going to eat into housing prices for a decade or more.
argento,
Thanks, Its about what i thought.
So the way I understand it:
If i hire a company to manage the property then I am not actively partipating so I can't deduct from my my income.
If I am the Landlord I may be able to deduct upto $25,000 max depending on my income. $25,000 if modified AGI is less than $100k - phased out..
no deduction if modified AGI > 150k.
What has happened over the past several years has very little to do with inflation/deflation, and the fact that so many people see it this way is astounding.
The point about Zimbabwe is (1) deflationist camp say deflation is inevitable, that gov't CAN'T print enough money to over come current deflationary pressures (2) rebuttal is to look at Zimbabwe for what a gov't can do when it wants to print money. Not saying Z is doing beacon of light but it does castrate argument that deflation is inevitable. In a fiat system gov't can print & print.
"Can't have true inflation, without increase in wages."
Well, we have for the past several years... fueled by an easy credit explosion. But in a world where credit is controlled and priced for risk you are 100% correct.
We are going to suffer a haircut to standard of living as inflation for consumer goods and staples devastates the bottom 80% of income earners.
Not going to catch up with inflation. Period. Globalization keeping a tight lid on wages is going to eat into housing prices for a decade or more.
So what? Wages have nothing to do with money supply. Inflation is increase in money supply - period.
Fiat is a wierd word. "Let it be done" A decree. The latin for "let there be light" is "fiat lux."
Having a fiat currency means that you are legally obligated to accept payment in that currency. I wonder if this will be an issue as its value drops. Has anyone gone to jail yet for refusing to accept payment in dollars?
Has anyone gone to jail yet for refusing to accept payment in dollars?
I think the law is that dollars must be accepted as legal tender for debts. You can specify the method of payment before the exchange.
OT ancecdote regarding Zimbabwe:
As a kid I visited Zimbabwe. Upon arrival at our hotel, I saw a large portrait of the the president. In large letters at the bottom was written: His Excellency, President Banana. I started laughing so hard It hurt. I was shushed by the very nervous desk clerk. He informed me that they had made it illegal in Zimbabwe to laugh at the President's name.
They also confiscated my Kruggerands. We had come from S. Africa. Upon arrival the customs people informed me that I was not allowed to bring S. African gold into the country. They confiscated it and told me I'd get it back when I left. But when I left they said they couldn't find it.
Sorry, from an old thread, but my service has been spotty.
A rise on diesel taxes would be a death knell to every O&O truck driver, they're getting killed as it is.
I know a guy who is a manager at Swift who used to drive a rig and tries to explain to drivers that they'll make more money as a contract driver than an O&O(no insurance, discounted fuel, but most of them don't want to hear it. And Swift thanks their LDS gods every day that they don't listen.
Most of these ham n eggers view it as the first rung on the american dream being an O&O, next they'll have 2 rigs, then they'll be as big as Swift.
Born and bred dopes, just like Jas writes.
he has the ability to hold on for price appreciation (which will inevitably occur if you time horizon is 10-20 years)
Unless you're in Japan, 1990 or Russia, 1989 or...
Thanks Argento. Will look into the law(s) tomorrow. Here's something to chew on as we drift off to a sleep:
"there is no such thing as fiat money, that governments can create fiat currency, but that the amount of money is determined by the valuation of the market place, and that attempts to create fiat currency beyond the demand for money generate inflation. In the words of Keynes, Money doesnt matter, meaning that control of the money supply beyond limited boundaries will be adjusted for in the marketplace"
(some shadowy wikipedia author)
"Its easier to toss a few hundred billion at a symptom and make it look like you're really doing something."
My point is that we do not currently have a politician in a leadership position who is capable of designing a "few hundred billion" project that would actually transmit the money into the real economy in a productive manner that results in a multiplier, and would also get passed by congress. Giving or lending a few hundred billions to insolvent entities so they can appear solvent doesn't get the job done. Maybe Obama can come up with a program, maybe he can't.
Dryfly, thanks. It's a long time ago and I would be inclined to take him at his word as to how he felt about it. To most of the rest of the family it's just money at this point, to pay for the care of my grandmother who has no idea what's going on.
But we still aren't done paying for the Manhattan Project yet, and we are not in a very good political position to get anything productive done this time around. I am not at all confident that the U.S. government can even implement an effective "print" order. Then they have to find a national guard unit with functioning helicopters that aren't busy surging in Iraq, they have to get the helicopters to a target location where people who will actually spend the money will grab it out of the sky faster than the bankers who are trying to shore up their balance sheets, etcetera, etcetera, etcetera.
Once deflation gets a head start, inflation has a hard time catching up. At that point they can make the currency worthless, but they can't necessarily get the economy going again so that there is a buyer for your house who can pay an acceptable price denominated in something you want.
Dryfly,
agree that "Inflation is anywhere and everywhere a monetary phenomenon." - but i think it's also fair to assume that the US govt doesn't go completely off the rails too. Which leaves them desperate trying to control a system nobody truely understands, and which arguably defies control in any case.
Imho, the debt impact on the money supply has already occurred to a large extent, and we're now into the cascading de-leveraging part of the problem. Even if the government did turn on the printing presses, the problem would then become a systemic conflict between the effects of generalised inflation, versus the effects of asset inflation - which would be messy. Entertaining no doubt, but messy.
Well hell, I showed up and the party is over. Still, dryfly nail's it on the flation thingy.
There's no one here in this hall.
Mock?
Heloooooo...echo echo echo....
Damn. Well there's no line at the food bar....heehheheeh.
Now lets see, ...no wait...some of them damned Landlords, if Only by Accident will default. As I've seen.
This is icky.
Bwahahahahahahaahahah!
Cheers,
Inflation in the rest of the economy will eventually raise the nominal prices of these places
Only wage inflation supports house prices. Consumer price inflation without wage inflation is negative for house prices.
By the way, shouldn't decreasing housing prices lower imputed rents
No.Imputed rent is what a house would rent for on the open market. It has nothing to do with the market price of the house.
Rents are falling in some of the areas with major busts,such as Phoenix and Florida, but that's due to an oversupply of rentals, not declining house prices.
I haven't seen rents falling in Fla.
I keep thinking now they are going to, but they don't. Except in Cobradriver's neck of the woods, Ft. Meyers/Cape Coral, the inner circle of doom.
"Owners should analyze the rent or sell decision based on current prices"
I highly recommend Dan Ariely's book "Predictably Irrational" (the chapter titled "The Fallacy of Supply and demand") to understand why this is so hard for so many to do (for both buyers and sellers).
Simply put, people got used to prices being high and even made rationalizations for it..."this area is being bought up by rich baby boomers", "this area will never be affordable again", "houses just cost that much". The new, higher prices became 'anchored' in their minds as the "reasonable" price of a house...and once that's set, it's hard (even PAINFUL) for them to take a price 20%, 30%, 40% less than that "reasonable" price.
We are now seeing a phase where house prices will be "re-anchored" at lower prices as the pain of actual financial loss (negative cash flow, foreclosure, etc.) trumps the psychological pain of reducing selling prices (aka "I don't just want to give the house away!").
Lawyerliz,
I'm seeing Sarasota's rents beginning to fall in distant suburbs and bedroom communities, though I too would have expected this long before now.
We have a number of luxury towers at or near completion which I'm watching with interest but, so far, no Biscayne Boulevard prices - either purchase or rental.
Miami is a disaster. Seriously.
Mr. Vallance might have a wee problem:
"If your rental property shows a loss for the year (when you figure your property's income and expenses), you may be able to deduct this loss on your tax return. If your adjusted gross income is less than $100,000 and you actively participate in managing the property, you're allowed to deduct your losses on operating rental real estate up to $25,000 per year. Limited partnerships and properties in which you own less than 10 percent are excluded.
If you make more than $100,000 per year, you start to lose these write-offs. At an income of $150,000 or more, you can't deduct rental real estate losses from your other income. People in the real estate business (for example, agents and developers) who work more than 750 hours per year in the industry may not be subject to these rules."
In the condo area where I used to live, there are four properties for sale that are priced as if it were 2006. Obviously they just sit there, unsold.
I know Miami is a disaster.
Seriously. It directly affects what I do all day and my bottom line and not in a good way.
Some areas are more horrific than others. The towers will eventually be lost for failure to pay taxes, some sooner than others. That is years down the line.
We could have a hurricane and get a lot of destruction, but I doubt that the insurers will pay.
The best possible scenarios is if fuel oil gets so expensive we will get okies from the frozen north who can't afford to live there any more. But house prices would have to seriously drop for those people to afford it. I suppose they could go to C.C. where I understand capitulation is happening. I don't thing capitulation will happen for single family for another year. In the meantime, nobody is lending, so even if you reduce your sale price drastically, you can't sell. For people with low mtges, eventually the buyers will "illegally" assume the mtg, the due on sale clause be damned. If the banks have any brains, they will ignore this breach, and accept the stream of income. Or, if they are lazy, a more reasonable hypothesis. Also, people with paid off mtges are gonna have to finance the transactions themselves.
I don't see loans happening here for institutional lenders in any quantity for years no matter what happens to Fannie & Freddie.
If prices get low enough and rates go high enough, you might get some hard equity lenders here in enough quantity to form a bottom.
Just saying that Ft. M/CC is worse.
dryfly:
others believe as you do, and I am one of them. First we get monetary deflation, and then monetary inflation
itulip has a similar theory about this that they call "Ka-POOM"
we are in the deflationary (or disinflationary) period now. by this, I mean that we have credit destruction that is overwhelming the paltry monetary creation.
Yes, prices of SOME THINGS are going up (food, gold, necessities) but many other things are going down (houses, cars)
if the govt "prints" then we get POOM, or an explosion of inflation. I agree with you and am worried about this. (not to put words in your mouth)
another way to get explosion of inflation is if we get dollar repatriation from other central banks.
Well it's a waste. I'm seeing rentals listed at Ten Museum Park. Unbelievable.
I suspect MI land will continue to suffer but LT markets like Phoenix, Las Vegas (yes), and CA, will bounce back much quicker than a lot of the real housing bears think. Fear to greed."
California maybe, but I doubt Phoenix/LV will bounce back too quickly.
if one believes that energy going forward will be a problem, then Phoenix/LV are some of the worst places to move to. High high energy costs (cooling) coupled with an overly suburban environment do not bode well for those two cities. Granted, they'll do better than OH and MI, but they will still fare poorly.
same with florida. Why would midwesterners move there? there are few good jobs down there. FL and AZ and NV are places you move to retire. my suspicion is that they will revert to what they once were: low cost places where people can retire. key word: low cost.
so yeah, heating will kill a lot of northerners... but it's the slow bleed... no way they're going to be able to sell their house and then move to an area that costs 2-3-4x as much for a job that pays less. besides: a lot of northerners will do what they've always done when heating oil gets expensive: wear sweaters and build a fire.
I think people in LV/Phoenix and SoFl started to believe their koolaid just a little too much. even now they have this idea that tons of people will flock there. during the boom times, people saw RE going up quickly and assumed it's because people wanted to move there. The higher it went, the more that people did want to live there. But now with prices falling it will cause a negative feedback loop, at least for a while.
the people who moved to LV/Phoenix were primarilly from california and the californians need to save their own RE, they're not saving anybody else. And the midwesterners can't sell their current houses to move down there
it'll be rough for Phoenix/LV. but I'm' ok with that, there is no reason why we should be building cities there anyway.
Yes, prices of SOME THINGS are going up (food, gold, necessities) but many other things are going down (houses, cars)
But the cost of manufactured goods cannot drop below the cost of making them. There is only so much the price can go down. Because of the short product lifetime the market price cannot drop below cost of manufacturing for any significant period. And the cost of inputs to manufacturing are mostly globally priced and the products are sold globally. You are not going to get a cheaper BMW if someone in Saudi or Russia is willing to pay more for it.
Houses have no such floor. Remember that land cost is completely endogenous - it will drop all the way down to zero as the market price of the house declines. Labor and material costs for housing are also highly endogenous. And the market is local.
The people in the article are clueless but what can you expect? It takes a long time to reach capitulation.
My brother in law bought a house to live in in Naples, FL in 2003 for $280,000 in a new development of cookie cutter houses in a bad school district. He like everyone in Naples was starstruck by real estate at the time.
At the peak there were several homes in the 800 house development that did sell for in excess of $500,000 and he thought he had struck it rich. He put it in the market in 2005 for $550,000 and let it sit there for over two years.
Even after two years of not selling he was bragging about his "500 thousand dollar house" when I would go down to visit. Totally clueless.
The last update I got is that the neighborhood is now loaded with foreclosures with the next door neighbor having just listed his house for $240,000. My brother in law put it on craigslist for what they paid for it and will not be able to even get out with that.
It took three years for him to reach the stage of total capitulation and lower the price. His mortgage payment reset in March 2008 and they are barely hanging on since his overtime was cut due to the Florida near depression like conditions in his area.
What a mess.
yoghurt, you have me confused.
my statement is not incongruous to yours. I stated that house prices are going down.
that said: I disagree with your argument. the price of manufactured goods is often lower than the price in producing them. and this can persist for some time.
It happens especially when we have a "subsidy". for instance; The US Govt subsidizes US farmers to make a crop. the farmers then sell said crop for LESS than the cost of production, flooding the world market with that crop dropping its price.
nobody wants to be completely dependent on imports for FOOD, so almost every government subsidizes this.
right now, many countries are subsidizing oil as well.
the list goes on and on. thus, your calculation is in error. a product can be sold indefinitely at a price below it's cost to make so long as it has a subsidy.
houses can obviously have a price subsidy as well.
A penny is now worth two cents and here is mine on inflation deflation. Think of it as becoming poor. The stuff you can sell ain't worth squat and the stuff you need is worth a lot of squat. The ultimate question will be if we are going to see declining levels of food production. It takes what one farmer to feed 130 people in the US and if that starts going down we have a great deal of adjsutment to do.
tg:
the US has a lot of problems. we could likely see depression-like circumstances.
however, I also believe that we will pull through "ok". during our depression we will live better than 90% of "boom-time" Chinese peoples.
there are so many natural resources here in our country that we could fare quite well...
the way I envision a worst case scenario:
we hyperinflate or default on our debt or whatever.
Interest rates thus skyrocket. We go into massive depression. lots of job losses etc. energy costs soar.
due to this, we start making hard choices. We start using more wood and coal for fuel. price to us= cheap in terms of $$$ but high in terms of pollution.
price of imported food skyrockets. Thus our agribusiness explodes.
we have to rework our infrastructure because the car-centered city will no longer be tenable. thus massive public works must be done tearing down SFHs and putting up the Parisian-stle of urban density (5-6 stories tall, business on first floors, central markets and gardens, etc)
a lot of people out of work=a lot more workers for agriculture and coal/lumber and infrastructure products.
everybody works for less, and more hours. a lot of these enterprises would be nationalized. so nationalized food, nationalized energy, etc... it is possible that the rich will abscond with this national wealth, but I believe that if we truly get to this point that we will have the rich's heads on spikes if they try to export food to the rich countries around the world while US citizens starve.
depressions can be time of revolutions.
Dryfly, half the things you say are gibberish, full stop. You certainly wouldn't qualify as even a Jr. Analyst at my fund.
The poster who called you out by citing opportunity cost is absolutely right.
My current landlord could easily have sold the house I am in today for $2.5m+ and put the money in fixed income. Instead he thinks he's getting a deal from the $80,000 per year of rent he gets from me and from there you have to subtract $2,000 per month of property tax and $1000 per month of maintenance CAPEX.
The "alternative" investment in the boom years and even today is bonds, which in many places still yield higher than rents.
Furthermore, printing works only so far as it can stimulate the real economy. The Zimbabawean dollar is not fungible into other currencies, the USD is and the excess dollars can easily travel outside the US market just like the JPY did in the 1990's when Japan printed. In many respects, this is what has happened today in commodities.
I do not doubt that given the intelligence of the posters on this board, by the time it gets to the monetization stage, many of the people on this blog will have bought.
Lastly, at the end of the day, I find any comparisons to the United States and a 3rd world dictatorship in the heart of Africa to be utterly ludicrous even if for comparison purposes.
This is the greatest country in the world. I've been to all of these so-called Emerging Markets and none of them hold a candle to the USA. Switzerland is the only other country I would live in.
oh:
but our children won't be text messging each other 100x a minute and the coolest new Apple product will be a Granny-Smith and cars will be for rich people and flying only for the ultra rich.
to us it would seem like a depression... but probably not much different than life in the early 1950s
Hedgefundanalyst:
can you read? nobody is comparing the US to Zimbabwe.
the ONLY reason we discuss Zimbabwe is because some deflationists say things like
"the government can never print money faster than credit is destroyed"
but this statement is not true. Zimbabwe shows us that. so does Germany. there are several examples of hyperinflation throughout history, where govts did print money faster than credit is destroyed. the US govt COULD also do this. they don't. but they could.
in other words, there is no reason why the US cannot face hyperinflation.
so step away from the mike, re-comb your hair, and put your USA Flag pin back on your lapel. it'll be alright big feller.
Dryfly,
I'm with you on inflation. There's plenty of evidence that governments respond to debt deflation by printing money. Most emerging markets have gone through this process. It involved not just monetizing deficits, but also increasing the velocity of money through perverse incentives.
The deflationists are a little scared of that body of evidence. I think they're not quite sure what to do with it. So they end up arguing that either 1) "we are not Zimbawe"; or 2) the government won't shoot itself in the foot by causing hyperinflation. Both arguments are strawmen.
No one is saying we are Zimbawe, only that we have accumulated debts that cannot be repaid out of income. Those debts must be either written off (causing devastating unemployment); or nominal income must be boosted much higher (causing inflation). The choice is purely a political one, as the government is in charge of nominal spending. Inflation is always and everywhere a POLITICAL phenomenon.
The second argument also fails under examination. No politician sets out to create hyperinflation. Hyperinflation is the unintended destination of path taken. It is the result of a bias in political decision making. That bias is easily described: avoid the pain of recession, accept the pain of a little inflation. Haven't we been on that path since, probably, 1998?
A decade of inflationary bias. A Fed Chairman that always thinks inflation will moderate, "in the next few quarters." A default towards always avoiding pain through bail outs, interest rates, stimulus, etc. Is this a government that thinks it is producing hyperinflation? Obviously not. But it is also exactly the type of government that does produce it.
And if you read what I said, the discussion is idiotic. To compare Zimbabwe and the USA makes no sense even for comparison purposes.
Elvis writes:
"I find that when someone wants to compare their writing to an icon (whether it deserves an icon status or not), they think way too highly of themselves and deserve to be mocked relentlessly."
OK...the bubbles in iconisity also rise. Elvis, you lost your icon status when Michael Jackson became your son-in-law.
"to us it would seem like a depression... but probably not much different than life in the early 1950s"
Family of four in a 3/1 of 1100 square feet, 1 bathroom, one car, one phone, one TV. Most vacations within 200 miles, or involve camping. Yes, that would seem like poverty -- and would be, comparatively, when things like TVs and telecom service are so much cheaper now.
On the other hand, what the '50s had was serious security: unions, pensions, near-full employment, confidence in the financial system, and low inflation. We getting back that part of it? If not, it wouldn't be "just like the 50s." It'd be much worse.
"Can't have true inflation, without increase in wages."
What do you call what happened to Friends of Ben's wages?
Even in the most affluent suburbs of NY City, where many houses sold for $1 million+ in 2006, we are seeing Realtor signs with a "For Rent" board on top. This never used to happen.
There are two big problems with renting top-end houses, in addition to those CR described.
The rents have to be very high to make sense. I've heard $8-10k per month. That market is very limited.
They tend to require more maintenance, especially for grounds. What renter is going to spend weekends weeding out your rose garden?
This is a sign of desperation. Realtors must be desperate to put these FOR RENT board up on homes listed for $1 million+.
HFA:
I guess we're not making ourselves clear
We are not using Zimbabwe as a comparison to the USA. we are only using zimbabwe to prove that something can exist. nothing more, nothing less.
It is like the black swan. For decades anglo-scientists felt that there was no such thing as a black swan, since no anglo-scientist had seen one. then one day someone saw one and got a picture.
it only took one black swan to prove that black swans exist.
By showing that the black swan exists we can prove that the black swan exists, WITHOUT comparing the black swan to the USA.
in the same way, there are some deflationists that feel that inflation CANNOT occur because it can NEVER overcome credit destruction.
I use the example of germany and zimbabwe to prove that this statement is in error.
I am not comparing zimbabwe or germany to the US at all.
I am simply showing proof that something can occur.
just like the black swan.
the black swan has nothing to do with the US. but its presence proves that it exists
Hyperinflation in zimbabwe has nothing to do with the US. but its presence proves that hyperinflation can occur.
=====
there IS a comparative argument that uses zimbabwe, but it is a different argument all together
Some people on this blog talk about how the US is in "hyperinflation" right now. so other posters use Zimbabwe's hyperinflation to compare with our inflation.
our inflation is high, but nowhere near as high as the hyperinflation seen in zimbabwe.
3rd world dictatorship in the heart of Africa
wasnt zimbabwe one of the african countries which actually had a good standard of life and actually exported food to their neighbours? and first when the dictators power was in danger he destroyed countrys economy so he can remain in power.
scary parallel indeed, and maybe not that far away
Yearning To Learn, you forget that this nationalization of yours could be done by chinese and japanese companies and swf. i mean state would need money it doesnot have.
remember russia in 90s, here itcomes
Inflation at the bottom of the economy, and deflation at the top. Where does this lead?
revro;
PUT YOUR AMERICAN FLAG PIN BACK ON YOUR LAPEL AND STOP SPREADNG SUCH NONSENSE.
the US is the free-est most wonderfullest country on the earth. We have a benevolent leader who would never interfere with our civil liberties in order to expand his power.
we have a well functioning system with checks and balances to ensure that no branch gets too much power.
we are known around the world for our unique ability to look out for the poor, and give due process to all criminals, no matter how heinous their crime might be
in fact we have set up freedom camps for this express purpose in Cuba. And we have other more secret freedom camps around the globe as well.
I mean, sometimes you need to get to freedom covertly, you know. I remember one day I was walking through the airport and then BAM! Freedom just snuck up on me when I went through security!!! I did find it interesting that freedom really only snuck up on young to middle aged men-of-color... but hey freedom works in mysterious ways.
dryfly writes:
...wondering the same thing - rate of cash burn & estimated time to burn out.
Hard to say - probably depends on the quality of their job. If Job goes POOF then Houston we have a problem... right now.
And that is exactly how history will misinterpret these events. We've never had a housing led recession before and the Sebastians of the world will point out the US economy muddled along with low positive growth until unemployment started rising. California smashed through 6% on Thursday.
HFA,
Like many, you confuse "won't work" with "won't try it".
Deflationists think their opponents are all making a normative judgement: that we should have inflation because that is the solution. Deflationists are so hung up on this normative judgment that they can't think straight.
Most people are not saying we SHOULD have inflation. They are saying we WILL. It is not a judgment that inflation will work, it is a forecast that the political process can, and probably will, produce inflation.
Really, the deflationist counterargument to the "political inflation" thesis boils down to: 1) we are not Zimbawe; 2) politicians don't want hyperinflation; and 3) inflation won't produce real growth. Can't you come up with something better?
I'm sure all the Gretchen Morgenson haters (Tanta) won't like being called out by her in today's article:
Given a Shovel, Digging Deeper Into Debt - NY Times
The easy credit vultures are out there waiting to pick over the carcass of the dead american economy. It's just about time for the rest of us to see the "financial services" industry for what they are: Blood suckers. It was all OK when they were pillaging subprime slime, but look - they've been screwing the middle class all along too. They're not providing services - it's just an extortion racket. Pay up or else.
Yearning To Learn, you forget that this nationalization of yours could be done by chinese and japanese companies and swf. i mean state would need money it doesnot have.
I disagree. we have all the money we want. we don't have wealth. but we have money
The Japanese and chinese have money too. but we can make more money than they have. their money is worth no more than we let it be worth.
we are not russia or japan. our debts are in OUR currency.
if we started running 10-20% inflation YoY we could wipe out a lot of our debt, no?
after that of course we'd lose our reserve currency, and borrowing in the future would be at high rates (20%? 30%?)
our currency would be worthless, so we'd get the nuevo dollar. and then the rebuilding would occur using the new currency. people are surprisingly willing to jump from one currency to another as long as it's done slowly enough.
yes, I hear all the gold bugs screaming "All fiat eventually goes to zero!!!!" And indeed it does just that. But there's an equally powerful corrolary: All gold currencies eventually go to fiat!
that said: there are many possible outcomes to this. right now we have an interesting symbiosis between us and the Asians/Middle Easterners. It serves all parties. Only when it no longer serves all parties will havoc ensue.
hence, the Ka-POOM
Rob Dawg,
You nailed the key point about what is different this time - historically, housing has lagged economic distress and foreclosures rose as increasingly stressed 'homeowners' couldn't meet their mortgage nut, sell or refi - historical trend data, indicator comparisons and other relationships would seem to be skewed in some fashion by things going cart first this time...
does anyone else have problems
downloading economic comentary from the Northern Trust website? Does
one need an account now to view
Kasriel and Banglore's commentary?
Good link from Reggie Middleton on oil production and consumption
Safe Haven | Are Energy Prices Curtailing Growth?
YTL,
Electricity in PHX is cheaper than NY/NJ, can't speak for Vegas.
SRP flat rates are something like .12/Kwh, variable is .05-.07 off peak, .15-17 peak(sorry I don't have exact #s, they just raised rates & I don't have quality net access.
Zimbabwe is tragic...hard to remember that Mugabe was elected, when SA was still in upheaval. Rhodesia/Zimbabwe was the breadbasket of southern Africa...most of the white farmers stayed on after the transition. Land grants to impoverished black citizens became land grabs, and descended to murder. As white farmers where chased out or killed, they took their ag skills with them, and even knowledgeable black farmers were left with ever smaller plots, which they had to defend from theft themselves, in chaotic conditions, without fertilizers and equipment now impossible to import with a destroyed currency.
the US is the free-est most wonderfullest country on the earth.
and thats why you have the freedom to be terorized by HOA and are taxed to dead while the feudals incomes (HF folks) are taxed by 15%
if we started running 10-20% inflation YoY we could wipe out a lot of our debt, no?
good morning, you runned 10-20% inflation since 2000, and it wiped out your debts really great. by debasing your currency from 0.8 to 1,6 EUR/USD
after that of course we'd lose our reserve currency, and borrowing in the future would be at high rates (20%? 30%?)
not necessarily. just make Final Fantasy guarantee explicit and P&B (PBOC, BOJ) will not care, i mean whats another 100b on top of the current interest the US government pays, just from 300b to 400b, who cares, its just peanuts. or maybe the entire budget deficit?
PUT YOUR AMERICAN FLAG PIN BACK ON YOUR LAPEL
i like you 
but i would loook kind of out of place here with an american flag pin ... 
heh? why should i wear an american flag pin here in europe? i mean nothing against you guys
besides i could accidently meet Jas on vacation and then had to endure a lection about "born and bred dopes" or whats the name of university course he teaches
Zimbabwe is truly a tragedy, kind of what Stalin did to Ukraina.
U.S. banking system sound -Treasury chief Paulson
Banks sound but economy to take time: Paulson
| Reuters
Considering his track record you had better be peeing your pants about now.
My current landlord could easily have sold the house I am in today for $2.5m+ and put the money in fixed income. Instead he thinks he's getting a deal from the $80,000 per year of rent he gets from me and from there you have to subtract $2,000 per month of property tax and $1000 per month of maintenance CAPEX.
The "alternative" investment in the boom years and even today is bonds, which in many places still yield higher than rents.
Not in my world.
My buddy owns seven houses - combined they wouldn't sell for a million dollars at the peak. That's all of them combined.
Yet he pulls in about $1000-1200 per unit per month. These units are 100% paid for though not 100% depreciated (the schedules are pretty long I understand).
Assuming about $1100 per unit per month... that makes $92400 per year gross. Looking at my bills (one of his rentals in next door) I'd guess he pays about $10K taxes & insurance. He does his own maintenance - he loves it, its like a hobby for him. he has his regular job and then landlord.
I'd guess he easily nets $80K from my rough guestimates. He might even squeeze out more - he's pretty frugal.
And 'yes' the rents are that high relative to owning. We have a lot of temporary folks who just have to live here for work but are reluctant to put down roots (they can't easily sell to get out again fast). So even with high rents his places are always occupied. I've never seen one of his places sit idle longer than a month. He's plugged in & knows whose moving in out & about the town.
At peak prices two years ago he might have received $1MM on all of them combined... thats an 8% cap rate I figure. Today he wouldn't get $800K for them if he could sell them at all so at todays valuation he makes 10%.
Doesn't matter though he bought most of these properties about the time I bought my home... his real out of pocket cost is more like $400K. Based on that he's getting about 20% - yes/no?
If he were to sell he'd pay capital gain & transaction fees - and then he'd have to decide where to put the money to do better than 8%. I don't think he knows a consistent & safe place that will provide that. I'm not sure I do either. Meanwhile his rents behave like an 8% annuity.
So the original point was - if the accidental landlord can make the property cashflow - holding on to it isn't a bad deal - still applies & makes sense. I said up front I don't know if these folks do cashflow - I doubted they all or even many did BUT if they did then sitting tight isn't terrible.
So while I might flunk the interview to be an analyst at your fund - I don't think you'd cut it as a landlord in fly-over either. Good thing we stick to the world we each know and understand.
Alo and orangeman - that is my understanding on how Schedule E works, too. Over the $150,000 income level then the losses are "suspended" until either owner's income is below $150,000 again or property turning a profit or selling either that property or another one and using the loss to offset the capital gain.
Paulson's a thug.
I wonder if Canada will get dragged down with us, or if they'll be able to implement more sound fiscal policies?
If you want a more of a robust picture on creditcard debt, rent the film 'Maxed Out' - much earlier, much more comprehensive look at the problem.
I wonder if Canada will get dragged down with us, or if they'll be able to implement more sound fiscal policies?
Man-moth | Homepage | 07.20.08 - 11:28 am | #
Ontario will get beat up very badly - especially the strip along the 401-402-403... its so closely coupled to Detroit.
Up North & Out West should do well (global resources)... but do the folks in Brampton want to move to Flin Flon for work? And there are places a lot farther north than Flin Flon.
dryfly,
Grande Prairie looks like the big city when you drive down the Alcan... course that's after the 300+ km stretch of absolutely nothing but wilderness before Ft. St. John...
FWIW National City offering 5.05 CD.
FWIW National City offering 5.05 CD.
Dryfly,
Not surprised that decoupling from Detroit is nigh impossible. Do you have a sense of how the Canadian banks are responding to the FED's actions? I've been nosing around, but haven't been able to find anything really descriptive or satisfying on the subject.
Flin Flon or bust!
Cash flow is the lesser part of the analysis. An amatuer with a cash flow model will take ARM financing or a 40 year mortgage.
I always recommended people take a Schedule E and put it into Excel with 10 years or more for columns. Don't forget to add in an hourly rate for your time spent landscaping, painting,court fees, etc. Now, look at your bottom line vs your total purchase price. If that percentage makes sense for a non-diversified investment, it makes sense financially.
Ontario will get beat up very badly - especially the strip along the 401-402-403... its so closely coupled to Detroit.
Up North & Out West should do well (global resources)... but do the folks in Brampton want to move to Flin Flon for work? And there are places a lot farther north than Flin Flon.
dryfly | 07.20.08 - 11:34 am | #
Almost 40% of Canada's population lives in Ontario, and the majority of those people live in the GTA and surrounding areas. The heart and soul of employment in these areas is manufacturing, especially manufacturing for export to the United States.
If manufacturing is significantly harmed, Canada is significantly harmed, no matter what the price of Fort McMurray oil, Brandon wheat, and Sudbury nickel is going for. I know Carney and Flagherty have recently told us that the world isn't that bad; I'm just curious how they're planning on finding jobs for the untold numbers in southern ontario whose livelihoods are directly or indirectly influenced by the flow of exported goods? The rapid appreciation of the CAD, combined with the economic slowdown in the USA, is just beginning to be felt in manufacturing, and is going to give us in Ontario an echo recession that's going to be pretty darned close to what's going on in the USA.
Unless, of course, Alberta wants to flow us over some cash to offset that loss. Say 60% of oil revenues?
Not surprised that decoupling from Detroit is nigh impossible. Do you have a sense of how the Canadian banks are responding to the FED's actions? I've been nosing around, but haven't been able to find anything really descriptive or satisfying on the subject.
I don't know much about the banks - there were some comments a few days ago (maybe even weeks) but it went in one ear out the other - no skin in the game for me.
All I can recall was that most Canadian banks were supposedly 'better regulated' and smaller & more focused than big US banks & not as susceptible to the SIV & CDO bug so should do better.
Sounds a lot like "Containment - The Canadian Edition" to me.
Yeah, I've heard the same thing about better regulation, but haven't been able to get hold of anything satisfying that is "non-anecdotal."
@Sounds a lot like "Containment - The Canadian Edition" to me.
LOL!
An alternative title to this article might be: "How to ruin your finances with emotions".
I was trying to help a client sell a photo shop. The place was making him about $50k/yr. He could have made the same money working for others with the hours he put in. He wanted $100k. Someone offered $80k, which was much more that it was worth.
Quote: "Hey, if I can't get my price, I'll just close the place"...and so he did. He lost $80k due to ego based judgement.
Unless, of course, Alberta wants to flow us over some cash to offset that loss. Say 60% of oil revenues?
noob goldberg | 07.20.08 - 11:50 am | #
That's kinda what I thought but my view of Canadian biz is kinda schizoid... I get up into Manitoba and everything is honky dory - I go over to the 401 & its EOTWAWKI.
Ontario is at greater risk than 'Michianio'at least until the CAN$ falls vis-a-vis the USD... and with Alberta exporting like it is - that might take awile.
One question I have is... how will Quebec do? Does anyone in Canada (other than the Frankophones) care?
All I can recall was that most Canadian banks were supposedly 'better regulated' and smaller & more focused than big US banks & not as susceptible to the SIV & CDO bug so should do better.
Sounds a lot like "Containment - The Canadian Edition" to me.
dryfly | 07.20.08 - 11:52 am | #
Banks are also supposedly better capitalized here as well, but we all know how quickly that can change. Canadian banks are quick to trot out the fact that they have relatively minimal exposure to sub-prime and alt-A. Indeed, it was quite a bit more difficult to approve marginal loans here than it sounded like in the USA. However, pretty much all the banks got involved in the asset-backed commercial paper market in a pretty big way, and the housing market in many parts of Canada followed a similar parabolic run as was seen in parts of the USA. A strong reversal in national housing prices would still significantly harm the banks, but as of now the doom and gloom scenario in the USA has been held at bay.
On the flip side, as far as I know the USA never experienced a year-over-year national housing price decline since the 30's; Canada experienced a brief one in 1999, so hopefully that lesson was still fresh and prevented the most egregious of poor lending actions.
We have this in today's SF Chron:
Diablo Grande project has a devil of a time
No potable water for the stressed remaining homeowners, but hey, the golf course is open!
One question I have is... how will Quebec do? Does anyone in Canada (other than the Frankophones) care?
I heard Charest speak at the Conference de Montreal and he's probably one of the most free-trade oriented premiers I've ever heard out of Quebec. Not that I've heard very many, mind you.
Charest is focussed on interprovincial trade barrier removal, and increasing labour mobility. I'm sure that's all Alberta wants; a flood of unionized francophone welders and pipefitters descending on the oilfields.
I've also begun hearing some pretty protectionist rumblings coming out of other channels in Quebec; my impression is that during tough economic times popular opinion begins to turn inward and a bit of xenophobia sets in. But I'm too far removed from the situation to provide any decent intel on public perceptions in Quebec.
I think the message is the same for Canada as it was for the US two years ago: Sell your real estate! Sell it now!
Dry,
With the price of energy, they're doing fine with all the hydro-power they sell to the Northeastern US. That is a huge part of their economy. Lumber has obviously fallen off. I haven't heard of any catastrophes la bas.
Sorry Dry, I didn't see your other question; Does anyone in Canada (other than the Frankophones) care?
No.
I think the message is the same for Canada as it was for the US two years ago: Sell your real estate! Sell it now!
I hope your message gets through; I've got some dry powder waiting for the sell-off. I just hope I have the patience to wait it out for the next couple of years.
With the price of energy, they're doing fine with all the hydro-power they sell to the Northeastern US. That is a huge part of their economy. Lumber has obviously fallen off. I haven't heard of any catastrophes la bas.
Quebec's agriculture sector is skewed toward hog production. While not a large portion of provincial GDP, it's definitely a rural catastrophe for them.
I always think that economic growth happens in Quebec in spite of their best efforts. It seems that, in the midst of an economic decline, they tend to implement some sort of policy that makes things even worse. It's like a guy with a broken arm shooting himself in the head to dull the pain.
First, I would like to be clear that if you read my only two posts to this blog, nowhere did I state that hyperinflation can't occur. It would be a ludcirous statement to make, given the fact that it has occurred many times in history and is occurring in a few places today. Furthermore, for you to insinuate that deflationists dispute that hyperinflation can't occur is insulting to them, I would think. The Fed can simply press a button, and increase the money supply by 100x. Deflation solved, problem not, so it's a USELESS THEORETICAL discussion that you should quit obsessing about if you actually want to make money.
I can easily bring up the example of Japan to dispute your Weimar example as a country that pursued a stated objective of "quantitative easing" with little or no success. So the evidence is not concrete that "printing" can lead to an (immediate) resolution to deflation.
If there is demand for the currency, which in a deflation occurs in order to pay down debts, then deflation can occur longer than one can stay solvent.
For the record, I think there is currently inflation, but it is not because of dollar printing (which can easily be observed by looking at the money supply figures). The U.S. is currently in a DEFLATION (that's what a credit crunch does), which is actually being exacerbated by the rise in fixed costs (food and energy).
The reason the world is experiencing inflation today is simply because of dollar pegging. Other countries are required to "print" in order to pursue monetary policy that is not in accordance to their internal economic conditions. In other words, global monetary policy is causing overheating.
The U.S. imports this inflation thereby negating the effectiveness of Fed monetary policy in stimulating credit expansion.
It's Econ 101, big country vs. small country. The U.S. is no longer the big country.
When the pegging stops, interest rates will rise and put an end to this crap.
video on mortgages
YouTube -
When the pegging stops, interest rates will rise and put an end to this crap.
HedgeFundAnalyst | 07.20.08 - 12:24 pm | #
Isn't that like saying 'when deficit spending stops'?
I'm not trying to be cute or smart ass - but that sort of defines the 'trivial solution'. Its like saying we'll have overall deflation once inflation stops and inflation will stop when it stops.
I agree that the pegs & resultant CAD are the root of the problem - I don't see them going away anytime soon, either as real pegs like PBOC or FX manipulation like BOJ. Deflationary pressures just jack up the ante, the cost of maintaining them - they seem more than willing to pay.
Yes/no?
We need a King!
YouTube - Obama vs. Mccain: It's the Economic Stupidity, Stupid
So while I might flunk the interview to be an analyst at your fund - I don't think you'd cut it as a landlord in fly-over either.
Not all hedge funds make money, not all landlords do either. My view of hedge funds and real estate is probably skewed by recent news reports.
I wouldn't make it as an analyst either, but the eternal chase after the maximum yield seems to have backfired and resulted in loses.
Treasury Secretary Henry Paulson sought to reassure an anxious public Sunday that the banking system is sound, while also bracing people for more troubled times ahead.
"I think it's going to be months that we're working our way through this period clearly months," he said.
Paulson said the number of troubled banks will increase as they struggle to cope with big losses on bad mortgages. The government this month took over IndyMac after a run led it to become the largest regulated thrift to fail.
"Monetizing" debt is great. But, and in like kind, inputs get "monetized" as well.
No one is printing money. Nor are they likely to. How the hell are the Feds going to artificially increase the monetary base (helicopter drops) w/ input (commodity) prices soaring w/o it?
With "majik" money???
Housing suffers further as economy slouches
Data likely to show market still far from bottom
Housing suffers further as economy slouches - MarketWatch
The housing market is suffering from a "one-two punch," said Richard Moody, chief economist at Mission Residential.
Poor economic fundamentals are beginning to weigh on the sector.
"You've got seven months of private-sector job losses. You've got wage growth that is not keeping pace with inflation, you've got sagging consumer confidence," Moody said.
Data on June existing and new home sales, to be released on Thursday and Friday, will show declining sales, large inventories, and many more miles to go before prices bottom, economists said. See Economic Calendar.
In Hindsight: Time off? No, we're busy saving the economy
In Hindsight: Time off? No, we're busy saving the economy - San Jose Mercury News
Of course, you also could look at the health of the Silicon Valley job market: According to the state Employment Development Department, the unemployment rate in Santa Clara and San Benito counties (well, mostly Santa Clara County) jumped to 6.1 percent in June, up from 5.6 percent the month before and 4.8 percent in June 2007. Silicon Valley gained 3,000 jobs in June, but that was only half the usual seasonal gain. Total employment hit 923,200, up just 800 or 0.1 percent from a year earlier.
No one is printing money. Nor are they likely to. How the hell are the Feds going to artificially increase the monetary base (helicopter drops) w/ input (commodity) prices soaring w/o it?
The fact that the fed hasn't raised rates in the face of stiff input & commodity prices tells me they aren't too concerned about about them... so why would that matter? That isn't much of a constraint it appears - so far anyway.
Shoulda added...no one in THIS country is printing money.
Agree hedgefundanalyst, it's been the rest of the world that has been printing...for some time.
And, I don't subscribe to the view that there is some conspiracy under way to destroy our country by debt, etc. It's just very hard to know what is the appropriate amount of money there should be in a rapidly growing industrialization effort and they've obviously erred on the side of loosy-goosy.
Whoops!
Argentina's Debt was in dollars
Germany's Debt was in Gold
Zimbabwe?
Our Debt is in dollars. Big Differnce. We can have inflation when we monetize trillions of dollars of debt. But currency should stabilize after.
This process can cause a world wide depression. I don't believe in decoupling.
Dry-
I suspect they're concerned (about input inflation). But, there's a lot of fires, and you gotta tackle the biggest one first. I read the past year as Bernanke trying to subtly monetize, but it ain't working as well as his Princeton thesis predicted.
And, outright printing would crunch real purchasing power to an unmanageable degree (dollar crisis).
Since we've been off the gold standard, we've relied on the Fed (and our trading partners) to fix the value of money via interest rates. When they are low, the actual value of money goes down (inflationary).
So, in a sense, I guess I agree w/ you that they've tried to monetize w/o outright printing, but the currency markets are repricing (have been for the last ten years) down to reflect this and we're still getting squeezed in much the same way we did when we were on the gold standard.
Bernanke is in a box. Which means we all are, of course.
I'd add that commodities are gonna keep rising to forestall a dollar crisis, which I think would cause a world trade crisis. And the only reason I feel this way is because China can't dump their Treasuries and Agencies any more than Bill Gates can throw over a billion shares of Microsoft.
IOWs- there is market liquidity but not owner liquidity and "new" commodity and finished goods prices will keep rising to offset the declining intrinsic return on our sovereign debt.
PS- always appreciate your insight and wish you had your own blog covering our manufacturing sector!
So far I believe we are chasing the Japan scenario. I don't see interest rates going up without the economy improving. As more workers are layed off there will be more pressure to lower interest rates.
China's number 1 concern is the goverment staying in power. It's also its no. 2 and no. 3 concern.
China does not have a problem if the dollar drops in value as long as they stay in power.
China needs to keep growing so more peasants can move to the cities to increase their standard of living.
Tenants should be very careful about renting from "accidental landlords," as many of them don't know what they're doing. There are a fair number of homeowners who, knowing they'll face foreclosure eventually, rent out the house to unsuspecting tenants and let the tenants deal with the fallout.
In addition many of them don't know that yes, the landlord is responsible for fixing things that break and tenants will not appreciate a landlord who tries repeatedly to fix it himself, rather than hiring competent help.
And most people who take up landlording as an occupation know that single-family homes are lousy investments. (The only time it works is when grandma dies and the kids decide to rent out the house and split the income.) A month's vacancy can throw off the cash flow for a year.
I keep seeing the same thing around here in Austin, which is just starting to wake up to the r/e bust. People are asking $160K for condos that sold 2 years ago for $95, just because a couple idiots in the building paid over $150K last year. These folks feel like they are losing money just because prices are going down, regardless of how much they actually paid.
Inventory is stacking up and anyone who does not price agressively better head to the library to get on the list for Accidental Landlording for Dummies (I know, it's redundant). I'd consider paying $90K for some of these places, but you just get a spiel about how Texas real estate is different (I thought Tex r/e was famous for it's boom bust cycles, but the conventional foolery around here is that Texas can't go bust). It's just the Kool Ade talking, I know.
Bring it on. All these accidental landlords will flood the market with vacant rentals.
PS- always appreciate your insight and wish you had your own blog covering our manufacturing sector!
moo goo the majik money maker | 07.20.08 - 1:50 pm | #
Thanks - I've thought about it - someday maybe. If I did, I'd want it collaborative from the get go - a couple different industrial perspectives, maybe even international (find Asian & European co-bloggers w/ mfg insights - we are so coupled, why pretend otherwise). I'm no where near there yet.
And I do think we agree on the monetary stuff more than the 'argument' would indicate. Bernanke really is in a box... the question is which end of the box will he try to bust out from... the inflationary end or accept the deflationary out presented him. I think you know my bias but I sure could be wrong.
"This is not South America, where hyperinflation was part of the landscape, this is the end of what most people would consider even the barest rudiments of a functioning society."
And the only pity is that there isn't an American to blame it on.
With regard to re values and a reduced living standards as being a likely scenario in the "out years", My wife and I now live on Connecticut Avenue in Washington, DC. Our real estate taxes are subject to a "senior citizen" haircut and a "homestead deduction" haircut. I have no idea what the re tax reductions will amount to, but likely they will be significant. So in point of fact, our big housing expense will be the condo fee, which is constantly being adjusted upward due to energy costs as well as needed infrastructure repairs/replacement in a 50-year-old building.
My guess is it may be cheaper living here with a small or no mortgage than it was in rural Virginia where we formerly hung out (as renters). Down there, I had to drive 100 miles round trip for dentist and doctor visits, and 50 miles for a haircut. Here everything is within walking distance or an easy bus ride. In addition, the bus costs me $0.60 per trip.
We own two cars and it is obvious we only need one (or none, actually, if we wanted to give up spur-of-the-moment trips). I'm thinking it will be quite easy to pare costs here if needed, whereas in the country you just had to have at least one car, and two were highly desirable.
Add that up, and I would say real estate values in the country can only go down further, whereas values in a well-policed city (someone across the avenue has 24-7 police protection and the protections around an embassy complex on Van Ness Street a few blocks away are beyond description) with excellent transportation options (I didn't mention the subway, which is an excellent value as well). A ton of federal money is available for whatever. DC is no place to raise a family due to lousy schools and parks and recreation, but for adults it seems to me it will be hard to beat in a tough economy, if that indeed occurs.
All these advantages, plus the excitement/turnover of a new administration coming into town next year will provide a floor under current re values in this city. Don't cry for DC, Argentina.
"shadow inventory that will eventually be sold and will help keep inventory levels high for years."
And while these units get older, they will be competing against cheaper, newer housing built on the now much cheaper land.
Dryfly, I do not know how to directly respond to you, as I am technologically incompetent, so hopefully you get this.
I do not think that it can last forever. The increase in food and energy is a nuisance for us in the West, but it's life threatening to Asia and Africa. Inflation ultimately causes revolutions and brings down governments. China has had that happen plenty of times in its history.
Either way, the best solution is to not get into the problem in the first place, but it's too late.
Emerging Markets must accept painful interest rates and revaluation or collapse.
This will obviously hurt us as with any banana republic. Risk Premium will explode and the current account will have to correct itself.
When the current account of the U.S. is at 0, this whole charade is over, just like the early 1990's accept many-fold worse.
Dryfly,
You say that wages don't have anything to do with money supply, so wages could stagnate (while money supply increases and inflation occurs).
However, if wages don't increaase, then people can't pay higher (nominal) prices for houses, so how will home prices (nominal) increase? They will stagnate - or drop in real terms. This will exert feedback pressure that will remove the need for the money supply to be expanded.
Haven't we gone vertical on unfunded liabilities? Like, already?
Yes, inflation scenarios start with fiat and the Fed's means to monetize about any obligation. And just what they monetize can become progressively more extravagant. We know all about this because we're lucky enough to see it in real time. But isn't this how currency units become artifacts of history?
As children I'm sure we've all concluded a game of Old Maid, guffawed a bit, collected the cards and re-shuffled. As to how the PTB will handle our present fix, we subjects will just have to ponder, because in those outer limits anything goes until it doesn't. They're seeing the slippage that albrt raises soon enough.
Manhattan project idea: reactors for B-1 bombers, unmanned drones, android security officers! Full spectrum force projection without that pesky petroleum. Yeah, that's the ticket...
New American Century indeed.
I really think the "class cues" in the video are just too heavy-handed to miss.
There you go again, Tanta. I didn't see any such class-cues in the video. I saw a middle class person, a smoker, yes, but with a nice tidy suburban home. She could be everywoman.
Perhaps you being a woman makes you read so many cues into that video that average geek men like me just don't see.
Dryfly, I just saw your comments.
Just to clarify, I own several commercial properties in "fly-over" with almost double digit cap-rates.
A number of people keep referring to inflation eventually causing house prices to rise after a continued period of decline and stagnation. What they fail to understand is that inflation won't cause house prices to rise unless INCOMES increase as well. This is the problem with the ongoing and future economy. Incomes have been stagnant for over a decade and they are going down currently. I don't see this changing anytime soon and any asset that is based on borrowing will continue to have downward pressure because of high interest rates and a small group of borrowers that can afford houses 3 times their income. This will be the norm in addition to high downpayments. Home prices can and will continue to decrease far into the future while other prices continue to go up.
"Grande Prairie looks like the big city when you drive down the Alcan"
My old stomping grounds. The best part of Grande Prairie was that you didn't live anywhere else near there.
Alberta (less so Grande Prairie these days) is still in the throws of the oil boom. However, to put it in perspective, it's a boom for ~3 million people. That's half the population of just the immediate SF Bay area, and less than 10% of Canada as a whole.