Buying with monopoly money

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Submitted by lifeizfunhuh on December 17, 2010 - 5:11pm

Ok all, here is my first post. I've been firmly in the camp of "don't buy, more to come" for the past several years as others around me take the plunge. However, I just went into escrow last week on an incredible property that my wife and I came upon by accident.

Now to establish my bona-fides, just let me say I'm a finance geek.I'm a class action attorney that sues banks and other financial firms for screwing over the little guys.

Here's my reasoning: I'm not the only one who thinks that serious inflation is coming, and in situations of high inflation, real assets appreciate. My hope is that I can leverage my 30 yr. 4.5% fixed to pay back my loan with monopoly money and wind up with a virtually free house.

What do we all think the end game is with QE? My thought is that the "official" plan is to inflate away all this debt that is being created. That is the only way out. Its either inflation or default. Inflation is of course an implicit default, but that's the problem of the Chinese and everybody else who is buying our debt.

We've all heard the story that the banks are hoarding money the get from the government and not lending. But why? My birdies tell me they are buying up REAL assets with the virtually free money they get at the Fed discount window. In my opinion, low fixed interest rates on free money is the best investment game in town, unless you have access to the discount window. I don't.

So leverage up people... this still is a no-recourse state and if you can happen to find a decent house that you can get for 10% or 3.5%, get yourself some of that cheap money and buy something that will get more valuable with inflation. I can virtually guarantee that we will see numbers higher than the 5% rate you'll get on your loan.

There are alternative hard (i.e., REAL) assets you can buy, like commodities, classic cars, art, etc. but you can't buy those with "other people's money".

As I heard someone say, "I don't care IF the market is rigged, just so long as I know HOW the market is rigged so I can play along at home."

What say you PIGGS?

Submitted by Diego Mamani on December 17, 2010 - 5:52pm.

I agree with your assessment. I almost bought a house last October... I wanted to offer 6.4% below asking price, but the listing agent essentially yelled at me and said that was too low, so I never wrote an offer. I should have written one, haggled and maybe split the difference, but I didn't, so I'm still renting as I've had since I sold my house in the summer of 2005.

Anyways, I think that mortgage rates hit bottom in October:
http://www.freddiemac.com/pmms/pmms30.htm

People are slowly catching up with what you wrote, which explains the fact that nominal mortgage interest rates will continue to go up, regardless of how much money the Fed prints. 30-yr fixed rates today have an APR of slightly over 5.0%. Not as low as two months ago, but may still be a steal.

Submitted by zzz on December 17, 2010 - 5:53pm.

Hmmm, a little fuzzy on who it was, but I think it was Roubini that wrote about this predicament, and there was a policy piece where the IMF put together a piece that a global power was going to need to leverage up on debt to fuel global growth as well as its own, and the way to get out of the debt was to take down their currency, all the while inflating their way out of it. I wish I could remember where I read this piece, but your thoughts have been debated by world class economists and I dont' disagree.

Someone help me out here on the IMF piece....

Submitted by SD Realtor on December 17, 2010 - 6:31pm.

I also think that your ideas have merit. I don't think anyone disagrees about upcoming inflation and much higher interest rates. I think the biggest question is how long they can keep the charade going. I believe the can keep it going for quite awhile and an external catalyst will be the event that cracks it open.

The question is will it be a year, 2 years, 5 years? Hard to say.

Given the rates of return on any investment and the potential for rampant rates, it is very hard to argue with logic that says you can have a tangible asset using borrowed money at a rate that will be phenomally low compared to rates in the future.

The depreciation question should not be ignored though. How much will property depreciate AT current interest rate levels. Then how much further will it depreciate when the rates skyrocket? Tough call isnt it? If rates go as high as I think they will, then I think your logic is correct.

Prediction, look for more federal intervention into the housing market this year in the form of stimulus.

Submitted by scaredyclassic on December 17, 2010 - 6:54pm.

Grow or die , or if you can't grow inflate or die. Perhaps what's amazing is that there actually was a crash at all. What if we were wrong what if the govt had got out so far and so fast in front of price declines that they just never allowed prices to fall. Could that have happened? I am now 100 perecent in favor of any stimulus no matter how arbitrary or imbalances to keep up housing prices.

Submitted by EconProf on December 17, 2010 - 6:55pm.

Your basic thesis is that all the money creation and monetary stimulus of QE2 will lead to inflation in most everything, so that by borrowing now at artificially low (temporarily) interest rates you will reap long term profits by paying back with cheaper dollars and have a highly appreciated real estate asset.
I've been saying the same thing for years. And I've been wrong. But like you, I have hope that some day I'll be proven right. After all, a broken clock is right twice a day. I also own a lot of real estate assets that would benefit from such a scenario.
Why might you and I be wrong in the future? The inflation we have had in commodities and other assets has not spread to real estate (except Midwest farmland). Past inflationary periods have been fueled by jumps in aggregate demand. The fiscal and monetary stimulus has not fueled a broader economic recovery because the first two components of aggregate demand, consumption and investment (remember GNP = C + I + G) remain weak, and look to continue weak. If 9.6% unemployment is the New Normal, and the housing inventory remains bloated, and housing speculation remains dead, then how will your investment go up in value? In fact the fiscal and monetary stimulus has scared the crap out of consumers and investors, which normally make up about three-fourths of aggregate demand. Both sectors leveraged to the hilt during the bubble, and likely have much more deleveraging to do. A final straw may be rising interest rates that typically accompany rising inflation, thus clobbering real estate demand.
In short, I hope you are right, but selfishly fear you are wrong.

Submitted by moneymaker on December 17, 2010 - 8:05pm.

Isn't it like trying to guess how big the next blob will be on a lava lamp, you know it's going up but how big and how fast?

Submitted by jpinpb on December 17, 2010 - 9:36pm.

walterwhite wrote:
Grow or die , or if you can't grow inflate or die. Perhaps what's amazing is that there actually was a crash at all. What if we were wrong what if the govt had got out so far and so fast in front of price declines that they just never allowed prices to fall. Could that have happened? I am now 100 perecent in favor of any stimulus no matter how arbitrary or imbalances to keep up housing prices.

Funny how as soon as someone buys, they start singing a different tune.

In line w/EconProf, I wonder what will happen when rates rise and the monthly payments will be more on a house. Will it really drive prices of homes higher? That doesn't make sense to me, particularly in these precarious economic times w/unemployment at an uncomfortable rate.

Submitted by scaredyclassic on December 17, 2010 - 10:04pm.

Hey the prison incarceration rate increases and they don't buy houses. Not sure what I mean by that but maybe a oermanfnt class of unemployed people like a permanent class of prisoners doesn't really matter as to housing prices.

I was singing the tune differently in a self mocking way

Submitted by ocrenter on December 17, 2010 - 11:29pm.

I firmly agree with OP in regard to the coming inflation and the feeling that essentially that is the ultimate game plan to get us out of the debt crisis.

This scenario will still work for homeowners even if home prices remain stagnate for the foreseeable future. Since homeowners will be using dollars that are significantly less to pay down debt that was worth significantly more.

If instead home prices increase at rate of inflation, that would be an added bonus.

While jumping on bandwagons is typically not the smartest move, being a permabear can be just as bad as for one's financial health as being a permabull.

Submitted by ocrenter on December 17, 2010 - 11:32pm.

aimloan's jr jumbo is now at 4.875%. The refi just a few months ago is already looking better.

Submitted by SD Realtor on December 18, 2010 - 7:53am.

Pretty much agree with you ocr. I don't see home prices rising due to the rate hikes that will come. Rather I see them depreciating, it is just how severe that I am unsure of. Inflation without job growth to me will be the worst of both worlds. So necessary commodities like food, resources and other tangible goods will go up in cost. Similarly other investment vehicles like bonds and such will be giving healthy returns as the money supply tightens. Also, as with any situation there will be alot of people with money and they will take advantage of the cheaper rela estate without having to incur large financing issues. To me depreciation will occur but I am not sure how much. It will be a great time to buy real estate but not if you have to finance much of it.

So that theary by the OP to buy now with someone elses money seems to make sense regardless of whether the home appreciates or depreciates. Buy the asset now with money that is borrowed and becoming worthless verses waiting until your own money is much more worthless but the asset has declined in value. I think the premise makes sense but everyone has a different situation depending on their holdings.

Submitted by bubble_contagion on December 18, 2010 - 8:25am.

Just keep in mind that housing prices and interest rates have no relationship. I have read this from several sources including Calculated Risk and Rich. The following quote is from the latest Nov 10 data rodeo:

"I firmly disagree with the idea that there is a one-to-one relationship between rates and prices, such that if rates increase a certain percent, prices should be expected to decline by that percent or anywhere near it. The historical data clearly demonstrates that there is no such correlation. However, there is no question that sustained higher rates will reduce demand, all other thing being equal, just as super-low rates have in recent times boosted housing activity above what it otherwise would have been."

From CR:

"I've tried to explain this several times in several different ways. Price is what you pay for something. Interest rates are related to how the item is financed. Some people pay cash for a house. Would they pay more because interest rates are low? Nope.

Imagine just one buyer gets a special interest rate. Would that lucky buyer be willing to pay more than all other buyers for the same property? Nope.

It is true that low rates make buying more attractive as compared to renting. And that can increase the demand for buying - and more demand might mean slightly higher prices. But if rates are low, a rational buyer will expect mortgages rates to rise when they sell the property, and under the theory that mortgage rates impact price, the price will then fall in the future. That makes the property less attractive, and the buyer in the low interest rate environment will not want to overpay for the house.

So the buyer needs to consider both current interest rates and future interest rates, and by the time they are done doing all the calculations, you get the graph that Leonhardt shows. And that is exactly what I'd expect - there is little relationship between house prices and mortgage rates. That doesn't surprise me at all."

http://www.calculatedriskblog.com/2010/0...

I am suspect that there is truly no relationship but the data seems to be clear on this.

Submitted by permabear on December 18, 2010 - 8:36am.

ocrenter wrote:
While jumping on bandwagons is typically not the smartest move, being a permabear can be just as bad as for one's financial health as being a permabull.

Did somebody say my name? :-)

I actually think the economy is getting better, albeit very slowly. Monthly fluctuations can obscure the overall trend:

http://www.aheadofthecurve-thebook.com/1...

It is interesting that the bond market is giving the middle finger to QE2 though.

In the long term, our country is still f'ed unless we figure out a way to fund stuff like education and bridges. Maybe we just need a few more bridges to collapse and then we can push thru a TBRP - Troubled Bridge Relief Program.

Submitted by GH on December 18, 2010 - 8:55am.

Just keep in mind that housing prices and interest rates have no relationship

Nonsense! Prices are falling today because at ANY interest rate very few can afford, and there are millions of foreclosures out there dropping prices. Credit scores are all but trashed these days, incomes are off and frankly no matter the spin prices ARE falling. If interest rates were raised to say 15% prices would fall massively as far fewer of the dwindling supply of credit qualified applicants could qualify for $500K at 15% than could qualify at 5%.

Assuming 10% down, your monthly payment incl tax will be ~3,000 /MO at 5% and ~6,200 /MO at 15%, so obviously many can afford the $3,000 payment but very few could afford the $6,200 payment.

This is simple math and not subject to opinion!

Submitted by Effective Demand on December 18, 2010 - 9:37am.

imho, i think the fed has won the inflation/deflation debate and that changes the purchase dynamics a lot. Tempering that thought is that we have a lot of stuff to still get through. Also i think many people on the inflation debate equate inflation with hyperinflation and i think that is a mistake (especially if they are using that fear and buying at the limits of their affordability)

Buy a house for the right reasons. its right for you and your family and you can afford it. Dont buy expecting to get rich off the house or expecting the house will protect ,you from the ills of the world.

Submitted by ocrenter on December 18, 2010 - 9:41am.

SD Realtor wrote:
Pretty much agree with you ocr. I don't see home prices rising due to the rate hikes that will come. Rather I see them depreciating, it is just how severe that I am unsure of. Inflation without job growth to me will be the worst of both worlds. So necessary commodities like food, resources and other tangible goods will go up in cost. Similarly other investment vehicles like bonds and such will be giving healthy returns as the money supply tightens. Also, as with any situation there will be alot of people with money and they will take advantage of the cheaper rela estate without having to incur large financing issues. To me depreciation will occur but I am not sure how much. It will be a great time to buy real estate but not if you have to finance much of it.

agree we are unlikely to see significant housing appreciation. as for depreciation, I think we would have to break that down to segments of the market. for example the over $1 million market. Overall I think for the most part depreciation of the middle of the road inventory is pretty much done.

overall rising prices certainly is a concern, but I do believe WE THE PEOPLE prefer overall rise in daily prices than any policy that would lead to significant drop in housing price. And the government will bend to the will of the people.

Submitted by SD Realtor on December 18, 2010 - 9:53am.

hahahaha

Excellent post. Yes WE THE PEOPLE do want that.

Very good point about different price levels depreciating differently in a high rate environment. Completely agree with that.

Submitted by Rich Toscano on December 18, 2010 - 11:36am.

GH wrote:
Just keep in mind that housing prices and interest rates have no relationship

Nonsense! Prices are falling today because at ANY interest rate very few can afford, and there are millions of foreclosures out there dropping prices. Credit scores are all but trashed these days, incomes are off and frankly no matter the spin prices ARE falling. If interest rates were raised to say 15% prices would fall massively as far fewer of the dwindling supply of credit qualified applicants could qualify for $500K at 15% than could qualify at 5%.

Assuming 10% down, your monthly payment incl tax will be ~3,000 /MO at 5% and ~6,200 /MO at 15%, so obviously many can afford the $3,000 payment but very few could afford the $6,200 payment.

This is simple math and not subject to opinion!

Sorry GH, rates DID go to 15%, in the early 1980s, and housing prices did not "fall massively." In fact, they didn't fall at all in nominal terms, though they did in real terms.

That is simple data and not subject to opinion. :-)

Of course, rising from 5% immediately to 15% would make for a "shock" that did not happen in the early 1980s. But that's not the premise of your argument... you are stating that as rates (and thus monthly payments go up), prices go down, and the historical data simply does not support this.

Go look at a chart of nominal housing prices in the early 80s to see what I mean (I'm sure I've put one up somewhere). And check out the "shambling toward affordability" series to see that rate levels have generally had no impact on housing price expensiveness ratios (they seemed to starting in the 2000s, but that was more due to low lending standards than low rates).

Submitted by Rich Toscano on December 18, 2010 - 12:03pm.

pri_dk wrote:
SD Realtor wrote:
So necessary commodities like food, resources and other tangible goods will go up in cost.

Why?

What will prompt my local Ralphs to raise prices?

Is the store manager going to read about QE2 and start remarking items on the shelves?

And what will stop the manager at Albertsons from lowering his prices? Because of high unemployment his cost of labor is lower. So he decides to get an edge on Ralphs...

Can someone explain exactly how current policy leads to massive inflation without simply using the premise that "printing money leads to inflation?"

Prices at your local Ralphs have in fact been rising. They have at Albertson's too (at least according to the CPI).

But to answer the question: Off the top of my head, QE can lead to somewhat higher inflation in the following ways:

1. Increasing asset prices, which is a stated goal of QE and seems to have worked for now, increases people's propensity to spend via the wealth effect

2. To the extent that broad money supply does increase, that leads to an increase in aggregate demand in excess of what it otherwise would have been. (if times are tough, the demand will be more apparent in the "necessities" such as food, since we are using that as an example).

3. As a result of foreign currency pegs, QE here leads to looser monetary policy and thus higher demand in foreign countries. This leads to increased competition for commodities and many other items that could feed into our own domestic prices, regardless of our unemployment rate.

4. If #3 gets bad enough, foreign countries could let their currencies rise, which would lead to an increase in prices of items we import.

5. Commodity prices in specific could increase due to #1 (more money flowing into risk assets) or #3 (higher demand in foreign countries). They could also rise as foreign countries try to redeploy their excess dollar reserves. Commodity price increases do feed into inflation over time.

Notice that none of the above require either US employment or labor costs to be high or rising.

You asked how QE could cause "massive" inflation. I'm not really sure what that means. But inflation can be self-feeding in that if it gets past a certain point, inflation fears cause people to spend money faster, or to redeploy their paper cash into hard assets, which makes inflation even worse.

An abrupt rise in inflation is also possible, and could be caused for instance by a sudden drop in confidence in US debt or dollars. This would lead to all of the above list happening to a larger degree, and would also result in the supply of dollars growing as dollars come out from under mattresses throughout the world to seek safer stores of value and drive dollar-denominated prices up. We've seen that sudden losses of confidence in financial assets are possible, and we've even seen this happen with sovereign debt and currencies recently. Given the precarious debt situation faced by the US it's entirely possible that could happen here. This is not necessarily an inflation being "caused by" QE, but it's possible that continued debt monetization could be one of the items that causes global markets to lose confidence in US currency and bonds.

Speaking outside the QE2-as-direct-causation question, I think the premise who suspect high future inflation is that it is really the only politically expedient way to get our debt back to manageable levels. (The sub-premise being that it is only manageable now because it's so unbelievably easy to roll over in this environment, and that ease is a result of markets mispricing the US ability/intent to pay back debt in real terms).

Submitted by Rich Toscano on December 18, 2010 - 12:20pm.

As to the OP, in my opinion the thinking is pretty sound and I more or less feel exactly the same way.

I am jealous of my friends who have all locked in sub 4.5% 30 year loans. I think their monthly payments will be laughably small in 10 years. Housing prices may go up or down in the years ahead, but unless you are buying in an area that is still heavily on the overpriced side (or maybe even if you do!), I think it will not outweigh the simple benefit of locking in a low nominal payment. (And in aggregate, payments are as low as they've ever been).

The hitch is that this only works if you stay in the place (or at least keep it, whether you live there or not) indefinitely. I myself am not ready to commit to buying my indefinite house. There are various reasons for this, but the main two are: 1) a desire for liquidity due to owning my own business, 2) I happen to like living in the areas that are still pretty spendy compared to rents (ie, payments wouldn't be locked in as low as they might in other areas). As a bonus item the house we are renting is the greatest house ever, which really reduces motivation to buy. If not for these me-specific facts, though, I would probably have already bought, and serially refi'd all the way down to sub 4.5%.

Note that only one of those reasons is related to the market, and note that even that item only applies to certain pockets of town. So, it comes down to personal situation such as how certain you are that you can commit to stay in the place long term, what area you want to live in, etc... but in some situations, I think it absolutely makes sense to buy for exactly the reasons outlined by the OP (and I have told many a client exactly that).

Submitted by AK on December 18, 2010 - 12:26pm.

"Buying with monopoly money" worked for an earlier generation. It's comforting to know that I have some protection against inflation. Of course this relies on the assumption that real incomes will keep up, or at least won't fall too far behind.

Submitted by Rich Toscano on December 18, 2010 - 1:01pm.

AK wrote:
"Buying with monopoly money" worked for an earlier generation. It's comforting to know that I have some protection against inflation. Of course this relies on the assumption that real incomes will keep up, or at least won't fall too far behind.

Actually I believe that it's only required for nominal incomes to keep up. As long as your fixed payment is falling against your nominal income, you win, even if your real income is falling. (Nominal income, or nominal rents, or nominal rate of investment return... depends what you want to measure your mortgage against, but the point is it's the nominal number that matters).

Submitted by Effective Demand on December 18, 2010 - 1:12pm.

Regarding interest rates and housing prices.

The issue is WHY rates are high or low. Rates are high because of high inflation or high growth, Rates are low because of low inflation (or deflation) or low growth. If you put high rates in a low growth scenario, it would no doubt effect housing prices, just as low rates in a high growth scenario would.

Submitted by SD Realtor on December 18, 2010 - 4:45pm.

Correct on both points deadzone, which is why we come circle to the original posters thoughts. Two points you made, we are times unlike we have ever seen, and high rates will kill housing.

So what is a govt to do? Well first off they will do everything they can to sustain that housing market. This will include sustaining the bond market at all costs. This will also include a resumption of stimulating that housing market when needed including manipulation of inventory, incentives, etc...

Now we all know this is the game they have been playing for a few years now but the corners have slowly been closing. Furthermore the actions by the fed and treasury have kept the bond yields at amazing levels however that game cannot be sustained indefinitely. At some point our credit will run out and our creditors will not tolerate our behavior.

I don't see rates running up and out of the galaxy in the near term but I do believe it will happen over time. I vividly recall the high rates of the 80's and in a matter of a few years it was incredible how high they went.

It will be quite interesting how things pan out. I think Rich capped it well in his three responses above and I agree with them all. I do know that many many successful people I have met and know were successful by working with other peoples money. I think that the opportunity to borrow money at a staggering low rate in the face of a future that IMO will be one frought with very high rates.... well it is hard to pass up.

Indeed I DO believe there will be depreciation in the high rate environment. However I think it will be tempered in some form to prevent a massive collapse that would surely happen today if rates skipped up into say double digits inside of 18 months.

There are some scary numbers to consider looking at the 10 year treasury.

April 1 1980 - 10.09 %
July 1 1981 - 15.84%

October 1 1976 - 6.81%
July 1 1981 - 15.84%

To me that second scenario is our secular trend of the future. As you can see the first scenario was embedded in that secular trend.

Oh yeah and this is just the 10 year yield so mortgage rates are higher then the treasury yield.

So yikes is all I can think of. The 64k question is when will this all start.

Submitted by sdrealtor on December 18, 2010 - 4:51pm.

deadzone wrote:
It may be true that high interest rates have not historically led to housing downturns. However, the current situation is unlike any in history. Due to the number of I/O ARM loans outstanding (reset chart), as we've discussed ad-nauseum, higher interest rates right now would abolutely DESTROY the housing market.

I love it! So this times its different.

The bear is using the mantra the bears attacked the bulls with a few years ago as being ridiculous. It was ridiculous then and still is.

Submitted by CA renter on December 18, 2010 - 6:29pm.

pri_dk wrote:
SD Realtor wrote:
So necessary commodities like food, resources and other tangible goods will go up in cost.

Why?

What will prompt my local Ralphs to raise prices?

Is the store manager going to read about QE2 and start remarking items on the shelves?

And what will stop the manager at Albertsons from lowering his prices? Because of high unemployment his cost of labor is lower. So he decides to get an edge on Ralphs...

Can someone explain exactly how current policy leads to massive inflation without simply using the premise that "printing money leads to inflation?"

They will have to raise prices because the cost of their goods is going up. As SDR has pointed out before (and I agree), prices of most basic necessities have gone up in the past year.

With IPods and such, people don't need to buy if prices rise too dramatically, but people will always need food, energy, water, housing, medical care, etc.; and the prices of ALL of those things have been going up, even during "The Greatest Recesssion Since the Great Depression."

It's not whether or not the local consumers can afford it, in many cases, it's a problem of too much money in investors' hands that cause prices to rise. Currency issues play a huge part in this. Most investors are trying to hedge against inflation, so they are buying up all kinds of hard assets. End consumers just have to pay the price set by these speculators, whether we like it or not.

edit: Just saw Rich's above post adressing this point. Agree with what he said.

Submitted by SD Realtor on December 18, 2010 - 6:45pm.

Pretty funny CAR. Yes in a post several weeks ago I was whining about how much more my grocery bills were this year compared to last year.

Submitted by Coronita on December 18, 2010 - 7:06pm.

You folks are making me regret refinance from a 30 year to 15 year loan, because I thought I would be able to pay off the home early. At this point, perhaps, I should just done another 30 year and made minimum payments of $2k/month, since it's going to be worthless anyway...Sheesh...

Submitted by CA renter on December 18, 2010 - 10:40pm.

bubble_contagion wrote:
Just keep in mind that housing prices and interest rates have no relationship. I have read this from several sources including Calculated Risk and Rich. The following quote is from the latest Nov 10 data rodeo:

"I firmly disagree with the idea that there is a one-to-one relationship between rates and prices, such that if rates increase a certain percent, prices should be expected to decline by that percent or anywhere near it. The historical data clearly demonstrates that there is no such correlation. However, there is no question that sustained higher rates will reduce demand, all other thing being equal, just as super-low rates have in recent times boosted housing activity above what it otherwise would have been."

From CR:

"I've tried to explain this several times in several different ways. Price is what you pay for something. Interest rates are related to how the item is financed. Some people pay cash for a house. Would they pay more because interest rates are low? Nope.

Imagine just one buyer gets a special interest rate. Would that lucky buyer be willing to pay more than all other buyers for the same property? Nope.

It is true that low rates make buying more attractive as compared to renting. And that can increase the demand for buying - and more demand might mean slightly higher prices. But if rates are low, a rational buyer will expect mortgages rates to rise when they sell the property, and under the theory that mortgage rates impact price, the price will then fall in the future. That makes the property less attractive, and the buyer in the low interest rate environment will not want to overpay for the house.

So the buyer needs to consider both current interest rates and future interest rates, and by the time they are done doing all the calculations, you get the graph that Leonhardt shows. And that is exactly what I'd expect - there is little relationship between house prices and mortgage rates. That doesn't surprise me at all."

http://www.calculatedriskblog.com/2010/0...

I am suspect that there is truly no relationship but the data seems to be clear on this.

Interest rates are just one input WRT the housing market. The other inputs are jobs, demographic trends, currency issues (which may or may not be correlated with rates in the short-term), tax policies, changes in mortgage availability/downpayment requirements, etc.

IMHO, the earlier period of higher rates correlated with the peak buying years of Baby Boomers (the largest, and wealthiest cohort to buy RE in the U.S.), rising inflation which affected wages as well as asset prices, and immigration/population growth trends (see pg. 4 in the following link) with more of our growth now coming from poorer, lower-skilled immigrants and workers vs. past immigration/population growth trends.

http://www.williamperezphd.com/articles/...

What we've witnessed in the 1982-2010 period is an environment of falling rates:

http://www.freddiemac.com/pmms/pmms30.htm

http://braydencapitalhomeloans.com/Histo...

Also, we've seen rising (total and mortgage) DTI ratios, and falling homeowner's equity ratio in that period:

http://seekingalpha.com/article/176462-d...

http://www.getsmartaboutbanks.com/2010/0...

The unemployment rate was much lower then than it is now:

http://www.ritholtz.com/blog/wp-content/...

Down payment requirements were lowered over the 1982-present period:

http://www.gkbaum.com/housing/topicalRep...

Mortgage securitization took off, which lowered rates and standards -- causing the "EZ credit" boom:

http://www.econbrowser.com/archives/2008...

In other words, while I totally appreciate the threat of inflation/currrency debasement, and think this is their goal, I question their ability to succeed over the long run -- espeically for as long as we engage in "free trade" with Third World nations -- because our labor market has absolutely no pricing power, and debt levels are still extremely high.

We've pretty much maxed out our ability to leverage and borrow more, IMHO. I firmly believe that asset pricing is most greatly affected by the credit market. If the credit market/leverage is growing, asset prices will rise. If the credit market/leverage is shrinking, asset prices will fall. There are other inputs, but credit is the primary driver of asset prices, IMHO.

Yes, you might be paying your mortgage off with "cheaper" money, but it will likely benefit hard asset holders and foreign currency holders who can exchange their stronger currency for "cheap" housing in the U.S. more than it will benefit regular folk who have to work for a living.

Submitted by temeculaguy on December 19, 2010 - 5:28am.

Effective Demand wrote:
Buy a house for the right reasons. its right for you and your family and you can afford it. Dont buy expecting to get rich off the house or expecting the house will protect ,you from the ills of the world.

If you combine what ED said above and the collective discussion about potential inflation, you'll be O.K.

If you buy a house that you cannot afford because you think inflation will alter the situation, you are nothing more than a 2006 bubble buyer with a toxic loan. They were buying a house they couldn't afford because they thought it's value would rise indefinately. But if you can afford what you are planning on buying, if it works with or without inflation, you will probably end up in great position 15 years from now when your house payment is the size of your car payment.

Prepare for inflation but don't count on it! It is the system's "easy button" but it has consequences that they would prefer to avoid. I think the odds are in favor of it but I wouldn't make it my entire financial plan, just a component of it.

If we do enter a period of high inflation, lets say 6% a year for 5+ years, wages tend to follow but they also tend to lag. Most people's wages do not adjust on a monthly basis, it balances out over a decade or so but it usually is a game of catch up.

In the early 1970's you could buy a house with a 30 yr mortgage and by the mid 1980's your mortgage was similar to a car payment. But it took 15 years and I'm cherry picking a period of time from the past, who knows what the future will bring.

If hyperinflation actually shows up, then those who own will make out like bandits, but it's never happened in this country, so i wouldn't bank on it.

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