Hopefully, this keeps me in the good graces of all the eco-hip-n-trendy on Bainbridge that really think recycling is next to godliness.
The following is an article I wrote for a friend's blog, Seattle Bubble, back in March of 2007, which was 6 months prior to the national acceptance of a problem in our banking sphere. It is a comparison between renting and buying, and examines a common hypothetical scenario that is used by those in the REIC to justify paying above-value prices for homes.
The comments are at Seattle Bubble, should you wish to read them.
For extra credit, could someone run the numbers on what the ROI was for renting vs purchasing in this example? Use -16% as the capital appreciation for owning the home for the previous 18 months.
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Buy If You Must. Why Must You Buy?
by guest poster Eleua (with contributions and spreadsheets by Tim)
Click here to download the Excel Spreadsheet that the numbers below are based on.I need to take a step back and insert a personal note. While I disagree with the motives and actions of the faceless Real Estate Industrial Complex (REIC), there are genuine, honest, intelligent and wonderful people that work as RE agents, mortgage planners, title agents, contractors, appraisers, granite counter fabs, etc. It might be difficult to find one of these in an sub-prime boiler-room, or on a CNBC interview, but there are those out there making a living that are just as much of a victim as their customers. Please separate my disdain for the high priests and the overall entity from the honest people that believe they are trying to help someone achieve a dream. Second, difference of opinion does not constitute condemnation. I enjoy a healthy, spirited, raucous discussion more than most. At the end of the day, drinks are on me.
With that said, let’s get on with the flogging.
I will be the first to say that buying is a good idea if you intend to live in the house for the bulk of the mortgage period, you can afford it, and it is viewed as your nest, rather than your nest egg. If you are a transient, or you are trying to save for retirement by living in your 401(k), you might get lucky and you might get ruined. Houses are homes. They should not be investments.200-7! You Crapped Out.
For the past several years, we have been living in a speculative economy. During the late ’90s, this was manifested in stocks, and now it is takes the form of residential real estate. Everyone wants in on the fun. Why not? Real estate, like stocks, always goes up in value. It is a great investment, and the way for normal people to build wealth. At least that is what the Real Estate Industrial Complex (REIC) wants you to believe. They don’t make as much money if you are skeptical.
At first glance, it sure seems like a dynamite investment. Everyone has a grandmother that bought her $600,000 home back when it was $60,000, and if you live in California or Seattle, you can’t go 15 minutes without running into someone yammering on about how much their home has gone up in value. Some idiots treat a daily visit to Zillow like they would a call from their stockbroker.
By Your Lease, My LandlordThe new homeowners are buying into the idea that America does, in fact, have a class system: the Landed Class, and the Perpetual Renters. The Landed Class have unlocked the secret to passive wealth, and the Perpetual Renters are condemned to the outer darkness of blowing their savings on their landlord’s mortgage - a double insult.
All current living generations in America have been force-fed the idea that home ownership is absolutely essential to financial freedom. It is an article of faith in the national religion. Question this and you are branded a heretic. Somehow, through an Orwellian twisting of the language and a corruption of the educational system, debt became wealth. The last two generations that would have disputed this have passed on.Morons + Money = Lumpeninvestoriat
The REIC sells homes as investments to the Lumpeninvestoriat. Homes are more expensive if the parties attach a high speculative premium. The higher the speculative premium that accompanies a property, the higher the price will be. This reinforces the validity of the speculation. Normally, this is called a bubble. The REIC makes a lot of money fomenting a bubble.
Pay No Attention To The Details Behind The Curtain
Let’s examine a common exercise that many in the REIC like to conduct to shore up their position that your home is your nest egg.
A gracious local mortgage planner responded to my stunned disbelief that someone would refer to a mortgage as a “forced savings plan” by posting a comparison between a hypothetical renting scenario and buying the same house. This is her example that shows how a house can be a great savings plan.
This is a very common proof put out by the REIC to keep the Lumps feeding from their trough. I’ve seen it in a dozen different forms. If it was posted on a billboard, and you drove past it at 70 mph, on a crowded freeway, it would make sense. Fortunately for the REIC, the flashbulb attention span, in combination with the economic and historical illiteracy of your average homebuyer makes this work.Owning a home is not right for everyone. There are certain benefits to not owning the home you live in. If something goes wrong with the property, you simply ring up the landlord and they get to fix it. You pretty much know what your cost are going to be month to month (unless your landlord decides to sell the property, increase rent, convert the condo, etc.). On comments from last Friday’s post on interest rates, there is a discussion debating if one could consider having a mortgage as a forced savings plan. I know I’m going to seem biased since I am a Mortgage Planner…and I fully expect all of the number-crunching-junkies out there to have a heyday with what I’m about to post…but here goes!
I found two similar homes, both in the north Seattle area. The rental property is available for $1850 per month. The home for sale, with close square footage, rooms, area, etc., is available (actually, an offer is pending) for $499,995.With the comparison, I’m going to assume someone has 20% down to either invest in the stock market or to buy a home. The current rate for a 30 year fixed is 5.75% (APR 5.904%). Principal and interest is $2,334 plus taxes and insurance equals a total payment of $2623. First year monthly tax benefits are $606 (mortgage interest benefit will decrease, property tax benefit will most likely increase).
The prospects are in the 28% tax bracket; they have a gross income of roughly $8000 per month and can have $700 in monthly debts with credit scores at 680 or better. The investor will receive 11% from the stock market and the homeowner will benefit from an appreciation of 7% on their real estate.
The first five years with the mortgage provide an average monthly principal reduction of $482.47 per month. Taking out any appreciation factors, the principal paid each month is a forced savings plan. With that said, home equity does not earn interest. And I would probably encourage most clients to consider not using the entire 20% for the down payment to stay more liquid (depending on their entire financial picture).
For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.Let the games begin!
Is This Apples-to-Apples, or Salmon to Mullet?
Using the provided example as the basis for comparison, we will take out our pencils, calculator, green eye shade, and a case of Mountain Dew and hammer out a valid side-by-side look at renting vs. owning.
Rent is $1,850/mo. I guess if you show up looking like you just crawled out from a flophouse in Pioneer Square, you would pay full price. In this market, if you showed any semblance of responsibility and wanted to negotiate, you could knock 15% off that price. However, we will go with the $1,850 to keep as close as we can to “apples to apples.”
Our poor, pathetic loser renter is on the hook for $1,850/mo + 3% hikes per year. Over the first 5 years he lays $117,863 on the altar of his landlord’s good fortune. In 10 years it amounts to $254,498. This assumes that rent tracks at 3%, which with all the building and speculating in real estate is a pretty bold assumption.
Over the same time our budding noble is also shelling out money for his living situation. He paid $100,000 for the down payment, and (according to Rhonda) currently pays out $2,623/mo in principal / interest / taxes / insurance (PITI).
Up until now, I am in agreement with Rhonda. We now need to look deeper into the realities of home ownership to find the true value of each living situation.
Real Estate Always Goes Up - It’s In The Constitution
Perhaps the biggest flaw in the classic “Rent vs. Own” comparison, as put out by the REIC, comes in the form of assumed appreciation of the underlying asset. It is given as an absolute certainty that real estate always goes up. Yes, in the past few years that has been the case. Will it happen tomorrow? Nobody knows - nobody. To assume this is, at best, irresponsible. Capital appreciation is never assumed when assigning value to an investment. Capital appreciation may be estimated for speculative purposes, but not investment purposes.
I am not against speculation - I do it all the time. However, it is speculation; it not investing, just as meaningless sex is not love. There is a huge difference. It is very important not to have expectations of one when engaging in the other. Assigning a value based upon the dividend or benefit an asset provides is investing. Assigning a value based upon someone else’s view of the price is speculation.
It’s Clear Sailing In The Rear-View Mirror
I wonder how anyone in the REIC can so confidently forecast an appreciating market? How do we know the market will not shift into reverse? We don’t. Yes, we can guess, but we don’t know. I would submit that after the breathtaking run in real estate over the past few years, and the problems that we are facing in the mortgage finance space, a very strong argument can be made for a precipitous drop in real estate prices - even in Seattle.
If you run the appreciation at +7%, you would be well served to run it in reverse to give a range of expectations. Back in 2000, many stock bulls (especially those on Wall Street that profit from high priced stocks) believed in the “New Economy.” This New Economy was based upon the absolute fact that certain, high quality stocks will always go up in price. Microsoft, Yahoo, Intel, Cisco, Juniper, Qualcomm, eBay, Lucent, Corning, etc. were all touted as fail safes. Seven years later, these predictions look foolish and self-serving. Had speculators prepared for a significant rollback, the pain may have been alleviated to some degree. Going “all-in” at the wrong time is devastating.
Removing the miracle of perpetual appreciation, the 5 and 10-year numbers for owning would have to be reduced by $201K and $438K respectively. If we reduce the appreciation by the same amount as we assume it appreciates, the owner’s position is reduced further by $126K at 5 years, and $240K by 10.
This is a pretty wide differential for something we don’t know. A prudent analysis would be to not factor in any appreciation. Such was the example in Northern California from the late ’80s to the late ’90s.
Show Me The Money! - Well…Let’s Hold Off On That.
In addition to the folly of just assuming that an asset will appreciate, it is incumbent upon the buyer to understand why an asset appreciates. Home prices track incomes as well as the ability to find easy money. Without easy money, homes could not appreciate beyond what incomes could support. A house is not a bank account that accrues compounding interest.
Unfortunately for our prospective home buyer, both sources of rising home prices are under attack. Mortgage lending has been a festival of economic irresponsibility since 2003. Up until early 2007, anyone could qualify for just about any amount of money with absolutely no documentation or lender vetting. The finance industry made billions selling high fee mortgages and chopping them up for sale in the secondary markets. It was a fundamental blunder to build a business model (or an entire industry for that matter) on lending money to questionable borrowers with lousy collateral. That business is now disintegrating right before our eyes. Lending standards will be increasing dramatically (driven by both government and investors), and rates will certainly rise. The go-go days of insane lending are in the rear-view mirror.
Global wage arbitrage with Mexico, India, China, Russia, and Brazil are keeping a tight lid on incomes. Incomes have been stagnant over the entire duration of the housing bubble, and show no sign of any broad-based increase. Other considerations include rising taxes to pay for the increasing scope of government, immigration pressures, and the retirement of 77 million Mouseketeers.
Comparing With Four Hands Tied Behind Your Back
While Rhonda was generous with her assumptions of the ROI of the renter’s investment portfolio, I wonder why this investment wasn’t treated in the same manner as the appreciation on the house? Why can’t the investment portfolio also include 4:1 leverage? Why assume 11%? If we are in the business of forecasting good things by looking in the rear view mirror, why not use a real example from another investment that took place over the same time period as the latest housing bubble? A 4:1 leveraged investment on silver bullion would have returned $1,120,000 on a one-time buy-in of $100,000 over the past 7 years.
Tax Benefits Need A Tummy Tuck
The tax benefit is overstated. Yes, itemizing mortgage interest and property taxes is a great benefit. If you make $96K/yr, you can do quite well come tax time. The problem comes with the “standard deduction,” which is the tax deduction that you get without itemizing. The standard deduction is less for a single man, than it is for a family. Rhonda assigns $35,293 of tax benefit for 5 years and $67,893 for 10. If we correct for the standard deduction for a family, that tax benefit is reduced to $20,873 and $39,053.
Oops, Your PITI is Slipping
The PITI was probably too low. $288/mo for taxes and insurance is probably more like $550. Tax rates are considerably above ½%.
It is doubtful that the county would keep property taxes stable. Even in a period of decreasing values, it is very easy for local governments to keep their bloated budgets going on the backs of the local citizenry. Even if you assume the tax rate holds steady, if your property is increasing in value, so is your property’s government-assessed value, right? 5 to 10 % property tax increases are certainly well within normal assessments. Let’s say the assessment increases at the same rate as the assumed appreciation, but with a 5-year lag.
So, What Are You Doing This Saturday?
Houses are also maintenance intensive. Rhonda assumed that our homeowner never needed to repair his castle, nor make a visit to Home Depot. If the homeowner spends 1% of the value of his home on maintenance and improvements (what’s a trendy Seattle home without granite, stainless, and bamboo?), we need to add another $400/mo to the equation.
The Highest Fee Brokerage
Finally, the REIC never likes to bring up that a hefty fee exists for cashing out of the home ownership money machine. You need to pay them a minimum of 7% of the gross sale to get at all that wonderful equity. Assuming the home price remained constant, that is another $35,000 out of the piggy bank.
The Bottom Line
Now that we have a more complete picture of the situation, let’s take a look at the financial bottom line for rent vs. purchase in few possible scenarios. We’ll use Rhonda’s given purchase price, down payment, investment return (11%), and rental price, varying only the assumed appreciation in each case. “Home Value” refers to the total amount of money you pocket upon the sale of the house (since that is the only way you can get the money).
The Million-Dollar Taffy Pull
So, did we answer the question of it being better to rent versus own? Not really. It is all based upon how congruent your assumptions about the future are with the reality. Nobody knows what will happen next week, much less 10 years from now. I would say that wildly optimistic assumptions of owning compared to a watered down forecast of the economic flexibilities of renting is not a valid comparison.
People always forget that using borrowed money for investing (whether it is a brokerage margin account or a mortgage) is leverage. Leverage works both ways. It amplifies your success or failures. What turns 4 walls and a roof into the American Dream is the same mechanism that makes it your financial coffin.
Yes, if you get enough appreciation of a home’s value, it makes sense to buy. This is true on any investment. However, if the home stagnates in value, or falls, the damage is magnified by the mortgage, taxes, and illiquidity.
Home ownership brings certain benefits like some level of sovereignty over the use of the property and any ephemeral value from “pride of ownership.” It also brings other pitfalls, such as illiquidity, maintenance, acts-of-God, or even your overweight, aging hippie neighbors that insist on walking around naked as they oscillate between the hot tub and the “herb” garden.
Renters may need more than just the consultation of a sledgehammer and a case of Mickey’s Big Mouth to knock out a wall, but if a heavy-metal band moves into the house next door, they can give notice, pull up stakes and move into a nicer home. If a renter gets transferred, they don’t have to put up with the agonizing process of selling a home in a squishy market, and then paying 7%+ to the REIC. At worst, they lose their deposit and move on.
Lending While Intoxicated
As the mortgage finance industry scraped the bottom of the barrel to find new suckers buyers to put into homes, they swerved head-on into the world of the financially illiterate. Many of these buyers did not have sufficient savings to pay the standard first/last/deposit as required for most rental contracts. Many did not have sufficient income to qualify to rent, yet the finance industry was able to qualify them for a home. This was done under the pretense of getting them into a beneficial financial situation. Rhonda summed it up as follows:
“For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.”
Yes, I guess you can refer to the principal paydown on a house as a “forced savings plan.” It is true that most Americans do not have any form of savings, other than their aging Beanie Baby collections, so I guess this is better than nothing. It also presupposes that most Americans are idiots. With that, I agree, but would like to add that allowing an idiot to juggle a half-million dollar, highly leveraged, speculative savings plan is a recipe for an unmitigated disaster in their personal life. Set this against the backdrop of tens of millions of the very same, and you have the certainty of a national financial disembowelment.
Given the recent activity in the sub-prime mortgage finance companies, this hypothetical is now a reality.
12 comments:
Hello - Matthew
David McArdle - logger, raised on Bainbridge Island, moved off 9 years ago, gave his family home to one of his daughters as she and her family couldn't afford to buy there.
He wanted you to know he was thrilled to see you are using' Clearcut Bainbridge Island' as your blog name. He created the bumper sticker almost 45 years ago to poke fun at the stuffiness of islanders who gave him a bad time about his livelhood. Now that we have found your blogs, we will keep reading. You are right on.
David Mcardle
justlikethat@embarqmail.com
David,
Thank you so much for stopping by and giving your endorsement of the blog's name. Here is how I came to use the name "Clearcut Bainbridge."
Back in 2005, everyone was falling backwards into real estate money. You couldn't go 10 minutes without someone pounding his chest and telling anyone that would listen how much their "Bainbridge Island dream home" had gone up in value.
One day, I was on the Seattle-BI ferry on a Westbound leg, and I wanted to just relax and get 25 minutes of quiet. The party in the booth next to mine was talking in an above-conversational level about how much their homes are appreciating and extrapolating that into the future by some insane amount.
I was annoyed, so I moved to a different part of the boat, where another party was going on about how they are going to buy homes to take advantage of the appreciation. Their conversation was based upon how "special" Bainbridge was (I think they were from California).
I moved again - more idiots prattling on about real estate riches.
Finally, I had to go sit outside and freeze my butt off, but it was worth it because all the fair-weathered Californians were inside.
I kept thinking that these morons were going to blow themselves sky-high and take all of us with them.
As I was driving off the island, I had steam coming out of my ears and was just annoyed at all the pretention that seems to go hand-in-hand with Bainbridge Island.
Finally, I got behind some beat-up pickup with a "Clearcut Bainbridge" sticker on the bumper. The instant I saw the sticker, I thought "PERFECT!" I knew that I would eventually start this blog and call it "Clearcut Bainbridge," even though I didn't know the history behind the sticker.
It just seemed to be a perfect refutation of the pretentious Bainbridge zeitgeist that is embodied in the housing bubble.
So, there you go. I'm glad that I am keeping with the spirit of the original intent of your work.
Please feel free to stop by and share stories as you think they are appropriate.
Eu,
Couple of questions to your xl file, if I may.
First, I don't know where you rent $500K house for $1,500. I have 1,500 sqf rental I rented higher than this, with 8 people interested in North Seattle few months back. Nothing special, really. Same property barely rented at $1,300 4 years back.
The property's worth may be $375K.
$500K home in-city (not in the sticks) is likely close to 2,000 sqf and rents are close to $1/sqf. You may be able to rent it at $1,700, may be. If you have pets, you will pay $2K.
You are being awfully generous with 1% maintenance costs per year. Unless unit is 40-year old and in poor condition, you are looking at $2K per year, and this is not skipping on anything.
Sure, 3% per year in rent increase sounds reasonable, though I know many people who had their rent going up 50% in 3 years (apartments). Such increases are not likely for SFR, but it depends on a landlord. I know of your predictions of rents coming down. Possible, but likely would require significant jump in unemployment.
I appreciate your hard belief of house appreciating zero in 30-years, but I doubt it would hold true. Current malaise will probably end in 3-4 years. Your own prophet Shiller shows data going back 100 years that has real estate appreciating 1%+inflation. Once things settle, it will resume the normal pace.
In 10 years prices will be higher than today. Many people are done with the stock market. It’s rigged to the core and regular people are done with it for the next generation. Nobody can look at 20%-30% swings of Dow 30 companies on a daily basis and remain sane. Money has to go somewhere. 4% Treasuries? I don’t know. Rent cap is close to 5% now. Another 1% gain in cap rates and real estate becomes attractive as investment for many people.
The difference between rent and mortgage payment is almost always spent. You can look at the statistics on this. People can and do change, but I'll believe it when I see it.
Right now there's little reason to buy, no argument, but you always seem to go into extremes, dude.
It is not "speculation" to expect and model inflation. Over the last 100+ years we have had ~5 years of deflation, and that was before our government realized just how easy it was to print more money.
So it is unreasonable to paint a scenario with 0% appreciation over the long haul (since future dollars will be worth less than present dollars). Whether there will be any real return to RE purchase above inflation is debatable, and will be driven by supply/demand factors like relative desirability of communities, but not even modeling inflation-driven increases makes for an unfair comparison between rent & buy. Since you are budgeting maintenance expenses presumably the inflation should apply to the total amount (alternatively you could assume depreciating improvements and model inflation increases for underlying land value only).
Anon #1,
Thanks for your comments. Here are some things that I was considering with my examples.
Rents in Metro King County are going to be higher than for the outlying areas (where I live). Rents may more accurately reflect their values for many reasons. Out here on the Kitsap Peninsula and Bainbridge, we have many people that buy homes (SFR) strictly as investment vehicles, where they rent them for a loss and refi them for the capital appreciation. It is in this environment that rents and prices are going to be the most distorted. Renters move into homes as owners, and people with access to cheap credit buy more homes to turn into rentals. In this scenario, you have two things at work: rapid demand destruction and massive supply overhang - both of these drastically reduce rents.
If you are a renter in Kitsap, you get a massive increase in the amount of "house" you can rent with each increasing dollar. IOW, the rent/value ratio is not linear up the line, but more parabolic. If you have ever priced diamonds or sailboats, it works the same way, only in reverse. Once you decide to spend more than $1500/mo, your options mushroom. You can live like a sultan for $2100.
There is a glut of renters on the low end of the spectrum, but as you move up the line, there are disproportionately fewer renters, because they are likely homeowners.
If you bother to look in the Kitsap Sun for rentals, you will see that my figures are pretty close to reality - perhaps even more today, as the excess, unsold inventory turns into higher-end rentals.
My own house Zillowed in excess of $650K, with a sub-$1700 rent.
Maintenance may be generous at 1%, on most years, but you need to plan for new roofs, floods, major repairs, updates, and reconditioning between tenants. Even so, the 1% maintenance does not move the underlying values as much as you would think.
3% rent increases would mirror wage inflation. As wages deflate (coming to an economy near you), or inventory balloons, you will see rents decline.
As far as price inflation goes, you need to factor out much of what has happened in the past generation, as it was fueled by shortsighted government policies and banking insanity. Homes have a teather to incomes, and 2-4X incomes seem to be the normal range over most of our history. Only when you get the aforementioned nuttiness, can you see eye-popping 12X ratios. Even if you have "wages +1%," it would not be long before homes would be unsustainable. Homes move on the basis of people being able to afford them. Sure, over short intervals, many other things may move the price, but affordability is king.
BTW, I don't follow Shiller much. I like some of his work, but he fails to see some of the significant pitfalls to home pricing.
I'm glad you are confident that homes will be more expensive 10 years from now. As always, I invite people to back up such claims with genuine math and economic realities. I am of the opinion that homes will not be more expensive over that span for reasons that I have explained ad nauseum in this blog.
Anon #2,
We seem to be arguing over definitions. Please cite how you can fully discount capital appreciation with existing math models. You can't, because you will get a divide-by-zero error.
As long as I KNOW that I can sell my asset to another investor/speculator for more than I paid, then there is no price that is too much. This is why I call it speculating.
Again, there is nothing wrong with speculating. Just be aware of what you are doing.
Investing is assigning a value to the dividend that an investment throws off, and comparing it with your other options, and discounting it against a ROI.
Yes, most things in an investment are negotiable, and that is where the study of history, and economics comes in.
People that bought in 2007 with the knowledge that their homes would increase in value have certainly been rudely awakened to the folly of such an assumption. Keep in mind that I wrote this 6 months prior to the peak in local real estate prices, and back then, everyone thought I was nuts to assert that the value of a home needs to be taken without regard to capital appreciation.
I am not saying that homes will not appreciate over the next 30 years, but that using that as part of your investment analysis is flawed. Sure, you can use it for speculative purposes, but not investment purposes.
Again, we are arguing over definitions.
Now, regarding inflation...
Contrary to popular belief, the government does not "print" money in the context you are suggesting. Ron Paul has his heart in the right place, but he is terribly misguided over what the Federal Reserve does. The "gold bugs" also get it wrong (and this is coming from a former gold bug).
The likely scenario is for DEFLATION, where the destruction of credit makes money much harder to obtain. People would be willing to dump "things" for money as they need money to extinguish debt and run their lives.
This is what explains the government actions over the past 18 months, as they want to avoid DEFLATION.
They will fail. Their efforts are ultimately going to make deflation worse.
How does population increase factor into all this? The most optimistic estimates are 11 billion bodies on the planet around 2050. Will the inevitable infux of the less fortunate push those of means into currently desirable areas like the northwest, or will they just run the numbers and live in Texas?
BobbO
If the worldwide economic output is decreasing, then the amount of people we can support shrinks with it. I have serious, serious, serious doubts that we will get to 8 billion, much less 11 billion.
I think the US population will likely shrink to 240 million as globalism comes to a grinding halt. That 240 million will also be living a lifestyle that looks more like the 1960/70s rather than our 21st Century expectations.
Even if we grant that US population is going to increase, there is NOTHING that makes the PNW inherently more desirable than Texas. Having lived in both, I can say that stereotypes of Texas as held by PNWers are very inaccurate.
The local economy has to be able to attract people and pay their salaries. Remember, over the past 100 years, the wealthiest cities in the US, with the most expensive home prices were "desirable." These cities include Pittsburgh, Detroit, and now San Jose. I know everyone up here thinks that Seattle is somehow "special," but it really is not. Our economy is currently better than most, but is still in decline.
"Demand" is not how much your heart desires something, but a function of the ability of your wallet to support that desire. Demand destruction is what you are witnessing around the world and we will not be spared.
I hope this answers your question. If not, please let me know where I can focus my efforts.
Clearcut
Time for an update...seems we're back to 2005-06 home pricing...and most folks look pretty glum...where are we going from here? What's your outlook for the remainder of the year?
I remember your pearls of wisdom - the bottom will be when no one is talking about house prices any longer AND - just wait, and let the house come to you.
...wow, looks like they're doing just that.
Oh yeah, and that March defecit...wow. Continued deflation...then inflation/hyperinflation?
Hit us with a chainsaw Clearcut - we're interested in what you have to say.
BI Renter,
Here is a quick update.
Home prices are still in the 2nd or 3rd inning of their decline. We won't stop until we get a full 80% correction. I don't say this as something that I want, but am saying as something that is.
We still are getting deflation as a trend, despite the FED/Treasury taking on as much debt as they possibly can to offset the widespread destruction of the money supply. This will be seen in housing prior to basic consumer goods.
Remember, less money equates to lower prices. In order to get inflation, or even hyperinflation you MUST get money into the hands of consumers so they can drive demand. All the inflationary arguments overlook that fact.
I predict that this rally in the broader stock market is shaping up to be a whopper sucker's rally. If you are hurting in your portfolio, use these prices to lighten up. It is a gift to those that are getting slammed in their retirement portfolios as well as those pesky short-sellers.
The big news will be a massive dislocation (crash) in the bond market, which will happen sooner rather than later. All of the moves you are seeing in the FED/Treasury are designed for one thing - keeping Congress' debt rolling. This is what caused the crisis in September.
Congress has been taking on massive debt at very low interest rates. Ask yourself, "where have we seen this before?"
Yup. Idiots buying too much home with subprime lending products.
Guess what? It ends the same way, but with a much bigger "bang!" Once the bond market sells off Congress' debt, Barry/Harry/Nan won't be able to roll their debt, and since HALF (yes, HALF) of government spending is debt, they will HAVE NO CHOICE but to cut spending down to tax levels.
Picture the federal budget with a 50% reduction in scope and picture that reduction happening over a span of just a few months.
How much of the PNW (and Kitsap) economy runs on federal money?
That ain't bullish, folks.
BTW, sorry for the dearth of cheery Clearcut Bainbridge postings. I have to attend to my day job, and right now I am in Fort Worth attending 767 school. When my training schedule lightens up, I plan on returning all of you to the normal doom-and-gloom you have come to expect from CCB.
Until then, stay solvent and renew that lease.
Copy all Eleua, keepn' my powder dry. Best with the training and safe travels.
Remember george bush talking. I want to create a nation of owners. Well we did not create a nation of owners but a nation of owners under water on their mortgages.
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