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Discussion: (18 comments)

  1. Nickolaus

    Do you think the recovery will continue when interest rates rise? Or will that drag the market down and put a bunch of people under water again?

    1. Nickolaus

      … and as an addendum… will people even care if they are under water if they have 30 years of (essentially) free money?

      1. Great question. Did you know that during the great hyper-inflationary episodes the people that made out the best were renters? You can make the mortgages disappear by making the money worthless but that will not save most homeowners. Sadly, that is a lesson that few people have bothered learning.

        1. Nickolaus

          My intuition tells me that debtors with a fixed rate make out best during hyper-inflationary periods. Renters don’t really fit into that category, as their rents could (would?) rise along with inflation. Heck, most of my friend’s rents go up much, much faster than inflation if they have a crappy landlord. So why would that be the case?

          1. My intuition tells me that debtors with a fixed rate make out best during hyper-inflationary periods. Renters don’t really fit into that category, as their rents could (would?) rise along with inflation. Heck, most of my friend’s rents go up much, much faster than inflation if they have a crappy landlord. So why would that be the case?

            This is not what the data tells us. If you were looking at a typical middle class family, the renters spent around 3% of their annual earnings on shelter, far less than owners who were still on the hook for taxes, repairs, maintenance, etc. By the time month 12 came around, a nail to fix a cracked post cost more than what the family paid in rent in month one. And by the time you had to renew the laws were in place to freeze rents in place, which meant living in a place for next to nothing. While the debts of the owners were wiped clean their properties yielded no income and produced real losses if a sale had to be made. Note that real estate also means less mobility and fewer opportunities that come due to the lower mobility.

            On a related note what do you think happens in depressionary times when your local city council finds that it has no money to pay the cops, firemen, and politicians? It hikes your property taxes, water bill, utility bills, etc. What about the renters? Well, as with hyperinflation the law makes it easier for them to stay put because the same politicians want support when they go after the haves in the form of higher taxes to pay for the have nots.

            I have a pile of books on Hyperinflation lying around in storage. If I can dig them up I would be happy to provide you with several references but my observations are common enough to find easily with a decent search engine. On tax resistance during the depression I suggest David Beito’s great book, Taxpayers in Revolt: Tax Resistance During the Great Depression. (Sadly he got a part of the story wrong because he did not take into account the positive effects of the end of Prohibition but that is a subject for another post.)

          2. My intuition tells me that debtors with a fixed rate make out best during hyper-inflationary periods. Renters don’t really fit into that category, as their rents could (would?) rise along with inflation. Heck, most of my friend’s rents go up much, much faster than inflation if they have a crappy landlord. So why would that be the case?

            Sorry…Fixed the broken html tag…Hope this reads better.

            This is not what the data tells us. If you were looking at a typical middle class family, the renters spent around 3% of their annual earnings on shelter, far less than owners who were still on the hook for taxes, repairs, maintenance, etc. By the time month 12 came around, a nail to fix a cracked post cost more than what the family paid in rent in month one. And by the time you had to renew the laws were in place to freeze rents in place, which meant living in a place for next to nothing. While the debts of the owners were wiped clean their properties yielded no income and produced real losses if a sale had to be made. Note that real estate also means less mobility and fewer opportunities that come due to the lower mobility.

            On a related note what do you think happens in depressionary times when your local city council finds that it has no money to pay the cops, firemen, and politicians? It hikes your property taxes, water bill, utility bills, etc. What about the renters? Well, as with hyperinflation the law makes it easier for them to stay put because the same politicians want support when they go after the haves in the form of higher taxes to pay for the have nots.

            I have a pile of books on Hyperinflation lying around in storage. If I can dig them up I would be happy to provide you with several references but my observations are common enough to find easily with a decent search engine. On tax resistance during the depression I suggest David Beito’s great book, Taxpayers in Revolt: Tax Resistance During the Great Depression. (Sadly he got a part of the story wrong because he did not take into account the positive effects of the end of Prohibition but that is a subject for another post.)

          3. Vangel

            far less than owners who were still on the hook for taxes, repairs, maintenance, etc.

            Of course those renters are living in property owned by someone else who is on the hook for taxes, repairs, maintenance, etc. who may depend on rental income to cover those costs. If they can’t, or if rent isn’t allowed to rise to cover at least most of those costs, the landlord will, at some point, just walk away leaving the taxing agency holding the property as has happened in Detroit.

            People own rental property to make money – either on a positive cash flow or a hoped for increase in equity, or both. Without one of those no one will continue offering rental housing for long. Either rents will rise, or renters will be left squatting in abandoned buildings and houses owned by the city.

            To my mind a decision to rent or buy housing is much like a decision to lease or buy a car. There are good arguments for either buying or renting, but neither is necessarily cheaper, just better suited to one’s personal needs.

          4. Of course those renters are living in property owned by someone else who is on the hook for taxes, repairs, maintenance, etc. who may depend on rental income to cover those costs. If they can’t, or if rent isn’t allowed to rise to cover at least most of those costs, the landlord will, at some point, just walk away leaving the taxing agency holding the property as has happened in Detroit.

            That is true. But the renters live for free because the laws make it hard for them to be kicked out. By the time the crisis has passed the renters are benefiting in the same way as anyone else. And if they can somehow figure out how to get a hold of the properties that they occupy at low enough costs they could be far better off than the previous owners, who wound up losing all of their capital.

            People own rental property to make money – either on a positive cash flow or a hoped for increase in equity, or both. Without one of those no one will continue offering rental housing for long. Either rents will rise, or renters will be left squatting in abandoned buildings and houses owned by the city.

            But this is not true. I have friends who have accepted the negative cash flows in the hope that their rental properties recover to previous levels. They have done this for the past five years and are willing to do so for several more until they run out of options. You forget that some people are trapped in a zone of indecisiveness where their flight instinct cannot be triggered even though they are terrified.

            To my mind a decision to rent or buy housing is much like a decision to lease or buy a car. There are good arguments for either buying or renting, but neither is necessarily cheaper, just better suited to one’s personal needs.

            It is more than that because real estate can limit mobility and opportunities even as it exposes a person to a lot of personal debt. That is why you have to go beyond simple desire and look into the general valuation levels. The typical American house reached a peak in 2001/2001, just after the stock bubble burst and the Fed tried to inflate its way out of trouble. While house prices went up in nominal dollars when prices were measured in barrels of oil or ounces of gold or silver real estate had began to fall. If we use the same measure a bottom may be coming up some time in the near future. Sadly for many, that may have to come after another contraction that finally clears the markets.

          5. But this is not true. I have friends who have accepted the negative cash flows in the hope that their rental properties recover to previous levels.

            I think that’s included in “…a hoped for increase in equity…”.

            They have done this for the past five years and are willing to do so for several more until they run out of options. You forget that some people are trapped in a zone of indecisiveness where their flight instinct cannot be triggered even though they are terrified.

            Sunk costs can be hard to acknowledge, and few people want to admit defeat. Fortunately rents in most markets are increasing as home ownership becomes more difficult, and some who should never have owned homes, now no longer do.

            It is more than that because real estate can limit mobility and opportunities even as it exposes a person to a lot of personal debt.

            I would probably consider those things when deciding what best suited my personal needs. :)

          6. I think that’s included in “…a hoped for increase in equity…”.

            There are many different types of hope in this case. One is that I will buy something now that requires negative cash flow in the hope that the equity increase will make it worth it over time. The second is seeing a huge drop in valuation and still having a negative cash flow and hanging on while hoping that the previous levels will be seen again and getting out without seeing a loss of equity is still a possibility.

            Sunk costs can be hard to acknowledge, and few people want to admit defeat. Fortunately rents in most markets are increasing as home ownership becomes more difficult, and some who should never have owned homes, now no longer do.

            But unfortunately, the conditions have become riskier. The dead cat has bounced and could be near a new top. Property taxes are going up as cities are bankrupt and need more revenue sources.

            I would probably consider those things when deciding what best suited my personal needs. :)

            But those are harder to consider in an environment that is far less stable than it used to be. Someone who has worked in the same place for five years may think that mobility is not a factor but if changing conditions mean that his job is relocating to another state or being done away with may wind up thinking that it was better to buy but winds up trapped with more limited opportunities because the general economy is not as strong in his area as it used to be. During the ‘good times’ when unemployment levels were lower and there were more choices, or when real estate markets were liquid enough and stable enough not to make moving an issue, being wrong would not have been as costly.

          7. Vangel

            But those are harder to consider in an environment that is far less stable than it used to be. Someone who has worked in the same place for five years may think that mobility is not a factor but if changing conditions mean that his job is relocating to another state or being done away with may wind up thinking that it was better to buy but winds up trapped with more limited opportunities because the general economy is not as strong in his area as it used to be. During the ‘good times’ when unemployment levels were lower and there were more choices, or when real estate markets were liquid enough and stable enough not to make moving an issue, being wrong would not have been as costly.

            Then I would have to consider even longer and harder during times of high uncertainty, and might be more inclined to rent.

          8. Then I would have to consider even longer and harder during times of high uncertainty, and might be more inclined to rent.

            Possibly. But you are assuming that you are in a position to judge the level of uncertainty. But that can be very hard for some people who are in favoured positions during times of market manipulation as we have today. Entire sectors can look to have good futures and safe jobs only to see a total collapse just a few years later. Think of shale gas and oil production right now. With the sector booming and jobs plentiful someone in the sector might consider moving to a city in a new basin to be close to where the jobs are and purchase homes that seem reasonably priced. But if the bubble pops the jobs may be elsewhere and the real estate may still fall 50% or more as demand drops.

            My problem isn’t with taking risks and having to make decisions but with the lack of market signals that illuminate those risks.

  2. Vic Volpe

    Bottom line??? A definite improvement; but, we have a long way to go. And don’t forget, our consumer economy was based on folks using their homes as credit cards (since their wage increases could not account for the increased consumer spending from the 1990′s to the housing bubble — something noted by Alan Greenspan in Congressional testimony several times over that period). Our economy is going to be in a slow crawl out of recovery if we have to wait for a true housing recovery. For our economy to really improve we need to see a true transformation of the economy where the industry sector picks up demand (like we had in the ’60′s).

  3. I think that your optimism is getting in the way again. Yes, we do see some improvements but many are due to the very cheap credit that has been made available. You cannot be saying that the housing market will strengthen as rates go up or that rates can stay very low if the economy recovers. Or are you?

    1. Vic Volpe

      I don’t think I’m expressing optimism when I say that our economy is in for a slow crawl. Housing prices have bounced off the bottom and are slowly rising — cheap credit or not. Credit is not that easy to qualify for today. Back in the ’70′s we had a strong housing recovery after one or two recessions and mortgage rates were very high by the standards of this century (8 to over 10% at times). It is hard to say what rates will do; but, I do not think they will go up much (and no more than 6 to 8% would be my pure guess). We did OK in the ’90′s with those kind of rates. Our problem is a slow growing economy — and it is going to affect the millenials more than it impacts any other age group (and I’m an old fart pushing 70).

      1. I don’t think I’m expressing optimism when I say that our economy is in for a slow crawl.

        That is not optimism. It is terrible because the economy depends on a lot more than a slow crawl. The warfare/welfare system needs north of 4% REAL GDP growth, not the BLS BS reported GDP. Unless jobs increase in number and real wages rise the US financial system cannot survive intact. And while more money printing and more debt could ‘help’ keep things going for a while any kicking of the can down the road makes things worse in the long run.

        1. Vic Volpe

          Check out my blog, Economics Without The B.S.
          http://vicpsu.blogspot.com/2013/01/economics-without-bs-reviving-our.html
          Like I said above, what we need, and what opportunity was missed by Obama in 2009, was a chance to transform the economy from the consumer economy we have had. And I do call for real GDP growth of 4% easily achievable if you look at our past (also in other posts on the blog site). But, I don’t think we have that kind of leadership from either party — we are in for a slow crawl.

          1. Like I said above, what we need, and what opportunity was missed by Obama in 2009, was a chance to transform the economy from the consumer economy we have had.

            Obama cannot transform the economy in a good way. As all politicians, all he can do is slow it down whenever he does something to meddle with it. The only fix is getting rid of the regulations and going back to the simple rule of law.

            And I do call for real GDP growth of 4% easily achievable if you look at our past (also in other posts on the blog site). But, I don’t think we have that kind of leadership from either party — we are in for a slow crawl.

            As I said, 4% is easy to do if you get rid of most of the federal government. But no party has the incentive to do so.

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