A question for the math whizzes


By woppa   Follow   Sun, 4 Mar 2012, 9:14pm   10,556 views   61 comments
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How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future. Lets say someone decides to take out a 500,000 dollar mortgage at 5% 30 year fixed right before interest rates start to rise and house prices fall. How much would inflation have to up and over how long a time period for that person to have made a wise choice, compared to renting for ten years after rates go up and prices drop, and buying with cash at a lower price. Not sure how low the price would be though and of course that is a key variable. I am just toying with the idea of housing vs gold. Stash your money in real estate, stash your money in gold? A little bit of both?

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  1. Dan8267


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    1   9:45am Mon 5 Mar 2012   Share   Quote   Permalink   Like (4)   Dislike  

    woppa says

    How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage.

    You're assuming that the government and banks won't cheat. They will. They always do.

    If they decide to inflate the currency at a rate of 30% a year, they will pass an emergency act that raises your mortgage rate, perhaps by forcing a conversion to an adjustable rate. They won't let a middle class peon profit from their debasing of the currency. All profits must flow to the hungry, greedy beast that is our corporate-run government.

  2. taxee


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    2   5:25am Tue 6 Mar 2012   Share   Quote   Permalink   Like (4)   Dislike  

    In 1975 my lady and I were living in a tepee on top of a mountain in Oregon with three other couples. Worked on tree planting crews for a little money. Skinned and ate road kill deer when we found them and had a good old time. I just don't know what's wrong with our youth these days that they can't enjoy themselves.

  3. chemechie


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    3   6:33am Mon 5 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    Hyperinflation will only help you with mortgage or other debts IF your income keeps up with inflation - which is a BIG if!
    It is widely known that real inflation is higher than reported by the government; I'm sure as real inflation increases, the discrepancy will get worse. Employers, if they can get away with it, will give wage increases at or below inflation (look at the discussion on federal pay - official inflation is over 2% yet federal workers might get a 0.5% increase; then again, they might not get anything).
    While this references salaries, it applies to rents also as a landlord - you can't raise rents to keep up with hyperinflation if nobody's salary goes up, so don't count on rental income to keep pace with inflation. Having said that, in some places it may, but don't count on it.

  4. citizen jpp


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    4   2:30am Tue 6 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    In hyperinflation, you would have trouble getting enough food to eat, forget about being able to heat/cool your house. Sounds like you want to prepare for a 1975 scenario -- that is like wishing you were 16 again...

  5. uomo_senza_nome


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    5   9:54am Tue 6 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    CashWillCrash says

    that's the same as a free zero percent loan if you include inflation in your financial planning. And if for any reason we should fall into deflation just hand the keys back to the bank, Obama got your back!

    This advice represents some serious things that are wrong in this country.

  6. oliverks1


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    6   7:18pm Tue 6 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike  

    thomas.wong1986 says

    Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

    Hyperinflation did not occur in the 70s. Hyperinflation occurred in Germany in the 1920s. It occurred in Chile in the 1970s. Hyperinflation occurred in Zimbabwe in the 2000's. But it has never occurred in the USA (yet).

    In Hyperinflation you do not worry about your house. You don't care about investments. You need two things more than anything else, food and safety. You will trade anything for these. Everything is reduced to what do I need to do today to survive.

  7. 121212


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    7   5:01pm Wed 26 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike  

    This might be helpful

    http://seekingalpha.com/article/1066721-6-scary-charts-on-the-hyperinflationary-cliff

    "The Link to Hyperinflation

    At this point, it almost doesn't matter what the 'right' thing to do is. There is no right or wrong anymore. The time for the altruistic decisions was years ago before the US chose a path of dependence.

    Today, it is almost impossible to cut spending because the population and economy is dependent on it. Worse, as the effects of spending shrink more spending is needed to maintain the status quo.

    Today the US government can borrow at ultra low rates - tomorrow, creditors may withdraw and interest rates may skyrocket. If that were to happen the government could choose to print (more) money to pay for social lubrication and keep the population sanguine for a few more months. It is this sort of trapping that can eventually lead to a hyperinflationary cliff.

    While many investors have turned to gold (GLD), silver (SLV) and commodities (DBC) as a potential hedge against currency collapse, there are other ways to potentially protect. Nobody really knows what will work until after the fact, but some investors believe that US stocks (SPY) - particularly ones with pricing power - could fare well. Other US investors might want to consider investing in non-US assets such as the iShares MSCI EAFE Index Fund (EFA).

    Personally, I'll stick with gold as my insurance policy against currency"

  8. thomas.wong1986


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    8   10:16pm Sun 4 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    woppa says

    How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future.

    Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

    Today, you have higher level of global competition and decline in collective bargaining. In places/industries of SV deflation is much much higher due to global competition and unheard of Unions.

    Hyperinflation in the future, if that is even possible, will not lead to increase in wages/salaries.

  9. uomo_senza_nome


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    9   7:29am Mon 5 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    woppa says

    Many people believe that there is a good chance of hyperinflation in the future.

    Yes and these "many people" have a complete misunderstanding of how hyperinflation actually works.

    Hyperinflation does not equal inflation on steroids .

    What we have going on is a secular deleveraging cycle, which means credit deflation. Credit has to contract from exuberant levels and it is happening as we speak.

    If you really want to understand hyperinflation with the background understanding that we have an ongoing credit deflation, consider this link.

    Hyperinflation is the after-effect of a severe deflation. Or think of it like a ridiculous political/monetary response to a severe deflation.

    Deflation becoming so severe that people lose faith in the currency itself. A complete loss of confidence leads to hyperinflation.

    In fact, if you think hyperinflation is likely -- you shouldn't take on any debt because what we will actually face is severe deflation (prior to the hyperinflation) and debt cannot be paid when money is running short in the economy.

    Taking on a mortgage makes sense if you think wage inflation will happen in the future. Paying debt more easily means that we have a steady devaluation of currency and commensurate increase in wages as well.

    but wages for middle class have been stagnating for more than a decade.

  10. TPB


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    10   10:12am Mon 5 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Inflation is not the problem, nor is mortgages, the problem is the ingrained belief that people over 30 today. Think that life just ain't worth living, unless they are living the house the Sapranos were filmed in.

    I bought in '10 and am paying less in Mortgage than I did in rent 3 for years prior.

    People need to quit fronting like they are Player. Players can afford to be Players, even when they lose their job. Players are their own job. If your finances hinge on the ability to find a job that is comparable to your present job. And that skill isn't a high demand. Then you are living beyond your means. I don't care if you are pop star with a new hit single. If you are going to buy a Mansion, you better be Michael Jackson and can keep the hits coming.

    People are always surprised when a once rich guy is broke. That's what happens when you're not Prudent with finances, and reckon your self a bit of a Player.

  11. rootvg


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    11   2:42pm Tue 6 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected  

    thomas.wong1986 says

    woppa says

    How severely would inflation have to rise for it to make sense to burden oneself with a huge mortgage. Many people believe that there is a good chance of hyperinflation in the future.

    Hyperinflation did occur in the 70s. As a result many workers (unionized) demanded higher wages or had wide strikes shuting down their employers business. So the employers accepted higher wages which in turn increased inflation, and the cycle kept repeating. We barely had global competition to worry about.

    Today, you have higher level of global competition and decline in collective bargaining. In places/industries of SV deflation is much much higher due to global competition and unheard of Unions.

    Hyperinflation in the future, if that is even possible, will not lead to increase in wages/salaries.

    Concur. Employers will move jobs to Right To Work states.

    That's what the Boeing thing in South Carolina was all about.

  12. rootvg


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    12   2:51pm Tue 6 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike (1)   Protected  

    CashWillCrash says

    uomo_senza_nome: You're absolutely right! And from what I hear from my friends in Europe/Canada/Caribbean: the US seems to be the only country where you can walk from your financial obligations (mortgage) without any consequences even if you got a million bucks cash in your bank account!

    I think it depends upon the state. Texas and California (as far as I know) are non recourse states. You can walk away from a house as long as there's no second mortgage attached to it.

    Ohio is a very different situation. It's a different economy and culture altogether...and if you pull that shit up there, the bank will chase your ass to the end of the earth and until your dying day for that money. You'll be very lucky if you don't end up in jail.

  13. uomo_senza_nome


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    13   11:13am Wed 7 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    woppa says

    . It sounds crazy, but I think everyone also will concede that is is definitley not impossible. So If this is the case, if the dollar is going to be worthless sooner or later, then isn't the entire point of this site and many others, how house prices are outrageously inflated, a moot point?

    Of course it is a moot point if the dollar goes toast.

    I mean dollar is the unit of measurement for not just houses, practically everything in the world. If that collapses, sure we are staring at a true financial armageddon. 2008 would be a child's play compared to that.

    woppa says

    Buy however much you can afford now, make the minimum payment, stock up on food, guns and ammo, and wait for the dollar to collapse? Maybe that is the way to go.

    Well, it depends. The problem with a confidence collapse is you can never tell when it's gonna happen. It can happen a year from now, or may be even a decade from now. It can even be avoided through disciplined fiscal and monetary policy, but is that politically and economically feasible?

    Complex dynamic systems are not easy to model, they are totally non-linear. I would say, preparation is critical for general peace of mind.

    Taking on debt is not bad if the income stream can support it and the debt is at a reasonable level when compared to disposable income.

    The other prepping part you refer to -- some people here will think that's totally crazy. And sure there are tons of places and websites that try to sell their stuff using this whole apocalypse concept.

    http://dailycapitalist.com/2012/01/08/the-end-is-nigh/

    Applying reason and logic to decision making will help a long way.

    Those are my .02.

  14. freak80


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    14   9:26am Thu 8 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Artemis,

    Whatever drugs you're on, they must be pretty sweet. Know where I can score some of it?

  15. 121212


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    15   4:01pm Wed 26 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    The fed has held basic inflation to 2% and will maintain this for the foreseeable future.

    Also stated the fed will devalue the dollar 33% over 20 years.

    Wage inflation ! it's stagnant for 30yrs+.

    Interest rates are only going to fall.

    Once interest rates are allowed to rise (unlikely) property prices will fall and create more starts.

    However, even 1/4 percent raise in rates is equal to $1 Trillion of added cost to the governments own debt.

  16. bmwman91


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    16   10:07pm Wed 26 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Kevin says

    I can choose to remodel a home, and I can use it as collateral for other low interest debt (much lower than any other form of credit you'll ever get). It's hard to put an equivalent financial value on those things.

    So.....buying a house is advantageous because you can undertake enormous spending projects and use it as collateral in order to borrow your way to prosperity?

    /facetiousness

  17. uomo_senza_nome


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    17   11:01am Mon 5 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    Dan8267 says

    They won't let a middle class peon profit from their debasing of the currency. All profits must flow to the hungry, greedy beast that is our corporate-run government.

    Very true. Rules will be changed if things go to crapper.

  18. Auntiegrav


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    18   6:44am Tue 6 Mar 2012   Share   Quote   Permalink   Like (2)   Dislike (2)  

    The true value of a house is whether or not it puts people where they need to be useful to their own future. Individually and collectively, this is the rub. Whether inflation occurs or not is based on the economics of the culture, because the economy is just data that reflects what people are doing. If everyone is using oil to drive to a job to buy a car to drive to a job, and they plop houses anywhere they have a hankerin' to do so, then basing your assumptions on the value of A: the economy figures and B: the price of the house is simply deluding yourself that the culture itself will continue to function as the consuming beast that it is, and that the availability of resources for it to do so will remain stable.

  19. marcus


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    19   7:14am Tue 6 Mar 2012   Share   Quote   Permalink   Like   Dislike  

    chemechie says

    Hyperinflation will only help you with mortgage or other debts IF your income keeps up with inflation - which is a BIG if!

    I know what you mean, but I don't agree entirely.

    I think too big a mortgage is an unwise risk. And we can't know about inflation. But having said that, debt is a hedge in inflationary times.

    Say you buy a 600K house with a 500K mortgage, and an household income of 190K. If 20 years later your household income has gone up to only gone up 350K, but the house is up to 2.4 million then it's a win. You're now paying back dollars on your mortgage that are worth much much less than the ones your borrowed.

    The thing is, it's impossible to predict. What if we have a 20 years like japan has had?

    Also, if inflation kicks in and prices go down in the short term because of higher interest rates, then you are locked in to a deal that's losing in the short term (although you might be able to rent it out - do the analysis on that).

    I think you need to be confident in your long term ability to pay the mortgage and stay in that home (or rent it out), but even then an oversize house commitment is a risk because of the possible japan effect - and resulting opportunity cost of other investments (savings) you haven't done.

  20. CashWillCrash


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    20   10:06am Tue 6 Mar 2012   Share   Quote   Permalink   Like (1)   Dislike (1)  

    uomo_senza_nome: You're absolutely right! And from what I hear from my friends in Europe/Canada/Caribbean: the US seems to be the only country where you can walk from your financial obligations (mortgage) without any consequences even if you got a million bucks cash in your bank account!

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