patrick.net

30 fixed has been a 'chump loan' for a very long time.

By that I mean we have been in a declining rate environment and if you were to refi into a 30 year loan every other year to get a lower rate you should have gotten the ARM.

In theory at some point rates will go up and all the 30 year fixed people will 'be rich'. We can only hope to live so long to see high rates again.

Los Angeles Renter says

At some point is it worth the gamble to pay a higher sticker price on a house knowing you'll save a boatload on interest payment over the course of 30 years?

Only if you assume that the price is independent of the interest rate, as I've mentioned on other threads.

$720K at 4% is equivalent in monthly payment to $468K at 8%. 4% interest rates result in a huge amount of price support.

In addition, you need to consider the principal amount when paying down the loan in advance. It makes a huge difference if I need to make extra payments to pay down $720K in principal vs. $468K in principal. I can pay down the latter much faster.

All else equal, I'd much rather pay $468K at 8% than $720K at 4%. I'm pretty sure I can pay down the former a lot faster. The overall amount paid on the loan doesn't really matter because I don't really intend to make 360 equal payments.

2% rates would only exacerbate this issue and keep providing price support -- it just helps maintain bubble prices at the expense of having a functioning market.

corntrollio says

2% rates would only exacerbate this issue and keep providing price support -- it just helps maintain bubble prices at the expense of having a functioning market.

Oh, i agree, but "the powers that be" appear to be dead set on preserving wealth... Maintaing the status quo. And if that means driving interest rates as low as Japan they can do it.

Los Angeles Renter says

but "the powers that be" appear to be dead set on preserving wealth...

not just wealth but the entire system of finance.

This is what the system has gotten itself into:

http://research.stlouisfed.org/fred2/graph/?g=2dZ

(That's total domestic non-bank debt / GDP)

Even this is deceiving since without all that debt there wouldn't be all that GDP either.

Lower interest rates keep this from BKing the country entirely.

Yes, this is the trap that Japan fell into.

Los Angeles Renter says

Oh, i agree, but "the powers that be" appear to be dead set on preserving wealth...

No, they seem to be dead set on preserving *debt*, not wealth. There is a huge difference.

corntrollio says

it just helps maintain bubble prices at the expense of having a functioning market.

For every borrower there was a "saver". If we lose the bubble prices we will lose the principal that was borrowed to set that price.

http://research.stlouisfed.org/fred2/series/HHMSDODNS?cid=32256

Living in a fictional world is more pleasant than fact.

PockyClipsNow says

In theory at some point rates will go up and all the 30 year fixed people will 'be rich'.

depends if wages are rising along with rates. Chances are that will happen, but I can't see the future, and some mass dislocation could somehow return 8%+ rates without the 5%+ wage inflation that would normally drive the system to fight inflation.

Los Angeles Renter says

And if that means driving interest rates as low as Japan they can do it.

And they will. That's what Operation Twist is all about. lowering long-term interest rates on T-bonds, which the mortgage rates correlate very closely.

Bellingham Bob says

the entire system of finance.

is built on a house of cards. If devaluing the currency will ensure the sustenance of this house of cards, it is being and will be done.

Bellingham Bob says

Even this is deceiving since without all that debt there wouldn't be all that GDP either.

GDP is a joke when growth of debt = growth of GDP. We actually need the non-productive or in other words purely consumptive GDP component to fall for overall healthier market.

austrian_man says

We actually need the non-productive or in other words purely consumptive GDP component to fall for overall healthier market.

No we don't. We need the top 5% to disgorge their rents back to the toiling masses.

Bellingham Bob says

We need the top 5% to disgorge their rents back to the toiling masses.

That's one way to do it. Put more money into the middle-class, which was exploited to consume more debt. They can deleverage by paying it with devalued dollars. Wage inflation will help.

austrian_man says

If devaluing the currency will ensure the sustenance of this house of cards, it is being and will be done.

We need to devalue against China and India. The wage arbitrage is continuing to hollow this country out.

Well not just that, but the systemic trade imbalance well beyond Triffin Dilemma needs.

The scale of these flows are what is deleterious to our economy.

We could tariff them, but that's difficult too.

Bellingham Bob says

We need to devalue against China and India.

Good luck with that. They are racing to the bottom faster than we speak here. Rupee is trading at 48:1 with the dollar.

They don't want to lose the forex reserves value, so they will devalue too.

Bellingham Bob says

The scale of these flows are what is deleterious to our economy.

What do you expect those countries to do other than what they're doing now? They have trade surplus and they need to export. US is the importer of last resort. If we want to produce and consume locally, we need to make it attractive for the businesses to do that. Currency wars are about who is racing to the bottom and US will probably be the last.

In my opinion, local enterprises is the way for future. Energy is not getting cheaper and the current globalization trade flow is unsustainable, if you just consider energy alone. Add in to the fact that the importer of last resort is saturated with debt, we have a compounding problem. The solution is to go simple, before we are forced to do it.

austrian_man says

The solution is to go simple, before we are forced to do it.

Energy is also not the long pole in the tent. The long pole is 5% of the country taking 33% of the national income.

Fix that and you have the resources to fix everything.

Bellingham Bob says

The long pole is 5% of the country taking 33% of the national income.

Wealth imbalance is a huge problem. I agree. I wish an intellectually consistent politician like Ron Paul understood what it takes to practically fix a problem. Libertarian philosophy of sound money and small government doesn't work when we are saddled with unsound money and inefficient big government.

What we need is a meaningful way of government intervention that will stop the middle-class bleeding. Rather than government intervention that serves Wall Street greed.

austrian_man says

I wish an intellectually consistent politician like Ron Paul understood what it takes to practically fix a problem

We've kinda gone too far out on the road we're on, yaknow?

Swedish-style disciplined Eurosocialism comes with a pretty big pricetag for a nation of 300M+. The monied elite would rather see this country become Mexico than Sweden if it costs them that much.

That's that for the bulk of conservate thought. "Let him die!" indeed.

"Liberals" don't even have that much of a clue. Hope is not a plan.

This is turning out to be a great thread. It was worth going back for a 2nd read.

Some comments:
Bellingham Bob says

For every borrower there was a "saver". If we lose the bubble prices we will lose the principal that was borrowed to set that price.

This doesn't take into account leverage. The banks are fighting hard to keep their capital requirements low, and thus for every borrower there are only 0.1 savers. Less really, as banks haven't been required to mark to market losses in their assets since 2008.

As we lose bubble prices we are losing more than the principal invested by savers. That is, of course, until institutions are forced to default and they get to erase the debt and start all over.

austrian_man says

What we need is a meaningful way of government intervention that will stop the middle-class bleeding. Rather than government intervention that serves Wall Street greed.

Wouldn't that be nice.

austrian_man says

Libertarian philosophy of sound money and small government doesn't work

Should have just stopped there... :p

Still my favorite thread on this:

http:/s.randi.org/showthread.php?t=136113

corntrollio says

Should have just stopped there... :p

haha. You have to give credit to Ron Paul, because he correctly called the housing bubble way back in 2001 before even it escalated to unreasonable levels. He is intellectually consistent and bases his economic views on sound economic theory.

However real world is not utopia so there should be a concerted effort towards practical means of solving the crisis rather than ideological arguments that take us nowhere.

I think there are a handful of politicians (both Rep and Dem) that are intellectually consistent. It's just that for a working solution to be actually implemented - we need a LOT more smarter people in Congress to get the job done.

Bellingham Bob says

Hope is not a plan.

That should be the tag line for the next President. He/she should then lay out the practical plan to get us out of the debt hole.

I'm with APOLCALYPSE on this one.

It's cash, or **** you.

Los Angeles Renter says

At some point is it worth the gamble to pay a higher sticker price on a house

Whats the point since prices are dropping already across the board in SoCal ?

http://patrick.net/?p=1034995

Los Angeles Renter says

Oh, i agree, but "the powers that be" appear to be dead set on preserving wealth... Maintaing the status quo.

Doesn't matter.

Not one bit.

They can get rates down to near 0% and foreclosures would still be an ongoing problem and home prices would still drop.

The wages have to go up or the home prices down, any thing else at this point is utter and complete BS.

tts says

They can get rates down to near 0% and foreclosures would still be an ongoing problem and home prices would still drop.

True, but the rate of drop matters if you're a buyer. Faster it drops, better for the buyer (greater the down payment will cover the loan).

tts says

Doesn't matter.

Not one bit.

Slow deterioration spells disaster to a buyer-in-waiting because his savings can get eroded through inflation.

we need complete and total debt forgiveness for everyone. it's worked in the past 5000 years. wipe the slate clean. only way to fix this with out a revolt. which could be coming soon to a town near you.
just say'n

Kate, that used to be part of a system we back in the days called Capitalism, the functions were called bankruptcy and foreclosure.

Government in the past few years has been fighting to keep that from happening. But once they pull life support from this socialism for financial industry, we'll finally get recovery going and get back to capitalism.

austrian_man says

Slow deterioration spells disaster to a buyer-in-waiting because his savings can get eroded through inflation.

Depends. If its sitting in a bank account yes. If its in inflation resistant investments (ie. commodites) then no or at least not so much.

FortWayne says

But once they pull life support from this socialism for financial industry

Its not socialism. Even if you dislike socialism at least the public gets something for their money.

Here the losses are socialized and the profits are being privatized. Its organized theft by a captured (read: corrupted) government and regulators.

tts says

Here the losses are socialized and the profits are being privatized. Its organized theft by a captured (read: corrupted) government and regulators.

It's socialism for them, that's what I mean, rest of us just get to pay for it all.

Bottom Line. Our gubmint favors banks over it's people. Saving or kicking the failure can down the road is just costing us a waste of money. They can not save banks, they can not create jobs, they can only give illusions and then say " we need more money to try again. ie. QE ssssss
http://www.grapevine.is/Home/ReadArticle/Icelands-Recovery-Has-Lessons-For-Other-Nations
Iceland allowed its banks to fail rather than completely nationalising them. While this led to the notorious Icesave debacle, the plus side is that severe re-working of the banking system has led to Landsbanki announcing that their assets should more than cover what is owed for Icesave.

Bernanke has promised ZIRP for the next two years, so you won't see the principal price crash predicated on rising interest rates for a while. 3% interest over 30 years is basically free money. Less inflation than food, which is a consumable with a much shorter half-life.

Thanx ptiedude.

I learn from your writings / perspective as well.

But I am runnin short on jpegs, so if we don't put some of these criminals away soon and correct our free enterprise system. STOP them from BLOWING BILLIONS of OUR MONEY for THEIR OWN BENEFIT(s) on poorly managed business's. I will start using really nasty pics.

HEY TTS, Pull that damn trigger !!!

Seriously... I hope they are thought provoking, relative and entertaining.