patrick.net

First!

From time to time I've thought this blog approached group thinking. Mostly it manifests itself by attacks on pro-RE rookies, who immediately get characterized as trolls and perma-bulls and then rained on. Fuzzy Math on the last thread was kinda middle of the road compared to Confused Renter. The counter-points were valid, but the negative emotions displayed can easily be attributed to a bunch of JBRs.

Anyway, I believe there is a bubble (and a huge one in the Bay Area), but it's hard not to notice that many patrick.net posters have memorized the exact same argument. Which can be summarized with, "It's in the bag. The crash is guaranteed to be huge. The dollar will tank and we'll buy McMansions for dimes on the dollar. We're already picking through the rubble." And so forth. Such 'arguments' are really just an inversion of the realtor propganda. I've seen plenty of people take projected data and work themselves into a frenzy for one political party or the other... the group "psyche up" on a blog is no different.

The exceptions are Randy H and a few others who are actually able to provide a meaningful analysis based on real financial theory. I come here for the factual stuff and real anecdotes, but sometimes the rah rah is a bit much. I mean, if the bubble pop is so predictably in the bag, then I expect to see several millionaires come 2008/2009.

Just my two cents.

The decline of the USD is irrelevant as a direct factor vis-a-vis house prices in the US. It is only relevant insofar as inflation. Unless you already have or will earn foreign currency, you will be buying dollar-denominated houses with dollars. If the Fed elects to defend the dollar, then interest rates will rise, making debt-financed owning more expensive. If the gov't decides to defend the dollar (with fiscal policy), then your taxes will go up, effectively meaning you lose tax-deduction power, raising the cost of debt-financed owning.

If inflation rises then owning a home becomes progressively more valuable ceteris paribus* because (a) real estate is a historical safe haven from inflation; it is at worst uncorrelated to inflation cycles; (b) having fixed-rate amortizing loans is valuable in a rising inflation environment. And when the inflation finally breaks, it will be due to rising interest rates, which also rewards the fixed-rate debt holder.

These are the very real factors working against savers and in favor of smart debtors. Unlike many here, I continually harp that debt itself is not a bad thing. Debt can be very powerful if used appropriately and smartly. Simply; it can be beneficial when you can afford it.

Monday's FT: the wealthy top 10% of America have well over 50% of all US personal debt on their family balance sheets. Why? Because their professional wealth managers determine their capital structure and tell them that buying a $20M mansion with borrowed money is cheaper than using cash. Better to put that cash into a VC/HF/PE fund.

Meanwhile saves subsidize that activity, because of inflation.

...how's that. I await calls for my head...

Yeah, i nominate that for comment of the month.

The decline of the USD is irrelevant as a direct factor vis-a-vis house prices in the US. It is only relevant insofar as inflation.

Well, like you Randy, I've admitted to holding a long cash USD position, a position which is likely true with most of the voluntary fence sitters here. Inflation is our nightmare and a plunging dollar would produce it on imported goods at least and likely trickle into wages. We've both said before that if we knew that inflation would get out of control down the line, the best thing to do would be to take out as much fixed rate debt as possible and buy whatever hard goods you can squeeze into your garage. A roof over your head is also a hard good, albeit one with significant running costs, so we should all buy houses if the inflation threat is real.

At a 20% inflation rate, $800K will feel like $400K today in only 5 years. Presumably, your salary will also double in 5 years at 20% (relatives tell me about WEEKLY raises back in the 70s). The ones this hurts the most is suckers (like me) holding cash. And don't tell me that my I-bonds have been protecting me from inflation; I want to buy a house, not a frigging CPI toaster.

I would gladly borrow $200K at a 30yr fixed rate now if I could wrangle it without buying the house. Whatever X might say, this would be a smart debt to take on as it would hedge me at a time of historically low interest rates. If I could claim it on my income tax as well, well then, wouldn't that just be peachy.

The data that keeps me firm in my position NOT to buy is the fact that wages of the lower 90-95% of earners have yet to significantly budge over the past 6 years. If wage inflation starts up, you better believe I'll be reassessing the thought of a house purchase. Bernanke claims he's on the ball. That remains to be seen.

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On a side note from last threat, Fuzzy doesn't strike me as dumb or blind and I too appreciate and acknowledge his candor. Of course, when the smart guys look like they're in a dicey spot...