The Number Facing ‘Debt Peril’ Might Rise
Readers suggested a topic on credit. “There have been numerous attempts to compare what has been happening with this credit cycle to other periods in history (in either the US or other countries). The two most prominent theories seem to be: 1. There will be weak inflation, until it’s not longer weak and goes much higher and the Fed won’t be able to stem the tide very well due to the extraordinary efforts that it has made to create money since the crash; or 2. We will similar to Japan, with an extended period of low interest rates and flattish/declining consumer and real estate prices and a stagnant stock market.”
“I’m sure there are other theories as to what happens next, but these seem to be the most prevalent. So, my question for discussion is this: What one piece of data would you look for (and when) that would make any of you conclude that one scenario is more likely and the other less likely? For me, it will be an eye specifically on wages once we reach “full employment” (5-5.5% unemployment).”
“If we reach full employment and there is not wage growth (in excess of other price inflation in the economy) that follows, then I think we can conclude that a combination of globalization and technology will keep typical workers in a ’semi-permanently’ screwed status for a LONG time, and thus we will likely have low rates for a long time like in Japan.”
“However, if following reaching ‘full employment,’ there is the start of wage growth in excess of other price inflation in the economy, that could very well be the catalyst that drives inflation and interest rates higher, making scenario #1 more likely to play out.”
A reply, “We will (be) similar to Japan, with an extended period of low interest rates and flattish/declining consumer and real estate prices and a stagnant stock market. The FED fears deflation like Japan so therefore embraces inflation with its very low interest rates and buying treasuries, mortgages etc. Anyway I think wages will stay low and the stock market and RE market will continue to rise with a result of Stagflation for most Americans.”
“However, if following reaching ‘full employment,’ there is the start of wage growth in excess of other price inflation in the economy, that could very well be the catalyst that drives inflation and interest rates higher, making scenario #1 more likely to play out. No Unions no wage growth, companies will just rely on over working the most productive workers, outsourcing and cutting corners.”
And finally, “Our problem is that the velocity of money has slowed to a crawl. The Fed prints up a fresh batch and buys treasuries, which the government fritters away, but it quickly ends up in investment/savings accounts rather than circulating though the economy. The economic stall warning horn has been sounding for years now. Corruption.”
This is Money UK. “The number of British households spending more than half of their disposable income on debt repayments could TRIPLE by 2018 if rates rise quicker than anticipated, according to The Resolution Foundation, with politicians accused of ignoring the looming crisis. The think-tank’s projections, based on figures from the Office of Budget Responsibility (OBR) which show household debt rising faster than income, lay out several ways in which the number of people facing ‘debt peril’ might rise from 2011’s total of 600,000. But if interest rates go up and growth is slow or unequal, that figure would hit two million.”
“Matthew Whittaker, senior economist at the Resolution Foundation, said: ‘Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double. Mr Whittaker called the worst case scenario speculative but plausible: if the Government’s Help To Buy scheme created a new housing bubble, or spending increased among the affluent only, interest rates would be driven up without any accompanying recovery.”
“In practice, he said, the number would not actually hit two million. Instead, ‘a high number of people’ would simply default on their debts after a few months, possibly losing their homes, and ‘drop out of the statistics’.”
The Financial Post. “‘People have become so used to interest rates being so low,’ says Craig Alexander, chief economist with Toronto-Dominion Bank. ‘In the past, small moves in bond yields wouldn’t even have been worth mentioning except maybe in small way in the financial press. But it became a big story.’”
“The fear of rising mortgage rates was credited with driving consumers back into the Canadian housing market as many would be buyers jumped ahead with purchases fearing that wouldn’t be able to get the same interest rate later in the year. Some consumers’ fears that they could be wiped out by higher rates are probably just, given debt levels in Canada have never been higher. Statistics Canada said in December the average level of consumer debt to annual income reached 163.7% in the third quarter.”
“Scott Hannah, executive director of the Vancouver-based Credit Counselling Society, doesn’t think that rates are going to rise dramatically in 2014 but nevertheless he feels 2013 may have caused some procrastination from consumers about paying down their debt. ‘We are just not as focused about taking care of our financial picture and we are worried that consumer debt, excluding mortgages, is continuing to rise,’ says Mr. Hannah. ‘We believe in a couple of year’s time there will be increases in interest rates but people aren’t taking action today to address that,” said Mr. Hannah. ‘I think a lot of people can’t comprehend mortgage rates beyond 5%.’”
The Orange County Register. “Changes to loan limits, reductions in the Federal Reserve’s purchases of mortgage-backed securities and treasury bonds and new fees for government-backed loans have some people speculating that the housing market’s in for a rough ride in 2014. The overall plan seems to be to get Freddie and Fannie away from purchasing loans for securitization and sale to investors. The government thinks private capital will come in if Fannie and Freddie rates are increased enough to make it attractive to compete against them.”
“Sally Doherty, a loan officer with Cherry Creek Mortgage said it all seems to be part of the plan that the federal government has to ‘unwind’ Fannie and Freddie and stop securitizing mortgages in favor of letting it be taken over by private entities – but it looks like it will be at a higher cost of mortgages to the consumer. Another factor that could play into 2014’s market is a decision by the U.S. Department of Housing and Urban Development to allow the temporary loan limits that came in as part of the Housing and Economic Recovery Act of 2008 to expire Dec. 31. ‘It’s a complicated issue with many moving parts contributing to the uncertainty present today in the mortgage industry,’ she said.”
‘debt peril’ ???
don’t be a debt donkey.
put down the pen.
step away from mr. banker’s desk.
save yourself.
If interest rates rise, doesn’t the government go bankrupt? How can they afford to pay interest on their own debt?
Debt= Crushing Slavery
Saving and reduced personal consumption=LARGE bank account and freedomm
No debt + lots of cash + renting = Freedom
Thank you for the correction Sir.
Bill in LA=WIN
Paying more for rent than a mortgage and calling that “freedom,” = IDIOCY.
Unless future housing market capital losses wipe out your savings in paying a mortgage, that is…
Oh, cool, another braindead REALTROLL.
Are you suggesting that real estate always goes up?
Well… here’s the deal. Bill and I are living rent free in many empty skulls. Our financial success and our relentless pursuit of the truth and exposing the fraud that is housing drives them out of their minds.
Where on earth is rent more than buying at current grossly inflated asking prices of resale housing?
I was wondering the same thing, I guess with 40% down maybe renting the money is cheaper then renting the place. Ignoring the cash locked up factor of course.
I think 10 down should be the standard when calculating own vs rent. And add in maintenance and PITI.
“Where on earth is rent more than buying at current grossly inflated asking prices of resale housing?”
Some small towns in the Columbia Basin are priced this way, but get into a more desirable area like the Tri Cities or Wenatchee, and the rent v buy quickly inverts again. The larger problem out here was the HELOC wave that swept through here with the 120% LTV, and the home owners signed up; scammers just sold the house to the bank for 20% more than appraised value!
The reality now is that brand new construction with HVAC and better insulation can be purchased for less than the older depreciated and leveraged chit. It still not an investor’s climate, IMHO, as the region is like a 45-rpm record played at 33-rpm, and the boomer die-off will likely exert slow but steady deflationary forces. Tom Vu and the hot babes wouldn’t have any fun here unless they belonged to a church.
I may pay more rent than the interest you pay on your mortgage sir troll Josh, but you pay more than my rent on your interest, insurance, taxes, principle, and maintenance than I do on two rents (if you are a sheeple home mortgage payer in either of the neighborhoods where I rent). The money I have left over after rent has been for years buying into the S&P 500 index fund of Vanguard and other funds, some better and some almost as good. Try to match this:
$2,390 monthly rent
2% annual house price appreciation (should really be 1)
3% annual rent increase
$500,000 house but borrowing on $400,000 (20% down payment)
4.5% interest rate
3% inflation
10% annual gain on investments you would invest in with left over money on rent versus PITI
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0
Renting is by far a better deal than owning.
Zip code 92691
Um, I don’t know where you’re living, but here in SF the rents are not even close to being more expensive than mortgage + taxes + insurance + maintenance.
His rental is La Mesa, east of Mission Valley in the San Diego area - that part where summers are almost like the desert. San Diego area has a much smaller region of relative cool temps. Probably up to eight miles inland and that’s it - compared to in the L.A. basin (even Carson is cooler than La Mesa). Average maximum high temp of La mesa in the summer is 86 (via weatherchannel.com ) but probably has bad days of above 96.
Oh yes, I can be a home moaner in PalmDale for $250,000 and “proudly” say I am a “law abiding” member of the community and you are not if you are a renter! But my commutes would be 3 hours. Each way.
The smart money rents near their jobs and keep their cars for fifteen years or more.
You’re comparing La Mesa to Palmdale? Lol come on man, you cannot be serious. I don’t know where you’re getting your numbers from, but the weather here is perfect. Unless 86 is too hot for you?
Look, I have 3 kids, 2 dogs, and a cat. I need a yard for my dogs and kids to play in. I have a stable job, love the company I work for, and have no desire to “be mobile.” Not everyone has the luxury of being able to just up and move wherever they want.
And you invest in the stock market instead of real estate and complain about a bubble in real estate? Give me a break. The stock market is fueled by QE far more than real estate.
Anyway, your situation of rent vs. buy is useless because you do not rent the same type of place that a median price home would afford you. I could rent a room out from someone and pay $600/month (I used to do that) and that would be far less than a mortgage. NO SHIT. I’m not getting nearly as much.
Kudos to you for being willing and able to sacrifice your living situation so that you can invest in other ways (however questionable they may be). But that doesn’t demonstrate that “housing always loses.”
Housing is always a loss. Houses depreciate rapidly.
“Um, I don’t know where you’re living, but here in SF the rents are not even close to being more expensive than mortgage + taxes + insurance + maintenance.”
+1 Coastal California in a nutshell.
+ you get all the downwind fun of Fukushima.
Mobility = freedom. What percentage of homeowners really stay in their own homes for life? How many homes do they buy and sell in their lifetimes? For most people who drank the Kool Aid of Home moanership, it’s more than one.
Extra closing costs, extra brokers fees. The buy vs rent calculators don’t consider this part.
If you move more frequently than five years you are better off not owning a house.
If you move after 30 years and you are living in Detroit, you are better off being a home owner.
The winning paradigm is a combination of
1) Being a consultant willing to work in another city, even more than 2500 miles away from where you normally live - for a year or so
2) renting
3) reaping the tax benefits of being Con-w2 - which blows away the MID - a laughable puny tax avoidance benefit.
The tools I successfully used in the past and still use FOR SURE are
1. apartmentratings.com - I don’t want to live in a noisy apartment complex or where there are gang bangers. I look for the highest ratings in a zip code with a reasonable amount of ratings, not one rating. This is for my work address when I consult.
2. dice.com - to find what contract engineering gigs are hot -my search criteria is boolean and “linux or ARM or “embedded software” it was “Ada or (C and (embedded or secret or clearance)” when I was a defense industry consultant. I see what rates are out there and then I work through my shop to get me there. My shop has a 2% matching contribution to 401k. They take a hike if I don’t like the rate they are willing to give me. In desperate times like in the year 2002 and 2008 I also check with cjhunter, Monster (contract only), and other job sites. LinkedIn is pretty new. I never really had to seriously look for a job since 2008.
3. Google maps - to see the distance from my new apartment to work and to the gym. The only two important places.
4. My airline web site. To see flight schedules and cost from the nearest airport of my work address. How often will I be able to fly back home to Phoenix? Important to me.
5. Location of a gym with a decent (at least 25 yard) lap pool.
I keep a spreadsheet (”Moolah calculator”) to compare the hourly rates / annual salaries / compensation for prospective jobs.
These are tools of the seasoned consultant. These tools are what you need to have and make to get further ahead in the rat race than everyone else and be able to get to where I am now.
And the “now” is “I can retire now if I want and move to a cheap place, have abundant money for my female friends, enough money for my Whole Foods produce and my fitness club, my mountain biking and swimming, and not have to say yes boss”
“…and not have to say yes boss.”
How many people hate their boss? It’s got to be huge.
In many cases the one with the label “boss” lets it go to their head and they have a sheriff badge. My current boss is okay. So far he is generous. I owe a lot to him for giving me a chance in commercial and be the second senior R&D software guy there, testing out theoretical possibilities with the open source software. Learned a lot about embedded linux.
This stuff will keep me consulting out west in a few years. I have a lot of other new things to my list besides Linux and embedded C, kernel development, device drivers and so on. There are even contract software gigs in these areas where my sister in Portland is - in her suburb. All sorts of neat cities up and down the left coast.
This does not mean I like the LIEberals. I like the tax haven of consulting and they don’t realize when I consult, I’m lower income than I am now, and paying less tribute to their kings and queens.
“What one piece of data would you look for (and when) that would make any of you conclude that one scenario is more likely and the other less likely?”
Will the Fed follow through on announced taper plans, or will the taper talk turn out to be a head fake designed to increase the expectations-related impact of quantitative easing when the taper doesn’t occur as fast as expected?
“Our problem is that the velocity of money has slowed to a crawl.”
I find that statement in isolation to be quite interesting. Why, exactly, is this a problem? Not being a monetary economist, I don’t grasp the implications of this situation.
This graph speaks for itself. Since the Asian currency crisis, the velocity of the M2 Money Stock has spiraled ever lower, to its current level far below its historic range to the lowest on record. I’m very interested to hear what the implications of this development are for real economic activity, and also what it suggests about how well quantitative easing has “worked”?
Velocity of M2 Money Stock (M2V)
2013:Q3: 1.571 Ratio Last 5 Observations
Quarterly, Seasonally Adjusted, Updated: 2013-12-20 2:01 PM CST
The other noteworthy feature of the graph is just how high above the historic range the M2 velocity went by the late-1990s, just before the U.S. tech stock crash was followed by the housing bubble and crash and historically massive too-big-to-fail bailouts. One might conclude at a glance that massive imbalances in the U.S. monetary system reached a peak by 1998 or so which was followed by an ongoing correction through the present day.
Here is another most interesting monetary-policy relevant chart. Does this only go up over time, or does it some times go down?
Reserve Bank Credit (RSBKCRNS)
2013-12: 3,947.669 Billions of Dollars Last 5 Observations
Monthly, Not Seasonally Adjusted, Updated: 2014-01-03 8:06 AM CST
I’m very interested to hear what the implications of this development are for real economic activity, and also what it suggests about how well quantitative easing has “worked”?
——————-
Global Freight Data Indicates No Economic Recovery
Contrary to establishment propaganda, there is no economic recovery taking place. There are many leading indicators to support that statement, none more so than global freight data. The International Transport Forum, in its December, 2013 Statistics Brief, titled “Shifting Economic Mass Towards Emerging Economies Shown in Global Freight Data”, clearly defines how the performance of the advanced (western) economies remains weak, while the performance of the emerging economies are becoming stronger.
http://philosophyofmetrics.com/2014/01/03/global-freight-data-indicates-no-economic-recovery/
Isn’t it normal for the velocity of wealth to come to a screeching halt when it becomes concentrated in the hands of a precious few?
“a crawl… Why, exactly, is this a problem?”
Because it is part of the deflationary process. Reduced borrowing and spending is death to the magical credit based economy and the parasitic class that feeds off of it.
At which point they switch from parasitism to actual predation to survive. This is when war happens.
“I find that statement in isolation to be quite interesting. Why, exactly, is this a problem? Not being a monetary economist, I don’t grasp the implications of this situation.”
I’ve read, but don’t recall where, that a falling velocity of money is indicative of widening corruption, and that central bank injections of money to offset the slowing velocity usually end up in bank accounts rather than being used for goods and services. For example, coastal economies that depend heavily on taxes from retail sales, hotel, restaurant, etc., suffer when the velocity of money slows. The only positive effect, IIRC, was the environment.
The End of the Synthetic Economy
By Richard Stavros on December 20, 2013
The US Federal Reserve’s aggressive stimulus program was a last resort initiated five years ago in the wake of the 2008 financial crisis to save the global financial system from collapse. Not just the Fed but central banks around the world took to pumping trillions of dollars into their economies.
… with the Federal Reserve’s move in December to reduce its stimulus program by $10 billion beginning in January, reducing its asset purchases from $85 to $75 billion, the issue of growth is now again at the fore. The question on everyone’s minds is will growth be enough to support the US economy in the absence of stimulus?
Guessing at Growth
Federal Reserve Chief Ben Bernanke, in his comments this week, argued that there has been enough improvement in the economy, “to modestly reduce the pace of [Fed} asset purchases.” The Fed slightly increased its economic forecast, raising its expectations for GDP to 2.9 percent to 3.2 percent growth next year from a prior rate of 2.9 percent to 3.1 percent. The central bank also sees a lower unemployment rate of 6.3 percent to 6.6 percent, from 6.4 percent to 6.8 percent.
But one Fed member, Eric Rosengren of the Boston Federal Reserve, formally dissented against the taper decision. He felt that unemployment was still too high and inflation was still too low to begin pulling back on stimulus. And in press statements this week, bond guru Bill Gross of PIMCO said, “It’s true that all asset prices are artificially priced and we have to be concerned about that as we move forward. What asset prices need basically is a real economy that grows at 2 percent to 3 percent for an extended period of time, and we haven’t seen that yet.”
Of course, what’s most worrying is that no one really knows if the growth will be there next year, given the size and scope of the stimulus and wind down, and the inconsistency in GDP growth per quarter and in corporate earnings reporting (even as other economic indicators have improved).
According to Factset, as of Dec. 13, “the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 89 percent (94 out of 106). This percentage is well above the 5-year average of 63 percent.”
Larry Summers recently argued that the US may have entered a period of secular or economic stagnation (low growth), a theory first proposed during the Great Depression that blames inadequate capital investing for hindering full deployment of labor and other economic resources. Economist Robert Skidelsky confirms that low growth today may be the result of the fact that the average prospective return on new investment in the United States has fallen below any feasible reduction in the Federal Reserve’s benchmark interest rate.
“We may be in a permanent liquidity trap, in which nominal interest rates cannot fall below zero, but the expected rate of return to investment remains negative. Unconventional monetary policies like quantitative easing may inflate a new generation of asset bubbles, but the underlying problem, negative returns to new investment, will not have been solved by the time the next crash comes,” Skidelsky argues in a recent paper.
Other economists assert that the Federal Reserve may be tapering its stimulus because the central bank recognizes that it’s not achieving any meaningful impact on the economy (it’s in a liquidity trap), because the incessant flow of stimulus dollars is not substantially spurring more hiring or lending. Further, the pullback may also have been an acknowledgement that the stimulus is having a corrosive effect on markets by creating asset bubbles.
But what’s most disconcerting is that the velocity of money has plummeted, which means that the huge amounts of money that has been printed by the Fed really hasn’t been used, if at all, though consistent with the tepid recovery (see chart below).
The Fed’s Stimulus Never Achieved Escape Velocity
When the Fed withdraws its stimulus the question is what if anything will spur banks and companies (with trillions on their balance sheet) to hire and lend. And certainly the velocity of money is a key indicator for inflation. According to the quantity theory of money, if the quantity of money goes up, then inflation goes up, as long as real GDP growth and what is called the velocity of money (the amount of times you use money) is held constant. But both real GDP growth and the velocity of money has been at all time lows.
…
“But both real GDP growth and the velocity of money has been at all time lows.”
+1 Guilty; hunkered down, saving cash, only necessary spending.
It is a symptom of folks with capital being unwilling/unable to invest/lend that capital, and also a symptom of folks with potential uses of capital (business owners, folks with investments) being unwilling/unable to borrow/attract investment dollars.
The more capital is invested/lent generally, the stronger economic growth (with stronger economic growth comes employment, wage growth, etc.).
Here is the risk with low monetary velocity:
It is making the Fed complacent. They keep pumping money into the economy citing MONTHLY measures of CPI staying tame, and with monetary velocity being so low, that money is just sitting out there, not doing anything. They aren’t necessarily looking at the magnitude of capital sitting on the sidelines, which ultimately could come out to play…which would be bad for inflation.
The inflation gun is being loaded because low monetary velocity is allowing the Fed to do so…will the Fed be able to unload it before a spark?
“It is a symptom of folks with capital being unwilling/unable to invest/lend that capital, and also a symptom of folks with potential uses of capital (business owners, folks with investments) being unwilling/unable to borrow/attract investment dollars.”
Wouldn’t that be a natural consequence of keeping interest rates too low for too long, thereby driving up asset prices to lofty levels where future returns are expected to be lower than historical norms?
Not necessarily. Don’t think about asset values, think about return on investment. If rates are low, then it should be easier to invest capital to get an acceptable return relative to the risk-free rate (which is effectively zero).
High asset values are a byproduct of this…however, another byproduct of this is fear of higher rates in the future, which impacts investment today.
This is why the sooner they unwind QE, the better. It will likely result in higher monetary velocity (more people willing to invest/borrow/lend, since the “what happens when the Fed unwinds QE” bogeyman will be less of a mystery).
will the Fed be able to unload it before a spark?
The question is, will YOU be able to unload that rapidly depreciating house you paid a massively inflated price for?
‘The overall plan seems to be’
‘a loan officer with Cherry Creek Mortgage said it all seems to be part of the plan’
So there are people besides me that see too much happening at once to be a coincidence. The sudden FHA limit changes brought it home to me. On top of the qualified mortgage changes, the QE tapering, the interest rate increase; nobody came out and made an announcement, but it looks like the brakes are on. Why? Covering their ass:
‘Data through October 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, showed that the 10-City and 20-City Composites posted year-over-year gains of 13.6%. This is their highest gain since February 2006 and marks the seventeenth consecutive month that both Composites increased on an annual basis.’
‘Home prices increased again in October,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Both Composites’ annual returns have been in double-digit territory since March 2013 and increasing; now up 13.6% in the year ending in October. However, monthly numbers show we are living on borrowed time and the boom is fading.’
Yes, the monthly numbers. Like Orr in Arizona, these guys see what’s coming and are positioning themselves. All that inventory coming on the market is a “good thing”.
If some decisions have been made to stop propping up house prices, there are going to be a few million borrowers wondering who whacked them.
“Like Orr in Arizona, these guys see what’s coming and are positioning themselves.”
Time to stop pushing the petal to the metal and start foaming the runway (again!)?
Rose petals?
“if some decisions have been made to stop propping up house prices…”
I see what you mean. You very well could be right. That 13.6% gain to October with wages still stagnant (or decreasing, as i have seen) might have been the final straw for a small amount of bureaucrats who might have just had enough brains to decide if they don’t brake now, the house price inflation will reverse even more strongly to deflation later. It’s a way to induce mild house price deflation to prevent major house price deflation ahead.
The housing bubble correction has been postponed for over ten years.
Tapering and lower loan limits are the first real signs of taking away the punch bowl from the fiddling grasshoppers.
Like HA said, it is far less likely for our wages to go up to equal the affordability of houses and much more likely that house prices will fall to meet wages.
Good idea to realize gains on U.S. stocks and add much more to your cash and T-Bills. There will be bargains ahead.
Looks like also a good idea to increase your stake in international stocks and decrease your exposure to U.S. stocks. I just changed from 22% to 24% international stocks out of all my stocks and stock funds.
Is it time to short China? (FXP)
“…there are going to be a few million borrowers wondering who whacked them.”
Why is this a problem? They gambled, they lost. What’s to stop them from getting over it and moving on in their lives?
but it looks like the brakes are on
Are the brakes on because they see it getting too bubbly too quick and they want to stop it? Or are they on because they know it has already turned and it’s going to stop no matter what they do and by tapping the brakes they can appear fiscally responsible? Or is it just to service their banker cronies who want to get back into the market that Freddie and Fannie took over to make some more on loans now ?
I’m highly suspicious of any governmental action that would appear to lead to lower house prices.
“The government thinks private capital will come in if Fannie and Freddie rates are increased enough to make it attractive to compete against them.”
It’s unbelievably simple: If Uncle Sam stops subsidizing Fannie’s and Freddie’s operations to give them much fatter profit margins than private sector competitors, their market shares will shrink, and private securitizers will gain market share.
Further, if too-big-to-fail bailouts are no longer provided to make feckless, reckless lenders whole on sour mortgage loans, prudential underwriting standards will return.
This will happen, folks — it’s only a matter of time and patience.
It is not only a matter of time and patience.
Slight changes are a matter of time and patience. Big changes are a matter of pain and suffering.
I can patiently watch the moron masses suffer.
“…it all seems to be part of the plan that the federal government has to ‘unwind’ Fannie and Freddie and stop securitizing mortgages in favor of letting it be taken over by private entities – …but it looks like it will be at a higher cost of mortgages to the consumer.”
This is a bass ackwards way to think about the prospect for getting Uncle Sam out of the mortgage market subsidy business. Why should U.S. taxpayers be collectively put on the hook for subsidizing and guaranteeing mortgages at rates that encourage households to buy more home than they could otherwise afford? Homebuyer households will lose when they realize they overpaid or get foreclosed at higher-than-historical rates due to overstretched household balance sheets. And non-homebuyer households are on the hook for paying subsidies and insurance claims on defaulted mortgages.
The private sector could handle private transactions between borrowers and lenders much better than the government can.
why for anything other than national defense?
why for anything other than national defense ??
National Defense is the biggest welfare program we have…
“National Defense is the biggest welfare program we have.”
Since the end of the cold war it has not really been national defense. It has been “conflict creation” and as a result, yes welfare, wealth redistribution, socialism.
It is shameful how we sacrificed thousands of young people and the 3000 people killed in September 2011 only to support Israel. Michael Scheurer’s Non-Interventionism web site woke me up to this stuff. He lately has caused libertarian atheist supporters anguish by his ramblings against abortion though. I guess he is for non intervention except for when it’s a woman’s own liberty about her body. Then the abortion police intervene at some point.
+1 The on-going crusades are siphoning our prosperity.
‘biggest welfare program’ ???
nonsense. military industrial complex = job creators
“…biggest welfare program…”
At least it’s one which Republicans like.
“Statistics Canada said in December the average level of consumer debt to annual income reached 163.7% in the third quarter.”
That sounds unprecedented and highly unsustainable. Where will this lead and when will the transition occur?
Forget house prices and debt, deflation is Canada’s new bogeyman
Bloomberg News | January 3, 2014 | Last Updated: Jan 3 10:07 AM ET
More from Bloomberg News
The slow pace of consumer price inflation surprised policy makers in 2013, reviving rate-cut bets and prompting the central bank to abandon its bias to raise borrowing costs.
After spending two years watching house prices and household debt measures, investors may spend 2014 focused on inflation reports when making bets on the Bank of Canada’s interest rate outlook.
The slow pace of consumer price inflation surprised policy makers in 2013, reviving rate-cut bets and prompting the central bank to abandon its bias to raise borrowing costs. Bank of Canada Governor Stephen Poloz said in an interview last month he can’t explain the weak inflation, which is now almost a percentage point below where the bank forecast it would be at the start of last year.
“A lot of people are starting to position for CPI releases,” Mazen Issa, senior macro strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said in a telephone interview. “Inflation is going to be one of the major stories for Canada” this year.
Statistics Canada reported Dec. 20 that annual inflation in November was 0.9%, unexpectedly staying below the central bank’s 1% to 3% target band. The difference between Canadian and U.S. two-year yields narrowed by 4.22 basis points, the largest one-day reaction to Canadian CPI data since September 2011, when inflation was above the target band.
Inflation below 1% gives the Bank of Canada “plenty of reason to be dovish,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia in Toronto. The Dec. 20 report was “a disappointment because the market thought we would go back into to that 1 to 3%” target band.
…
Economy
Why Bank of Canada boss Stephen Poloz stopped worrying about debt, housing and hoarding
Gordon Isfeld | January 2, 2014 | Last Updated: Jan 2 5:28 PM ET
Bank of Canada Governor Stephen Poloz has responded to economic challenges by dropping all guidance on the future direction of the bank’s trendsetting interest rate and using his words to deliver more transparency on monetary policy.
OTTAWA — For Bank of Canada governor Stephen Poloz, the signature moment of the early stage of his tenure came in October when he acknowledged he really didn’t have a strong feeling about where interest rates were going next.
That Oct. 23 rate announcement — along with the latest Monetary Policy report — caught many by surprise. While policymakers kept the rate at 1%, untouched since September 2010, they dropped any mention of the bank’s long-standing view that borrowing cost would eventually start rising again. By taking a neutral position, the bank implied the rate may eventually go down, if the economy and inflation didn’t begin to pick up pace.
But more striking than just taking a neutral stance, was Mr. Poloz’s laid-back, plain-spoken attitude toward using interest rate guidance at all. Didn’t he, like his predecessor Mark Carney, want to hector the Canadian consumer for larding on so much debt? Nope. Instead, Mr. Poloz seems absolutely confident in his lack of certainty.
“There isn’t anything wrong with guidance, but what I think it’s best used for is to have it in your tool kit so you feel you have an extra qualifying effect,” he said in an interview with the Financial Post. “If it’s used all the time, then it’s just our conclusion of all the analysis that we have. Anyone else can figure out what that conclusion is.”
In a December news conference, Mr. Poloz had called the lack of guidance a “movement towards honesty.” Still, he’s quick to note the bank was in no way being “dishonest” when, under Mr. Carney, it was the only central bank in the Group of Seven saying rates were more likely to rise.
“What really is the value about fussing over a few lines of so-called guidance . . . . It’s kind of like writing down your conclusion,” he said. “I think it’s more credible to be open and honest . . . . This we believe is roughly right. We’re not pretending to be right.”
While Mr. Poloz is making his mark on the Bank of Canada, the learning curve has been steeper than he could have envisioned when he took over from Mr. Carney — crowned as the Golden Boy of global finance after keeping Canada afloat during, and after, the banking crisis and economic recession of only a few years ago.
“[Poloz] and his team have been more or less following the course charted by his predecessor, Mark Carney,” says Louis Gagnon, professor of finance at Queen’s University.
Now, only in his eighth month as the governor of Canada’s central bank, Mr. Poloz is still learning the hard realities of global fiscal and economic risks, ultra-weak inflation, a still-strong currency and housing market, lagging exports and hesitant business investment.
…
Paying down debt remains top financial priority of Canadians, poll shows
Canadian Press | January 3, 2014 | Last Updated: Jan 3 7:46 AM ET
More from Canadian Press
But while their intentions are good, CIBC says many Canadians are not yet making progress on reducing their debt loads.
TORONTO — Paying down debt remains the top financial priority of Canadians, although a new poll says slightly fewer have made it their top pick compared with the previous two years.
The poll, conducted for CIBC by Harris/Decima, found that overall 16% of respondents said lowering debt was their No. 1 priority for 2014.
That was down one percentage point from 17% in 2013 and in 2012.
However, it was five percentage points better than the 11% who said they would focus on building savings, up slightly from 10% over the last several years.
Next in order of importance were managing day-to-day spending and getting current bills paid, both selected by 8% of respondents.
Retirement planning was the top focus of 7% of those surveyed, the same as last year but down from 11% in 2012.
“For the fourth year in a row, Canadians have told us their top financial priority is paying down their debt as we enter a new year,” said Christina Kramer, executive vice-president, retail distribution and channel strategy at CIBC.
…
Since Housing “Analyst” is too afraid or stupid to answer, does anyone want to take a shot?
If a person puts down 5% to 20% and the resulting PITI payment is equal to or less than the rent for an equitable residence, is that a good buying circumstance?
Where on earth is buying less than renting?
Detroit, Michigan
Flint, Michigan
Cleveland, Ohio
Compton, Ca
Inglewood, CA
Richmond, CA (I think)
Needles, CA
Barstow, CA
Trona, CA
Gee wiz. Where do we all sign up to live in Compton?
“Richmond, CA (I think)”
Surprisingly, now may be the time to buy there, or adjacent San Pablo. Homes are selling for as low as $4000. How many other places in California offer similar prices?
16401 San Pablo Ave
SPC 230, San Pablo, CA 94806
For Sale: $4,000
Zestimate®: $126,215
Est. Mortgage:
$16/mo
See current rates on Zillow
Bedrooms:2 beds
Bathrooms:1 bath
Mobile / Manufactured:720 sq ft
Lot:Unknown
Year Built:1971
Heating Type:Unknown
Richmond or Stockton, which of those two are the real Detroit of California?
It appears there is no shortage of for sale (red) or premarket foreclosure (blue) homes around Stockton, either! Next year should be a great one for real estate investors to snap up bargain basement deals in downtrodden U.S. cities.
Unlike Stockton or Richmond, Detroit apparently has many homes offered for sale at a price of $1 (scan over the homes depicted at the right end of this graphic to see them). I can’t understand why the all-cash Chinese investor brigade hasn’t snapped up all of these places in a heartbeat. What is stopping them?
“What is stopping them?”
Maybe the Chinese have a similar saying like “if it is too good to be true, it’s too good to be true” or for “there’s gotta be a catch to it!”
Sacramento also has a shirt load of homes indicated as “premarket,” which is a pleasant euphemism for “pre-foreclosure” or “in foreclosure.” Lots of these are listed for WAY lower than $100K.
I’m amazed that real estate investors can avoid capital losses in Sacramento, given the many distress sales that appear to be in the pipeline!
Turns out there are even homes listed for sale in Sacramento at a price of $1. Go figure!
114 J St, Sacramento, CA 95814
View larger map
For Sale: $1
Est. Mortgage:
$0/mo
See current rates on Zillow
Bedrooms:Studio
Bathrooms:Contact for details
Single Family:Contact for details
Lot:Contact for details
Year Built:Contact for details
Heating Type:Contact for details
Listing site:Coldwell Banker
“Richmond or Stockton, which of those two are the real Detroit of California?”
What’s your favorite color, black or yellow, respectively?
The other thing about Richmond is that they don’t exactly have an inventory shortage.
The blue homes are “foreclosed” or “pre-foreclosure.” It appears that Richmond has a bevy of homes in this so-called “pre-market” state.
I thought California had a foreclosure moratorium in effect. How can so many homes in Richmond and Stockton possibly be going through foreclosure, given the moratorium?
Because there is no moratorium.
California Lawmakers Approve Foreclosure-Protection Law
Reuters | Posted: 07/02/2012 9:06 pm Updated: 07/03/2012 11:54 am
California Foreclosure Protection
SAN FRANCISCO, July 2 (Reuters) - California legislators on Monday approved a sweeping bill aimed at stopping abusive practices by mortgage lenders and helping homeowners avoid foreclosure.
The legislation, among the most ambitious of its type in the nation, would bar banks from moving ahead with foreclosures while still negotiating with homeowners over loan modifications, a practice known as “dual-tracking.”
It would also allow lawsuits against banks for so-called “robo-signing,” in which foreclosure documents are signed en masse without review. Revelations about robo-signing helped lead to a $25 billion settlement of a multi-state foreclosure lawsuit against major banks.
California Attorney General Kamala Harris, a central player in the foreclosure lawsuit settlement, also played a lead role in developing the legislation approved Monday.
Governor Jerry Brown has not formally weighed in on the legislation, but he is expected to sign it in the coming days.
The California law, and others like it around the country, is opposed by banks, mortgage servicers and some real estate market professionals. They say that such legislation imposes unnecessary burdens on lenders and has the effect of delaying, rather than preventing, foreclosures. That, in turn, may impede the long-term recovery of the real estate market.
In response to such criticisms, the final legislation was amended so that it applies only to first mortgages, and only to homeowners who still occupy their residences, among other changes.
California is among the states hardest-hit by the housing meltdown. The city of Stockton last week became the largest municipality ever to file for bankruptcy, in part because of a devastating housing collapse that has given Stockton one of the highest foreclosure rates in the nation.
There are foreclosure moratoriums in all 50 states.
The law does not stop foreclosures, it changes how they must be processed.
See propertyradar:
http://www.propertyradar.com/trends/california
Note how there are still homes going back to the bank and being sold to 3rd parties…this is the conclusion of foreclosure processes. If there was a moratorium, these would be close to zero.
Which is a distinction without a difference. The name of the game is to delay and kick the can down the road.
ALL of these moratoriums achieve that end.
I gave you an example already. I purchased two years ago: $270k sale price, 5% down, 3.625% interest. $147 HOA fee = $1,800 total payment. I rent the place out for $2,200.
This is in La Mesa, CA. Other areas of San Diego are more expensive, and I agree, bubbly. But even after the run-up the past 2 years, I still see houses that with 20% down would have a PITI payment equal to the rent.
I’m merely asking you to address your statement that housing “always” loses over time. Always is a lot.
“…with 20% down…”
That’s $100K down the drain on a San Diego starter home priced north of $500K. Can’t you think of a better use of $100K than to overpay for a house which is quite likely to go down in value once the Fed takes away the QE3 punch bowl?
I am contemplating that exact scenario, to be honest. I do fear that once QE is lessened, that rates will rise, prices will drop, and I would “lose” that $100k. Although it isn’t actually lost, it just disappears until the next bubble forms.
My point was that I don’t see how “housing always loses.” If one can get to rental parity and stay in that home for 6-10+ years, how do they lose?
I’m still waiting for an answer.
“If one can get to rental parity”
You can’t at current asking prices.
I found a place in your area at $1895.
http://www.zillow.com/homes/for_rent/La-Mesa-CA/17008681_zpid/46089_rid/days_sort/32.850606,-116.874619,32.684897,-117.113228_rect/11_zm/
however I would prefer to get all my maintenance done within the same day. And pay $100s less if I was in La Mesa,
They are below your $1800 cost. See ya!
http://www.apartmentfinder.com/California/Chula-Vista-Apartments/Terra-Vista-Apartments
That’s a 3/1 with 1,000 square feet. I have a 3/3.5 with 1,500 sq. feet. Try again.
And thanks for the apartment listings. Again, NO SHIT rent for a one bedroom apartment is less than a 3/3.5 house. But it’s NOT COMPARABLE.
Now, downtown San Diego and the coastal cities are bubbly. You can rent for far less than what the mortgage would be. I would never buy there (I don’t know who would). I don’t think we’re saying different things, I think you and HA are missing the point. Housing doesn’t ALWAYS lose. If a person can buy for less or the same as the rent of an EQUAL house, then buying wins.
“If a person can buy for less or the same as the rent of an EQUAL house, then buying wins.”
But you can’t so renting wins.
One bedroom apartments suit me. $1290. The NYT calculator says this $1290 per month beats your $270,000 house even if rent goes up 3% a year. I put your house appreciation at 1% per year - above the inflation rate, while I invest my leftover money in the Vanguard 500 index fund. You say $2200 rent? Fine. I would put $920 a month into the Vanguard 500 index fund.
Plus walking distance to restaurants dining.
http://www.apartmentfinder.com/California/Chula-Vista-Apartments/Teresina-Apartments
Average house price in zip code 92691 : $575,000. My 1 bedroom rent: $1350.
Average house price in my Arizona zip code: $275,000. My 2 bedroom (deluxe, with a park in back): $1050 per month. It has gone up 2% per year.
15 year mortgage rate let’s say 3.12
In either case, renting is better than buying.
Combined, and since I work in 92691, we get $2400 per month rent. $2400 per month rent versus $575,000 average house cost - renting still wins.
And I’m one of the only three people who talk about this but the mobility factor of renting is a bigger winner. It’s not part of the housing calculator of the NYT. The average person moves several times in his career. So a renter avoids several times closing costs, several times broker’s fees, and so on. Not only that, a renter has an entire continent as his job market and community. Not just his county like a home moaner does.
My original house was $96,000. I added $4,000 in landscaping and maintenance to it. Sold it for $79,000 six years later. My income was $35,000 when I signed the purchase agreement. When I moved to Arizona I took a job at $56,000 and sold the house. Had I stayed in that little Navy town, the house today would be valued at the breathtaking … $140,000. My salary would be approaching $100,000 and I would be having 5 weeks of annual vacation. But instead I had more than ten years of income above $140,000 from 2003 to $2013. Some of those years were in the $190k range. One year of it was $223k. I had taken the opportunities that home moaners would pass up. In 1999 I would not even dream I would have broken a million in net worth ten years later. Now my salary is $130,000. But I have pledged to myself to keep my working address in this 92691 zip code for four years. That’s enough time to give me good connections in the commercial realm and then go back consulting. At higher rates. I’m going to go back to $90 per hour rates and all them will be Con-w2s in California, Oregon, and Washington. Opportunities a home owner would not take.
Comparing the average priced house to a 1 bedroom or 2 bedroom apartment = idiocy.
How can you guys expect to be taken seriously if you can’t give intelligent examples of your positions?
Because housing is a loss ALWAYS.
That leaves a $400 a month difference assuming the 2200 rent is stable (Bill’s post seems to imply it isn’t). I also assume that you pay some form of upkeep for repairs and such? And do you spend time managing this, because people I know pay 10% of the monthly rent to prop management companies if they don’t do it themselves. Then what happens if the renters leave the place in a shambles, is some of that 400 a month put away to cover that? What about if it takes some time to rent it out if current tenants leave, one month empty cuts your “profit” in half, and one month downtime is hardly a far fetched scenario. Two months and your pretty much negative.
Does a tax write off balance out with what you pay in prop taxes?
Bottom line seems to be that there is quite a bit of risk for a solitary SFR rental to become an alligator even if it cash flows now. If you are making some money, great, they’re your ulcers if it goes south.
Where is the PMI for on going in with 5% and the maintenance costs? Water Trash? Repairs? Empty mos? Time to manage it?
seems like we are only getting part of the story
That’s why he’s to be treated as a lying troll.
“I gave you an example already. I purchased two years ago: $270k sale price, 5% down, 3.625% interest. $147 HOA fee = $1,800 total payment. I rent the place out for $2,200.”
If the fed ever stumbles it will be game-over, and rents will drop back to $650 or so, where they would be given real median household income.
My handyman has been buying forclosures for $25- 32K and renting them for $600-750 a month.
Now Locaville is no trendy hot spot. A lot of us are fat and ugly and talk funny - but there is good scenery and a decent economy.
Definitely a good quality of life to be had if one is not interested in maintaining an image or a top tier salary.
Oops. Curious always about ‘good quality of life’, I googled locaville, ca and came up empty. Is ‘locaville’ a euphemism, or did I get the wrong state? Thanks.
Jane, Locaville is indeed a euphanism. Flyover country, southern half of US. Decent weather and economy but nothing noteworthy. We get the arctic spells like everyone else (brrr) but they don’t last as long.
Locaville is an actual but generic city and has been studied by some demographers/marketing experts as being indicitave of the country as a whole. So it that way it is worthy of discussion.
My point is that there is a median between high priced locales and dirt cheap war zones such as the list above.
“If a person puts down 5% to 20% and the resulting PITI payment is equal to or less than the rent for an equitable residence, is that a good buying circumstance?”
Bottom line is the price tag, and is it grossly inflated. How about a zip code?
La Mesa, CA. 91941 and 91942
El Cajon, CA 92019, 92020, 92021
It is amazing to think of all the homes you could buy in small rural markets for $600,000 or more. But more staggering is making the mortgage payments and struggling to retire the mortgage. The less Uncle Sam steps in to fix economics, the better the private sector does making the loans without that shadow,
The smart money rents deluxe one bedroom apartments with same day maintenance far cheaper than PITI-UM (Principle, Interest Taxes, Insurance, Uggggh! Maintenance) on a house and has far better money making opportunities by being mobile - I’m a contract engineer at heart and will go back to it in a few years. I got a contact high from the first day I became a contract engineer in late August 2000.
Maybe I should not be so quick to sell my staffing company stock. More and more people are realizing that being a contract engineer who is not anchored to any community is so much more lucrative for your net worth than staying in one place.
Bwahahahahahaha!!!!
Arooostook county Andrew mooer? Good grief. What an arctic hole…. yeah….. I know you vaguely….. the notion that any houses somehow worth $600k is laughable. In Maine? Outlandish.
“The less Uncle Sam steps in to fix economics, the better the private sector does making the loans without that shadow,”
FWIW, our government is wholly owned by criminal bankers, and they aren’t trying to “fix” anything.
An aging population means an end to the labor surplus, but income inequality and the debt overhang mean ongoing declines in living standards. My theory is plenty of jobs that don’t pay much, because the customers can’t afford to pay more.
How that plays out with regard to the inflation rate I’m not sure. I thing one reason that the PTB want somewhat higher inflation is to create the possibility of real wage cuts without the added conflict of nominal wage cuts.
“I thing one reason that the PTB want somewhat higher inflation is to create the possibility of real wage cuts without the added conflict of nominal wage cuts.”
I suspect the Phillips curve lurks behind the economic logic from on high, though I doubt any top economist would admit it.
If the trend toward raising minimum wage continues, I see some inflation for essentials and low end housing, but I don’t think it will extend beyond that.
“How that plays out with regard to the inflation rate I’m not sure. I thing one reason that the PTB want somewhat higher inflation is to create the possibility of real wage cuts without the added conflict of nominal wage cuts.”
Economists already know that we can’t inflate our way out of this mess. If we don’t stumble on some new innovation soon life for many will be misery not seen since the last depression.
Anyone who passed high school algebra has all the math background needed to understand NPV. Why is it that U.S. schools don’t teach basic financial literacy?