0.25%-0.75% increase in mortgage rates (only?)

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

One way or another - there WILL be a spike in interest rates.

...

If this assertion is correct, then there will be an opportunity where the house price WILL be at its nadir - and your cash, assuming it has kept up its purchasing power, will purchase what you desire.

Thanks for your input, c1ue. I recall GRG55 making a similar recommendation some time ago (along the lines of waiting to buy after the period of high interest rates). I think one subconscious reason for posting an invitation to comment is that I needed reinforcement of conclusions previously reached.

The Jtabeb method (GRIZZLY!) has its risks in either scenario; both in the monster taxation aspect and in the confiscation aspect.

Well, I'm not really contemplating the Jtabeb method, although I can see where he's coming from. The option that tempts me the most (the Roth conversion) is far too rose-colored-glasses for JT.

It is the contemplation of all of these equally poor choices which led me to prepare the 2 exit options.

In the past, I think you have stated that if things go to hell in a handbasket, it is much smarter to leave than to make elaborate preparations to stay. I agree with the logic.

I have a few red lines in mind myself, but I do not think I am as well positioned as you to play the role of emigre.

[charliebrown]

Re: 0.25%-0.75% increase in mortgage rates (only?)

you may want to try option c", that is determine how much you can convert from your trad ira to a roth without increasing your mtr.
I'm considering this for this year.

If people are afraid of confiscation of 401k, 403b, trad ira, i don't know why they think roth's won't be raided also.

without any hard facts I believe housing has farther to fall. Maybe in a hard hit area like CA, FL, NV, MI we have a near bottom, but other areas I think have farther to fall. I assume the cost of housing is driven by
income, and mortgage rates. Also boomers may be downsizing. Many states are on the take raising taxes and fees. So there will be less income to support housing.


As my daddy told me a long time ago, buy the cheapest house in the nicest neighborhood. Make sure the surrounding economy is diverse and sound.

[c1ue]

Re: 0.25%-0.75% increase in mortgage rates (only?)

c1ue, would you mind sharing your exit options to the extent you feel comfortable? I too have been considering the case if and when circumstances here become intolerable, and leaving becomes the best option. The shenanigans that occurred in the fall of 2008 was enough to actually get me to apply for an immigration visa (paranoid and overreactionaryu as that may sound to some ... including my own family).

VV,

My choices are: Japan and Russia. I have historical reasons for both - but a review of what my criteria were:

1) Entry and residence visa - neither of the two are in the 'more easy' camp, but I am able to get both due to family/connection reasons

2) Bank account - related to above. But being able to open and access said bank account before moving there is important

3) Place to live - not as straightforward as you might think depending on the country

4) Social grouping - family or close and trustworthy friends and associates. Because if TSHTF, pieces of paper won't necessarily be enough (visas)

5) Economy divergent from the US - Japan is relatively weak here, but Russia is very strong

6) Defense - Again, Japan weak but Russia strong

7) Energy sufficiency - as above

Mexico or Costa Rica, for example, fit the top few criteria well but very poorly in the last few.

The other thing I would note is that waiting until the crisis is upon us - will be too late. The exits will be crowded and even a handful of Krugerrands may not save you.

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

My choices are: Japan and Russia...

Then I guess you're not of the view that Japan will go down first.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

I've noted your earlier comments about Japan's debt being owed primarily to their own citizens, but I would think the demographic story matters. Is Grice's analysis (Societe Generale) hot air?

Being half-Japanese, I have many relatives there, and a minor head start on the language and culture. However, I would never have considered Japan as a flight destination. Out of the frying pan...

[jk]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Thanks for the advice, JK. Job security is a tricky thing to evaluate. I was the first permanent hire at a small company which now has about 15 people or so. Given the structure of the company and my role here, I'd probably be one of the last to go in a down-sizing. On the other hand, we work in a heavily government-subsidized industry; all it takes is for me to get my wish (i.e. the government balances its budget), and *poof* -- suddenly much less money for science and defense R&D. That could easily wipe the company out.

Maybe the moral of the story is to wait a year, and only buy if my wife is able to find a job in the area. The financial advantage of a low fixed-rate mortgage may be offset by the acceptance of greater risk through reduced flexibility.

do the roth conversion. that's a good idea, and if you later decide to use the funds to purchase a house, you'll have already paid the taxes on the withdrawal.

[c1ue]

Re: 0.25%-0.75% increase in mortgage rates (only?)

I've noted your earlier comments about Japan's debt being owed primarily to their own citizens, but I would think the demographic story matters. Is Grice's analysis (Societe Generale) hot air?

Being half-Japanese, I have many relatives there, and a minor head start on the language and culture. However, I would never have considered Japan as a flight destination. Out of the frying pan...

The debt issue I am less concerned about both due to the whom it is owed to and also because of the South Korea devaluation precedent.

The demographic issue I am equally less concerned about:

1) No nation has ever yet collapsed due to demographics of old age. Invadability, yes. But barring a resurgence of pirates, not sure what the benefit of invading Japan would be to anyone.

2) Japan has social structures that would kick in should demographic pressures really become a problem (i.e. stepping aside from life)

There are definite xenophobia potential problems, but that's what the social circle is for.

[Jay]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Being half-Japanese, I have many relatives there, and a minor head start on the language and culture. However, I would never have considered Japan as a flight destination. Out of the frying pan...

What kind of protections do Japanese citizens have from the State?

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

What kind of protections do Japanese citizens have from the State?

That is a very un-Japanese question. ;)

[nedtheguy]

Re: 0.25%-0.75% increase in mortgage rates (only?)

redacted

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

If I had, let's say, $50,000 to convert from a traditional IRA to a Roth IRA, that would count as $50,000 for my income. That would fall into the 25% tax bracket (2009). However, if they are allowing the split above, then that would mean that you would have $25K in 2011 and $25K in 2012 for your taxable income. This would mean that these distributions fall under the 15% tax bracket for their respective tax years. This seems like a pretty good deal (ASSUMING THAT THE TAX RATES REMAIN THE SAME). Just wondering if you or anyone else has looked into this and whether my tax interpretations are wildly incorrect. I've scoured the IRS website, but can't find any more specific details. May contact Fidelity directly, if no one has experience with this.

I'm in my mid-30's, my US IRA is about 35% of total assets, and yes I do own physical PM's . Cheers!

Hi Ned. I share your interpretation of the taxes pertaining to the Roth conversion; taxation of overseas income is over my head. But if your only income taxable by the US in 2011 and 2012 was from a 2010 Roth IRA conversion, then it would indeed seem that taking the option to split the income between 2011 and 2012 would land you in a lower marginal tax bracket... assuming that the tax rates remain the same. It sounds like a good deal to me, given your ability to take advantage of the low marginal rate.

My wife and I are expecting our second (last) child soon. Sometime in 2011, labor market willing, our household income will roughly double when my wife returns to work. That, combined with my expectation that marginal tax rates are going to rise in the brackets immediately above ours, means I should probably just take the income in 2010. I probably don't even gain anything by keeping the size of my 2010 conversion small enough to avoid hopping income tax brackets, because a year later, I'll likely be one bracket up, anyway.

While I think marginal rates for the upper income tax brackets are likely to rise sometime after the 2010 elections -- for my state as well as for federal taxes -- I'm not sure how much risk there is that taxes will rise for the lowest bracket. If you manage not to have any taxable income besides the 2010 Roth conversion in 2011 and 2012, it might still be a good bet to split the income across those two years.

[jacobdcoates]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Ash,


I can't tell you what I would do with your money, because mostly like that would be the wrong thing for you. I will tell you what I would do if I did not have my current mortgage and significant liquid funds. I would either chose option B or D. I will explain.

I live in Columbus OH, there are enough foreclosures that if I can't find a house that is "good enough" then I am being too picky. Of course what I consider good enough and what my wife considers good enough are vastly different things, but banks are very willing to sell foreclosures(short sales not so much) around here so the process is not horrible. Yes, I really hate to say it, but I think it is safe to say nominal interest rate will never be lower.

Reasons for Option D: The good neighborhoods are more affordable, but still overpriced relative to middle class income. Property/income taxes are/will rise more and incomes will decline further. If there is a Hyperinflation several things happen - riots and people burn things in riots namely houses and business. I would be hesitant to sink a significant portion of my wealth into a house in the city. We are, as people, bad prognosticators of the future. So given the uncertainty liquidity is preferred over illiquidity.

I am a practical person by nature, it if is working don't change/screw with it. If I was renting and was happy with it, I would let the landlord take all the risk.

PS: you are also assuming the "IRA's" survive this mess in any meaningful form with a significant fraction of the wealth contained within them intact.

[jacobdcoates]

Re: 0.25%-0.75% increase in mortgage rates (only?)

No place in really safe in an economic collapse. Running will probably mean you end up poorer faster.

[Rajiv]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Ash,

Brokerage accounts are not true self directed -- the options of what vehicles you can invest in is limited to what the brokerage offers. Here I am talking of accounts with checkbook control, and those that can invest in vehicles other than you can with brokerage accounts.

[ASH]

Re: 0.25%-0.75% increase in mortgage rates (only?)

Ash,

Brokerage accounts are not true self directed -- the options of what vehicles you can invest in is limited to what the brokerage offers. Here I am talking of accounts with checkbook control, and those that can invest in vehicles other than you can with brokerage accounts.

Hi Rajiv. Thanks for the clarification -- I checked out the PGI Agency link. I don't personally have a need to expand my retirement investments into tax liens and real estate, but I appreciate knowing such plans exist. For me, there is a big difference between the standard 14-fund (or whatever) menu offered by most 401(k) plans and the flexibility of my self-directed brokerage 401(k); the practical difference to me between a brokerage account and a 'true self-directed' plan is slight because I'd have to be a much more sophisticated investor to need investment options beyond stocks, bonds, and funds thereof. Maybe I should file this bit of knowledge away for a decade in which I'm better equipped to use the extra flexibility.

[Rajiv]

Re: 0.25%-0.75% increase in mortgage rates (only?)

It is also great for funding startups particularly if it is a Roth IRA!