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

[stanley2008]

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

Ash,
I am also currently renting and am considering a real estate purchase. Here are my thoughts on our situation:

Consider 3 scenarios of moderate inflation, hyperinflation, and a Japan-like economy where interest rates stay low and there is gentle deflation.

Krugman, Achutan, and David Goldberg see high unemployment in the us for the next 5 to 10+ years. There is a lot of housing inventory, and the banks are probably hiding more.

With moderate inflation with high unemployment, my guess is that housing prices will decline or remain constant because wages won't keep up with inflation (ie mortgage rates). I'm sure you have done the math, you only have to lose a few percent on a house to make renting an even money proposition.

I think all bets are off if we experience hyperinflation. It is not obvious to me that owning a house in the panic of a dollar collapse would be a good thing. Any posts from itulipers that have lived through latin american hyperinflation would be welcome.

If we have a japanese style economy with little or no price increase, housing will be cheap, but then again so will renting.

So from a strictly wealth accumulation point of view I don't think a home is the optimal choice. However its nice to have a home when you have children. Overall my thought is that a real estate is not going to appreciate any time soon, only buy if the non-wealth benefits of home ownership are worth it to you.

[ASH]

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

Ash,
I am also currently renting and am considering a real estate purchase. Here are my thoughts on our situation:

Consider 3 scenarios of moderate inflation, hyperinflation, and a Japan-like economy where interest rates stay low and there is gentle deflation.

Krugman, Achutan, and David Goldberg see high unemployment in the us for the next 5 to 10+ years. There is a lot of housing inventory, and the banks are probably hiding more.

With moderate inflation with high unemployment, my guess is that housing prices will decline or remain constant because wages won't keep up with inflation (ie mortgage rates). I'm sure you have done the math, you only have to lose a few percent on a house to make renting an even money proposition.

I think all bets are off if we experience hyperinflation. It is not obvious to me that owning a house in the panic of a dollar collapse would be a good thing. Any posts from itulipers that have lived through latin american hyperinflation would be welcome.

If we have a japanese style economy with little or no price increase, housing will be cheap, but then again so will renting.

So from a strictly wealth accumulation point of view I don't think a home is the optimal choice. However its nice to have a home when you have children. Overall my thought is that a real estate is not going to appreciate any time soon, only buy if the non-wealth benefits of home ownership are worth it to you.

Hi Stanley. Thanks for taking the time to share your thoughts. I'm persuaded it does make more sense to continue renting, given the future scenarios which seem most likely. I seem to be converging on the decision to do the Roth conversion.

My wife doesn't even want to think about moving, because we've already got the rental baby-proofed. I can't say I blame her. I guess she'll get a Roth IRA instead.

[vinoveri]

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

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.

clue, thanks for sharing.
I've been tempted to look at south of the border alternatives, but have been hesitant b/c of my lack of knowledge of the political/legal systems on thr ground, rule of law, property rights and corruption in general; don't know specifics of Cost Rica of Mexico, but I work with a woman who is from Brazil, and she says corruption is rife there and she has no desire to return to live notwithstanding the economic growth (granted this is only one data point). Of course, a reason for leaving the USA is b/c of law changes restricting liberty and perceived acceleration of corruption here.

My wife has family in Malaysia, but that does not look like a particulary attractive destination either.

Canada has a relatively open immigration policy, and even though the climate is not ideal and its relationship to the US is, how shall we say, intimate, my impression is that given the natural resources and commodity economy, its relatively small population, english speaking, very strong social support/safety nets, that it may be a good place to be able to go to. I'd be grateful for any comments from our Canadian iTulipers on this.

[c1ue]

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

My wife has family in Malaysia, but that does not look like a particulary attractive destination either.

Canada has a relatively open immigration policy, and even though the climate is not ideal and its relationship to the US is, how shall we say, intimate, my impression is that given the natural resources and commodity economy, its relatively small population, english speaking, very strong social support/safety nets, that it may be a good place to be able to go to. I'd be grateful for any comments from our Canadian iTulipers on this.

Malaysia is good from a 'far away from USA' perspective. There will be power games around the Straits of Malacca, but other than that Malaysia doesn't have much reason for 'terrorist intervention'.

I've been on Sarawak - it seems nice but as a business visitor, the Muslim ethic wasn't a factor for me. As a resident this would probably not be true.

Canada - as I've noted before - is problematic.

On the one hand, it is easy to get to and familiar. On the other hand, it is easy to get to (by the US government) and familiar (51st state?).

If a significant part of the problems to come (assuming they do come!) is due to energy, Canada will be in a very interesting - and poor - position: A much larger, energy hungry, militarily strong neighbor who needs your energy...

[ER59]

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

I can restore my Russian citizenship. In fact, a Russian consulate was trying to force me to do it last year by not granting me visa in my American passport while my mother was dying from cancer there. I have a good apartment and a circle of close friends in Saint Petersburg, Russia. My Russian as you can guess is better than my English and I know how to adapt to the society there.
If my half-Russian and half-Jewish child needs to change her last name to feel accepted and I am unable to do anything without bribes, gifts, calls to people who has connections, the country does not past my test as an immigration destination. You should look and talk like a native Russian or have tons of money or powerful friends to be able to survive there. If you have all three, you could be on top of the game but then why bother to move to a country like that. It will take a while for the US to disintegrate to such degree.
A very simple incident shows it better than anything. I forgot my glasses in an indian restaurant visiting Las Vegas with my russian friends. When I told them that I called to the restaurant and my glasses were FedExed to me, they were speechless. That was the biggest hit of their 2 weeks vacation here and was mentioned every single day for the rest of it. All those small things life is made of are taken for granted here. It takes generations to acquire higher moral standards for the society.

[nedtheguy]

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

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[ThePythonicCow]

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

I seriously doubt there will be any radical changes to the lower income end of the tax bracket over the next few years.

I think you're wrong. A 50% tax increase on those in the lowest bracket is pretty much a guarantee, in just over eleven months, when the Bush tax cuts expire. The lowest bracket will go from 10% to 15% tax rate, on January 1, 2011.

[ThePythonicCow]

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

There's a decent article on all the possible tax increases, on rich and poor alike, that are looming on the horizon at The Largest Tax Increase in US History.

[GRG55]

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

I think the Fed's ability to monetize greatly exceeds the Treasury's ability to backstop Fannie/Freddie with borrowed money. The Fed will have bought $1.25T worth of MBS by March, but so far, the Treasury has provided only $111B of funding to Fannie/Freddie...

The GSE's are currently estimated to hold $5.5 Trillion of mortgages...far more than the Fed has purchased. You are kidding yourself if you think the Fed's agency holdings could ever compete with the gargantuan balance sheets of the GSEs.

Treasury is backstopping only the [under?]estimated losses on the portfolio.

[raja]

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

Also, on a related (but somewhat tangential) note, I'd be interested in advice from any who care to comment on the following:

Unfortunately, I don't have any advice, but I can suggest some things that might need to be considered:

1. I've heard rumblings about the gov't "confiscating" retirement accounts to make (their) ends meet. Putting the money in "trusts ", ect.

2. Gold may be a big taxation target, or worse.

3. Let's say you lock in a low fixed rate. Inflation jumps 100%, and the banks start to crumble under the weight of the "fixed" mortgages. So, the gov't "declares" that all fixed mortgages are now "adjustable" in the "interest of national security". Suddenly you inflation hedge has vaporized.

Having these possibilities in mind makes all choices seem undesirable, i.e., we can't win even by being clever, which why I can't offer any advice. Perhaps I'm just not clever enough :eek:

If you want to protect yourself against some of the more dire scenarios, the safest thing may be to own your property outright (preferably a farm) . . . but there are even dangers with that.

The big issue in my mind at the moment is, how far do the gov't and Financial Elite think they can impoverish The People and get away with it . . . and at what point will The People revolt against their impoverishment (politically or otherwise).

[nedtheguy]

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

redacted

[ASH]

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

The GSE's are currently estimated to hold $5.5 Trillion of mortgages...far more than the Fed has purchased. You are kidding yourself if you think the Fed's agency holdings could ever compete with the gargantuan balance sheets of the GSEs.

Treasury is backstopping only the [under?]estimated losses on the portfolio.

I could be missing something, but I thought the issue was demand for new mortgages. The GSEs may hold $5.5T of mortgages, but how many did they buy last year? How many did the Fed buy?