TIPS yield curve predicting near-term disinflation

[photon555]

Re: TIPS yield curve predicting near-term disinflation

First, all the best to Starving Steve and his daughter. I will pray for both of you and hope that that does not disturb you. I have enjoyed reading Steve's posts on many occasions. They have prompted me to think through the issues concerning the so-called "green movement" (the green part appears to be all the money being wasted/stolen).

I would like to ask advice from all concerning this projection of deflation. We (my wife and I) just a few minutes ago signed a contract on a house. Simply put, the house we are buying is a large all brick colonial/manor with three floors including a finished walkout basement. We live close to the DC metro area were this house also is located. The price is significantly below average per sq. ft. for above average construction values. It has a large lot in a rural setting with quick access to stores, etc. It appears to be an excellent buy on price per sq. ft. compared to other houses we have looked at. But is this a good enough buy to offset the projected deflation. How much lower are prices expected to go? We will be fortunate to recover the price we paid for our house in '98 plus all the upgrades we have done to it. Anybody have any advice? Don't be shy. I will take into account it is free advice and therefore consider it appropriately.

[CanuckinTX]

Re: TIPS yield curve predicting near-term disinflation

A few notes on the "historically low mortgage rate" world.

Points and fees must be carefully understood. Some lenders make up for the low rate with upfront costs.

Succeeding at landing the all-time lowest rate is a two edged sword. It guarantees that in the future the rate will be higher. If for some reason you need to pull out any equity - via your initial down payment, sweat equity or market inflation - you will be paying more, maybe a lot more.

Keep in mind why we're seeing these artificially maintained low rates - to prop up housing bubble pricing as much as the tumbling market will allow. Rates and prices are a teeter totter - when one goes up, the other goes down. As EJ pointed out long ago, it's better to pay a higher rate for a lower priced item than the reverse. That should be kept in mind when a mortgage rate increase appears likely.

The only good thing about this low rate environment is that I'm about to refi again (last time was early 2010) and now my payment for a 15 year fixed rate is going to be about what I was paying for a 30 year back in 2005 when we bought the place. Even after the fees of about $3k for the refi I'll be way ahead in the end. If you can't beat em, join em!

[c1ue]

Re: TIPS yield curve predicting near-term disinflation

As a practical matter what does this mean for mortgage interest rates? If someone is buying a house in the near future is it better to pay for a rate lock or let it ride hoping it stays flat or even goes down?

If you're buying a house and getting a mortgage on it - the only real win for you is if inflation erodes the value of dollars needed to repay the mortgage.

Thus while you might get some flexibility with a variable rate mortgage, you will at the same time give up a significant portion of the inflation erosion aspects. Trying to refi in the present and near future credit environment is non-trivial; a jump in interest rates will, all things being equal, see a fall in house values and thus equity to loan ratio.

Equally serial refinancings into lower interest rates may or may not be worthwhile - frankly it isn't that clear cut since the payment 'savings' both has lower growth potential under ZIRP and the future 'savings' is equally to be eroded in the event of inflation/Ka-Poom.

What jk has done is the safest: to have an amount in the iTulip-ish portfolio equivalent to paying off the mortgage while having the mortgage be the inflation 'win'.

Don't forget either that the bank can also call the mortgage: in this scenario you did everything right, inflation came, but then the bank decided to squeeze you on your liquidity by calling the loan.

I think this is regulated in many states now, but it was a very common pattern during the Great Depression: ironically those most responsible were the most likely to lose their houses since the banks could only 'make' money on homes that still had equity.

[lakedaemonian]

Re: TIPS yield curve predicting near-term disinflation

cityqat,

Sorry to hear that your father suffered a health event recently. Please let us know if there is anything we at iTulip and the iTulip community can do to assist.

Starving Steve,

For the time being, we are going to restrict your access to the forums until you indicate to us that you are feeling better. We ask that you and your daughter continue your family discussions offline via private messaging so that members can continue various forum discussions on-topic. Thank you and best to you.

All the best to StarvingSteve and Cityqat. I hope to see you both back contributing on the forum soon.

[ST]

Re: TIPS yield curve predicting near-term disinflation

As a practical matter what does this mean for mortgage interest rates? If someone is buying a house in the near future is it better to pay for a rate lock or let it ride hoping it stays flat or even goes down?

Keep in mind that locking in for 60 days vs. 10 days requires you to pay a premium for the privilege. Ten day lock ins are almost always lower rates than 60, but if mortgage rates move you may end up with a higher rate than the 60 day lock in. Some lenders will float down the rate for you, passing on the savings if the rate moves down after you lock in, but usually you pay something for it.

I would recommend Carolyn Warren's latest book on mortgages - I have been going through the process for the first time myself, of late.

[CanuckinTX]

Re: TIPS yield curve predicting near-term disinflation

What jk has done is the safest: to have an amount in the iTulip-ish portfolio equivalent to paying off the mortgage while having the mortgage be the inflation 'win'.

Don't forget either that the bank can also call the mortgage: in this scenario you did everything right, inflation came, but then the bank decided to squeeze you on your liquidity by calling the loan.

I think this is regulated in many states now, but it was a very common pattern during the Great Depression: ironically those most responsible were the most likely to lose their houses since the banks could only 'make' money on homes that still had equity.

Interesting point Clue - I never even considered banks might force people to get a new mortgage at a higher rate (I think that's what you're saying by "the bank can call the mortgage"). Luckily I've got plenty of savings in gold already so I could pay off the house if there is a big inflation win. I'd rightly be sooooo pissed off though if I didn't and got screwed by acting responsible!

[c1ue]

Re: TIPS yield curve predicting near-term disinflation

Interesting point Clue - I never even considered banks might force people to get a new mortgage at a higher rate (I think that's what you're saying by "the bank can call the mortgage"). Luckily I've got plenty of savings in gold already so I could pay off the house if there is a big inflation win. I'd rightly be sooooo pissed off though if I didn't and got screwed by acting responsible!

No, the practice in the Great Depression was to call the note: i.e. demand payment in full.

Obviously if you can get a mortgage from another institution, the result would be a higher interest rate paid, but the objective then wasn't anything so subtle.

It was a pure equity grab.

And as I noted, it is quite unclear to me whether this is legal or not anymore, or more importantly if the goal could be accomplished by different means but similar tactics.

[astonas]

Re: TIPS yield curve predicting near-term disinflation

All the best to StarvingSteve and Cityqat. I hope to see you both back contributing on the forum soon.

+1 All the best to you both. Our thoughts are with you in these challenging times.

[raja]

Re: TIPS yield curve predicting near-term disinflation

As EJ pointed out long ago, it's better to pay a higher rate for a lower priced item than the reverse.

Assuming you represented EJ's position correctly, EJ is wrong.

For example:

If you pay $100,000 for a house at 4% fixed, the total cost at the end of 30 years is $171,871.

If you pay $80,000 for a house at 8% fixed, the total paid over 30 years is $211,326.

[Chomsky]

Re: TIPS yield curve predicting near-term disinflation

Assuming you represented EJ's position correctly, EJ is wrong.

For example:

If you pay $100,000 for a house at 4% fixed, the total cost at the end of 30 years is $171,871.

If you pay $80,000 for a house at 8% fixed, the total paid over 30 years is $211,326.

I have an idea! Let's pick two totally arbitrarily chosen figures out of the air and pretend there is a direct relationship between them!

[jiimbergin]

Re: TIPS yield curve predicting near-term disinflation

I have an idea! Let's pick two totally arbitrarily chosen figures out of the air and pretend there is a direct relationship between them!

+1

[ST]

Re: TIPS yield curve predicting near-term disinflation

Assuming you represented EJ's position correctly, EJ is wrong.

For example:

If you pay $100,000 for a house at 4% fixed, the total cost at the end of 30 years is $171,871.

If you pay $80,000 for a house at 8% fixed, the total paid over 30 years is $211,326.

The point is that it is best to buy a house when the prices have bottomed - generally when the rising interest rate has stabilized at what you would perceive to be the highest level. Then, even though you are paying a higher rate, your house has a chance of appreciating and negating the higher interest rate.

Aside from that - in a declining or flat real estate market, the mortgage loan is quite disastrous since its so heavily front loaded. If you stay in the house for only 7 years (avg. homeowner) in a flat or declining market, then you have likely paid double digit interest to the bank and may even owe money upon sale since mortgage loans are so ridiculously front loaded.

Any wonder why banks earn so much? Historically, mortgage loans weren't structured that way - rather they were balloon loans which were rolled over before the balloon was due.

[c1ue]

Re: TIPS yield curve predicting near-term disinflation

Assuming you represented EJ's position correctly, EJ is wrong.

For example:

If you pay $100,000 for a house at 4% fixed, the total cost at the end of 30 years is $171,871.

If you pay $80,000 for a house at 8% fixed, the total paid over 30 years is $211,326.

If you want to attack the rate/price comment, it would behoove you to consider using a fixed monthly payment as a reference.

For $1000/month payment, the amount of loan that can be serviced is a bit under $210,000 at 4% and a bit under $137,000 at 8%.

The total payments made is identical in both cases ($360K paid).

Rather a significant difference than your 100K/80K 'example'.

An extra $100/month paid would see the $210K loan paid off in 25 years and 3 month, but would see the $137K loan paid off in 22 years.

The point is that it is best to buy a house when the prices have bottomed - generally when the rising interest rate has stabilized at what you would perceive to be the highest level. Then, even though you are paying a higher rate, your house has a chance of appreciating and negating the higher interest rate.

Very true. I'd also note that a high interest rate mortgage can be refinanced if/when interest rates fall.

A low interest rate mortgage, however, yields you few advantages when interest rates rise - unless you're willing to give up the investment. In that case, an assumable low interest rate mortgage is a good feature for potential home buyers.

[A Dub]

Re: TIPS yield curve predicting near-term disinflation

Don't forget either that the bank can also call the mortgage: in this scenario you did everything right, inflation came, but then the bank decided to squeeze you on your liquidity by calling the loan.

That's only true if you default - as long as you make your payments on time the lender cannot demand repayment at will. Were mortgages structured differently in the great depression days where lenders had the right to demand payoff at will?

[don]

Re: TIPS yield curve predicting near-term disinflation

If you want to attack the rate/price comment, it would behoove you to consider using a fixed monthly payment as a reference.

That's the key. With the exception of a housing/lending environment distorted by fraud, the top-end amount locals can pay for their monthly mortgages is the pivot point for the rate/price ratio.