I am panicking

[flintlock]

Re: I am panicking

8% only for the amount over 650k. I didn't really shop around that much. I was just going to the loan agent to see how much I can get at roughly what rates. I'll also have to put 30-35% down.

Thanks for the replies. My wife might not fully understand the risks, but she clearly understands the numbers.

The way it looks right now, I'll probably extend my current lease by 6 months (BTW, this is the first time we got a reduction in rent since 2002). I'll keep my current cash in inflation hedges, and worst comes worst, I shouldn't be too badly off.

A mortgage over 650k!? Yikes.

[LargoWinch]

Re: I am panicking

rachits, I urge you to read the attached paper.

Perhaps this may help with your discussions with your wife?

[FRED]

Re: I am panicking

think about this:



Did the Fed actually do what they said they would do? that was published Jan. 28. today is march 20th. The markets didn't respond as they expected so they waited two months and made another stronger statement. The dollar dropped a few percent, but next week everyone will forget and it will be back to deflation as usual. take a close look at this paper:
http://www.debtdeflation.com/blogs/2...liersofcredit/
Bernenke has tried hard to produce inflation for some time, but he is using a flawed model of how the economy works. As a result he is underestimation by a factor of 25 the amount of money needed to create inflation:



The important thing right now is to look with clear eyes at the situation right now and ask yourself is the direction of things up or down? In the distant future, say a year or so Berneke will get religion and pump $20 trillion into the economy, but what we are experiencing right now is decreasing wages, consumer prices, commodities, and stocks. I sold GTU today at an all time high. I will buy again when gold hits $800

EJ: My argument is that this is not the behavior pattern of a deflation-biased Fed. It’s not like they are allowing deflation on purpose as in the 1930s by staying on the gold standard. On the other hand, the argument is that the dollar is going to collapse is countered by the argument that the dollar is a reserve currency, and the only way that could happen is if there was a general political repudiation of the United States by its trade partners. That’s the only way to cause the dollar to truly collapse. So far its been managed down, politically, until recently when we had a big spike in the value of the dollar due to de-leveraging, after every hedge fund on earth sold every stock and bond denominated in rubles, rupee, pesos, and everything else but yen to buy US Treasury bonds. That spiked the dollar. I think most people understand that’s a short-term phenomenon, and by my estimate ends by the end of Q1 2009. Which is good, because now the United States wants to see more sales of dollar-denominated assets to lower the exchange rate value of the dollar because that will produce a much desired surge in inflation, yet at the same time wants to be able to sell new bonds to finance fiscal stimulus programs.

SK: Yes, that’s going to be tricky, of course, because a surge in inflation soon causes America to cease importing. Now that might sound like a drastic statement but if you have a collapse in the dollar, suddenly those BMWs and flat panel TVs go through the roof in price, people won’t be buying them anymore. All the imported commodities just go through the roof. It’s possible that they stop consuming them because again you’re not a major food importer. You’re not like Iceland. Iceland with the destruction of its currency still has to buy food otherwise people would starve. In America if you have a currency collapse caused by those sorts of actions then its quite possible for America to go on an importing strike. And then, rather than having an inflationary effect on the American economy it would have a deflationary effect on the whole world.

- Interview: Steve Keen - New World Order or New Era of Global Bickering? Feb. 10 2009

[CanuckinTX]

Re: I am panicking

I sold GTU today at an all time high. I will buy again when gold hits $800

I'm thinking of doing the exact same thing. The premium on that sucker is getting unreal. I can't decide if I'm more afraid I'll miss this good time to sell or sell and miss more upside.

[jtabeb]

Re: I am panicking

After this week's bombshell, I've told my wife (who's been bugging me to buy a house) that if she wants to, we can start seriously looking for a house to buy.

Earlier, I kept telling her prices are going to keep dropping and we don't want to just throw away money. Here in the SF bay area, in the more desirable parts, prices haven't yet dropped much yet (maybe 10%ish). Recession is only beginning to hit the job market here. But I am so scared the massive expansion of the Fed balance sheet and the monetization of treasuries is going to blow up in everyone's face.

Half of me wants to wait and see and hold PMs. The other half wants to go out and borrow as much as I can at these rates I'll likely not ever see again in my lifetime. The loan rates above the GSE limits, last I checked were only decent if they were ARMs (5%ish). 8% if 30 year fixed. Not sure if the recent news has dropped them any.

I guess I'll be the lone dissenter here. I think you are reading the situation EXACTLY CORRECT. So far everyone that has responded to you has used every defaltionary argument in the book. I would disagree with the deflationary outcome, as most readers of this site would have say 6 months ago. What's changed, well an unexpected and unprojected bout of STRONG ACTUAL DEFLATION for the most part.

Here is the fundamental thing, DO YOU REALLY THINK DEFLATION IS GOING TO BE THE DOMINATE FORCE

OR

Do you think that the FED WILL INFLATE (HYPER, if necessary) to achieve their policy objective of halting deflation. I believe that they will, even though they have been unsuccessful up until this point. Why? Because the policy responses are coming FASTER and FURIOUSER and are Bigger and BIGGER, each dwarfing the preceding one by leaps and bounds. IN THIS TYPE OF ENIRONMENT do you THINK THEY WILL FAIL? OR SUCCED FAR TOO WELL?

I'm in the latter camp.

I advised my Mom who is a fixed income retiree to DO EXACTLY AS YOU ARE CONTEMPLATING, STOP RENTING AND BUY. (What you can comfortably afford, with 20% down and still have an affordable mortgage). Why? BECAUSE her risk on a fixed income to inflation GROSSLY EXCEEDS ALL OTHER RISKS. Her house can go down in price, who cares, All she needs to care about is being able to afford the cost of shelter.

I am planning on doing the same and buying, as soon as I get my deployment date worked out.

ON this matter, IMHO, You have your eye EXACTLY WHERE IT NEEDS TO BE,

ON THE BALL! (I agree, BUY!)

V/R

JT

[Raz]

Re: I am panicking

EJ: My argument is that this is not the behavior pattern of a deflation-biased Fed. It’s not like they are allowing deflation on purpose as in the 1930s by staying on the gold standard. On the other hand, the argument is that the dollar is going to collapse is countered by the argument that the dollar is a reserve currency, and the only way that could happen is if there was a general political repudiation of the United States by its trade partners. That’s the only way to cause the dollar to truly collapse. So far its been managed down, politically, until recently when we had a big spike in the value of the dollar due to de-leveraging, after every hedge fund on earth sold every stock and bond denominated in rubles, rupee, pesos, and everything else but yen to buy US Treasury bonds. That spiked the dollar. I think most people understand that’s a short-term phenomenon, and by my estimate ends by the end of Q1 2009. Which is good, because now the United States wants to see more sales of dollar-denominated assets to lower the exchange rate value of the dollar because that will produce a much desired surge in inflation, yet at the same time wants to be able to sell new bonds to finance fiscal stimulus programs.

SK: Yes, that’s going to be tricky, of course, because a surge in inflation soon causes America to cease importing. Now that might sound like a drastic statement but if you have a collapse in the dollar, suddenly those BMWs and flat panel TVs go through the roof in price, people won’t be buying them anymore. All the imported commodities just go through the roof. It’s possible that they stop consuming them because again you’re not a major food importer. You’re not like Iceland. Iceland with the destruction of its currency still has to buy food otherwise people would starve. In America if you have a currency collapse caused by those sorts of actions then its quite possible for America to go on an importing strike. And then, rather than having an inflationary effect on the American economy it would have a deflationary effect on the whole world.

- Interview: Steve Keen - New World Order or New Era of Global Bickering? Feb. 10 2009

Well, there's one area where the US cannot go on an "importing strike": crude oil. And a rising price for this item eventually raises the cost (and price - if one has any pricing power) of practically everything.

This is why I have kept 20% to 30% of my assets in oil & gas equities, mostly Canadians (Arc Energy, Crescent Point Energy, Zargon Energy, Enerplus Resources, Encana, Husky Energy, etc.). I was at about 22% going into last fall's crash (ouch!):eek: but mustered up the courage to add to my position very close to the lows of the past four months.
Hope EJ remains interested in adding oil as another hedge against the unfolding political madness of the Treasury and the Fed.

[jtabeb]

Re: I am panicking

A mortgage over 650k!? Yikes.

At 5%, with 30% inflation over the next four years? Sounds like a bargain!

I was looking at a place 3200 sq ft on a hill with 10 acres, $799K, don't knock a price till you know what it's buying.

If I told you you could buy trump tower for 650K, I'd bet you'd jump at it.

Know what you are buying, know what it is worth, and DON'T OVERPAY!!!!!!

[gwynedd1]

Re: I am panicking

what bombshell?

From the context I thought it was his wife, the lucky bastard. Well my wife is too but the point is.....

[ThePythonicCow]

Re: I am panicking

import strike ... suddenly those BMWs and flat panel TVs go through the roof in price

It isn't just the BMW's and big TV's.

The shelves on most stores will have long bare spaces and gas stations will have long lines and a shortage of petro. Unemployment and soup lines will snake around the block. Inner cities will go to hell. Farmers will be unable to afford to plant their crops or bring them to market.

Very few Americans actually make the stuff that people need day to day, and those that do have critical dependencies on foreign oil and FIRE financing.

As to retail prices, it's like the deal with the bear. I don't have to outrun the bear. I just have to outrun you.

If basic supply and demand curves are working, then prices will rise until demand falls to meet supply, hence those with the most cash win. If the supply and demand curve is not working (likely in the event of rationing and price controls and a tyrannical central government) then ones stash of essentials and means for bribing officials will be precious.

In either case, the ones having the most cash, storable food stuffs and other essentials win. They outrun their neighbors in the race for survival. Price patterns will not mean much when there is (1) nothing to buy, (2) no cash to buy it with, and (3) no free markets in which to conduct the business. The Fed might dilute problem (2), but problems (1) and (3) seem likely anyway.

Location, location, location takes on a new meaning in real estate. Those living amongst trusted neighbors in fly over country, where individual responsibility and old fashioned justice prevail, will be better situated.

Inflation happens when the currency outruns its convertible base. Hyperinflation happens when the currency seriously outruns the markets in which the currency is useful for trading. We risk both. But we need to quit being distracted by this (de-disin-in-hyperin)flation debate and by the economists with their charts scaled in currencies.

Stay out of debt and out of trouble and out of (future) bad neighborhoods, so that those with more guns and goons than you have fewer excuses for taking your stuff. Keep cash on hand for those unpredictable times when it's useful, and the essential stuffs of life, or the means to make such, for the other times.

:eek::eek:

[mmr]

Re: I am panicking

Don't forget about the other ongoing costs of ownership - with interest rates as low as they are, these costs may well be more than your mortgage interest, and of course they don't stop once you pay down the mortgage.

- Property taxes - consider how the state / city where you're moving will cope with declining tax revenues. Income and sales tax receipts here in NY state are crashing, and there aren't nearly as many high income residents in NYC to go after anymore to balance the state budget. Higher property tax rates (and inflated home price assessments) seem like the only realistic way to close that gap without federal aid. Maybe Prop 13 will help you somewhat in California, as long as it isn't overturned. Worst case scenario - in the part of NJ where I used to live, property taxes just went up 47% year-over-year, and that was before the recession really hit - you can imagine what that did to home values.

- Long-term jobs outlook - could you afford to lose your home equity if you have to move to another area to find a new job before the inflation hits? Ask any resident of places like Michigan (or, next year, New York City) with an underwater mortgage how homeownership is working out for them.

- Energy costs and maintenance - I'm dreading what's going to happen to oil / natural gas prices to heat my apartment here in the northeast once deflation reverses, and for a McMansion, those costs would be much, much worse.

This isn't to say that homeownership is wrong for everyone, but obviously there are quite a few risks involved other than missing out on low rates.

[rachits]

Re: I am panicking

A mortgage over 650k!? Yikes.

Yeah, pretty much any decent 3 bedroom house will put you back at least a million dollars (so I wouldn't have to borrow much money at 8%). And I'm talking about the 2nd tier areas, San Carlos, Belmont, etc., not Palo Alto / Atherton and such. We both work in the tech industry and been squirreling away our money for the last decade or so, and recently are looking to actually get a nice place.

[BK]

Re: I am panicking

In my area there are a good number of empty homes - they are for sale or lease - how do you think over supply will affect the price of homes VS Inflation created by the Federal Reserve and Govt Stimulus?

[renewable]

Re: I am panicking

The really good areas will hold their value the longest...but they...like everything else will go down sooner or later in a market like we have today.

Is this how the most desirable parts of the real estate market work? Last to fall? Do they finally end up falling similar percentages to the more mediocre stuff?

If so, this would mean that timing is even more important for the really good areas?

[rachits]

Re: I am panicking

A mortgage over 650k!? Yikes.

Is this how the most desirable parts of the real estate market work? Last to fall? Do they finally end up falling similar percentages to the more mediocre stuff?

If so, this would mean that timing is even more important for the really good areas?

They tend to go later. I think there is an old post by EJ describing the typical patterns.

[jtabeb]

Re: I am panicking

This isn't to say that homeownership is wrong for everyone, but obviously there are quite a few risks involved other than missing out on low rates.

Agreed, got to know your own circumstances, the case I ref above had very specific criteria (qualifiers) layed out.