America's Race to the Bottom

Kmgur's post 37 is almost entirely (or totally?) a quote from the link he gives, but it is full of falsehoods.

The US exercises great control of many imports that would compete better than domestic producers can - Especially agricultural areas. (The WTO last year found the subsidies for cotton are illegal, Brazil cannot sell sugar or alcohol fuel to the US because of quotas, 54cents / gal import duty, and more than a dollar subsidy on the corn based alcohol the US gives, plus some "blender's credits" given to the producers of E85 with the alcohol)

The claims that US businesses are all for sale to foreigners is also false: Remember a few years ago when Chinese oil company want to buy Unocal? (I think that was the name) because it has relatively large in ground reserves? Or how about that UAE Company that wanted to operate US ports. There are many other examples, but these two US forbidden multi-billion dollar deals immediately spring to mind, with no research for others.

 

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that is true, as is the fact there are non-economic reasons for choosing to be a home owner, but both are irrelevant to a discussion as to whether buying or renting (by one who could afford to buy) was the ECONOMIC rational choice back in say 2005.

And I say that is a false claim - Try support it with some realistic analysis. That of course is totally impossible for the 23% of home owners who achieved their current negative equity gains (the "under water" owners) .The renter who just banked the monthly difference between the cost of buying - cost of renting has significant positive gains.

Many of those 2005 home owners who do still have positive equity have less positive equity that those "renters by choice" do have as they were saving and investing something on the order of $500 to $1000 each month for 5 years. That is the target you need to show the typical buyer in 2005 has EXCEEDED with his homes equity gain - very hard to do as the mean house has LOST ~40% of its value if purchased in 2005.

AGAIN, you are making unsupported claims - show some analysis if you can.

I will be generous and admit that there are periods when buying was the correct economic choice. I suspect your POV is mainly based on the fact that you bought when that was the case - You said you had paid off your mortage and that would typically imply that you bought at least before 2000, probably before 1990. My point is that in recent history renting has been the clear better choice for those who could afford to buy (I.e. had a choice) if they also had the self control to save the difference in cost, in CDs etc.

Also to tie this POV into the thread's subject more explicitly - Those many home buyers making the wrong choice (the vast majority of recent buyers) is a large part of the reason for the current "race to the bottom" - I.e. Their huge loss of equity makes recovery harder (It takes money to make money argument.)

 

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I will say only this much, Billy. Your arguments make sense ONLY for those who intend(ed) to sell their homes in the fairly near future. As for the rest of us, we are quite happy and satisfied with the choice we made. End of story.

 

Nonsense! You are arguing that the gain/loss outcome is important only for short term investments.

By that line of reasoning buying life insurance when young and rates are low (or any other investment with expected returns only in the distant future) is foolish. In fact long term (large part of a human life time) investments tend to be the most profitable, in part because even if you invested at a relative expensive time, that will be only a small factor reducing your gain.

It is mainly because US political leadership is not much interested in investments that have payoff after the next election that China is going to surpass the USA. China is signing 30 year contracts all over the world. Before all those contracts (calling for delivery of energy, raw materials, food stocks at today's fixed prices) have expired, China will be the world's largest economy. It is passing Japan to be No. 2 this year. It is amazing what a >10% growth rate will do in 30 years. (China has averaged that for 30 years so probably will continue 4 or 5 times the US's average growth rate.)

When the "Sage of Omaha" was asked what was the optimum period to hold an investment i.e. when was the best time to sell, he replied with one word: “Never.”

I.e. just because you are not converting a capital gain into cash within the next few years, does not mean you are not gaining. In fact, because of taxes and selling fees it is usually to your advantage to delay selling your house or stocks, etc. as long as they are a good investment. If they are not appreciating, as now, it probably is a good idea to wait to sell if you can.

I.e. typically the longer you can delay selling, the better. This is not true for “investments” that steadily depreciate in value, like a car or a house that is not maintained.

Because houses do require maintance, for that reason too, in the long run they may not be as profitable as other options (One being: renting and investing the cash saved). The other main reason, already discussed, is that for periods like now, perhaps even a decade in rare cases, the house value may be decreasing, even if well maintained.

 

Can't delete #28. Aside oligarchical capitalism & financial pyramid fueling it, mankind must deal with embracing the thought that exponential growth is not sustainable for much longer, the natural world is not mere collection of resources to exploit and that technology reaches a point of diminishing returns (already there I believe). It just unfortunate that sci&eng. education promotes somewhat different world views straight from 18-19 centuries, more frequently it promotes no views of any kind except "getting a job".

It seems that technology saved some whales and made USA greener than 100 years ago, but those improvements are teetering on the edge of uninterrupted flow of cheap fossil fuel supplies, which is not assured to say the least. Overfishing is disrupting oceanic feed chains so the saved whales may just starve off in the not so distant future.

 

To Read-Only

I just stumbled on this article, entitled "Why are homeowners idiots?"

It mainly notes that the 23% that are Under Water, should just walk away, rather than lose more by continuing to pay the mortgage. It discusses why they don't - and who is brain washing them to keep paying, but notes this is starting to change as a few wiseup and do walk away, especially in states where you do not need to declare banruptcy to keep the bank from going after your other assets to collect the full mortgage balance due. {Billy T insert: if that becomes common many more banks will fail.}

Article also notes that commercial under water property owners are not so dumb. For example I recently posted about the owners of a large NYC development (110 modest rise building and 11,000 apartments, bought for 5.4 Billion dollars just afew years ago) turning the keys over to the loan holders.* Rational under water investors are walking away. Many home owners should too and start renting like they should have in the first place.

Read article at: http://www.fool.com/investing/general/2010/01/26/why-are-homeowners-idiots.aspx

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*more detals at: http://www.sciforums.com/showpost.php?p=2466667&postcount=28
and the external links there.

 

Sure. But you are still not seeing the rational of those of us who decided to pay off our houses - even less than ten years ago - and then stay put in them. The point being that we are totally UNAFFECTED by any of this. Not "under water" in any sense, no debt and completely home free from those worries.

EDIT: In fact, we don't care if home values drop to zero! It just reduces our property taxes.

 

sure you are affected - for many people with mortgage free house, it is a major part of their total net worth. That will affect your credit rating, the interest rate on loans, etc. I do not know you circumstances - perhaps you will never need to borrow money, even when kids go to college, etc.

If willing to tell when you bought your home, what it cost then and what it is worth now and I will try to see if buying it was better than renting and putting difference between monthly mortgage payments and rental, the monthly saving in 5% CDs. As you paid off you mortgage in less than10 years, effectively you invested in your house, instead of CD. - an obviously bad economic choice if your house is like many, less valuable now than when you bought it.

 

Nope, I'm not in any of those conditions. My three kids have all finished school and two are married with children of their own. I owe absolutely nothing (everything is paid off), have no need to borrow money since I have substantial savings and stock holdings. So I'm not affected in the least by whatever the real estate market does - I could not care less.

As to the particulars you asked about, I bought this house 12 years ago for $102,000 and paid cash on the line. No mortgage, no points, no interest, no equity account or loan insurance - nothing.

So you may now go and compute your numbers...

 

I always thought that was crazy myself but no one even admits it. money is worthless and has become a game at the expense of common sense, balance and real life.

 

If you bought a house in California in 2001 that you could not afford using a liar loan you won at the financial casino. If you did the same thing in 2005 you lost at the financial casino. Loan brokers, realtors, the media consensus and Wall Street consensus failed to see the bubble rising and encouraged the beliefs in endlessly rising home prices. The belief in endlessly rising home prices pushed people who were afraid of being priced out of home ownership by prices rising faster than incomes and who were greedy to get the free home equity that rising prices create, into buying homes that they could only afford if prices continued to rise. People who bought homes they could not afford at the right time and refinanced wound up getting a home they could afford out of the process if they did not spend the refinance money on living beyond their means in other ways.

The rise in price allows them to go from 5% down to 35% down on the refinance and lowers their interest rate. When you live in a place where a small starter home cost $300,000 in 2001 and $500,000 in 2005 the change in interest rate that accompany a higher down payment can make the difference between whether a home is or is not affordable. As long as the housing prices kept rising you could keep refinancing to get money with which to make your monthly payments and that is what people were doing.

In California in 2001 it was better to buy regardless of whether you could afford the home. In 2005 in California it was better to rent regardless of whether you could afford the home. But even highly paid people in Wall Street who's job it was to be able to recognize the difference between 2001 and 2006 failed to recognize the difference.

California and Indiana or wherever you live probably had completely different housing market situations.

 

Thank for the information. Nirakar's post tends to indicate that you bought at time when buying was the smarter option than renting and that did not reverse for a few years (I.e. until about 2005 until probably now* generally speaking renting has been the smarter option).

In your circumstances, I agree the gain or loss on your cash-up-front purchase of a house does not matter TO YOU, but it matters to your heirs. I am too lazy to try to find what $102,000 invested in say 10 year CDs would actually generate as monthly income. So conservatively lets guess monthly income at say 0.5% or more than $500/month. I suspect most if not all of that would be required to rent a house comparable to the one you bought. You did say that you had added to your home. That additional investment if made after 2004, is sort of like buying a a small house. Probably on that sum, you lost money, if when made, renting was the smarter financially option. Again I admit there are many non-financial reasons for buying (or expanding) your home.

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* No one can know for sure if buying or renting is currently the smarter financial choice. Gary Shilling, widely accepted as THE expert in real estate market trends is expecting an additional decline of 10% in the median home price. (In 2010 or soon there after). (It could be more if the stigma against under water owners walking away erodes by the increasing numbers doing so.) So probably renting is the economic choice now.

 

Well, Billy, I can see that you are now FINALLY getting the point I've been making all along.

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And an additional point - it matters not to my heirs, either, despite your claim otherwise. This house and property (6+ acres) will all go to my daughter who is currently renting. She will do with it just as I have and use what she was paying in rent for whatever purpose(s) she wants.

 

All three of my kids have *very* stable jobs and haven't been bothered bu this downturn at all. And no, were NOT just a lucky bunch, either. I put a lot of planning and effort into helping them each plot their futures. (I'm the type who will *never* depend on anecdotal information or "current wisdom" when doing things.)

And I've noticed that very, very few here operate that way. They just "go with the flow" and are simply waiting for their throats to be cut - much like the general population. No real, solid planning at all !!!!!

 

Civil War?????? Only in your nightmares - dream on, bud!! Gad!!!

 

Here is more on post 47, which was based on article calling under water homeowners who keep paying (instead of walking away) "idiots." It comes from same source. Author is replying to all the Emails he received (and makes many points supporting his original "walk away" POV.) Especially interesting to me was that by not walking away, they are probably making more banks collapse and a prolonging recovery:

"... for the housing market to truly find itself on a sustainable path, we'd need to see home prices fall back into line with historical norms. One widely used gauge of home prices involves comparing housing prices with prevailing rental rates. Between 1988 and 2000, the average home in the U.S. sold for 14.6 times the average annual rental rate. Though this multiple has fallen significantly since its high of 25 in mid-2007, it was still at 18 during the third quarter of 2009. Strategic foreclosures could help bring this multiple down further, allowing more potential buyers to be able to afford a home, and putting the market back on a sustainable path.

... the extraordinarily low interest rates that the Fed has been providing for banks ... gives the banks additional ability to absorb hits from their mortgage portfolios now. Prolonging the process risks the possibility that the banks will have to keep limping along when {low} interest rates are not there to cushion the blow.*

Finally, as one reader pointed out to me in an email, homeowners who walk away from a hefty mortgage in favor of a lower rent payment suddenly end up with more money in their pockets at the end of every month. This money can be pumped back into the economy if they decide to spend it at Wal-Mart or Costco, for instance, or it can be pumped back into the stock markets as these folks rebuild their retirement nest egg. ..."

From: http://www.fool.com/investing/general/2010/02/01/why-we-care-about-idiot-homeowners.aspx

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*Author, like most, is assuming prices will fall more, causing eventual foreclosure of home whose owner could have walked away now instead of continuing to lose more money monthly by paying the mortgage.