Monday, August 22, 2011

Inflation, deflation, and buying a house

As you may recall, I aborted my plan to buy a house last year because a) the housing market was still FUBAR, b) prices were still going down, and c) Deflation looked like a real probability, meaning that the value of any house I bought would be declining from the moment I bought it even if the housing market got un-FUBAR'ed. So what's happened in the year since?

  1. California is still officially a "distressed market", but there's no longer a "distressed market" premium for mortgage insurance. Instead, the mortgage insurers simply require a very high credit score. (Not a problem for me, my credit score was 780 *before* I paid off my last credit card). This means that PMI is now 0.67% rather than 0.96% for a 5% down loan, which puts conventional loans back into play (at .96% an FHA loan was a better deal).
  2. The backlog of short sales is starting to break up because banks have resumed foreclosures. A house I looked at last year as a short sale was finally foreclosed on and is now for sale as a REO. (It still sucks just as badly now too, which is another issue).
  3. Banks are now starting to accept conventional loans again for their REO's rather than accepting cash-only offers for far below what they could get if they sold it to someone who needs a mortgage. They still prefer someone who has 10% down but if you have more than 5% but less than 10% you're still in the game, unlike last year when they weren't interested in talking to you.
  4. Some of these REO's are even halfway decent, unlike last year, when every REO I came across was utterly trashed with holes in the walls, gutted interior with no cabinets or bathroom fixtures, and so forth.
So the housing market here in the Bay Area is starting to show some signs of a return to functionality, though it's not there yet -- there's still a lot of short sales that have been on the books for eons because the banks are refusing to accept reasonable market-value offers for the houses. And really, given that they get paid more servicing fees if they foreclose than if they handle a short sale, who can blame them? Blame Fannie/Freddie/etc. who set up their servicing contracts that way, and Washington for not fixing things legislatively, not the banks servicing the loans, who are just doing what banks do if you set up the incentives that way.

So, am I buying a house right now? Well... no. The reason is simple: I'm not seeing inflation, and without inflation, buying a house makes no (zero) sense because it means my debt will, instead of decreasing in real value over time, will instead *increase* over time. Remember, monetary deflation is the same thing as debt inflation. Without monetary inflation to reduce the value of my debt over time, it makes no sense to pump $40,000 cash into buying a $400,000 home (a typical suburban 3-bedroom home here in the Silicon Valley), because you'll never make the money back. You would need six years of 2% inflation to be able to recapture your investment in the home, and what I'm seeing is instead deflation.

At which point I hear you say "but... but... quantitative easing! Monetary base!" But as I pointed out, only money in the hands of people willing and ready to spend it actually counts as money insofar as the economy is concerned. Money under mattresses -- or stashed in the Fed's electronic vaults -- basically doesn't exist as far as money is concerned. So what's the supply of money actually in people's hands doing? Well... err.... Wal-Mart reports nine quarters of declining sales. And their competitors aren't doing a whole lot better. Uhm, not well, in other words, because if there isn't enough money for people to shop at Wal-Mart for cryin' out loud, people don't have money in their hands. And if money is under a mattress somewhere rather than in people's hands... well.

So, what's going to get me off the ledge and jumping into the housing market again? I need to see some inflation. Some real inflation, not producer price inflation caused by monetary deflation (a phenomenon which I discussed last year). Until I see that, it simply makes no sense to buy a home... and so my money will sit under a mattress, making me part of the problem, not part of the solution. Funny how what's good for the individual is bad for the economy. Paradox of thrift indeed, huh?

- Badtux the Thrifty Penguin


  1. The place I live in can sell for 65 to 70 percent of what I purchased it some 7 years ago (based on Internet listings). Gonna probably stay here till I pass on, so the loss is paper. Someone else will see the gain from selling it, as I figure it should go back up in value just before I cash in on this mortal coil. I just don't see the housing market improving until the whole foreclosure and overbuilding mess works through the system. Plus, people need jobs so they can buy, and we know how well that is going...

  2. It all depends on your retirement plans. I don't intend to retire here in the Silicon Valley -- it's too expensive. So when I retire in ten to fifteen years, I want to be sure that I can sell whatever I buy for sufficient money to a) fulfill the mortgage, and b) recoup my initial investment plus any other investments I made in keeping the place in good repair over the years. Otherwise, I might as well just keep the money in the bank and rent.

    - Badtux the Thrifty Penguin

  3. I think this is a great time to buy a home, if you can find financing.

    I've never considered what a home may be worth in the future, I bought my homes simply because I wanted my own homes, didn't have any intention of selling them for more than I paid for them.

    Now my little place is free and clear so I have that going for me. I'll never sell it so I don't care what others think it's worth.

  4. I don't intend to retire here in the Silicon Valley -

    Lots of nice out of the way places in Utah away from the big cities and interstates. Wish I still had my 60 acres there.

  5. BBC, if what you're paying in mortgage is less than what rent would be, it makes sense to buy. Otherwise it doesn't.

    Regarding where to retire to, Utah is run by the magic undies brigade and frankly I'd rather be ruled by the Taliban, at least the Taliban are honest about being un-American religious zealots who want to impose a theocracy. I haven't decided yet, I might not even retire to any fixed place. Hopefully fifteen years from now there will still be enough gasoline left to do the RV thing and just travel for a while... we'll see, I guess.

    - Badtux the Housed Penguin

  6. I don't know what you mean by the magic undies brigade but having lived in Utah a few times I think it's as good of a place as any to live.

    I can't live a nomad lifestyle, have too much stuff and like my roots. I would think that you would at least some land, eventually building a small home and a big shop on it, for a home base ya know.

  7. There's a good sized lot with an okay home on it next to me, the price has been dropped to 119K, I'd buy it if I had the cash, just to keep anyone else from getting it.

    This is a quite block, only 3 dwellings on it.

  8. Stuff can be sold or given away. Roots can be developed anywhere, think like a jade plant, not like an oak tree. Just sayin'.

  9. Stuff can be sold or given away. Roots can be developed anywhere,

    I have no intention of getting rid of any of my stuff, mostly tools and equipment.

    And the older one gets the lest prone he is to taking up new roots. I've been here since 98 and have developed some damn good friendships. This works for me even though I get tired of the local politics and fucking rain.

  10. You'd be surprised how many tools you can fit into a big 27' RV :).

    I've been a nomad my entire life. The eight years I've been in the Silicon Valley are the longest I've been in one metropolitan area since I left home at age 17, and the five years I lived in my last apartment were the longest I lived in one home since then also. So a nomadic lifestyle suits me well. Perhaps I could even tolerate the magic undies brigade for a while... hmm...

    - Badtux the Nomad Penguin

  11. You'd be surprised how many tools you can fit into a big 27' RV :).

    If I put my metal lathe, welders, press, air compressor, and all my other stuff in a 27 foot motor home there wouldn't be any room for me in it.

    But I do my share of nomading, with my 17 foot fifth wheel and my boats.

    You'll know in 15 or 20 years if what you believe today was the right track for you, hindsight is always interesting.

  12. In hindsight I'm sort of sorry I sold my valve grinding equipment.

  13. Wow, for the first time that I can remember, I agree with BC's comments. especially the first one. Even a blind squirrel...

    As for PMI, why does that still exist? How many failed mortgages did PMI pay off to the banks, anyway? If there was such a thing as legitimate "mortgage insurance" there would be no banking/housing crisis, right? Whether it's 0.96% or 0.67%, it's still just a useless vigorish charge that the banking system extorts out of people who can't swing a better mortgage. Banksters are a collection of small leeches attaching themselves to the bodies of anyone unfortunate enough to have to deal with them.

  14. A large percentage of the failed mortgages didn't have PMI, because they followed the fad of an 80% first mortgage and a 20% balloon second mortgage for 100% financing. No skin in the game = set up to fail, especially when the balloon comes due.

    Note that PMI covers 30%, so if housing prices fell by less than 30%, PMI did pay the difference between what the investors paid for the mortgage and what the house sold for as a REO. That didn't help markets like California where housing prices fell by as much as 50%, though.

    And in case you're wondering, the various PMI companies reinsured via AIG, which is why AIG had to be bailed out, so that they could pay the PMI companies which paid the mortgage owners when the house was foreclosed.

    Regarding my rent thing, here is my computation on relative costs:

    1: Rent: Add up all rent payments for the next 15 years.

    2: Own: Add up down payment, all mortgage payments, all maintenance costs such as furnace and roof repairs etc., and all sales costs (roughly 8% of sale price). Find out how much you gain or lose by:

    Sales price - initial price - expenses above = total gain

    Then add the result to the expenses. If the result is higher than what you'd have paid if renting, then you would be better off renting.

    Currently if I amortize all those expenses over 15 years of home ownership I end up paying around $2500/month mortgage, purchase/sales expense, and maintenance. I can rent for $1700/month. *BUT* the $2500/month is fixed. If inflation happens, eventually my rent will rise to what my mortgage payments would have been if I bought now. If inflation *doesn't* happen, then I'm throwing money down a hole to buy now, I could take that $800/month difference and do a lot with it such as, say, save it for retirement. So... do the math. Right now I'm betting that the $800/month difference between buying and renting, which is I remind you $9600/year, is going to be cheaper over the next 15 years because of no or low inflation. If I'm wrong, and inflation ramps up... oh well :).

    - Badtux the Dice-throwin' Penguin

  15. Hey, thanks for the schooling on PMI. In my simplistic thinking, I assumed it was expected to pay off the whole mortgage in the event of default, not 30%. I didn't understand PMI because I never had to pay it. First house (cabin on the shore of Lake Superior) I bought for cash, second house I put 20% down on (not hard to do with a $56K 2-bedroom in Florida) and paid the balance off in less than three years (thank you, rich deceased Aunt Mercy) and the third house in S.F., me and the Mrs. had a mortgage similar to what you mentioned, only ours was 80% first, 10% down and 10% second. No PMI in sight.

    I was not as savvy back then in the ways of home finance. After reading about bubblenomics for five years now, I'm happy to be -- not a rent-SLAVE, but a rent-FREEDMAN. In addition to the financial benefits you point out, I also have the flexibility to "up sticks" (as the Aussies put it) at any time should I want to move elsewhere.

    Our rent is high -- almost $2,700 a month, and that's only for the top two floors of this house. (As is pretty much standard in bubble-town here, the basement has been subdivided into a dwelling unit for a family of three.) But we'd be paying more, and probably still be forced to have strangers living in our basement to help with our mortgage, if we had bought a similar house, because this 80-year-old wood structure would command $1.25 million or more. And that's in those mighty, mighty Canadian dollars, son!

    The only drawback is that we don't feel free to modify or improve things the way we would if we were owners. Luckily, we are blessed with that rarest of things, a good Chinese landlady (instead of the usual on-the-cheap skinflint.) When something needs doing that would better the place, Minnie gets her people to do it straight away. I am truly in the best of all reasonably possible worlds, Tux.

  16. If you are going to rent having a good landlord certainly does help.

    But I've always lived in areas where housing was a lot cheaper than there, don't recall ever having a house payment over 400 bucks a month, and did my own upgrades, repairs, etc so saved a lot of money that way.

    But I haven't bought property for over fifteen years and back then things were a lot simpler, and more honest.

    Went into my bank about a year ago to find out about a loan for some land (nothing on it) and after fifteen minutes of talking to them I decided that I damn well wasn't going to deal with a bank for a property loan.

    If I found an owner willing to carry the contract that would be okay, as long as there was a clause in it stating that they couldn't sell it to someone else.

  17. My best deal ever was the 60 acres I bought in Utah, 6 miles out of town and no neighbors, decent 14X65 mobile home on it, garage, woodshed, chicken coop. How much? 20 grand...

    Sold it cuz the woman with me at the time said she would be happy in Montana, she wasn't, I left her there anyway. Just signed over the title of the home there and left. :-)


  18. You mention REO a lot. Given what has come out about bank foreclosure techniques, especially if MERS is involved, what are your chances of getting a clear title?

  19. California is a civil foreclosure deed-in-trust state where the title is held in trust by a title company which has the right to convey it to whoever they wish to convey it to. If they do so in contradiction to their contract, which calls for them to convey it to the bank only if you fail to pay your mortgage and the bank forecloses, the title company is liable for cash damages to the person whose home was illegally foreclosed upon, but the title itself conveys cleanly because the deed was in trust, rather than being registered to an individual with a mortgage lien against it. So MERS is not an issue in California except insofar as it raises the cost of doing business for title companies that must set aside money to handle claims that they illegally conveyed title.

    The downside is that in a civil foreclosure state like California, there is no judge to halt an illegal foreclosure. The bank simply forecloses, then you must sue the bank for any losses that result. The only upside is that the bank can't foreclose against someone who has no mortgage, because the deed is then in the possession of the owner rather than in the possession of the trustee (title company). That said, the banks seem to be stretching out foreclosures for a fairly long time. The house I mentioned yesterday that last year was listed as a short sale, had been listed as a short sale for about a year that the owner hadn't been making payments on it. Today the house is for sale as a REO, but it took roughly two years for the bank to actually pull the trigger on the foreclosure (not helped by the fact that the borrower declared bankruptcy and the bankruptcy judge put a temporary stop on the foreclosure, of course).

    - Badtux the Real Estate Penguin

  20. I just added a frig box to my series of other cardboard boxes and am starting a green commune under an overpass on I 5. just bring a funnel and hose for your own privy. Penguins and friends are most welcome!

  21. Ah, hell. If things work out the way I'm afraid they will, some of you people can come live with me if you bring the skills to build a house/cabin/hut/hovel that will keep you warmish and dry. The timber, rocks, and dirt are readily available.

    My mountain land (appropriate for rock apes, mountain goats, and Scots-Irish) has been in my family since way before the Civil War. (Yes indeedy, one feels a strong personal obligation to hold on to it as well as an emotional/blood connection that just can't be explained.)

    Jay in N.C.

    *Gordon and Fixer would definitely always be welcome. :)

    Jay in N.C.

  22. someofparts25/8/11 6:49 AM

    "at .96% an FHA loan was a better deal"

    If I had understood this when I got my place, I might still be in it. I could have gotten FHA, but was steered away from it.

  23. MandT, have you looked at the state of America's infrastructure lately? No thanks. I'd rather die of carbon monoxide poisoning while sleeping in a car than from having an overpass collapse on me!

    Jay, I have a place like you're talking about. I also had the opportunity to interview elderly aunts, uncles, and grandparents who lived a subsistence lifestyle on that place where they had three digits worth of cash money every year from selling a small cash crop, the rest they built or grew themselves. If necessary for survival I would do it, but with much, much grumbling, because that's a hard life.

    SoP, there are two things that scare a lot of people away from FHA mortgages. The first is the hefty up-front MIPS payment -- which, however, can be rolled into the loan. The second is the fact that the FHA inspector is God. If he comes in and determines that the house needs a roof within the next three years, for example, No Loan For You (unless the unlikely event of the seller agreeing to pay for a new roof happens). All in all, under normal conditions a FHA loan is what you get when you can't swing at least 5% down on a conventional mortgage, because the current 1% upfront MIP / .90% yearly MIP for FHA loans simply isn't a good deal. And frankly, if you can't fairly rapidly (as in, in 2 or 3 years) swing accumulating sufficient swag for a 5% down payment you don't need to be buying a house anyhow because you're running too close to the edge.

    - Badtux the Finance Penguin


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