Buying with monopoly money

[Anonymous]

[quote=jpinpb][quote=deadzone]
I like your line of thinking and great job. But the problem is, what can you invest in today that will guarantee better than the 4.5% interest rate you would pay for the mortgage? There are some relatively higher yield corpoarate bonds but there is always higher risk associated with higher yield. Stock market is even riskier. Especially now with prices reaching 2-year highs you’d be nuts to put big money in there. Gold is also near its all time high so not the best entry point.

So I would say given the limited investment options out there is no point.[/quote]

deadzone – lately I’ve been sharing your sentiments and applauded your posts.

On this, though, been thinking about it and financing @ about 4.5% today is probably a pretty good idea. My reason for thinking this is that when (not if, but when) rates go up, that money, even just sitting in a bank, could be earning quite a bit. I think most of us believe that rates will go up, just how long before they do and how high. But until that time, having the cash won’t be gaining much. So in that respect, I agree.[/quote]

jp, so what you are saying (i think) is to refinance the house and pull out the money at let’s say 4.5% for arguments sake, and hold it in short term account temporarily. Then when inevitably interest rates start shooting up and you can get safe short term debt instruments for above 4.5% start purchasing these.

I like the logic, just be aware of the risks. The short term cash accounts currently are earning maybe 1% so while you are awaiting the interest rate boom you would be losing significant amount of money. Once you start purchasing debt, to be safe you would have to stick to relatively short term. If you buy 10+ year instruments and interest rates keep moving higher then you will have to hold them until maturation or possibly lose your ass.

Also, it could be a long time before interest rates go up significantly (short term rates above 4.5%). Unlike sdr, the Fed (and US government) knows full well that a significant ramp up in interest rates in the next 1-2 years would be catastrophic (reset chart). So they will continue to do everything it takes to keep that from happening (QE3, QE4….QEn).

So if I were following this strategy, I would have to be willing to take the risk of losing 1-3% for at least the next two years. And again, I wouldn’t risk putting any of the money into longer term instruments.

[Anonymous]

[quote=EconProf]The question of whether interest rates and housing prices are inversely related is an old one. Common sense and economic theory would suggest the connection is real. But Rich T. has pointed out the empirical evidence supporting that conclusion is weak or nonexistent.
We all know a variety of factors influence housing price trends. I suggest that periods of rapidly rising interest rates are also periods of rising inflationary expectations. So house prices then are both pushed down by rising interest rates and pushed up by buyers hoping to capitalize on rising inflation. The years around 1980, when inflation hit 13.5% and interest rates mid-teens are the best example of this.[/quote]

The current situation has nothing to do with economic theory. Today, unlike anytime in history, there are billions of dollars worth of underwater residential mortgages with interest only variable rate mortgages. The only thing keeping many of these mortgages from foreclosure is the historically low rates being driven down by the Fed. Nohing from this scenario has ever happened before so historical data is meaningless.

Sure interest rates went up very high in the early 80s. But how many homeowners had I/O ARMs? NONE. Yes, things are different now.

[Anonymous]

[quote=EconProf]The question of whether interest rates and housing prices are inversely related is an old one. Common sense and economic theory would suggest the connection is real. But Rich T. has pointed out the empirical evidence supporting that conclusion is weak or nonexistent.
We all know a variety of factors influence housing price trends. I suggest that periods of rapidly rising interest rates are also periods of rising inflationary expectations. So house prices then are both pushed down by rising interest rates and pushed up by buyers hoping to capitalize on rising inflation. The years around 1980, when inflation hit 13.5% and interest rates mid-teens are the best example of this.[/quote]

The current situation has nothing to do with economic theory. Today, unlike anytime in history, there are billions of dollars worth of underwater residential mortgages with interest only variable rate mortgages. The only thing keeping many of these mortgages from foreclosure is the historically low rates being driven down by the Fed. Nohing from this scenario has ever happened before so historical data is meaningless.

Sure interest rates went up very high in the early 80s. But how many homeowners had I/O ARMs? NONE. Yes, things are different now.

[Anonymous]

[quote=EconProf]The question of whether interest rates and housing prices are inversely related is an old one. Common sense and economic theory would suggest the connection is real. But Rich T. has pointed out the empirical evidence supporting that conclusion is weak or nonexistent.
We all know a variety of factors influence housing price trends. I suggest that periods of rapidly rising interest rates are also periods of rising inflationary expectations. So house prices then are both pushed down by rising interest rates and pushed up by buyers hoping to capitalize on rising inflation. The years around 1980, when inflation hit 13.5% and interest rates mid-teens are the best example of this.[/quote]

The current situation has nothing to do with economic theory. Today, unlike anytime in history, there are billions of dollars worth of underwater residential mortgages with interest only variable rate mortgages. The only thing keeping many of these mortgages from foreclosure is the historically low rates being driven down by the Fed. Nohing from this scenario has ever happened before so historical data is meaningless.

Sure interest rates went up very high in the early 80s. But how many homeowners had I/O ARMs? NONE. Yes, things are different now.

[Anonymous]

[quote=EconProf]The question of whether interest rates and housing prices are inversely related is an old one. Common sense and economic theory would suggest the connection is real. But Rich T. has pointed out the empirical evidence supporting that conclusion is weak or nonexistent.
We all know a variety of factors influence housing price trends. I suggest that periods of rapidly rising interest rates are also periods of rising inflationary expectations. So house prices then are both pushed down by rising interest rates and pushed up by buyers hoping to capitalize on rising inflation. The years around 1980, when inflation hit 13.5% and interest rates mid-teens are the best example of this.[/quote]

The current situation has nothing to do with economic theory. Today, unlike anytime in history, there are billions of dollars worth of underwater residential mortgages with interest only variable rate mortgages. The only thing keeping many of these mortgages from foreclosure is the historically low rates being driven down by the Fed. Nohing from this scenario has ever happened before so historical data is meaningless.

Sure interest rates went up very high in the early 80s. But how many homeowners had I/O ARMs? NONE. Yes, things are different now.

[Anonymous]

[quote=EconProf]The question of whether interest rates and housing prices are inversely related is an old one. Common sense and economic theory would suggest the connection is real. But Rich T. has pointed out the empirical evidence supporting that conclusion is weak or nonexistent.
We all know a variety of factors influence housing price trends. I suggest that periods of rapidly rising interest rates are also periods of rising inflationary expectations. So house prices then are both pushed down by rising interest rates and pushed up by buyers hoping to capitalize on rising inflation. The years around 1980, when inflation hit 13.5% and interest rates mid-teens are the best example of this.[/quote]

The current situation has nothing to do with economic theory. Today, unlike anytime in history, there are billions of dollars worth of underwater residential mortgages with interest only variable rate mortgages. The only thing keeping many of these mortgages from foreclosure is the historically low rates being driven down by the Fed. Nohing from this scenario has ever happened before so historical data is meaningless.

Sure interest rates went up very high in the early 80s. But how many homeowners had I/O ARMs? NONE. Yes, things are different now.

[EconProf]

Deadzone, you are reading much more into my post than I actually said, which was limited to the influence of interest rate changes to housing price changes.
As I said, and you echoed, lots of factors other than interest rates also matter. And those factors are always changing–no cycle is exactly like the last. And to explain events, predict the future, make investment decisions, we need those dratted economic theories. We need to test them, invite critics to challenge them, pay attention to the past records of advocates and detractors, etc. And study history to learn its lessons.

[EconProf]

Deadzone, you are reading much more into my post than I actually said, which was limited to the influence of interest rate changes to housing price changes.
As I said, and you echoed, lots of factors other than interest rates also matter. And those factors are always changing–no cycle is exactly like the last. And to explain events, predict the future, make investment decisions, we need those dratted economic theories. We need to test them, invite critics to challenge them, pay attention to the past records of advocates and detractors, etc. And study history to learn its lessons.

[EconProf]

Deadzone, you are reading much more into my post than I actually said, which was limited to the influence of interest rate changes to housing price changes.
As I said, and you echoed, lots of factors other than interest rates also matter. And those factors are always changing–no cycle is exactly like the last. And to explain events, predict the future, make investment decisions, we need those dratted economic theories. We need to test them, invite critics to challenge them, pay attention to the past records of advocates and detractors, etc. And study history to learn its lessons.

[EconProf]

Deadzone, you are reading much more into my post than I actually said, which was limited to the influence of interest rate changes to housing price changes.
As I said, and you echoed, lots of factors other than interest rates also matter. And those factors are always changing–no cycle is exactly like the last. And to explain events, predict the future, make investment decisions, we need those dratted economic theories. We need to test them, invite critics to challenge them, pay attention to the past records of advocates and detractors, etc. And study history to learn its lessons.

[EconProf]

Deadzone, you are reading much more into my post than I actually said, which was limited to the influence of interest rate changes to housing price changes.
As I said, and you echoed, lots of factors other than interest rates also matter. And those factors are always changing–no cycle is exactly like the last. And to explain events, predict the future, make investment decisions, we need those dratted economic theories. We need to test them, invite critics to challenge them, pay attention to the past records of advocates and detractors, etc. And study history to learn its lessons.

[jpinpb]

[quote=deadzone]
jp, so what you are saying (i think) is to refinance the house and pull out the money at let’s say 4.5% for arguments sake, and hold it in short term account temporarily. Then when inevitably interest rates start shooting up and you can get safe short term debt instruments for above 4.5% start purchasing these.

I like the logic, just be aware of the risks. The short term cash accounts currently are earning maybe 1% so while you are awaiting the interest rate boom you would be losing significant amount of money. Once you start purchasing debt, to be safe you would have to stick to relatively short term. If you buy 10+ year instruments and interest rates keep moving higher then you will have to hold them until maturation or possibly lose your ass.

Also, it could be a long time before interest rates go up significantly (short term rates above 4.5%). Unlike sdr, the Fed (and US government) knows full well that a significant ramp up in interest rates in the next 1-2 years would be catastrophic (reset chart). So they will continue to do everything it takes to keep that from happening (QE3, QE4….QEn).

So if I were following this strategy, I would have to be willing to take the risk of losing 1-3% for at least the next two years. And again, I wouldn’t risk putting any of the money into longer term instruments.[/quote]

deadzone – yes, that’s the rub, as I even stated. Rates will eventually go up. The unknown factors are when and how high. So in the interim, you could be eating it short term. It would be idle money, basically, until the rates start to rise. Say rates rose to 10% in 5 years. Potential to earn a fair amount is considerable when you look at a home at 4.5% for 30 years. There’s a risk, no doubt.

[jpinpb]

[quote=deadzone]
jp, so what you are saying (i think) is to refinance the house and pull out the money at let’s say 4.5% for arguments sake, and hold it in short term account temporarily. Then when inevitably interest rates start shooting up and you can get safe short term debt instruments for above 4.5% start purchasing these.

I like the logic, just be aware of the risks. The short term cash accounts currently are earning maybe 1% so while you are awaiting the interest rate boom you would be losing significant amount of money. Once you start purchasing debt, to be safe you would have to stick to relatively short term. If you buy 10+ year instruments and interest rates keep moving higher then you will have to hold them until maturation or possibly lose your ass.

Also, it could be a long time before interest rates go up significantly (short term rates above 4.5%). Unlike sdr, the Fed (and US government) knows full well that a significant ramp up in interest rates in the next 1-2 years would be catastrophic (reset chart). So they will continue to do everything it takes to keep that from happening (QE3, QE4….QEn).

So if I were following this strategy, I would have to be willing to take the risk of losing 1-3% for at least the next two years. And again, I wouldn’t risk putting any of the money into longer term instruments.[/quote]

deadzone – yes, that’s the rub, as I even stated. Rates will eventually go up. The unknown factors are when and how high. So in the interim, you could be eating it short term. It would be idle money, basically, until the rates start to rise. Say rates rose to 10% in 5 years. Potential to earn a fair amount is considerable when you look at a home at 4.5% for 30 years. There’s a risk, no doubt.

[jpinpb]

[quote=deadzone]
jp, so what you are saying (i think) is to refinance the house and pull out the money at let’s say 4.5% for arguments sake, and hold it in short term account temporarily. Then when inevitably interest rates start shooting up and you can get safe short term debt instruments for above 4.5% start purchasing these.

I like the logic, just be aware of the risks. The short term cash accounts currently are earning maybe 1% so while you are awaiting the interest rate boom you would be losing significant amount of money. Once you start purchasing debt, to be safe you would have to stick to relatively short term. If you buy 10+ year instruments and interest rates keep moving higher then you will have to hold them until maturation or possibly lose your ass.

Also, it could be a long time before interest rates go up significantly (short term rates above 4.5%). Unlike sdr, the Fed (and US government) knows full well that a significant ramp up in interest rates in the next 1-2 years would be catastrophic (reset chart). So they will continue to do everything it takes to keep that from happening (QE3, QE4….QEn).

So if I were following this strategy, I would have to be willing to take the risk of losing 1-3% for at least the next two years. And again, I wouldn’t risk putting any of the money into longer term instruments.[/quote]

deadzone – yes, that’s the rub, as I even stated. Rates will eventually go up. The unknown factors are when and how high. So in the interim, you could be eating it short term. It would be idle money, basically, until the rates start to rise. Say rates rose to 10% in 5 years. Potential to earn a fair amount is considerable when you look at a home at 4.5% for 30 years. There’s a risk, no doubt.

[jpinpb]

[quote=deadzone]
jp, so what you are saying (i think) is to refinance the house and pull out the money at let’s say 4.5% for arguments sake, and hold it in short term account temporarily. Then when inevitably interest rates start shooting up and you can get safe short term debt instruments for above 4.5% start purchasing these.

I like the logic, just be aware of the risks. The short term cash accounts currently are earning maybe 1% so while you are awaiting the interest rate boom you would be losing significant amount of money. Once you start purchasing debt, to be safe you would have to stick to relatively short term. If you buy 10+ year instruments and interest rates keep moving higher then you will have to hold them until maturation or possibly lose your ass.

Also, it could be a long time before interest rates go up significantly (short term rates above 4.5%). Unlike sdr, the Fed (and US government) knows full well that a significant ramp up in interest rates in the next 1-2 years would be catastrophic (reset chart). So they will continue to do everything it takes to keep that from happening (QE3, QE4….QEn).

So if I were following this strategy, I would have to be willing to take the risk of losing 1-3% for at least the next two years. And again, I wouldn’t risk putting any of the money into longer term instruments.[/quote]

deadzone – yes, that’s the rub, as I even stated. Rates will eventually go up. The unknown factors are when and how high. So in the interim, you could be eating it short term. It would be idle money, basically, until the rates start to rise. Say rates rose to 10% in 5 years. Potential to earn a fair amount is considerable when you look at a home at 4.5% for 30 years. There’s a risk, no doubt.

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