Sequestration and the housing market.

[DataAgent]

[quote=sdduuuude]What prompted you to say “Sequestration appears likely” ?[/quote]

Paul Ryan says it will happen:
http://www.businessinsider.com/paul-ryan-sequester-meet-the-press-video-2013-1

[an]

SDR, my point is that, there are many ways things could play out and in the past rates and price didn’t move together inversely. It doesn’t mean that it won’t in the future. It just means it didn’t in the past and I admit my crystal ball is broken so I have no idea if it will or will not in the future. I was just pointing out what happened in the past.

[livinincali]

[quote=AN]
I wouldn’t 100% count on interest rates either. It depends on why interest rates went up. If the reason is like the 70s, good luck trying to catch the nominal price.[/quote]

Why did the interest rates go up in the 1970’s. I’d argue that the primary reason was baby boomers coming of age and demanding loans for houses while there was limited supply. In essence the supply demand curve for creditors and debtors was skewed heavily towards the debtors. Over time that curve has switched as baby boomers would rather be creditors rather than debtors as they approach retirement. I really think everything is going to boil down to the demographics in the end barring some miracle technology breakthrough.

In a decade or so when the boomers go from asset collectors to asset sellers asset prices will decline. Maybe not nominally but in real terms they will. Maybe the boomers will reverse mortgage homes and stay there but it’s hard to see a scenario where asset prices keep rising faster than the economy grows when a large portion of the population is going to be looking to cash in those assets either via rent collection or outright sale. Maybe I’m just looking at this too analytically or logically.

[SD Realtor]

I understand your point AN. I agree entirely. I would say though that housing is a payment based purchase. You don’t care about the price (as long as prop tax is only 1%) but if you cannot crack that payment each month you are screwed.

A 600k 80/20 loan payment for a couple making 125k at 3.5% is one thing but quite different at 8%.

[The-Shoveler]

[quote=livinincali][quote=AN]
I wouldn’t 100% count on interest rates either. It depends on why interest rates went up. If the reason is like the 70s, good luck trying to catch the nominal price.[/quote]

Why did the interest rates go up in the 1970’s. I’d argue that the primary reason was baby boomers coming of age and demanding loans for houses while there was limited supply. In essence the supply demand curve for creditors and debtors was skewed heavily towards the debtors. Over time that curve has switched as baby boomers would rather be creditors rather than debtors as they approach retirement. I really think everything is going to boil down to the demographics in the end barring some miracle technology breakthrough.

In a decade or so when the boomers go from asset collectors to asset sellers asset prices will decline. Maybe not nominally but in real terms they will. Maybe the boomers will reverse mortgage homes and stay there but it’s hard to see a scenario where asset prices keep rising faster than the economy grows when a large portion of the population is going to be looking to cash in those assets either via rent collection or outright sale. Maybe I’m just looking at this too analytically or logically.[/quote]

Look up owner’s equivalent rent,

This whole thing would have ended a lot differently if CPI was calculated the same as it was in the seventies.

[an]

[quote=SD Realtor]I would say though that housing is a payment based purchase. You don’t care about the price (as long as prop tax is only 1%) but if you cannot crack that payment each month you are screwed.

A 600k 80/20 loan payment for a couple making 125k at 3.5% is one thing but quite different at 8%.[/quote]
I agree most people only care about monthly payment. But you have to keep that into perspective as well. IIRC, we’re at or near an all time low in term of monthly payment. I don’t see rates going from 3.5% to 8% without massive economic and nominal wage growth. TPTB won’t let that happen. If you think that they’ll have no choice, what make you think rate will stop at 8% and what make you think wage won’t rise around that level? Rate doesn’t act in a vacuum.

[sdduuuude]

[quote=DataAgent][quote=sdduuuude]What prompted you to say “Sequestration appears likely” ?[/quote]

Paul Ryan says it will happen:
http://www.businessinsider.com/paul-ryan-sequester-meet-the-press-video-2013-1%5B/quote%5D

Interesting. I don’t really like politicians and I’m not sure I want to “save defense,” but I have to say, I like this quote:

“If we keep going down this path we will have a debt crisis … this isn’t a Republican or a Democrat thing. It’s a math thing.”

[SD Realtor]

Look at the 10 year treasury yields from 79 to 84. Pretty staggering. No way we ever have wage growth that matches that. I think that in the past the two have moved in tandem because we were nowhere near as globalized as a society. Jobs were plentiful. Wage growth is important but so is quantity of quality jobs. I think that our country is in the middle of a fundamental shift. You know, the new normal, a lower quantity of quality jobs, etc. Things do not happen all at once as well. We have not witnessed a tight money supply policy like the early 80’s. When that tightening happened we were in no way shape or form in the economic quagmire we are in now with respect to employment, quantity of jobs, and of course debt. Insofar as San Diego is concerned, even with a high rate environment I don’t see it getting as clobbered as the national numbers will be. To many sincs and dincs as well as lots of money and jobs.

[The-Shoveler]

That was Paul Adolph Volcker, vowing to kill inflation, (enter OER) at that time as well.

Anything to kill wage inflation including to absolutely destroy the economy.

it was a bad time from in 1980-84.

That was the time CPI was changed to deny any inflation was occurring, it separated asset prices from inflation.

Minimum wage earners have suffered disportionately ever since

[an]

I wasn’t trying to say that wage rise as fast as inflation or treasury yield. What I’m saying is housing price didn’t crash when rates went up. Also keep in mind that if you have FRM and not ARM, even if your income doesn’t match inflation, if your income increases in nominal terms, you’re paying back your mortgage w/ ever devalued dollar. Which is a good thing for you. It will only suck for those who are not owners.

[SD Realtor]

I think it is more complex and that different times and circumstances may or may not invalidate the effect of pricing from interest rates. I don’t have the data but I would guess that the percentage of monthly take home pay that housing costs back in the 80s when rates flew up was much lower then it would be today. That is because the 200k home in the mid 80s is now most likely the 500 or 600k home today. Not many ancillary fees like Mello Roos or HOA as well. I mean I do agree that in the past there may not have been exceptional effects on pricing due to rate hikes. I am not so sure that will be the case in the future but obviously there are alot of factors in play.

For the homebuyer of today and the past, I don’t think it is a bad thing, especially if you lock into a low rate. I don’t plan on selling anything I have bought so I will be quite happy paying 3 or 4% when rates are sky high. Until then I will save cash and when it happens, buy bonds.

[paramount]

It goes without saying that the housing market is heavily manipulated, and I tend to agree with shoveler – I think an event horizon is definitely approaching.

Some type of Lehman~ish shock event.

The economy – which has been on life support anyway – is now contracting.

I’m not surprised there are a lot of San Diego housing bulls here – I think some may be suffering from a normalcy bias.

At any rate, San Diego generally is not that good of a value IMO – and I think this has been and will continue to be good for Temecula.

I just wish I could figure out how to acquire more Temecula properties – which is not in contrary to my original statement. It’s all about timing.

[Coronita]

Then again there’s this…
It will be interesting…

http://www.utsandiego.com/news/2013/jan/31/Perry-Texas-lures-biotechs-California/

Texas governor targets SD biotechs

Perry visited with executives from several large medical device companies, said Mark Cafferty, chief executive of the San Diego Regional Economic Development Corp. Perry talked to the companies about the benefits of relocating to Texas, a state with no corporate income tax, relaxed environmental regulations and reduced land costs, Cafferty said.

“(Perry) certainly was here. He certainly met with CEOs of companies within San Diego, seemingly with a heavy emphasis on the biotech industry,” Cafferty said. “Our region has a target on our back. And people are coming in very charismatic to lure jobs away. While we do the best we can locally at EDC, we need state leadership to fight back.”

A spokeswoman for Perry’s office would not confirm his visit in voicemails Wednesday, but said that Perry often visits other states to court employers.

“We are always looking to reach out to companies who might be interested in moving or expanding,” she said. “We’re always trying to tell the Texas story of low taxes and reasonable regulations.”

Perry also visited California in December to court employers, the Austin American-Statesman reported.

That visit came a month after voters in California approved Proposition 30, which raised the income tax rate for earners making more than $250,000 and added a quarter cent to the sales tax. In California, large corporations other than financial companies pay 8.84 percent in corporate taxes.

When Perry returned to Texas in December, he told a tea party rally in Tarrant County why he made the trip to San Diego.

“The passage of Proposition 30 in California this last November, which raised their tax rate substantially on businessmen and woman, has made California a target-rich environment for pro-business, low-tax, fair and predictable regulatory states,” he said.

One target for Perry appears to be ResMed, a San Diego manufacturer of sleeping devices.

“Gov. Perry was in San Diego in December and visited with a few members of our executive team for about 30 minutes. There wasn’t an offer on the table. It was more of a fact-finding mission to learn about ResMed’s concerns,” company spokeswoman Gretchen Griswold said Wednesday.

Peter Farrell, ResMed’s CEO, made some pointed comments on California’s business climate at the time.

“The whole place is very Democratic, very union-friendly and tax-unfriendly,” Farrell said. “And we just see the costs going up, and the benefits going down. We see more regulation and more taxes, and more of an anti-business kind of environment.”

He went on to say, “The unemployment rate in Texas is 7 percent; we’re over 10 percent. Surely they must realize that the policies here are incredibly negative … They’re just anti-growth.”

Life Technologies spokeswoman Patty Zamora said the company already has operations in Texas, but could have even more in the future.

“Life Technologies currently has facilities in Austin and Houston,” she said. “We have invested in these facilities in the past and would consider doing so again as necessary to support our on-going business.”

[CA renter]

[quote=flu]Then again there’s this…
It will be interesting…

http://www.utsandiego.com/news/2013/jan/31/Perry-Texas-lures-biotechs-California/

Texas governor targets SD biotechs

Perry visited with executives from several large medical device companies, said Mark Cafferty, chief executive of the San Diego Regional Economic Development Corp. Perry talked to the companies about the benefits of relocating to Texas, a state with no corporate income tax, relaxed environmental regulations and reduced land costs, Cafferty said.

“(Perry) certainly was here. He certainly met with CEOs of companies within San Diego, seemingly with a heavy emphasis on the biotech industry,” Cafferty said. “Our region has a target on our back. And people are coming in very charismatic to lure jobs away. While we do the best we can locally at EDC, we need state leadership to fight back.”

[/quote]

Was watching Art Laffer on CNBC Thursday where he was discussing this issue and repeated the story about him moving from CA to TX because of the “tax-friendly” environment, and how Texas was “growing” jobs. He stated explicitly that low taxes create an environment for job growth.

What Laffer and Perry seem to miss is that they are NOT growing jobs. They are simply moving existing jobs around. If low taxes could actually GROW NEW JOBS, that would be something to crow about, but I have yet to see any evidence at all that low taxes grow the economy or create new jobs. To the contrary, history has shown repeatedly that some of the highest tax rates have coincided with some of the most prosperous times in history…while periods with the lowest tax rates have led to massive economic disruptions, credit bubbles, and huge disparities in wealth and income.

If Texas is so great at growing new jobs, why is Perry out here trying to pilfer employers/jobs from California? Shouldn’t he have his hands full in Texas with all the NEW companies and jobs being created there?

I’d like to see an idea from the right explaining how NEW jobs can be created rather than simply moving them from one state to another. Moving jobs around is NOT “growing the economy.” Some fact-based evidence to show how any of their ideas would actually work in real life would be nice.

[CA renter]

[quote=livinincali][quote=AN]
I wouldn’t 100% count on interest rates either. It depends on why interest rates went up. If the reason is like the 70s, good luck trying to catch the nominal price.[/quote]

Why did the interest rates go up in the 1970’s. I’d argue that the primary reason was baby boomers coming of age and demanding loans for houses while there was limited supply. In essence the supply demand curve for creditors and debtors was skewed heavily towards the debtors. Over time that curve has switched as baby boomers would rather be creditors rather than debtors as they approach retirement. I really think everything is going to boil down to the demographics in the end barring some miracle technology breakthrough.

In a decade or so when the boomers go from asset collectors to asset sellers asset prices will decline. Maybe not nominally but in real terms they will. Maybe the boomers will reverse mortgage homes and stay there but it’s hard to see a scenario where asset prices keep rising faster than the economy grows when a large portion of the population is going to be looking to cash in those assets either via rent collection or outright sale. Maybe I’m just looking at this too analytically or logically.[/quote]

I think you’re right on the money WRT Baby Boomers. Don’t forget the entrance of a massive number of women into the workforce in the 70s and 80s that pushed household purchasing power (and prices!) way up. This is in addition to the sheer number of Baby Boomers entering their peak purchasing years. These two trends alone were probably responsible for 80% of the inflation during that time. The other 20% (just guessing here) was probably due to the expansion of credit markets (also affected by the demographic changes, as you’ve noted), and taking the dollar off the gold standard.

[Author]

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