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livinincali
Participant[quote=skerzz]Your payment and required salary figures seem high to me. In years 1 and 5, I compute monthly payments of $2,700 and $3,900 respectively. Assuming a 36% front-end ratio, then your annual salary figures are also overstated.
[/quote]Looks like I had a bug in my excel formula. I get $2,600 to $3,900 which is still an increase of 50%. Of course I’ve also left out property taxes and any MID tax benefits. Not sure why you’d assume a 36% front end. Bankrate and other sites tend to say 28-30% percent front end and 36-41% back end. I made my salary calculation on 30% which I felt was pretty fair.
If your San Macros place appreciates at 5% and interest rates increase at 50 basis points per year I get the following.
The house is worth $510K. The monthly payment @6.5% is ~$3,250 and at 30% front end ratio a average annual salary of $130K. That average annual household salary would be in the top 20%.
Participant[quote=skerzz]
Everyone is so concerned with a “bubble” and quickly appreciating prices. Anyone else believe that the price move we saw early this year was the adjustment needed to bring prices back to sustainable market levels after a post bubble over correction? From here, I project modest price increases (5% per year) coupled with interest rate increases over the foreseeable future.[/quote]Here’s what the monthly payment people would be forced to come out of pocket with to meet your projection. Let’s assume $500K rising at 5% per year modest interest rate increases of 50 basis points per year.
Home Price | Interest Rate | Monthly Payment | Annual Salary
Year 1 | $500,000 | 4.5 | $2,808 | $112,306
Year 2 | $525,000 | 5.0 | $3,148 | $125,906
Year 3 | $551,250 | 5.5 | $3,521 | $140,824
Year 4 | $578,813 | 6.0 | $3,929 | $157,156
Year 5 | $607,753 | 6.5 | $4,375 | $175,001The monthly payment for that exact same house goes up 56% in 5 years if your prediction comes true. Do you expect salaries to keep up with that kind of increase.
Participant[quote=AN]What was the interest during the great depression?
[/quote]
10 year treasury rates declined during the Great Depression. From 3.6 in 1929 to 1.95 in 1941. Then then went up once we got involved in the war.[quote=AN]
Were we the currency reserved?
[/quote]I’d assume you mean were we the reserve currency at the time. The answer would probably be no but during the great depression ‘beggar thy neighbor’ of currency devaluation in order to increase competitiveness was prevalent. Seems a lot like the current version of currency wars where central banks are desperately trying to devalue right now. Reserve status probably doesn’t really play much of a role in all honesty, but if you think it does then by all means elaborate.
[quote=AN]
We we the super power then as we are today?
[/quote]Why does our super power status matter in terms of deflation or inflation. Not sure what the point is here.
[quote=AN]
Also, if you’re counting a great depression as a possibility, then shouldn’t you also count in a hyper inflation as a possibility where you have to cart around a wheel barrel to buy a loaf of bread?
[/quote]I believe I did with this comment
[quote]
Certainly congress could cause hyper inflation. They could credit everybody’s bank account with $1 billion dollars but that would detonate ever retirement portfolio in the world in a matter of minutes. One person’s debt is another person’s credit. You can’t get rid of the debt without getting rid of the corresponding credit. Although that’s pretty much the game the economists play in their solutions to the problem. Solve one side of the equation and bury the loss on the other side of the equation with complexity.
[/quote]The reason I discount the possibility of hyper inflation more so than deflation and depression is that hyper inflation makes every debt worthless and blows up all the big banks, social security, medicare and every pension fund in the nation. It also takes an act of congress rather than an act of the fed to come into play. Will congress do something dumb enough to produce hyper inflation. Maybe but considering it would blow up the banking institution and the campaign contributions I doubt it. It think it’s easier to bleed off bad debt in deflation politically. The government give away program that leads to hyper inflation will probably look pretty good on paper before it blows up into hyper inflation.
Participant[quote=The-Shoveler]My guess as to what will happen,
Remember this is what I think is most likely to happen IMO, not what I think should happen but what I think is most likely to occur.The Gov will first raise minimum wage to around 9 or 10 dollars then tie it to CPI.
Wage inflation will then reach about 5 to 6% and may even get to 7% by 2018.
Anyway that’s what I think is most likely to occur but we will see.There were way too many differences in Fed Gold deposit requirements which kept the fed from printing money during the great depression, so there are no comparisons to what is occurring now and what happened then. Even Minimum wage did not start until 1938.
The wheel barrows of money to buy a loaf of bread thing is not likely in any event.[/quote]
There’s only about 3.5 million worker at or below minimum wage which represents only 2-3% of the total labor force. Over half of those worker are 25 or less. Do you really think a slight boost in minimum wage is really going to get the ball rolling on significant wage inflation across the board. I have my doubts especially with globalism and automation.
BLS Stats on minimum wage.
http://www.bls.gov/cps/minwage2012tbls.htm#5Participant[quote=AN]I agree that it could happen. But then again, every country is different and we’ve never experienced a Greece/Spain/Portugal/etc situation before. That doesn’t mean that it can’t happen. It’s just that it hasn’t. We can print more USD while Greece/Spain/Portugal/etc can’t print more Euro to increase inflation.
[/quote]Of course we have. It was during the great depression. That was the last time we had a really big debt bubble across all sectors of the economy. Government debt was big during world war II but public debt was next to nothing because everything was being rationed and it was people’s patriot duty to conserve rather than consume.
Certainly congress could cause hyper inflation. They could credit everybody’s bank account with $1 billion dollars but that would detonate ever retirement portfolio in the world in a matter of minutes. One person’s debt is another person’s credit. You can’t get rid of the debt without getting rid of the corresponding credit. Although that’s pretty much the game the economists play in their solutions to the problem. Solve one side of the equation and bury the loss on the other side of the equation with complexity.
Participant[quote=AN]
What I’m trying to infer is, if history repeats itself, then when we see high inflation, we’ll see higher housing price and higher rent. I don’t know if life was easier or not for average Americans and really, I don’t really care. I don’t care if they can buy more house or not. What I care about is if price will rise like the last time we saw 10%+ mortgage rate and inflation going crazy.[/quote]I think rates can go up without high inflation. See Greece, Spain, Portugal, etc. That’s where the problem lies in betting that buying a higher price home at a low interest rate guarantees good positive returns on rent in the future. It’s certainly possible that you’d see deflation in a rising rate environment as we are witnessing in Europe. Unemployment can rise, vacancy can rise, and rates can rise at the same time.
The big bet on residential real estate is that higher than average inflation is coming and that a fixed 30 year rate going to allow you to win huge when that inflation shows up. Of course you’re screwed if deflation shows up along with higher rates. At the same time I can’t find any recent occurrences of a 1970’s type environment. Japan has been mired in deflation and low rates forever. Europe is experiencing higher rates and deflationary forces as well. Yet here we are in America thinking the worst can happen is 1970’s stagflation with asset owners hitting the jack pot. It’s possible but I don’t know that’s it’s likely.
Even if it does pan out this government has shown no respect for contract law so what makes you think they won’t stick it to the little man holding 30 year fixed mortgages on rental properties. Hi little man, we’re going to be adding a new fee to mortgages on second properties that were obtained in the years 2008-1015.
Participant[quote=SD Realtor]
So yes what you said about being in the catbird seat for owners is true however we will absolutely see asset depreciation in those cases of high rates. The golden question is how much. Now if you will be holding the property anyway and have it as a rental then yes, You will be raking in monthly income while paying out on a 3.5 or 4% mortgage. Nice.
[/quote]It will certainly be interesting to see what happens with 30 year fixed rate mortgages if rates to start a general trend upwards. There’s really no assets out there that can be levered with 30 year fixed rates other than residential properties. Bonds, commercial property, stock margin etc are all based on a short term floating rate when they are levered up.
If you’re lucky it will work like prop 13. You’ll get to keep the rate as long as you hold on to the property. If you’re not government will probably adjust your 30 year fixed rate higher in the name of fairness, especially if you’re renting a second home.
August 23, 2013 at 2:20 PM in reply to: OT: On the killing floor; immigrations impacts on wages #764745Participant[quote=SK in CV][quote=livinincali] You worry that McDonald’s might make too much money but you have no consideration for how much harder you just made it for Joe the Pizza guy to start his 2nd restaurant.[/quote]
Why should we care whether it’s hard for Joe the Pizza guy to start his 2nd restaurant? Is there a shortage of pizza joints? Is it a good thing if he only has to sell 20 pizzas a day employing people at the current minimum wage? Is there some reason public policy should support that?[/quote]
Historical evidence shows that most job creation comes from small business creation. Encouraging small business creation would likely be the most effective policy at creating economic growth. My opinion is we should let the free market decide. If Joe the pizza guy can open a new pizza joint and find kids willing to work for tips it’s fine with me. There’s obviously some negative side effects and perhaps some worker exploitation, but in general I think it would be good for growth.
Government’s involvement in trying to level the distribution of goods and services via regulations has led to an environment gives advantages to large businesses. The cost for Walmart to comply with regulations per employee is much lower than the cost per employee for some small retail business.
August 23, 2013 at 12:09 PM in reply to: OT: On the killing floor; immigrations impacts on wages #764731Participant[quote=The-Shoveler]If it were not for food-stamps and medi-Cal the walmart and mcd’s workers would have been throwing stones a long time ago.[/quote]
Why must we constantly insist that every job in America must pay a wage that allows someone to support themselves living alone or even better a family. There’s plenty of zero skill labor in America that wants to work part time for discretionary income and experience. There’s plenty of businesses that want to hire those people. Those businesses don’t seem to be experiencing any shortages of labor because there’s plenty of people in households that do not need to be the sole breadwinner.
Why do we constantly insist on trying to tell everybody else what to do. Lets force businesses to pay more for employees and when they cut/replace employees then we can argue about how it’s a good idea to force businesses to hire employees. You’re never going to win this game via forced government policy because every step you take makes it harder for an employer to employee people. You worry that McDonald’s might make too much money but you have no consideration for how much harder you just made it for Joe the Pizza guy to start his 2nd restaurant.
August 23, 2013 at 10:35 AM in reply to: OT: On the killing floor; immigrations impacts on wages #764720Participant[quote=SD Realtor]
It is all about net profit. McDonalds is an example that looses the wage scale battle. As NSR pointed out in his argument about the place in Colorado, paying those employees more makes sense because it saves the company money in the long run due to retention and employee training costs. Thus the company becomes more profitable by doing so. This is a valid argument and makes alot of sense.
[/quote]In this particular example of the meat packing facility it looks like there’s an actual shortage of labor. If you do indeed have an actual shortage of labor the first response might be to market or expand recruiting operations, but if that doesn’t work the next step would be to raise the wages. At some point these facilities will have to come up with a solution whether it’s automation, raising salaries, or increasing the total compensation package for the employees.
McDonald’s doesn’t seem to have a labor shortage. In a certain locations like Aspen, CO maybe they do and are forced to pay employees more and charge higher prices, I don;t know but it wouldn’t surprise me. Of course in most cities there’s plenty of low skilled labor available just looking for a part time job to get some discretionary income. They aren’t trying to raise a family on a single minimum wage job.
Participant[quote=CA renter]
If a white man was mugged by black men on three occasions (but never by a white man, even though he lives in a predominantly white neighborhood), I’m willing to bet he would end up with “racist” tendencies. A general dislike of certain (perhaps violent, vulgar, or otherwise offensive) behaviors found in other cultures that are linked to race might also make one perceive that race in a different way…and feel some disdain for them, generally.
[/quote]I’d probably view this case as a stereotype initially. Maybe stereotypes turn into racism at some point. A young male middle eastern looking traveler gets on my plane by himself, I’m probably somewhat suspicious. I have good reason to be because of the historical evidence on who tends to hijack planes. Now if I decide that all Middle Eastern people are evil terrorists because a small majority are and have committed terrible crimes then I’ve probably moved into the realm of a racist.
It’s pretty clear this kid hated white people but you’ll probably never know if it was from bad experiences with white people or from some kind of learned behavior. You can’t necessarily fix the bad experiences, some people are going to be racist and he might have come across some of those people. You can probably fix the learned distrust and negative view of white people in the black community. I just don’t think the leaders of black community are ready for reconciliation of past wrongs yet.
Eventually the black community is going to have to fix itself if it wants to get out of it’s impoverished state. Nobody is going to do it for them and it’s not going to be easy. As long as they’ll willing to rely on excuses of racism rather than doing the hard work it will continue to be the same.
Participant[quote=bearishgurl]
No, livinincali, homes are only a “highly leveraged asset” for those fools (mostly “worker bees” at the mercy of employers) who tend to borrow themselves into oblivion to get into one. Many, many regions of the country have a VERY LARGE percentage of homeowners (over half) who owe 0 to $20K on their primary residence.
[/quote]I said at the margin. Not all home owner are highly leveraged, but most new home owner are. Potential new home owners bidding for the available properties are the ones setting the prices. Move up buyers generally require somebody to buy the previous home unless they decide to rent it and lever up in a new purchase. If leverage was reduced and interest rates were raised then the amount one could bid on a house would be lower. Now there doesn’t necessarily have to be willing sellers at that price, but at the margin there would be some sales and prices would reflect the reality of lower leverage and higher interest rates.
Participant[quote=bearishgurl]
The agency’s biggest blunder was when they increased the ceiling on their high-cost area lending limit in December of 2008 for ONE SFR to $729,750 thus raising it from 75% to 87% of the FF conforming limit. Although it was later lowered in 2012 to $697,500,
[/quote]I’m not sure that their biggest mistake was raising loan limits. There biggest mistake was sticking around as the low down lender when everybody else decided no skin in the game and <5% interest rates wasn't worth the risk. You could have probably gotten a low down payment loan if FHA wasn't around but it wouldn't be at prevailing 30 year fixed mortgage rates. It would probably be close to 10%.
Homes are a highly leveraged asset for home owners at the margin and those at the margin set the prices. If you eliminate the leverage you eliminate the marginal buyer. If you like higher home prices FHA and the Fed did everything in their power to help you.
ParticipantThe Oklahoma case just keeps getting better. I can’t wait to see excuses from the race baiters on this one.
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