Sorry sniglet, I was under the impression you argued that QE could not offset the massive wealth destruction resulting from falling house and stock prices.

What I have said is that policymakers will not be able to make up for the collapse of private credit markets with their stimulus or bail-outs.

It’s good to hear from you again Sniglet. I was getting your model mixed up with a blogger that has a theory somewhat similar to yours, but he keeps lumping asset values in with money supply. This has made it really difficult for me to figure out the big picture. So when I came upon this simple MV=PQ formula, it was like a lightbulb went off in my head. I realized it is not loss of money supply that is ultimately driving down prices. It’s loss of velocity, which creates a loss of price. People percieve they lost money because the price of their assets declined from peak. But really an asset is valued at the buying and selling price (ultimately the same thing from different perspectives). Inbetween those points, you have psychologically induced noise. If the noise goes up high enough, it increases velocity. If it goes down low enough, it decreases it. In the meantime, the money supply increases (govt. pump), which should drive up PQ. But the now plummeting loss of velocity (hoarding of M) ultimately won’t allow that to happen.

I think what I’m finally beginning to realize is a part of what you’ve been saying all along. For whatever reason, I need that little econo101 formula to put it into perspective though.

I’m exactly there. The house is 60′ set back from the high-water mark and about 20′ above it. The property backs up to a few miles of protected shoreline. The house is brand new, very well built, and the builder used high quality materials throughout. There are no neighbors, and the zoning restrictions and land layout prevents anybody from building in the vicinity. The asking price is below replacement cost. When you stand on that shoreline and look out across the most pristine remaining portion of Puget Sound, the dopamine just pours through your brain. It’s like waking up from being dead to the astonishment that you now have what you’ve been missing all these years. It’s my current drug of choice, but unfortunately the letdown is severe when you realize you must ultimately abandon her in favor of economic common sense.

I’ve been playing this game for 3 years thinking about money, and suddenly something greater than money grabbed me and shook me back to my senses. Ultimately I won’t buy the house in this market, but I now realize that I cannot just buy any old house just because it’s a good value. From here on out, I’m looking for my dream house and waiting for the prices to fall to the levels where I can afford it and have no risk of losing it all to the next great depression.

At this moment, I’m much less concerned about the cost of the house than I am the outside risk of losing my job in this massive downturn. I’m experiencing the fear aspect of the greed/fear cycle that ultimately will drive home prices MUCH further in the downward direction.

One should consider many things before buying a property. At this point 50% decline is just as likely as Microsoft making Zune a great success.

The big banks are all insolvent. Deleveraging will only increase.

Hunker down for now and enjoy life.

You are right, Sniglet. I am very much looking forward to leaving this mortgage behind and I assure you, I will never take on that big of a bite again! I’m sorry to hear about your sister’s situation. I used to be very smug about how smartly we handled everything, how we had money in the bank and no debt but our house. Well, I’ve been humbled. I’ve learned my lesson. And I’m less judgmental about others’ choices, so that can only be a good thing. I don’t want anyone else to have to go through this, that’s why I posted my thoughts for Sam and Tiffany.

real families are being affected here

I didn’t mean to blithely ignore the pain that many home-owners are feeling. My very own sister has been delinquent on her home in Florida for over a year now (although the lender still hasn’t foreclosed), and she isn’t particularly thrilled about this state of affairs.

That said, I do think that many struggling home-owners will actually be better off once they can get out from under the debt of their existing homes, and move into more reasonably priced accomodations. I don’t think lenders are doing a service to anyone to modify a loan for a delinquent borrower, only to find them go back into default because the costs are still too much for them.

Even in my sister’s case, I think she is better off getting out from under her horrendous mortgage payments. I always thought she was insane to take on such debt loads to begin with (paying something like 50% of her income on the home). She has certainly been able to start rebuilding her savings over this past year of living “rent free”…

Yeah, wait. Nowadays sellers are still content to try to win the lottery. Another year will soften that up considerably .

On the other hand…believe me, it’s probably not really the perfect house, it’s that altered state that you’re in. And there will be other perfect houses.

Wise words Ira. I have been eyeing the “perfect house” and am considering making an offer.

I think one of the challenges is that this is the first property that we have seen that fits our dream criteria and that is also solidly within our price range.

We could pull the trigger, but I have to remind myself that there will very likely be MANY “dream houses” coming our way over the next few years, at much, much better prices.

So unless the owner agrees to a further 20% cut (and I suspect they wont as they are pricing at 2005 levels) we will pass.

This “I want it, but should wait” seems like a grown up version of those psychology experiements they run on kids to measure maturity….

As for Sam and Tiffany, I would tell them to keep looking, and keep throwing mud against the wall. At some point in time the mud will stick and they will have a nice home in which to build their family from over the next 10 years. I would also suggest they plan to live there for 10 years, in order to ensure they are purchasing a great investment.

I would also suggest they go back to those other homes they made offers on and present an offer lower than their first offer, but on scale of how the overall market is doing. If the market has dropped .5%, make the offer .5% lower than their first offer.

I would also suggest they take into account FHA financing, the cost of obtaining the financing, and the repairs the seller might have to do in order for FHA to take on the loan. There will be things the inspector calls out that must be fixed prior to closing if they plan to purchase a fixer (or a variation of such).

I would continue to offer 10-15% below what the market dictates to offset the potential of the market dropping further, and mull over the responses to the point that it becomes cost effective to own the home.

The 10k tax credit may help them, if they pay that much in taxes on a yearly basis (38% of americans pay NO tax), but not until the end of the year. Don’t factor it into the equation at this point in time. Use it for your vacation fund to go somewhere fun, warm and tropical over the next few years!

I can totally relate – I have the feel good chemicals as well. And part of my brain tells me I am getting a good deal.

But, the more rational side points out there are a lot of Tokyo residents who bought when their market was 20% down who wish they had waited…

And each month that goes by puts more $ in my pocket and brings us closer to the end of this recession/depression.

So unless the owner agrees to drop significantly more than the asking price (which is unlikely since they are back to 2005 levels) we are likely going to pass.

The day dreaming was nice though….

Yes at some price they will sell, but I don’t think many sellers are willing to discount that much.

This is the key. Any home is sellable, it’s just that some sellers are unwilling to lower the price to the point where it becomes attractive to purchasers. The fact that a given owner “needs” a certain price to pay their mortgage is immaterial. If the home isn’t selling, then it is clearly priced above current market values.

I agree that in many cases the only way the homes will finally be sold is after the lender has reposessed them and listed them as an REO. It is only at that point that a true market price might be reached (i.e. where the owner is willing to price the home to clear).

I’ve been complaining for a long time about the condition of some listings. But in this market I really wonder what some people are thinking. There are nice units in good condition that are not selling for not that much more, and sometimes even less, than units that are in poor condition.

But more to your comment, there are certain houses that in a hot market would sell, but in a cold market are difficult due to traits that simply cannot be changed. Being on a busy road or having a bizarre floor plan come to mind. Yes at some price they will sell, but I don’t think many sellers are willing to discount that much.

Finally, don’t discount the fact that some people probably are not good candidates for short sales. Perhaps they own two houses, for example. For them they might truly be unable to sell because the price the property could sell at could be less than what they owe together with their cash in the bank.

you could be stuck in heck with the rest of us whose homes are “unsellable”

Is it really true that some homes are “unsellable”, or is it simply an issue that no one is willing to buy a given home for the price the owner wants to sell it for? When I hear people talk about being unable to sell a home I really start to wonder if they are being realistic in their pricing.

When trying to sell a home today, I think it is important to consider the consequences of further price declines when setting a price. Too many sellers wind up chasing the market down, only reducing their asking price when their home has languished on the market for a lengthy period of time, but then finding that their new lower price is no longer accurate. Instead, they would have been better off with a substantial price reduction, placing their home well BELOW typical asking prices in the first place rather than continually ratcheting down the asking price even while the broader market declines at an even faster pace.

Sellers need to ask themselves what the consequences to their own finances, and peace of mind, wil be if they still haven’t sold the home 2 years from now and the market value has dropped an additional 50% from where it is now in that time-frame.

this is off-topic (sorry!), but can anyone tell me this:
if we are contacted by a buyer’s agent whose buyers saw our house while it was on the market, how long after the listing expired does our former listing agent still have claim to any commission?
Or at least can anyone give me an idea of where to look this up?
thanks!

With the NWMLS contract, six months.

I’m having a harder and harder time seeing how the government can commit to all this stuff without there being inflation at some point

Keep in mind that the vast majority of the government stimulus/bail-outs are in the form of BORROWED money (i.e. t-bill sales), which just sucks money out of the private sectore. The Fed is threatening to begin a major program of outright purchasing of treasuries, but this is just talk so far. And even if the Fed does start buying treasuries I doubt they will do so in a huge manner since the consequences of spooking the broader market are so dire (i.e. no one who owns t-bills will want to keep them if the government/Fed becomes a major purchaser).

Also, it is important to remember that the vast majority of stimulus governments have been spewing out in the last 20 years has been in the form of debt, and debt creation (e.g. low central bank interest rates, etc). All this DEBT acts as a massive deflationary force when economies slip into reverse.

Again, to repeat my broken record, Japan has been pulling out all the stops to prevent declining asset values for 20 years, and that hasn’t worked. Japanese central bank interest rates have been near 0 for a long time, and their government has spent many trillions of dollars over the years on various stimulus efforts.

This at least indicates that asset value declines aren’t so easy to stop once begun.

Anyway, I don’t want to re-hash these arguments on these threads. You need to listen to my podcast if you want the full picture of the argument for deflation.

In buying bargains there are three types of situations:

Divorce,

Death,

and,

Investors.

I don’t typically see divorce situations as being something to step into, because there’s too great of chance one of the two spouses will be unreasonable.

Estate sales on the other hand can be great, especially if you have many heirs. If you have 10 heirs, a $50,000 price reduction is only $5,000 per person.

governments like inflation

Yes, they do. However, that doesn’t mean they will get what they want. Japan has been facing declining asset prices for 20 years despite a huge increase in the money supply and massive government spending. I don’t see why a similar thing can’t happen in the US. Heck, just look at how impotent governments have been in preventing the growing purchasing power of the dollar in the last year. If policy makers were all powerful, then we shouldn’t have seen the types of declines in incomes, stocks, real-estate, and commodities that have taken place.

As I outlined in my deflation podcast (http://www.surkan.com), I think the government’s hands are tied, and that an increase in the purchasing power of the dollar is what we are going to see. A dollar put under the mattress today will buy a bigger piece of house 2 years from now than it can today.

http://www.financialstability.gov

For sure buy what you can afford today, but governments like inflation. A thirty year mortgage is a long term investment.

BTW you have excellent content on you site. Thanks

If I were buying today for the first time and wanted a fixer or close to it, I would first go to a foreclosure auction to see how that works. I’d go more than once to see who shows up, who bids, and why.

Then I would go to the foreclosure “classes” on the Eastside. Don’t sign anything. You are there to meet people. You should know how the process works.

In buying bargains there are three types of situations:

Divorce,

Death,

and,

Investors.

I would get to know some investors first before buying. There are legitimate people who buy, sell, rent, and trade in properties. These are good hard working people who are apart from the get rich quick crowd.

Many investors are addicted to buying properties. They simply like good deals. The problem is you can only hold so many at a time. A really good deal for an investor is one they can sell for a profit quickly.

When you find the right investor who is buying for a resale you can be that resale buyer.

I have a lot of cautions about this. Some people let a property be foreclosed on because it is unsalable. There may be fixes that make the property cost prohibitive. Get a very detailed inspection before buying.

Buying foreclosures themselves are high risk, but it is a good thing to know. It’s also fun. You really can’t buy this type of entertainment.

Since when does a 20 something com tech make low-mid six figures which is what a 380K load on a 30 fixed with 10% would reguire. None of the stuff you put out remotely seems possible. The 20 somethings with 60-70 COMBINED income buying 380k houses with ARMS was a big part of the problem. Get out a calculator and put it all down right down to 401K, medical matching, realist grocery entertainment budget , cable, phone and such. Unless they inherieted some dough this skit is not realistic in the least. Renting is cheaper but it is not that much cheaper.

I’m in a somewhat similar situation so I get that it’s not all about the money.

On the other hand, this is already the worst recession since 1981. In a few months it will be the worst since WWII. After that, who knows?

So the way I see it, I can’t afford not to wait.

BTW: Does Windermere gather their agents together in a room and advise them on how to price? I ask this because realtors seem to be pricing units about 20 higher than I would expect given the fact that no sane person thinks the market to recover in Spring of 2009. One more big reason not to buy a house right now…

Sorry sniglet, I was under the impression you argued that QE could not offset the massive wealth destruction resulting from falling house and stock prices.

What I have said is that policymakers will not be able to make up for the collapse of private credit markets with their stimulus or bail-outs.

You buy at today’s prices with today’s money. If you pay today’s money off with inflated future dollars you come out ahead

But what if the future value of money increases? As I’ve mentioned here before, I believe there is a good chance that the purchasing power of the dollar will be substantially higher in the years ahead (i.e. that asset prices will fall signficantly in dollar terms). In such a scenario, it becomes even harder to pay-off debts.

Just look at how companies across the nation are cramming pay-cuts down onto employees. People should expect to have LOWER incomes in years ahead, and the dollars they do manage to save will go a lot further than they do today.

RE: Kary L. Kris mer @ 44 –

I’ll agree that you are much more informative here at Seattle Bubble. It’s the absurd arguments you engage in on other sites that are distracting from the information. There’s a lot more thought here, with statistical analysis, bs calling, and data to make points.

Well I’m done engaging in absurd arguments at one site, indirectly as a result of you! Thanks!

What I don’t get is why some people buy into the absurd or self-serving arguments. For example, do people really expect their real estate agent to turn to Zillow if they can’t find comps?

BTW, Ira, I’ve never posted on Active Rain.

Yes, you are making sense. The point sniglet is making and you are making also is that wealth is money in the bank. Rich is a new car in the drive way, but wealth is cash.

Money circulating is the leverage. Wealth is capturing the money in your own investment strategy.

You’re all going to love this, but the price of the house makes very little difference if you have a strategy of paying it off. It also depends on the future value of money. You buy at today’s prices with today’s money. If you pay today’s money off with inflated future dollars you come out ahead.

The way I look at it is how fast can I pay the thing off. Buying a fixer gives you a lower payment. It is a negotiating point with the seller. You look at the property, determine the cost of repair and make an offer accordingly using as little cash as possible.

That idea is the buy in cost of getting equity. Rather than start fixing right away I would put money towards the principle balance up front. Run some amotization schedules for what principle payments will do in creating equity as opposed to what fixing the place does.

I also recommend some one live in a house a year before they start fixing. Each house has quirks and it takes some time and planning to know what will give you the most bang for your buck.

Sorry sniglet, I was under the impression you argued that QE could not offset the massive wealth destruction resulting from falling house and stock prices.

I’m in the same boat. I have no good advice to give because my common sense is clouded with feel-good buy-it-now chemicals. Complicating the issue is it is a one-of-a-kind that would be impossible to replace in certain aspects due to its unique “dream-house” location and setting. It’s tough because I would like to live my life there and retire in that setting. It’s that good. But the market timing is very poor. If we enter into a depression, having financed a high-dollar house at the leading edge will prove to have been out and out foolish. I’d kick myself from here to Kindom Come. OTOH, if we simply have a 2-year downturn and come out the other side, I’ll have lost the irreplaceable setting. As much as I hate to say it, the smarter move is to error on the side of least risk, which means wait out the storm. It’s tough to do though when after 3 years of looking you finally find the perfect house. Maybe in 3 more years of searching, I’ll find something that can replace it.

6 years of my life wasted on a frigging artificial housing bubble created by a bunch of 4-letter words.

But this appears to be different from Sniglet’s argument that the amount of wealth destruction cannot be offset by printing M

To be clear, I have never said that a massive decline in asset prices (which I think it highly likely) will be due to “wealth destruction”. Further, I have even suggested that we could see asset price drops EVEN with an expanding money supply. This crash in asset values (and rise in the purchasing power of the dollar) will be driven by 1) a lack of purchasing demand and the acculation of savings/cash and 2) continued tightening of lending standards, which will decrease the over-all pool of available credit.

My wife and I are in a similar position, although we have two kids and we have the 20% saved.

We know full well prices are coming down, and that the longer we wait the better off we are financially. But, we have recently seen a house that comes close to “dream house” territory for us.

They owner is quite realistic and has offered prices equivolent to around 2005 levels.

We know that prices will continue to drop, but we like it so much we are planning on making an offer.

To ensure we dont go into negative territory we will offer well below the asking price (another 15% off) but are pessamistic about our chances. The house has only recently been put on the market.

Net-net, we will jump if we feel we are getting a great deal, but given the huge downside potential, and the certainty of getting better prices on all proporties over the coming 1-2 years, we are are going to err on the cautious side.

Oops, that’s off, but flip it and I think it makes a point of non-equavalence of M and V. But I’m guessing at that as I haven’t read that far yet.

M = Amount of money in circulation (let’s say averaged over a year)
V = The rate at which the money is circulating
P = The price of goods
Q = The quantity of goods sold

So the velocity (V) went way up when the cheap easy money hit along with all the exotic credit default swaps etc. The money was diverted into assets, which caused the price of homes and stocks to escalate (P) along with economic output (Q). PQ can be thought of as the GDP, so the economy underwent a great period of expansion.

But when the bad loans were exposed that caused the velocity increase, the banks wouldn’t lend anymore, and V went into the cellar. Thus, the price of stocks and homes started coming down to match MV. So the government wants to print more M in order to support V and ultimately raise PQ. But the problem is, V cannot be increased to the bubble level or the house of cards will collapse (need good credit to borrow and no toxic assets).

The goal appears to be to print enough money to shore up the banks and return to a normal healthy level of velocity (lender confidence) while P and Q go up (more money and credit in consumers’ hands=consumer confidence). Ultimately this means the price of assets go up or at least level out, but houses and stocks are actually worth less because the dollar is worth less (inflation). But it causes people to start buying because V starts to move, and sitting on cash means losing money. Consumer prices rise along with assets, so in a way, things balance out as long as wages rise along with PQ.

Now I seem to be saying during the contraction, the velocity shrank so far that it’s questionable whether the govt. can print enough money through quanitative easing to offset the loss in velocity and support a rising PQ (GDP). IOW, it can increase M, but not to the point of offsetting the dramatic fall in V, so PQ will continue to decline.

But this appears to be different from Sniglet’s argument that the amount of wealth destruction cannot be offset by printing M. To me, his wealth destruction is not real because M didn’t increase or decrease. In fact, P decreased. Thus the rise in P during the bubble made people feel wealthier because they could cash out with a big profit, but when they failed to cash out and P fell, they felt poorer. This affected velocity and will continue to affect it in a negative manner because people with less percieved wealth are reluctant to borrow and spend. This will offset the government’s efforts to increase M because V will not rise in this scenario.

So we don’t really appear to have an M, P, or Q problem here. We have a V problem. PQ cannot rise to the bubble level without inflation because V cannot be Jerry-rigged to the same level as the cheap easy era of half million dollar loans to strawberry pickers and the wonderful era of credit default swaps. That’s what caused the massive increase in V, and printing M cannot replace a loss in V. IOW, M and V are not equivalent even though a rise in either can affect PQ. You can have a high PQ, but the intrinsic value can be less or more depending on the ratio of M to V. High M and low V with fixed PQ means 1 unit of M has less purchasing power than low M and high V.

Am I making an ounce of sense here? Can we ever get back to where we were before? Do we even want to?

Get w-2 income for tiffany,even if part time

open and put a balance on revolving and installment credit

maximize pre tax retirement investment

hold nest egg in cash equivelents in a roth ira

investigate neighborhoods, schools, sex offenders, bus lines, shopping, dining, entertainment

look for some data on seattle elementary schools on the chopping block.

Rethink your desire to want to do a ton of work on a house. It takes a ton of money and time.

To be blunt: re-evaluate your desire to get a house that needs a ton of work. Take an inventory of your free time, what do you do? Hang out, sports, hobbies, travel, shopping, drinking, coitus?

I’m very handy and keep my place in great condition. It really sucks that I have to do it. I’d much rather be fishing with my kids, going to soccer games, band concerts, or just kicking back all weekend. Instead I have to drop a couple of hundred a month (averaged out) at home depot and do chores at least half the weekend. And I bought this place brand new, I didn’t have to fix up anything. I’ve seen a lot of fam and friends buy great old homes and have grand dreams. 5 years later your living in construction zone, or worse, your upgrades turn out to be a bust.

Hey listen, if your hobby is woodworking, more power to ya, go to town. If Sam’s a techie who has never hung a door, or loves to watch HGTV, please take my advise and rethink it. Please trust me when I tell you that remodeling costs a fortune, even if you don’t factor in how much your time is worth, not to mention your marriage. If your really serious, buck up and buy some software like Xactmate that insurance adjusters use to calculate replacement costs. You have to factor it into your total investment costs.

Look for a house that you can raise a family in, improve your cash position every month. Your extremely fortunate in your timing. You can watch your buying power increase. I’d wait until at least 2010, as all the Alt-A’s will be going bust. Don’t worry about missing the bottom. Make a date with each other and go to open houses. Walk in and check out at least 100 homes. Drive through potential neighborhoods on a summer saturday afternoon.

You will know it when you see it. It will feel like home. The only alternative to a 30 year fixed mortage is a 15 year fixed mortgage. If you can afford it, buy it and love.

Don’t forget to include taxes and insurance

RE: Sniglet @ 47 –
it looks like you are still heating the universe. That’s why they call it faith.

Are you infering that prices might drop more than 50%, or that people shouldn’t buy even if a 50% price drop wouldn’t cause significant hardship? Or are you suggesting that it is silly for potential buyers to consider the consequences of depreciation?

Sniglet,

I checked out your web site. Kudos on better appearance, but it looks like you are still heating the universe. That’s why they call it faith.