Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

148 responses to “Has the Tide Turned Against Home Ownership?”

These comments are paged! This is page 2. Navigate the pages here:
1 2
  1. whatsmyname

    By iChris @ 98:

    RE: whatsmyname @ 96 -Clearly I don’t get it then, I don’t see how our revenue will cover our debt obligations without the middle class paying the bulk of it. Show me how it can be done mathematically and maybe I will get it. You are placing a lot of trust in politicians to do the right thing at the right time. The bankrupt countries in Europe (PIIGS) were all funding future liabilities with revenues from future productivity, how is that working out for them? I wish I had the optimistic outlook that you do. Taxes will be going up for everyone, not just the rich. Plan accordingly.

    First, you need to differentiate between assets (or investable assets, or even net assets) and cash flow. Do you pay your bills by selling your assets or by using your earnings/cash flow? For nearly all people and governments it is the latter, PIIGS and nonPIIGS alike. The meme starts with this basic asset/cash flow non-sequitor, then compounds it with the unfunded liability nonsense. A liability is simply a recognition of an obligation. I know that I will have to eat food next year – and the year after. It makes sense to recognize that fact. But should I be upset if my checking account only has enough for food this year? Assuming I expect continuing revenues, the answer is no. There is a lot to be argued about our current deficits and spending, but this is simple misdirection.

    You are right about the middle class paying the bulk of it, though. Such is life.

    Rate this comment: Thumb up 0

  2. iChris

    RE: whatsmyname @ 101

    You failed to explain anything new that would ease my concerns. I will continue watching the real estate market from the perspective that I explained in post #5.

    Rate this comment: Thumb up 0

  3. David Losh

    RE: deejayoh @ 79

    From your own definition: Social Security and veterans’ compensation and pensions are examples of entitlement programs.

    We pay into Social Security, so you can take that argument down what ever road you’d like.

    Veteran’s compensation is one of my favorite examples of our lack of entitlements. We can’t even figure out the military, and we are in the process of privatizing that.

    You have no point here. You have nothing to say, and I get that. No you don’t listen to me, be happy.

    Rate this comment: Thumb up 0

  4. ray pepper

    You just cant help people that are unwiling to help themselves.

    Let me just state:

    1. When you choose to BUY and not rent its ALWAYS an investment.
    2. Its taking a minimum of 24 months to foreclose on a property now in King County. Much much longer if the buyer simply attempts Loan Mod.
    3. Please factor in the cost of savings a homeowner can tuck away. It appears here he could save as minimum of 50-60k from not making payments.
    4. I’m here to tell you that Despondent can easily buy a home the day after this one goes back as long as he SAVED THE CASH. Apparently for 180k if not less. But, you MUST save the cash you would have otherwise flushed down the toilet.

    Despondent you will look back to April 2011 and wish you initiated this now instead of continuing to pay. Each and every person I know that has walked said it was the best financial move they ever made.

    Don’t feel you are making a morally correct decision. To even contemplate doing what you are suggesting, with the recent comps that sold next to yours, is sheer lunacy and you deserve to continue to struggle with your financial incompetence.

    I know we spoke on the phone about this and I apologize for being so blunt. But, get your 60k back and don’t be braindead anymore.

    For those who insinuate that I profit from people walking I must contend that is even more insane then Despondent continuing to make payments.

    Good Luck!

    Rate this comment: Thumb up 0

  5. Dweezil

    My own cycle of emotions is an inverse of most people. I had reached despondency at the height of the bubble as people were pricing me out of ever being able to afford a home in Seattle.
    Once prices started to correct, I began to experience hope and optimism.

    Rate this comment: Thumb up 0

  6. Blake

    RE: One Eyed Man @ 99 -I agree, the December capitulation on tax cuts/$900 billion stimulus probably ensured Obama’s re-election and kept our anemic recovery limping along. (But it cost me 5-7% in that week alone in my bond funds!) But I really doubt that in 2012 they will let cuts expire… the 1% rules.Scotsman: “The only politically feasible solution I can see is to debate and agree upon what percentage of GDP will be dedicated to government at the federal level- say 20%.”That’s a prescription for a depression… and “politically” whose ox do you think would be gored? The weak and powerless… Besides, it’ll never happen.When the second economic crisis hits 3-5 years from now, what we’ll need is a true political revolution where the left and right unite and throw the rascals out and let Wall Street and the crony capitalists crash and burn. It’ll be very painful, but necessary. Only then can we move forward.

    Rate this comment: Thumb up 0

  7. whatsmyname

    By iChris @ 102:

    RE: whatsmyname @ 101

    You failed to explain anything new that would ease my concerns. I will continue watching the real estate market from the perspective that I explained in post #5.

    I am not looking to ease your general concerns, or encourage you to buy real estate. I am merely trying to free you from one fallacious argument. I will try to put it in a simplified example for you.

    John graduated from college 6 months ago. He has a $50,000 student loan.
    He got a job right away for $4,000/month. Tax withholding and his part of the benefits package take $1000/mo, leaving him with check for $3000/mo. He has $350/mo student loan payments. He signed a two year lease for a $950/mo apartment. He budgeted $250/mo for the utilities – which has been right on. He walks to work, but he has an old car worth $4,000. He budgets $1,050 for gas, food, entertainment, and has successfully saved $400/month.

    John has 6X400 or $2400 in the bank plus his $4,000 car. His contractual liabilities are approximately $50,000 for the student loan, $17,100 for the remaining 18 months of his lease, $4500 for utilities for the remaining 18 months of his lease.

    $6,400 in assets; $71,600 in liabilities. There is no way his assets can cover his liabilities. Is he doomed?

    Rate this comment: Thumb up 0

  8. iChris

    RE: whatsmyname @ 107

    No, but if he lives in America he’s very fortunate to have a job, if it lasts. His future also looks bleak due to circumstances beyond his control. While he’s saving money every month he can’t escape what is happening to the value of the dollar. Quantitative easing and zero interest rate policies enable wall street to go nuts speculating in the markets. It’s eroding the value of his savings and driving prices up. In 6 months, after higher commodity prices have trickled down to the consumer, he may be constantly over budget for utilities, energy, food, and entertainment. It will all cost more. I hope John doesn’t mind paying more for taxes either, those are coming.

    Rate this comment: Thumb up 0

  9. Scotsman

    RE: whatsmyname @ 107

    Let me step in- we’ll continue with your example. John has $72,000 in debt and $36,000 in net annual income, as stated above. That’s debt to income ratio of 2:1. Yep, he can handle that as many do.

    Now lets look at the national situation. We have $100T in the NPV of unfunded entitlements above and beyond the ongoing conventional expenses of the federal government- you know, things like military, EPA, education, homeland security, etc. The $100T is the equivalent number for John’s debt. He will end up paying more than $50K for his debts because of interest, etc. but the $50K is the NPV- net present value.

    Now let’s look at national income. This year we have actual income of $2T and borrowed “income” of $1.7T for a total federal budget of $3.7T. We can’t keep borrowing for ever, so let’s use the real income- $2.0T. I’ll even give you the benefit of the doubt- let’s assume huge tax increases- 50%- so that now income is $3.0 trillion.

    OK, how does $3.0 trillion in NPV income stack up against $100 trillion in NPV commitments? It’s not even enough to cover the interest at traditional market rates, let alone actually pay some of the capital costs. The debt to income ratio is 33:1 verses the 2:1 in your example with John. Can you see now that this isn’t going to work? People truly fail to grasp the enormity of the problem- as you have so aptly indicated.

    We are insolvent as a country. We will at some point be bankrupt, if not in the traditional sense then through the mechanisms of currency destruction or default. One year, three years, ten years, it will happen. Plan for it.

    Rate this comment: Thumb up 0

  10. whatsmyname

    By iChris @ 108:

    RE: whatsmyname @ 107

    No, but if he lives in America he’s very fortunate to have a job, if it lasts. His future also looks bleak due to circumstances beyond his control. While he’s saving money every month he can’t escape what is happening to the value of the dollar. Quantitative easing and zero interest rate policies enable wall street to go nuts speculating in the markets. It’s eroding the value of his savings and driving prices up. In 6 months, after higher commodity prices have trickled down to the consumer, he may be constantly over budget for utilities, energy, food, and entertainment. It will all cost more. I hope John doesn’t mind paying more for taxes either, those are coming.

    Thank you, the answer was in your first word.

    Rate this comment: Thumb up 0

  11. whatsmyname

    By Scotsman @ 109:

    RE: whatsmyname @ 107

    Let me step in- we’ll continue with your example. John has $72,000 in debt and $36,000 in net annual income, as stated above. That’s debt to income ratio of 2:1. Yep, he can handle that as many do.

    Now lets look at the national situation. We have $100T in the NPV of unfunded entitlements above and beyond the ongoing conventional expenses of the federal government- you know, things like military, EPA, education, homeland security, etc. The $100T is the equivalent number for John’s debt. He will end up paying more than $50K for his debts because of interest, etc. but the $50K is the NPV- net present value.

    Now let’s look at national income. This year we have actual income of $2T and borrowed “income” of $1.7T for a total federal budget of $3.7T. We can’t keep borrowing for ever, so let’s use the real income- $2.0T. I’ll even give you the benefit of the doubt- let’s assume huge tax increases- 50%- so that now income is $3.0 trillion.

    OK, how does $3.0 trillion in NPV income stack up against $100 trillion in NPV commitments? It’s not even enough to cover the interest at traditional market rates, let alone actually pay some of the capital costs. The debt to income ratio is 33:1 verses the 2:1 in your example with John. Can you see now that this isn’t going to work? People truly fail to grasp the enormity of the problem- as you have so aptly indicated.

    We are insolvent as a country. We will at some point be bankrupt, if not in the traditional sense then through the mechanisms of currency destruction or default. One year, three years, ten years, it will happen. Plan for it.

    Ah, Scotty,

    Like me, you sometimes jump too quickly. In my example, we would conventionally consider John’s income to be $48,000, and his debt to be $50,000. No matter, let’s get to the meat of your complaint.

    The $100T (really $113T) of “unfunded entitlements” is really a construct for total spending by SSI, medicare, and GWB’s prescription care. I don’t see anything in the US Debt Clock about NPV’s; and there is certainly nothing in its format to suggest anything but nominal dollars are being used. Of course, I couldn’t find how may years out they are projecting either, so maybe you can help me out there. Whatever the methodology, it really isn’t reasonable to present the estimated costs without any reference to the estimated revenues, as if you are honest, only the difference could really be called “unfunded”. It’s big scary numbers without context, and that’s great for motivating the sheep because they don’t know better. But I do.

    Again, we have real problems here. But we can’t see them better by using a funhouse mirror.

    Rate this comment: Thumb up 0

  12. Jillayne Schlicke

    110 comments? Wow I missed a good one yesterday. IMHO different people are in different phases from denial all the way through hope.

    One of my students summed it up well: “Nobody’s happy right now. Seller’s aren’t happy with the prices and buyers are full of anxiety regarding home values dropping further combined with anxiety surrounding their job and the overall economy.”

    Anxiety…..plus, there is still a lot of denial going on with home sellers “hoping” that we’ve reached the bottom and in denial about values falling further.

    Rate this comment: Thumb up 0

  13. David Losh

    RE: ray pepper @ 104

    Number one Ray is that you are in the business of real estate. It’s easier for you to see ways this could work out. Second is that Desponder has already taken a course of action that financially makes sense.

    He’s saying that in five years he will have taken $300K down to $180K. He has already started the amortization process. It won’t stop. He can at that point stop with the double payments and still be amortizing the loan.

    His rent right now would be about $1200 per month, and he would need to live some place.

    Do the math on that.

    Rate this comment: Thumb up 0

  14. alex

    RE: The Tim @ 63

    It is correct that people don’t sell if they don’t have to. However, I don’t think that act is called “capitulation”.

    Capitulation is bearish.
    Holding on to the property is a bullish sentiment.

    ===============
    ca·pit·u·late
       [kuh-pich-uh-leyt] Show IPA

    –verb (used without object), -lat·ed, -lat·ing.
    1. to surrender unconditionally or on stipulated terms.

    2. to give up resistance: “He finally capitulated and agreed to do the job my way.”

    Rate this comment: Thumb up 0

  15. Scotsman

    RE: whatsmyname @ 111

    ” it really isn’t reasonable to present the estimated costs without any reference to the estimated revenues”

    I didn’t. You need to read up on NPV and how it’s calculated, what it means. In short, yes- it is as bad as my post makes it seem. The income stream is accounted for. And there is no way in hell we’ll ever be able to pay it. That’s what people have been yapping about for a decade or more. But only now, with $trillion deficts as far as the eye can see does it hit home. Boom!

    Rate this comment: Thumb up 0

  16. whatsmyname

    By Scotsman @ 115:

    RE: whatsmyname @ 111 -” it really isnâ��t reasonable to present the estimated costs without any reference to the estimated revenues”I didn’t. You need to read up on NPV and how it’s calculated, what it means. In short, yes- it is as bad as my post makes it seem. The income stream is accounted for. And there is no way in hell we’ll ever be able to pay it. That’s what people have been yapping about for a decade or more. But only now, with $trillion deficts as far as the eye can see does it hit home. Boom!

    I’ve been making a living on NPV’s for 25 years so I’ll skip the lesson. If you can point me to a place on their site that indicates this is net and discounted, I will be happy to put in further energy at testing their methodology. If you are right, I will be happy to join you in the panic room.

    edit: I see that they claim this does take taxes into account. Projection methodology does seem to be a black hole. I’ll keep looking.

    Rate this comment: Thumb up 0

  17. Blurtman

    RE: Hugh Dominic @ 75

    “Now you’ve crossed the line and are providing bad advice.”

    Well, I think the advice I provided was to take a few finance classes. Maybe that is bad advice.

    “(1) that Desponder will not lose any money and is unaffected unless he sells”

    – No one knows if he will inevitably lose money or not if he sells in the future. If he sells today, it seems certain he will lose money. Not sure what “unaffected” means.

    (2) given a longer time horizon, his home value will probably correct itself, so he should not take action in the present

    – No one knows if his house will or will not correct itself over a longer time horizon.

    “Ok, first of all he is affected by the current state of his condo value. That cannot be ignored.”

    – Can’t argue with that since I don’t know what “affected” means.

    “Second, I have no reason to believe that real estate is a good asset to hold right now for a long term gain. That advice is unfounded, and is the misconception that is driving so many owners right now to hang on and hope their values will recover.”

    – OK. Who really knows, though, what will happen in the future? Spot prices are no indication of future prices. I will go out on a limb and say that spot prices are not even an indication of value. They are only a reflection of what you can buy or sell something for today.

    “Third, the present is the only time where action can be taken, by definition. His actions should be guided by his present situation and his best guess at how present action could affect his future. Advice to ignore his present condition prima facie is unfounded and foolish.”

    – You can take action in the present, you can take action in the future. You can’t go back in time, as far as I know, and take action in the past. His actions are guided by his future situation, too, i.e, the five year plan. Who advised him to ingore his present situation?

    – You can’t always get what you want, but if you try some time, you just might find, you get what you need.

    Rate this comment: Thumb up 0

  18. David Losh

    RE: whatsmyname @ 111

    Exactly right, the big scary numbers actually come in increments of five year blocks: http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf

    It’s bad.

    http://capitalismtoday.blog.wku.edu/tag/unfunded-liability/

    What this doesn’t tell you is that it’s not that far off from what is managable.

    Rate this comment: Thumb up 0

  19. Hugh Dominic

    RE: Blurtman @ 117 – “affected” in this case means that his options are limited due to the present market value of his home. He cannot afford a conventional sale because he cannot repay the mortgage in that case. He must stay and pay, or default. Your advice is to stay and pay because he can. And because after a while his condo will rise in value, if he just holds it long enough.

    “- You can take action in the present, you can take action in the future.”

    No, you can only take action in the present, by definition. You can plan for the future, and anticipate taking action, but there is no guarantee that this will work. In this case he plans to drive his mortgage down far enough that he could sell without default in 5 years. That may or may not work out. He could lose his job or values could drop even more.

    In the present, he could choose to default. He could plan to live rent-free for a year. He could plan to take those double payments and put them in the bank. He would probably achieve his freedom in one year instead of five, and have tens of thousands of dollars in the bank too. His credit would suffer, he’d have some risk of the bank going after him. (unless he declares bankruptcy and the debt is legally discharged)

    Or better yet he could buy his neighbors identical condo for $180k and the default on the one that he owes $250k on.

    These are all really good options for Desponder, that could get him to his goal more quickly. I do not agree with your arguments for why stay and pay are better. I will say, however, that the advantage of default shrinks with each payment that he makes.

    Rate this comment: Thumb up 0

  20. Jonness

    It’s quite obvious the desponder bulls have failed to factor in several $trillion in fiscal and monetary stimulus, the GSE takeover, massive shadow inventory, mark-to-market, traditional banking profits in the toilet, and an increasing number of large cap jobs being sent overseas. These folks actually believe the house of cards is real and are banking on a quick return to normalcy. Although I’m not surprised the attitude exists (its the U.S. mainstream consensus), I am surprised by some of the people who have decided to go along for the ride.

    Thinking inside the box leads to a warm fuzzy feeling but seldom represents an accurate viewpoint of reality. Quick, someone call up the NAR and let’s arrange a social.

    Rate this comment: Thumb up 0

  21. Jonness

    By David Losh @ 113:

    He’s saying that in five years he will have taken $300K down to $180K. He has already started the amortization process. It won’t stop. He can at that point stop with the double payments and still be amortizing the loan.

    5 more years of double payments just to break even? That doesn’t sound like a very good deal to me.

    His rent right now would be about $1200 per month, and he would need to live some place.

    He could put all of those double payments into his savings while he lives for 3 years rent free in foreclosure limbo. When the free rent gig is up, he’ll have a nice savings built up.

    Which outcome feels better to him personally is what’s most important here. I know what I would do, but what’s right for me might not be what’s right for him.

    By the way, the above post is unrelated to this one. By “the desponder bulls,” I’m referring to those who believe we have reached the despondency stage of the cycle of emotions.

    Rate this comment: Thumb up 0

  22. Blake

    RE: Scotsman @ 109
    oh gawd… This “$100 trillion in unfunded liabilities” meme is so much BS. I was wondering where it came from and – more importantly – what timeline it is derived from.

    It appears to have originated from a speech by Dick Fischer of the Dallas Fed in May ’08 (and amplified by Bill Walker on LewRockwell.com)
    http://www.lewrockwell.com/walker/walker34.html
    Fischer’s remarks: “Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.”

    Yeah… “over the infinite horizon.” That’s rich…
    A little more investigation seems to show that the numbers were actually derived from projecting over 75 years. Ok, forget for a minute about trying to project 15-25 years into the future, much less 75 years (!)… and forget that they are projecting Medicare to lose $500 billion/year for 75 years (!)… Our economy is $14 trillion now. If it grows at about 2% for the next 75 years it will generate over $2.5 quadtrillion dollars. This $100 trillion in debt would represent about 4% of that economic activity over 75 years.
    Shocking… “There is nothing we can do!! We’re doomed!!”

    This $100 trillion “estimated” is so much BS and not even worth discussing. It is thrown out there by ideologues who have an agenda they want to push using bogus numbers to frighten people.

    ugh… Pete DuPont’s NCPA wrote in Oct’08:
    “To pay promised elderly entitlement benefits to our old folks into the future, we must have $101 trillion in the bank today gathering interest.”
    http://www.ncpa.org/sub/dpd/index.php?Article_ID=17104
    … what idiocy: “we must have $101 trillion in the bank today…”

    About the NCPA, Newt Gingerich says: ““The NCPA generates more analysis per dollar than any think tank in the country. It does an amazingly good job of going out and finding the right things and talking about them in intelligent ways.”
    :-))

    Rate this comment: Thumb up 0

  23. David Losh

    RE: Jonness @ 121

    Look at it from an amortization stand point. If they paid the thirty years on a mortgage it doubles the price. If they pay it off within 10 years it greatly reduces the interest payments.

    He said eight units close in. It depends on the condition of the building, but my opinion is that some close in locations are worth keeping. Just because other people decide to walk away doesn’t make the place a bad investment. Especially in condos many people over stretched.

    Last is that most people do walk away because when you stop paying the collection process starts. It’s the cards, letters, phone calls, people coming to your door to “inspect.” Then you never know what will happen in the foreclosure process. You need an attorney, and should consider bankruptcy. Are you up for all of that?

    I’m just saying that his plan has less flaws than many alternatives, but it does depend on the building.

    Rate this comment: Thumb up 0

  24. One Eyed Man

    RE: Scotsman @ 109RE: Blake @ 122

    Just to relate back to the thread, I still think we’re in the range of “capitulation.” As to the macro factors and how they will affect the cycles of emotion for home ownership, I still think that despite a long history of cronyism and corruption, american capitalism and democracy will benefit from resiliance and Darwinian adaptability to patch up its economic problems.

    Its my recollection that the figure of approx 100T in unfunded entitlement liability came out of the Trustee’s Report for Medicare for 2008 (probably as part of the election debate). I took a look at that report a couple of days ago when the NPV issue was first raised. My cursory review of the report didn’t yield a definitive answer to the NPV issue. It is my understanding that the actuarial reports don’t do NPV, but I think they do consider other factors including projected interest expense, projected revenue growth, etc. The Trustee’s reports are at the following cites.

    http://www.cms.gov/ReportsTrustFunds/

    Here’s an interesting executive summary for the Trustees that seems to say they could increase payroll taxes by about 1% and solve all the problems. I know Scotsman will fume just looking at the names of the Trustee’s. Have at it Highlander.;-)

    http://www.ssa.gov/OACT/TRSUM/index.html

    Caveat: As I’ve said before, I’m personally in favor of doing away with the Bush Cuts for those with incomes over 250K and decreasing (limiting and means testing) certain medicare benefits. As I’ve also said before, my father has probably received over 250K in medicare and tri-care covered health care in the last 5 years. I am one of 3 kids and thanks to the american taxpayer, I’ll receive an additional 80K in inheritance someday without contributing anything toward the wellbeing of myself or society at large. Thank You! And thanks for the 3DTV tax cut dollars too. We got Tron in 3D this week and I’ll probably watch it tonight. You’re Bush Tax Cuts at work!

    Rate this comment: Thumb up 0

  25. Blurtman

    RE: Hugh Dominic @ 119 – You are attributing advice to me that I did not make. Please re-read my original post. I observed that Desponder was reacting to a present time situation, and to self-imposed constraints. If there is any advice in my post beyond taking finance classes, it is to consider multiple future scenarios which the farther out, the more uncertain they become. I also observed that as Desponder has shown to be fallible in prediciting future RE prices in the past, he may be fallible again. The action he has taken now may prove to be wrong, right, or neutral, based upon his criteria. One can certainly take action in the future. In 5 minutes I wll have another cup of coffee.

    Rate this comment: Thumb up 0

  26. Scotsman

    RE: Blake @ 122

    You clearly don’t understand NPV either. The total paid out over the years will be $100s of trillions, not just $100 trillion. The last quote about needing $100 trillion in the bank now is the indication that this number is a net present value calculation. $100 trillion now, in the bank, is in essence the annuity calculation- the amount need now to insure that both interest and capital paid out together over time will be adequate to cover the expected costs. And we don’t have anything close to $100 trillion laying around- it’s close to the total wealth of the world.

    If you don’t like the 75 year calculation, take comfort in the fact that the 30 year number is closer to only $60 trillion. A funny thing about NPV calculations is that those years after 20 have a very small impact on the current value, and years after 40 are almost insignificant, so the 75 year horizon means very little more than the 30 year horizon.

    For those that don’t know, NPV is essentially a reverse savings and interest problem. But instead of asking if I have $10k in the bank now earning 6% interest, how much money will I have in 20 years, it asks the reverse: If I have a bill for $40k coming due in 20 years, how much do I need in the bank now, earning what interest rate, to make sure I have the cash to pay it when it comes due? It is the current value of money in the future, assuming an interest rate or more properly discount rate.

    But let’s say the calculation, done by licensed actuaries, is way off. Let’s assume the NPV is only $30 trillion. Can you pay off a $30 trillion (current value) debt with only $ 2 trillion dollars (current federal revenue actually collected) in income? No, you can’t- you can’t even pay the interest at traditional market rates. Same question, but with realistic numbers- $60T and $2T- off course is even worse.

    Rate this comment: Thumb up 0

  27. Scotsman
  28. David Losh

    RE: Scotsman @ 125

    You and deejayoo shamed me into reading the total CBO projection, it just isn’t that bad: http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf

    Just to be a little more clear, if I am paying my bills from the interest form the principal I have in the bank, is my cash flow considered extra income?

    Actually isn’t NPV more of a loan modification tool?

    Rate this comment: Thumb up 0

  29. Scotsman

    RE: David Losh @ 127

    For starters, that particular CBO projection has been pretty heavily discredited. Do you think we’ll see 8% unemployment by the end of this year with it continuing to fall to 5%? Not many do. The recovery they were banking on when those projections were made hasn’t happened.

    What ends up in a NPV calculation depends on the objective. It is a tool that allows you to compute the values through time of projected income streams and expenses, then bring them both down to a number as of today and see how they compare. Will the income stream be enough to cover the expenses? What happens if we change expectations about inflation, interest rates, etc? All of those variable can be incorporated into the calculation. But the bottom line is you end up with two numbers- one for income, one for expenses, and get to see if they come close to matching up. In the case of projected federal tax revenues and expenses, they don’t even come close to matching up- the expenses dominate by some factor greater than 20 in every analysis I’ve seen. What that says is you can’t pay today’s $20 invoice with the $1 you have on hand. That people are so unwilling to believe it’s that bad when the Fed governors, past comptroller of the treasury, and others who have the training and access to know say it is astounds me. We have been lied to for years by pandering politicians and now the tab is coming due.

    Sadly, I don’t have to prove my case or anyone else’s to the readers on this board. It will unfold before our very eyes over the next decade, if things don’t collapse before then. It’s as simple as figuring out how long you think the world will let us finance $trillion+ annual deficits before they up and walk away with their money, because we are out of our own, except for that which we are willing to print up.

    Rate this comment: Thumb up 0

  30. David Losh

    RE: Scotsman @ 129

    This is why I spend more time with the debate about currencies. The dollar is falling the Euro is rising, and the Yen is dead. What do you think all that means in the real world?

    The bill is already due. You don’t need to project another decade ahead. We owe $14Trillion, we take in $2 trillion, and operations are $2.4 to $2.7 trillion.

    We could have the debt servicing debate again, but that is money we pay to ourselves, that we charge ourselves. In other words I’m really not looking at a cash flow debate.

    My point was about our lack of entitlements: http://www.politicususa.com/en/debt-social-programs

    We pay about the same as Australia, and France for social programs but our deficits far exceed theirs.

    The point that you are also missing is that we pay tax dollars to benefit a wide variety of private enterprise, oil, just to name one. Banking would be another pet peeve of mine. You mentioned the EPA which has probably created, generated more profits for major corporations, then turns around, and hands out tax credits.

    I don’t want to fill this thread with economic mumbo jumbo about nothing. It’s just important to keep a perspective that if the United States ever wanted to cure the deficit they would have to include the major corporations. Talking individual entitlements is a non starter.

    Rate this comment: Thumb up 0

  31. whatsmyname

    RE: Scotsman @ 129
    I got to comment on two things you said:

    “What ends up in a NPV calculation depends on the objective.”

    You said it brother. And that’s why if you don’t know the assumptions behind an NPV number, then you don’t know whether or not it is garbage. I asked debtclock.org to provide the assumptions behind their numbers. I haven’t heard back yet, but it’s Easter weekend.

    The CBO report, for all its weaknesses, projects social insurance tax receipts of $11.8T over 2011-2020 (page 8), and SSI, Medicare, Medicaid expenditures of $20.4T (page 48) over the same period for an $8.6T shortfall over the 10 years. That’s gross cumulative, not discounted. That’s bad news, but I’d sure like to know how we get from there to $113T on an NPV basis.

    Notwithstanding, there are big problems need to be solved, and hopefully soon. People who make this an issue should also be focusing on the healthcare aspect of this. Should your numbers hold up to analysis, the healthcare entitlements are 90% of the problem.

    “In the case of projected federal tax revenues and expenses, they don’t even come close to matching up- the expenses dominate by some factor greater than 20 in every analysis I’ve seen. What that says is you can’t pay today’s $20 invoice with the $1 you have on hand.”

    The practical NPV of my mortgage is easy to figure out because the all the key elements are contractual. (Yes, I know true NPV would be affected by potential rate arbitrage, but that is not significant for this exercise) My NPV is the current balance of my mortgage. However, doing the NPV work does not make it today’s invoice, and I don’t need to pay it with my $1 in hand. Nor do I need to have an equivalent financial asset in hand today since I am going to pay out of income from work rather than income from portfolio. This is simply not a valid argument. I will grant you this doesn’t work so well if you run current spending deficits every year. One more reason the W tax cuts need to expire.

    Rate this comment: Thumb up 0

  32. Macro Investor

    By The Tim @ 63:

    By alex @ 33:
    I think the meaning of “Capitulation” is something else. It doesn’t mean that people give up doin business. It means that sellers – specifically sellers – give up hope that the value will ever go up, and start to sell in a hurry – at any price.

    I disagree. Why would they sell if they don’t really have to? Everybody needs to live somewhere and if a potential seller realizes that there’s no way they’ll be able to get the price they wish they could get for their house, why not just keep it (assuming they can afford it)?

    Alex is correct. You may “disagree” all you like, but you are forgetting this is a social science model which someone researched. You don’t get to change the published definitions of the terms. They are easy to look up:

    “The Downturn

    • Anxiety—The market begins to dip, generating feelings of anxiety (Point 5).

    • Denial—The market continues to fall, and the investor goes through denial with such thoughts as “It’s ok, I’m in it for the long run,” and “This is just a temporary setback,” (Point 6).

    • Desperation and Panic—As the market cycles lower still, feelings of desperation and panic ensue (Points 7 and 8, respectively).

    • Surrender [capitulation] —Panic eventually gives way to surrender, when the investor thinks “How could I have been so wrong? I just can’t handle being in the market any longer. I can’t take any more losses,” (Point 9).”

    Rate this comment: Thumb up 0

  33. Macro Investor

    By Jillayne Schlicke @ 112:

    110 comments? Wow I missed a good one yesterday. IMHO different people are in different phases from denial all the way through hope.

    One of my students summed it up well: “Nobody’s happy right now. Seller’s aren’t happy with the prices and buyers are full of anxiety regarding home values dropping further combined with anxiety surrounding their job and the overall economy.”

    Anxiety…..plus, there is still a lot of denial going on with home sellers “hoping” that we’ve reached the bottom and in denial about values falling further.

    Sorry, Jillayne. Like Tim you are forgetting this is not just some pretty picture that we get to attach our own comments to. It is someone’s research, and he defined the terms in his paper. If you look again, “hope” is after the price curve has started going up. That is what that line represents.

    Rate this comment: Thumb up 0

  34. One Eyed Man

    RE: whatsmyname @ 131

    From page 198 of the 2008 Annual Report of the trustees, this is the NPV of the 75 year deficit for Social Security and Medicare:

    “From the 75-year budget perspective, the present value of the additional resources that would be needed to meet projected expenditures, at current-law levels for the three programs combined, is $42.9 trillion.69 To put this very large figure in perspective, it would represent 5.4 percent of the present value of projected GDP over the same period ($797 trillion).”

    http://www.cms.gov/ReportsTrustFunds/downloads/tr2008.pdf

    The reference to 3 programs is that SSI is one program, medicare hospital insurance called HI is a 2nd program, and medicare parts B and D is a 3rd program.

    The above NPV uses a middle range of assumptions and is also considered to be low because it has some reimbursement caps on doctors fees that were not expectedf to survive. Scotsman’s numbers probably come from sources that use the infinite (not 75 yr projection) and probably use more negative financial assumptions.

    Note that the numbers drop for the NPV in the 2010 Trustee’s Report because of the Healthcare Act.

    Rate this comment: Thumb up 0

  35. Scotsman

    RE: whatsmyname @ 131

    Tax receipts are completely dependent on employment numbers. If the unemployment assumptions are obviously going to be a miss after just one year, why continue on with the analysis? How valid can the other numbers be?

    In all honesty I don’t think we’ll get to the point where projected expenses 10 years out are an issue. With current deficits running 40+% of expenses and no reductions in sight this game will end long before your or even my Medicare/etc. expenses get to be an issue.

    Rate this comment: Thumb up 0

  36. David Losh

    RE: Scotsman @ 135

    You can’t get away from paying Social Security, or Medicare. As stated in the other thread corporate profits are up 29%. The unemployment figures can’t last forever, we have a cap here that some other countries do not. So people need to eat, we have no social safety net so that leaves private enterprise. In business you have to pay Social Security, and Medicare no matter what.

    Rate this comment: Thumb up 0

  37. JVP

    I’d like to read the source material for this chart of market emotions. Does anyone know the original author/researcher? Google didn’t get me anywhere useful.

    Rate this comment: Thumb up 0

  38. Choc Donut

    With the vast majority of boomers still to unload their properties to retire, and the fact that they own much of the best properties, other than that already inherited by genxers etc, we’ve only just begun to die. Plus throw in US middle class and manufacturing decline, a nutcase republican party that won’t face the reality of higher taxes, and the fact that foreign buyers like CHina, and Bric commodity economies are in a bubble, and the effect of all this has on a younger generation who don’t want to commute, and want to stay mobile, and see housing as a liability (which it has also become with rampant regulations and zoning and taxes and building costs), housing will NEVER recover, and if it does, give it at least ten years. Fact is, we’re still headed for such a bloodbath, including inter-generational conflict over jobs and money, who knows what comes out the other side.

    Rate this comment: Thumb up 0

  39. PensivePete

    tim, we (the PS real estate market) is moving towards capitulation.

    by and large, the majority of buyers, sellers & financiers don’t agree on where the equilibrium should be.

    Rate this comment: Thumb up 0

  40. Blurtman

    RE: Choc Donut @ 138 – There will always be a housing market. Change is a constant.

    Rate this comment: Thumb up 0

  41. David Losh

    RE: Blurtman @ 140RE: Choc Donut @ 138

    Here in the Pacific Northwest we must know that some industries change forever. Fishing, and timber are industries we relied on for generations that are now changed.

    Housing is one of those industries that has changed from an economic leader to a constant.

    What was interesting is about the baby boomers who will be selling for retirement. That’s really true, that’s another shoe to drop.

    Rate this comment: Thumb up 0

  42. Blurtman

    RE: David Losh @ 141 – Supply and demand. New equlibria until they change again.

    Rate this comment: Thumb up 0

  43. David Losh

    RE: Blurtman @ 142

    I don’t think so any more. The housing market is way over built, globally. We also have the ability to prefab housing and deliver it anywhere, anywhere. We can stack, squeeze, densify, or sprawl it makes no difference any more. We are an era of planned communities.

    The next generation however isn’t going to care. We called the Depression Era family a mobile society with the automobile, but the internet makes us that much more mobile. We can go anywhere, we can build anywhere, we can have business globally.

    So I don’t think the supply, and demand issue is relevant any more.

    Rate this comment: Thumb up 0

  44. Blurtman

    RE: David Losh @ 143 – Folks still prefer housing to car camping wherever they live, except for the true nomads. And somebody/something owns the homes. The bubble likely contributed to overbuilding, the crash perhaps to underbuilding. Meanwhile, the human race continues to reproduce. New equilibria are continually established. Right now, in the USA, it appears that prices continue to head down. Since I don’t think prices can go negative, a new bottom, a new static equilibrium, will eventually be reached. And prices might be flat for decades thereafter. Or they might not.

    Everyone can speculate to their heart’s content, No one really knows.

    Rate this comment: Thumb up 0

  45. Kary L. Krismer

    RE: Blurtman @ 144 – I wonder how much the tax credit resulting in a second period of overbuilding?

    Rate this comment: Thumb up 0

  46. David Losh

    RE: Blurtman @ 144

    Yes we do. We’ve seen it before. This is a dead issue. The price may stay as a constant, but our willingness for debt is greatly diminished.

    We use less lumber, we eat less fish.

    Rate this comment: Thumb up 0

  47. whatsmyname

    By Scotsman @ 135:

    RE: whatsmyname @ 131

    Tax receipts are completely dependent on employment numbers. If the unemployment assumptions are obviously going to be a miss after just one year, why continue on with the analysis? How valid can the other numbers be?.

    This is why I say if you don’t know the assumptions, you don’t know if your number is garbage. At least we can test those numbers. We still have no idea what’s behind the $113T number. What makes that credible? OEM posted a 2008 trust fund report at #134 with a $42.9T NPV.

    “In all honesty I don’t think we’ll get to the point where projected expenses 10 years out are an issue. With current deficits running 40+% of expenses and no reductions in sight this game will end long before your or even my Medicare/etc. expenses get to be an issue. ”

    Partially agree. This won’t go to the distant end point. Changes have to happen, and they will. (What would happen to these numbers if our medical costs were cut to those found in most of western society?) Not sure why the rush to “end it, not mend it”. I also have trouble with the undifferentiated lumping of SSI and the medicare/medicaid programs. How many people know that SSI is 10% of the problem and the medical is 90%? A lot more heat than light here.

    Rate this comment: Thumb up 0

  48. Seattle Bubble • Top 10 Most-Commented Posts of 2011

    [...] 147 comments, 04/21: Has the Tide Turned Against Home Ownership? [...]

    Rate this comment: Thumb up 0

These comments are paged! This is page 2. Navigate the pages here:
1 2

Leave a Reply

Do you want a nifty avatar picture next to your name, instead of a photograph of Tim's dog? Just sign up with Gravatar, and make sure to use the same email address in the form below. It's that easy!

Please read the rules before posting a comment.

You have 4 comments remaining on this post.

Archives

Find us on Google+