Could This Be the Bottom? (agreement, historical, recession, cost of living)

[mojo_1979]

Originally Posted by Humanoid

So far the FED hasn't "printed" any money this is a inflationista myth. Whether they do in the future or not is yet to be seen, but Frannie Mae going under would be highly deflationary, that is after all why the they would "print money" in the first place. Anyhow, the money supply is contracting that smells of deflation not inflation.

If you think the money supply is contracting then you do not understand economics or the fact that the entire money supply, as measured by the no deceased M3, has been and is still continuing to grow at a double digit rate.

And the FED has indeed printed money "out of thin air". Here is a very simplified explanation of how it works...

Our government collects x in taxes but it spends much more than that. It spends x+y. Where does that extra 'y' come from? The government sells bonds to foreigners and the FED. Yes, the FED buys and holds government bonds... The government hands the FED a bond and the FED hands them a fat check of "new" cash that it just created from nothing.

Hence, the money supply has just been expanded and the value of all dollars in circulation has just been reduced by inflation.

Sure, housing prices are going down but what about the things people actually need? Food and energy are going through the roof. You need to realize that you can have runaway inflation on food and energy and other commodities while at the same time having asset deflation that drags down the value of things like housing. It's simple logic really, if somebody now spends 3x more on food and energy and other consumer necessities, they don't have as much money to spend on a house or a boat or other big-ticket items.

[chuck22b]

I think your intelligent, but you seem to see things one sided.

Underlying a lot of these financial instruments are collateralized debt... ie, securitized mortgage obligations. So, where are these debts coming from? In spite of how mixed up and jumbled up and twisted, underlying a lot of these "instruments" is peoples' ability to pay. If and when people are able to pay, then the amount of leverage a bank or institution holds at that level would make sense. So, when things get affordable, and people are able to pay... then that level of leverage for the banks would make sense (ie the level of risk vs. the amount of interest for investors etc is balanced).

Banks will always be highly levered, that is how they make money. But what will change is how much leverage they use. Of course things aren't going to be the same as they were.

Currently things are working on both sides of the equation, Banks are deleveraging at a rapid pace, and people are starting to live within their means (smaller cars, driving less, going out less, etc.). The balance will be met somewhere in the middle ie, stabilization. Like I said, energy prices and jobs will help out on the people side of the equation and on the Bank side when investors feel comfortable investing/funding/buying securities (which could only happen if they see that people are able to pay - ie the risks are acceptable).

Originally Posted by Humanoid

Sooner or later you're going to have to face the fact that you are going to lose a lot of money on the home you've recently purchased. Next year its going to be much harder to deny.

Actually, I'm glad we purchased... if things get as tight as you say it's going to be, then rates would be quite a bit higher (probably more higher than the 7-8% people keep on talking about) and it would be very difficult to get a loan or there would be a lot more overhead (ie, more fees, etc.). Like you and I agree, it'll be those with substantial cash holdings holding the cards. So, the ability for the average Joes, or middle class to purchase a home will shrink.

I'm just glad that we were able to get in on something we can afford before the window closes and while new homes are still available. Considering that builders already have negative profit margins, if houses drop a lot more... then there is no profit incentives to build and new housing stock will diminish (there is a reason why there is very few to no houses made during the early 90s). Therefore like I said, the upper classes and investors will take advantage and rent to those that can not get a loan. Rental prices is based on supply and demand. If average Joes can not purchase... they will have to rent (ie higher demand)... meanwhile the amount of housing stock shrinks (no profit motives). You figure out what happens when demand outweighs supply on rents.

*hint: The rich/investors would purchase cheap housing/rental units while leasing out to the average Joes.

Humboltd1 from what I understand is building up his cash reserves so he'll be one of those rich/investors.

-chuck22b

[k374]

The Fed is running the printing presses at full throttle throwing any sense of caution to the wind. This has been stated time and again not only by economists like Roubini, Schiff and Shiller but also investors like Buffet and Rogers.

Infact, Europe and us have the same inflation problem but the ECBs monetary policy is different from ours? Why? Not only the ECB, even India's RBI has been raising interest rates while our Fed has gone on a lowering spree. Inflation is the bigger problem here because once it gets out of control it can become very dangerous. We have a very unique situation now in the US, due to global wage arbitrage there is inflation without growth in income.

[Humanoid]

If you think the money supply is contracting then you do not understand economics or the fact that the entire money supply as measured by the no deceased M3, has been and is still continuing to grow at a double digit rate.

Of course, because I disagree with you I don't understand economics. Needless to say M3 is not the way you measure inflation, but apparently you haven't looked at want its doing lately:

http://www.shadowstats.com/alternate_data
Some key statistics

As can be seen ALL measures of the money supply are down. So much for inflation. Also, much of the increase in 2007 (of M3) had to do with people moving funds into money markets and other save heavens.

Sure, housing prices are going down but what about the things people actually need? Food and energy are going through the roof.

Increases in food and energy prices is not inflation, its a possible effect of inflation. Since all measures of the money supply are down, we can role out inflation as the cause.

The Fed is running the printing presses at full throttle throwing any sense of caution to the wind.

As measures of M0 show...this isn't the case. But this isn't even worth talking about, I should have not opened this can of worms.

[Humanoid]

If and when people are able to pay, then the amount of leverage a bank or institution holds at that level would make sense.

First I would like to note, this isn't just about housing anymore. Commercial loans are going south very fast as commercial real estate was overbuilt, credit cards etc etc. Saying that "When people can afford to pay, then the leverage will make sense". Really says nothing at all, its tautological. The problem is the only way people are going to "afford to pay" is if trillions of dollars magically materialized. This is the problem so much credit was available that there was no way it was going to get paid back.

The balance will be met somewhere in the middle ie, stabilization.

This is just saying the obvious. The economy will stabilize...but will we be in a depression when it does? That is the more interesting question.

Banks are deleveraging at a rapid pace

I should note, the biggest problems aren't at banks per se. They are with large investment firms (e.g., Bear Sterns). The banks that are having trouble are the ones that 1.) Own a lot of the exotic crap (CDO etc etc), 2.) Are stuck with a lot of crappy loans on their balance sheet. Not all banks are having trouble, in fact most are going to be okay. Its just that some rather large ones are likely to collapse (e.g., Wamu).

Now, soon banks with a lot of commercial loans (often smaller regional banks) are going to have problems too.

if things get as tight as you say it's going to be, then rates would be quite a bit higher (probably more higher than the 7-8% people keep on talking about)

You figure out what happens when demand outweighs supply on rents.

The problem with your thinking here is you are assuming everything stays the same except the demand for rentals. But that isn't what is going to happen under the situation we are discussing. The price of rentals isn't going to go up if deflation takes hold as people will simply not have the money for it. There are always alternatives:

- Living in an RV
- Living with relatives
- Living in a tent
- Living in larger groups then you normally would.

This is not to mention that if this was to happen the banks would be holding a massive number of REOs. At that point they would be likely to start renting them out until they could sell them.

hint: The rich/investors would purchase cheap housing/rental units while leasing out to the average Joes.

Again, you are ignoring the fact that if given situation does occur it will be highly deflationary. It should also be noted that your big investors have no interest in owning a bunch of houses to rent out. They will buy/build apartments, commercial real estate and other property that typically does better investment wise than individual residences. But we don't even need to pontificate about this, we can just look at the depression. What you are describing simply didn't happen during that period, despite the fact that there were many investors with loads of money. Nor has it happened during severe-recessions. And in all cases the reason is the same, the environment that causes the economic problems makes it a bad environment for real estate investment.

Humboltd1 from what I understand is building up his cash reserves so he'll be one of those rich/investors.

No, he will require a loan just like the average joe. He does not have the cash to purchase a property with. In fact the average joe is much more likely to get the loan than he is, as loaning for personal residence has always been less risky than to investors.

[Humboldt1]

Here is something you won't learn in the classroom or from reading articles.

Rents in affluent suburbs where homeowners cab afford to hold on until they sell will possibly go down as there are more rentals units on the market as more of these homeowners become accidental landlords.

You will also see similiar effects in downtowns with overbuilding of condos leads to oversupply of units that are converted to rentals when they don't sell. We are seeing this is Miami and will see this in Chicago in the future to a lesser extent.

In Itasca I have seen this first-hand as I had hoped to increase my rent this year but am not able as there are a number of similiar units for rent. Several of these units are listed for sale. Granted, I can do 1 and 2 year leases while they are mostly doing month-to-month but this still cuts into my renter pool.

In less affluent areas, borrowers have less stellar credit and will be foreclosed upon before they can rent out their places. Many who were putting 0 down to buy are now not able to buy now, forcing them to become renters. This bodes well for me raising rents in Humboldt Park (gentrifying Chicago neighborhood).

Humanoid,

I agree with you that rents could go down, but only for certain areas. Outside of my neighborhood falling into total ghetto, how would rents be reduced for my Chicago property? Remember, we also just more than doubled our property taxes (totally sucks) which makes it even harder to buy. I simply passed it on in the form of higher rents.

[Humanoid]

how would rents be reduced for my Chicago property?

Do you know what deflation is? Don't talk about real world experience, because both of us are too young to have it. In fact things have been relatively rosy since we've been around. Please understand that I'm talking about the risk of deflation not the supply/demand issues created by foreclosures. Some rather deflationary are events happening, honestly its all a bit scary. Whenever deflation takes hold of the economy as it did in the depression is yet to be seen. But even without the extremes seen in the depression, rents will drop with deflation. If people can't afford the rents how are you going to raise them?

BTW, IndyMac just collapsed. This may be the most expensive bank collapse for the FDIC...until of course WaMu falls.

[jimj]

Run for the hills!!! We're all doomed, doomed I say!!!! Massive bank failures, chaos in the streets, looting when people's money is worthless and it's all the governments/rich peoples fault. It's a mass consperacy by the gentry to take over the U.S. (yet again)!!!!!
Food will be impossible to find due to fuel shortages and if you do find it you won't be able to purchase it, and if you do by chance get some food you'll have to take it back to the bridge you now live under since all the financing banks have gone belly up because they can't complete transactions.
Start stocking up on flour,rice,and cereal and lots of canned goods. Plant a garden and get some dried meats. Start hoarding gold and silver (money will be worthless) as well as generator fuel and batteries. Prepare for rioting in the streets!!!!!!
Oh wait, sorry, that was the advice from the Y2K crowd, wrong disaster, but it seems the same advice....

[KCfromNC]

Originally Posted by Humboldt1

I agree with you that rents could go down, but only for certain areas. Outside of my neighborhood falling into total ghetto, how would rents be reduced for my Chicago property? Remember, we also just more than doubled our property taxes (totally sucks) which makes it even harder to buy. I simply passed it on in the form of higher rents.

If prices continue to go down and an investor grabs a neighboring building for 10-15% less than you purchased yours for, he could possibly afford to undercut your rents to get tenants. Renters are not going to care that you need them to spend more, they (like everyone else) are just looking for the best deal.

Not saying this will happen since I really don't know the details of your neighborhood, but it doesn't seem crazy to think that someone could duplicate your particular investment strategy but start with a lower initial price.

[Humanoid]

Oh wait, sorry, that was the advice from the Y2K crowd, wrong disaster, but it seems the same advice....

Nobody has said anything like this on the thread. What exactly is your point?