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Pray For Inflation?

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USPAP Compliant

Elite Member
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Jan 15, 2002
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North Carolina
Add another 15-25% of "inflated appraisal value" to a 100% mortgage and these numbers get really crazy.



Leveraged Homeowners
Should Pray for Inflation
By JONATHAN CLEMENTS
Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online


Message to homeowners: Pray for inflation.

To be sure, low inflation has been a bonanza for the housing market. The accompanying decline in mortgage rates has allowed folks to buy bigger homes and to slash their monthly mortgage payments by refinancing.

But low rates have also encouraged many homeowners to overdose on mortgage debt, leaving them with precious little home equity. For these folks, renewed inflation could be their financial salvation, allowing them to rapidly build home equity, while stagnant inflation or even deflation could be a disaster. Puzzled? Bear with me while I explain.

Drowning in Debt: According to the Federal Reserve, mortgage debt jumped 12.4% last year and has climbed 9.7% annually over the past five years.

Low mortgage rates have made all this borrowing not only possible, but also necessary. The reason: Low rates have fueled a sharp rise in home prices, which are up 39% in the past five years, according to home-finance corporation Freddie Mac. With houses increasingly expensive, many home buyers have had no choice but to borrow more money.

The surge in mortgage debt also reflects a growing fondness for second mortgages and cash-out refinancings. As homeowners have refinanced to lock in lower rates, they have taken the chance to cash out home equity, which is then lavished on home improvements, new cars and goodness knows what else.

The problem is, all this debt eventually has to be repaid. As I have noted in earlier columns, it's awfully tough to retire in comfort if you still have to make monthly mortgage payments.

Which brings us back to inflation. To understand why the inflation rate is so critical, check out the accompanying chart. As you will see, home prices have tended to track inflation closely.

But in recent years, the link between home prices and inflation has broken down. In 2001 and 2002, home prices surged 7.5% a year, while annual inflation muddled along at just 2%.

What happened? "Cheap and easy money has driven up demand," explains Chris Mayer, a real-estate professor at the University of Pennsylvania's Wharton School. "But the supply isn't there. In many parts of the country, it's difficult for builders to respond quickly to market signals. Building is not keeping pace with demand."

Still, Prof. Mayer expects the historical pattern will reassert itself, with property prices once again closely tracking inflation. As he notes, there's a good reason this pattern exists. Incomes tend to rise with inflation. That means people can afford to pay more for houses, thus helping to propel home prices higher.

Inflating Your Gains: That still leaves us with a key question. Why is higher inflation better? Suppose you have a fixed-rate mortgage. If inflation picks up, you are likely to end up with more disposable income, because your salary will rise, while your mortgage payments will stay the same.

But there's another, more critical reason to root for higher inflation. High inflation can do wonders for your home equity. Let's say you bought a $200,000 house with $10,000 down, borrowing the other $190,000 through a 30-year fixed-rate mortgage with a 5.5% interest rate. Over the next three years, inflation bubbles along at 6% a year and home prices follow suit.

Compound that 6% over three years and your home would be valued at $238,200. Meanwhile, over the same stretch, your monthly mortgage payments would have trimmed your loan balance to $181,900.

That means you now have $56,300 in home equity, up from $10,000 three years earlier. What if you suddenly had to relocate? Even after paying a 6% real-estate-brokerage commission on your home's $238,200 sale price, you would still be left with $42,000. That's plenty of money to put down on your next home.

Now, imagine the same scenario, but this time there's modest deflation and home prices fall 1% a year, so that your house is valued at just over $194,000 when you go to sell three years later. After deducting the $181,900 still owed to the bank and a 6% real-estate commission, you would walk away with just $500.

"You either can't move or you move with very little equity, which means you could end up being a renter again," says Douglas Poutasse, chief investment strategist at AEW Capital Management, a real-estate investment adviser in Boston.

Of course, if we really did get zero inflation or even deflation, there would be a silver lining. Interest rates would probably decline, allowing folks to refinance and thereby trim their monthly mortgage payments. But if you haven't got much equity in your home, you might have a tough time finding a lender who will let you refinance.

Admittedly, all this is unlikely. With the federal government running huge budget deficits and the economy apparently set to recover, renewed inflation seems far more likely than deflation.

Still, I think it is wise to be cautious. To that end, make a decent-size down payment next time you buy a house. Avoid second mortgages and cash-out refinancings. Consider making extra principal payments, so you pay off your mortgage more quickly. In a weak housing market, your best defense is a healthy amount of home equity.


-- Mr. Clements writes the Getting Going column for The Wall Street Journal Online. WSJ.com subscribers can view past columns in the Getting Going archives.
 

Austin

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Virginia
You thought the New York Times had problems, where did the Wall Street Journal find this halfwit?
I wonder if idiots like this don’t realize the “UNINTENDED CONSEQUENCES” of this inflating of real estate prices? Built in inflation is like stealing from the next generation or more specifically from your children. When real estate prices go up faster than wages don’t these idiots see that people are losing disposal income? There was a newspaper story posted on this forum last week that listed the hottest inflation areas in the country at around 10% per year. How many people do you know that has a disposal income that goes up at 10% per year? Don’t these idiots realize that this inflating of home values is destroying the American competitive position in international trade? How can an American worker compete with a Chinese worker when the American has to have a $75,000 minimum mortgage just to have a place to live not to mention the insurance, energy cost, etc. Instead of praying for inflation we should be praying that idiots like the author of this story find the other half of his brain and look at both sides of this problem, and it is a problem. It is fools gold. The largest company in my home town is Dan River, Inc., one of the country's largest textile firms. They announced this week that they are closing two plants, one in SC and one in GA costing 630 jobs. Why? For reasons I just cited; they can’t compete because labor cost are to high and the principle reason labor cost are to high is the cost of living in this country the chief expense of which is over prices housing. If you want to keep on selling your children into poverty go for it, keep adding fuel to the fire with time adjustments and facilitating the scam.
 

George Hatch

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California
Austin,

I agree with you that hyper-inflation (above and beyond COL or CPI increases) can have long term negative consequences and at this rate our children will pay the price. When an individual's personal home is viewed primarily as another source of income rather than simply a home, the long term implications for the population as a whole are staggering. You hear stories of how some Japanese homebuyers are forced to get into such long term financing that their homes won't be paid off for at least two generations. Meanwhile, we have homeowners here who are so short sighted that they are cashing out their equity for frivolous uses and thereby engendering more long term debt just for the short term fix. In effect and on a long term basis, these folks are doing little better than renting their homes from the banks that hold their mortgages. It's not sustainable and it must self-correct, sooner or later. Crazy stuff.

Which is how I interpret this article's theme. I don't see this author as being a half-wit at all. He has pointed out basically the same thing you have. Merely reporting on inflation, its causes and consequences does not contribute to it; just the same as ignoring it doesn't make it go away.


George Hatch
 

Austin

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Virginia
George:
You said, “inflation beyond the CPI.” That implies that the CPI is a fixed number, and as you imply it is A FIXED NUMBER, just like the whole economy is a fix.” The CPI is fixed right at 2.3%, the perfect balance to keep the scam running, fool the guys down at the union hall that think their union is getting them a raise when in fact they are losing ground every year, keep the Realtors & bankers in business all based on cashing in on the FOOLS GOLD scam to expand the economy with artificial growth bought and paid for with the poverty of the next generation. There is a time limit on this type scam, and time is about up. Basically what you are saying is: Sure we are stealing from the next generation, but if we do it lower it will take longer and by the time it happens we will all be dead and they, the next generation, can worry about it them. I bet you not one person read that story and came away seeing the underlying danger. They are probably all on their knees praying for imflation and the revival of the Democratic Party the father of all scams because that party is itself a scam.
 

George Hatch

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Austin,

I absolutely gotta hear how you got the implication that I said any measures of, or rates of, inflation are fixed. In any way.


George Hatch
 

David C. Johnson

Senior Member
Joined
Jan 15, 2002
Ummm....

Speaking of "scams," what we have is an example of how the Bush Recovery & Reallocation Plan for moving existing and future wealth from the middle class to the upper and super-upper classes is scheduled to continue:

Yes, the country is due for recovery. It was SO DUE for such recovery that even by largely sabotaging it's long-run benefit by creating outrageous deficits (at a time of recent previous "surpluses," no less) via war spending and overseas reconstruction cost spending, and also via outrageous tax giveaways, it will STILL recover, just NOT NEARLY as well. However, the socioeconomic class that will benefit are those poised with existing massive passive income generating potential, the wealthy and the super-wealthy, via EQUITY STOCKS.

The stock holdings of the middle class has been greatly reduced in recent months as it was necessary for much of it to be sold-off for living requirements (including housing), so recovery of the stock market will benefit them MUCH LESS -- they simply have little appreciable stock in the market to be able to watch it rise in value. The wealthy realized lower stock values like everyone else recently, except there was NO CONSEQUENCE to them WHATSOEVER, as it was all "on paper" money to them -- they did not have to sell, but rather just had to "wait it out." NOW HOWEVER, all that stock will be regaining its previous value. BUT IN ADDITION, they are now much further poised to take advantage of the situation:

1) They have more new money to put into the stock market -- Relatively Speaking -- as the middle class has little or no new money accumulated for investment as its now all tied-up in their houses or otherwise spent, again, just when the stock market is due to climb. Remember the absurdly obvious old sage advice: Buy Low, Sell High. Well, that's nice, only thing is, you have to have at least some available money to buy low in the first place.

2) They (i.e., the wealthy) have more money to put into the stock market -- Absolutely Speaking -- due to the massive tax cuts of which they recieved THE LION'S SHARE (what the middle class recieved were actually just bribes to keep them quiet -- but the bribes were well-timed for maximum impact for sure). Be it Anticipated or Actual new cash in hand makes no difference due to their borrowing power. And they will also be greatly leveraging EVERYTHING via "margin buying." Buying on margin at a time of near guaranteed stock market increases is hard to beat.

3) And to top it all off, the considerable gains they will be realizing will be receiving greatly enhanced TAX TREATMENT (both dividend treatment and capital gains treatment) starting just as the considerable gains are due to accumulate.

Therefore, the Known To Be Coming Recovery (sure, it will happen -- its only a matter of degree) is pre-engineered to benefit only the wealthy and the super-wealthy.

Just another accelerated mechanism in the ongoing socioeconomic grand plan for the redistribution of the country's wealth from the middle class to the upper class as the ranks of the lower class explode.

dcj
 

Austin

Elite Member
Joined
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Professional Status
Certified General Appraiser
State
Virginia
David:
Thank you comrade Johnson peoples party commissar of the People's Republic of North Carolina. David did you know that the reason Russia is in total chaos and turmoil is because they don't have the class of rich people to whom you refer? They killed them all or drove from the country during The Revolution, now there is no one to run the economy, just like in Iraq. Be careful what you who for, you might get it, then what?
Also, how is letting people keep the money they would ordinarily pay in taxes taking from the middle class and giving it to the rich? How is letting people with money keep more of it hurting any one else? The only way your arguments makes any logic is to assume that the tax code is an income redistribution scam to take from the so called rich and give to the less productive. Have you ever wondered why capital is fleeing this country and consider that Bush may be trying to reverse that trend? Have you seen the trade deficit lately or seen the value of the dollar? They last time I heard there were 75 million people in this country with no health insurance but they are entitled to the same medical treatment that the people like me that pays $800/mo gets. The last time I hear locally, in our hospital 40% of the people treated don't pay one dime of the cost. I went to the emergency room a month ago and it cost me $2,000. Actually that was the total cost for the room for everybody that came that night, I just happened to be the one with insurance and picked up the bill. The local public schools are financed by real estate taxes and state income taxes, of which the class of people that attend public schools, well lets just say don't exactly pay their fair share. Food stamps, social security, health care, free medical programs, keeping them prison, you name it, who do you think is picking up the bill, and you talk about the rich benefiting from the system? Doesn't sound that way to me.
Many moons ago I majored in Economics in college. I had a course in Economic Growth and Development. Let me tell you what I learned in that class in a nutshell: The key ingredient for creating economic growth and development is large pools of capital funds. Another way of expressing that is: We need rich people that want to make some more money. If you loath these rich people, I am sure Russia would be more than willing to take them off your hands together with their pools of capital.
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
We won't be taking anything away from future generations, nor will they be having to pay the price for what our generation has done to the economy.

We'll just have to get used to them living under the same roof with us until we die. :eyecrazy:
 

David C. Johnson

Senior Member
Joined
Jan 15, 2002
Austin,

Some of the first questions you asked of me are actually addressed in my post.
____________

I don't necessarily disagree with some of your other statements and arguments, however would you concede that the trend continues to be, that the disparity between the rich and the middle class widens? According to you, this is not only natural, and indeed completely the way it ought to be and must be, but by extension of the dictum the country's wealthy should eventually own everything in the country -- after all, they are "the most productive" (actually I would argue that small business actually may be, depending on how one interprets "productive") and capital should go were to where it is the most productive.

Partly the problem for us is this: For the very first time in human history, the ruling class is increasingly finding itself in a position of no longer having much use for underlings, and this trend is due to increase its pace exponentially from here on out...

dcj
 

Austin

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified General Appraiser
State
Virginia
David:
I agree that the rich are getting richer and all others are getting poorer, but I don’t agree that is the fault of the Bush administration. I am not defending the Bush administration but the fact of the matter is that Bush has no more to do with that trend than you or I do. It all has to do with the Malthusian Theory that only one social-economic system in history has been able to over come and you don’t want to know what or who that was. My point is that if Clinton or whomever was in office it wouldn’t be any different and may be a lot worse. At this stage of the game which party is in power is no longer relevant as far as the trend is concerned.
 
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