“I agree buying today is insane, but the bears forget that there are legions of homeowners who are living mortgage free. So the market drops.. big deal. I am in for the long haul.”

“One thing most bloggers in here seem to overlook. There are masses of homeowners like myself, who like myself have shaved years off the mortgage monster and have only a few years remaining. We have been given a golden opportunity on financing with ultra low rates that probably won’t return for decades..yes, my old man use to tell me how in the early 80′s, 1st and 2nd mortgages were the norm, 11%-12% rates made you feel blessed.
So, I enjoy the remaining years of my mortgage with a locked in, juicy 2.89%…bought before the market lost it’s bearings – prices may have doubled, but I am loving where we live – mortgage free is just a skip away – and though some will hiss that being liquid is having cash – but I say – what if..just a thought, the world goes into a financial crisis (I know, that’s just crazy talk) and the currencies around the world become worthless toilet paper – hard assets will rule. Money won’t keep you warm at night if those digital numbers all of a sudden get wiped out.
I agree buying today is insane, but the blog dogs forget that there are legions of homeowners who are living mortgage free, investing in themselves and have the same long term investment strategy .. so the market drops .. big deal – I am in for the long haul…I came to terms that dedication and commitment will always prevail, and I climbed my own Everest and watching all the rest scramble below me.”

Just Park It at greaterfool.ca 12 Jul 2012 9:48am

Sure, there are a majority of owners who will sit tight through even a protracted downturn. Bulls forget that bears expect that. Prices are set at margin, and it only takes for a small minority of owners to become anxious sellers for a price crash to occur.
Furthermore, some owners in the same position as ‘Just Park It’ underestimate how much the market price of their house has come to mean to them. This is one of the perversions of the bubble… regular citizens get distracted by the mania; they change their outlook, their plans; perhaps even at an unconscious level. They anticipate that, if the market drops, they’ll simply shrug and think “big deal”. But then it happens and they notice the unsettling effects. Some will even surprise themselves by rushing to market to attempt to lock in what then remains of their paper gains.
– vreaa

51 responses to ““I agree buying today is insane, but the bears forget that there are legions of homeowners who are living mortgage free. So the market drops.. big deal. I am in for the long haul.”

  1. Ralph Cramdown

    There’s that “on the sidelines” bit again. Although I’ve been known to sometimes be overweight cash, most of my money is invested in companies that own hard assets and produce or do things that others are willing to pay for.

    And how could every country suffer inflation at the same time? Currencies are measured against each other. As long as the “OMG! Infaltion” and the “OMG! Deflation” crowds are fighting it out in the press, assets are going to be cheap for bottom feeders like me.

    • “And how could every country suffer inflation at the same time? ”

      When you see the price of fuel, food and other stuff going up everywhere, then everyone is suffering inflation at the same time. I don’t know if it’s ever happened before, but then I don’t believe the world has seen pretty much every nation in the world having housing bubbles at the same time. “This time is different” may actually be true for once, but not in a good way.

  2. A 100% allocation to real estate is dangerous, even if there is a not small probability of hyper inflation, especially if the mortgage is almost paid (economies implode and such a depression will also devalue the real estate whose value is always linked to the ability of people being able to afford to rent it). A good inflation hedge is having a smaller portion of your total net worth in a home bought by borrowing at a fixed interest rate and preferably a 30 year loan. Goes without saying if you overpay for the home you lose a lot of the benefit.

  3. it’s a short step from “hard assets will rule” to buying a second or third investment property, and then price suddenly matters a great deal more

  4. Just a note, Ralph. When the first and second rounds of Quantitative easing were unleased by Ben Bernanke the prices of all commodiities rocketed ahead. Commodities are priced globally, not locally, and this did in fact deliver inflationary pressures to every single nation on earth.

    The basic premise behind the idea was to create a reflation globally and to thus stem the forces of deflation that were threatening to damage the worlds major economies.

    What was not recognized at the time was how such an act of exporting rising prices to the rest of the world in the form of resource price hikes might lead to civil unrest, revolution, war and crisis in the Third World and developing nations.

    Rising commodity prices came as little more than a tax when growth was already faltering and this created tremendous suffering in some countries. Wages did not rise as a result nor did GDP expand sufficiently in the target countries to justify the continuation of the program. This is one of the reasons that the Fed has been slow to reenact the emergency actions of the past.

    Food cost increases in particular were delivered as a shock to those in poverty and as a direct outcome we saw governments overturned in Africa, Asia and the Middle East. This unfortunate outcome was actually very predictable. In fact, citizens in countries like Egypt were already spending the majority of their meager incomes on food before the reflation event.

    The political crisis that brought down the government of Hosni Mubarak was more about bread than it was about freedom of speech and the world quickly discovered how dangerous a food shock could really be.

    Some will argue that irresponsible policies of Western Governments to sustain our own economies with bubble economics were the primary cause behind those events and frankly, it is hard to argue we in the West were mere innocent bystanders in the global upheaval that resulted..

    So money printing and other forms of easing in the worlds richest economies (Europe, America, Japan and England) were producing a single digit devaluation of sovereign currencies on the one hand while delivering a very real double-digit tax on the incomes and resources of the worlds most impverished nations.

    Clearly this was putting the system out of balance and as those whose daily existence in poorer countries recognized that they were paying the price of economic problems in the West with ferocious rises in food costs, the alarm bells began to go off.

    Obviously there have been objections. Why should the poor be burdened by mismanagement in the West? It is almost impossible to explain these dynamics to the typical Canadian who is engaged in property bidding wars and is utterly blind to how the damage will be contained when our own deflation begins.

    Someone always pays the price though.

    Who knew it would be Egypt, Syria, Tunisia, Libya and much of rural India and China though?……..(well, actually we did know..which is why we all need to behave more responsibly in the first place and not dump our solutions and quick fixes onto the laps of those who can barely afford a daily meal in the first place).

    So all countries can in fact inflate under certain circumstances. We have seen how QE made that theory a reality. What we now need to recognize is how that process is creating and magnifying global inequity and in doing so we must take more responsibility for our own domestic problems.

    Housing bubbles hurt the poor. Ours is as hurtful as every other.

    • Ralph Cramdown

      But at the time QE was initiated, all the smart people said we were going to have big-time inflation (i.e. the US dollar would fall and people would stop buying treasuries, pushing up yields). Didn’t happen. And remember, before the financial crisis, we had to endure half a decade or more of people talking about ‘decoupling,’ the notion that Asian and third world economies were developed enough that the US could slip into recession without affecting them. Turned out not to be true.

      “This unfortunate outcome”? I’m shedding no tears for fallen Middle East dictators. Egypt had been subsidizing bread for decades before these recent events. I don’t subscribe to the “he may be a sonofabitch, but he’s our sonofabitch” mentality of geopolitics. If a commodity price shock was the last straw for those governments, so be it. Can it be that after decades of mismanagement in these countries, the West owes them a duty of care as they teeter on the brink of collapse? Egypt doesn’t have oil, and it doesn’t have the bomb, and those are the two criteria for the West’s caring — I’m not saying this is ideal, but it is the current state of realpolitik.

      When I look at the improvements in the third world post WWII, I think we’d have to call it an unqualified success. Spain, Portugal, South Korea, (parts of) China and India, Indonesia, the Phillipines, much of Central and Southern Europe — That’s a few billion people who have seen GDP per capita and literacy rates increase by several hundred percent in two or three generations. Yes, there’s still some places where the Hatfields and the McCoys are hacking each other to pieces over God, food, or which side to wear the baseball cap brim on, but I suppose that’s timeless, and the long term trend is down.

      I will admit that the rise of commodities as a respectable asset class is unfortunate. I like my investments to be productive assets which spin off cash, not mere piles of stuff that sit in a vault or a bin. It’s unfortunate that the central bankers are saying “here’s free money, go invest it in the economy” and the population says “AAAAH! The World’s Ending. Buy gold and silver!” In a better world, we’d have governments taking up the slack in demand on the fiscal side with infrastructure projects instead of their ridiculous austerity posturing, forcing the central bankers to attempt easing with tools that are more scattergun and less surgical.

      And it would be nice if your average middle class first worlder could read a balance sheet and an income statement, and do price/income and price/rent comparisons. But that’d be utopia, I suppose.

      • It is very challenging to turn an understanding of macro-economics (even if correct!) into a successful investment strategy.

        For some discussion in that regard, see this recent brief article at Seeking Alpha: ‘The Best Investment Advice George Soros Ever Gave’.

      • “I will admit that the rise of commodities as a respectable asset class is unfortunate. I like my investments to be productive assets which spin off cash, not mere piles of stuff that sit in a vault or a bin. It’s unfortunate that the central bankers are saying “here’s free money, go invest it in the economy” and the population says “AAAAH! The World’s Ending. Buy gold and silver!” In a better world, we’d have governments taking up the slack in demand on the fiscal side with infrastructure projects instead of their ridiculous austerity posturing, forcing the central bankers to attempt easing with tools that are more scattergun and less surgical.”

        I very much agree with this statement.

      • Ralph Cramdown

        Nice link, vreaa. Keynes compared stock picking to a beauty contest:

        “It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

      • Some investment managers I’ve had the pleasure of listening to once opined, at the core, they are tasked with little more than not losing their clients’ capital.

      • From the [MostExcellent] link… “The beauty of markets, though, is that you don’t have to understand the reasons for why investors buy certain assets or equities to be profitable.”

        Perhaps. But if you do or could fathom those reasons… there be magnificent FrontRunning opportunities.

        Now, as it happens, there was this guy – oft maligned – who had an idea or two about all that….

        http://en.wikipedia.org/wiki/Keynsian_beauty_contest

      • Yikes! Ralph beat me to it. Accordingly, I’d better up the ante with an instructive short clip on UncleGeorge’s [& Nem’s] ‘Homies’…

      • @Ralph Cramdown

        “But at the time QE was initiated, all the smart people said we were going to have big-time inflation (i.e. the US dollar would fall and people would stop buying treasuries, pushing up yields). Didn’t happen. ”

        Rising prices is a symptom of inflation, not inflation itself. M2 has dramatically grown and will find its way into the system at some point in the future.

      • Ralph Cramdown

        The M2 is already in the system, but velocity is very low. The bond market knows it’s there, and is ignoring it. The Fed can take it out again if they have to, by selling all those assets it carries, sopping up M2.

        If inflation is going to manifest, the obvious trade is to sell long Treasuries and to lever up with real estate, which you’ll get to pay off with inflated dollars.

        I wish Uncle Milty was still alive, so we could all get a coherent explanation as to why we haven’t seen general price inflation yet given his monetarist theories.

      • rc, if cb’s sell assets on their balance sheets yields go much higher. banks, govts, anything dependent on low rates will go down. in fact, never mind that, even if they slow rate of purchases, yields go higher. that is why, it’ll never happen, imo. we do have high general price inflation, but not in stuff previously boosted by leverage. check food, energy, healthcare, insurance rates, etc. those are going up >5% yoy. can believe this continues indefinitely or that it does eventually does end … position accordingly, re-evaluate regularly

      • @Ralph Cramdown

        To contract M2 requires rates to be raised while selling bonds would exacerbate government debt and send more businesses into bankruptcy—homeowners into foreclosure. Although central banks can control M2 on a broad scale, they can not control velocity. Both are very different.

        Inflation will creep back in the near term as USD, JPY and CNY are appreciating against CAD. These currencies are heavily weighted in our import prices. Check here http://www.oanda.com/currency/historical-rates/

        The days of cheap goodies from Walmart are over. Time to pay.

      • Ralph Cramdown

        Well, those CB’s don’t need to sell assets until we see the inflation which people keep insisting is going to show up real soon now. Oil and gas are down, insurance is an odd one because during the great bond bull market, many insurers were actually selling insurance at less than their cost of claims and making up the difference plus profits with the investments in their floats. It’s hard to do that now. I don’t find that my food costs have gone up much, though if I don’t read the flyers and cherry-pick at several stores I’ll get scalped — I think grocers have gotten better at changing prices, and one can either be the invisible hand of the market or be choked by it.

        Just as near universal bullishness on the Canadian housing market has meant that eventually everyone who could have bought would have, I find the near universal bearishness on stocks as encouraging… I think “riskless” assets are too dear and risky assets are too cheap.

      • Ralph Cramdown

        http://www.tradingeconomics.com/canada/general-government-net-debt-in-percent-of-gdp-imf-data.html

        A falling dollar! Well, I don’t know that it’ll revive the auto industry, but it should help some in the oil patch.

      • “Oil and gas are down”

        Are they? http://postimage.org/image/5aefgfhld/

        “I don’t find that my food costs have gone up much”

        Because what’s changed aside from price increases is the value. A $1 bag of chips lowered from 100 grams to 75 grams is the same percent change as a $1 100 gram bag increased to $1.25. Now increase the price and lower the value and you have a 50% increase. That’s the mechanics of inflation.

      • I would have thought lower volumes of debt issuance (austerity) would result in lower yields. And… yes.

      • “Now increase the price and lower the value and you have a 50% increase.”

        While I’m not one to defend the ability of “the plebs” to smell out a scam, no matter how grandiose, Mr. Bond disagrees.

      • dude, for sure most cost of living prices are higher post-2008. if neg real rates weren’t a problem people could just park it in treasuries, forget and sleep fine, cb’s wouldn’t print and buy mass quantities … but yes, definitely more than one way to solve. ciao.

      • Are negative real rates a problem? Maybe it will help focus where one’s capital is deployed.

      • The purpose of QE is to increase economic inequality. It increases stocks and financial assets and decreases savings and labour income. If people at the bottom starve that is a feature of the policy, not a “side-effect”. Capitalism has a few less mouths to feed, and it keeps the masses in line.

        Everything Bernanke has ever said about QE is demonstrably false. Like how QE is supposed to lower interest rates. He still says that despite this graph:

        http://articles.businessinsider.com/2011-04-19/markets/29966866_1_david-stockman-treasuries-rates

        QE is entirely about bailing out speculators and failing markets, and encouraging more speculation with free money, the expense of the economy and the living standards of almost everyone on earth. The parasite is killing the host.

  5. That there are those who won’t care if prices drop by X% validates how prices can drop by X%. The only prerequisite is to stall sales.

    Now try dropping prices by X+ δ % and report back.

  6. if you go to the GreaterFool link to read the original post, notice the post above it. For a person like me who wishes to understand ‘price gaps’ in the time-continuum, what we had on July 9, was an enormous gap down in house values…. the post is copied below:

    “An interesting post today by the guy who is tracking the Vancouver price drops, re: the $1mil CMHC changes:

    “Homes that are listed for $1.1 million are now missing a huge chunk of potential buyers and many are listing for $999K as the data below shows but this cascades through all prices. Homes that were listed at $995K before now need to go below $900K to avoid competing with these newly dropped homes. Those drops force lower priced homes to drop and so on. It also affects prices above $1 million. That $1.3 million home isn’t looking much better than the $999K home so it drops to $1.2..”

  7. Pingback: Real Estate: “So the market drops.. big deal. I am in for the long haul.” |

  8. Renters Revenge

    These smug “mortgage free” folks are forgetting that they don’t really own their home even if the loan is fully paid. If you disagree try NOT paying your property taxes for a year, or have a look see in your personal files for the actual title. When provincial and municipal revenues collapse in the face of a crashing real estate market, don’t think governments won’t try to squeeze more revenue from property taxes. Registered property holders could be sitting on a significant tax liability even if it is mortgage free.

    • I also think it will hit us renters as landlords pass along (at least a portion) of those higher tax assessments, sigh.

  9. Well what the comparisons between past busts in Canada and this time around miss is that there was never 70+% homeownership in Canada. And except for some older folks that maybe mortgage free, the vast majority today are not or we would not have over a trillion in mortgage debt. The mindset of Gen. X (or Y or Z or XXY or whatever) is also different from that of the 80’s. People used to be on a mission to pay off their mortgage (the word MORT in mortgage literally means DEATH, so it’s a Death Trap). Not so these days, the under 40’s crowd, and even older ones think of houses as ATMS and therefore HELOCS have exploded: no one is paying of their mortgages, they are adding to their debt, and the majority of 1st timers that bought post 2004 will never pay off their mortgages, so even if you are paid off you will be screwed because of factors beyond your control like your neighborhood going to the dogs as has happened all across the US.

    Above all with RE activity now accounting for 25% of GDP in Canada, you may not have a job when the downturn takes full hold in 4 major cities – Toronto, Vancouver, Montreal and Calgary. That will be enough to screw the whole country. And municipalities will squeeze you for tax shortfalls; watch them change the calculation from assessed value to a flat rate. So you will be paying for all the boat loads that will end up on welfare and become renters as their homes are foreclosed upon. And this is without taking into consideration the vast numbers of condo developments in Toronto that have been financed by European banks like BNP Paribas, Deutschebank, HSBC and others. Remember the condo development in Vancouver that hit the brick wall when Lehman bros. collapsed? Toronto will be a post-apocalyptic ghost town with dozens of unfinished buildings by 2015. And you think you will be fine because your mortgage is paid off? If anything I would do the opposite and get the max possible mortgage at these low rates and invest in real hard assets.

  10. I’m definitely living mortgage free !

  11. ” I climbed my own Everest and watching all the rest scramble below me.”
    http://www.cbc.ca/news/world/story/2012/05/24/f-everest-bodies-faq.html

    • Renters Revenge

      Thanks for posting that. Excellent parallel to the “I’ve got what I want so to hell with everyone else” attitude Just Park It exhibits.

  12. A friend of mine commented about a year ago that she loves her house and would have paid double the reasonable 2001ish price she paid because it’s perfect for her family. I thought that was great for her, even though in her position I would have to seriously consider the alternatives.

    Recently talk of real estate prices came up again, I wasn’t actually in the conversation, but listening. The same woman talked about how her and her spouse like to look at better locations, closer to work and muse about moving. Another homeowner in the crowd asked about the possible bubble implications. This other homeowner has long been a real bull, but he’s smart and he can’t completely ignore my logic when I talk bubble. He’s also an avid poker player, so his question was “If you could see everyone’s cards, would you still hold?” Meaning, if you knew, with 100% certainty, that the current value of your house was going drop back to it’s 2001 level, would you sell? And she said yes. I did step into the conversation at that point and suggested then that she should really do some research and decide that since 100% certainty was impossible that she should really figure out what level of certainty she had. Was it 80%, 40%? And how comfortable is she with whatever odds and stakes she decides on? Would take a $200,000 bet with only 50% odds of winning? How about 30% odds. She seemed to glaze over at the point in the conversation.

    My point is that people seem to short circuit when the hard numbers of speculative assets meet the fuzzy emotions of a family home. I’m sure “Just Park It” really likes his house and takes great pride in the prudence of his accellerated payments. But there are really nice homes you can rent and really fun things you can do with a mountain of cash that a speculative bubble drops in your lap. I find it hard to believe that it is really that easy to sit back and watch that paper equity evaporate without so much as a tinge of regret. Given the state that most of the world lives in, it’s definitely a first world problem (comfortable home or mountain cash, oh the humanity). But I find the suggestion that he really doesn’t care about the paper equity to be just a little disingenuous. I believe he doth protest too much.

    • Ron Dembo in “Upside Downside” suggests that risks are often hard to measure. He thinks it’s useful to consider risks in terms of regret. So, I wonder what home owners would regret more? Not capturing their paper equity now and sitting on a mountain of cash or seeing the value of their house dropping to 50%? Of course the circumstances are different for everyone since regret is personal (although predictable in most cases).

    • It’s the same argument as that those who didn’t get in the market are “missing out” on all the recent gains. But missing out on some gains is not nearly as negative psychologically as being handed losses. It’s a fact. Humans are extraordinarily loss averse. I don’t know anyone who doesn’t dislike even thinking about a loss, whereas missing out on something gets more of an “oh well” reaction; you still have what you have. Besides, those who did not invest in real estate, or bought their shelter, have had some pretty nice opportunities elsewhere.

      • Not just humans. Monkeys too it seems.

        (Apparently this trait is millions of years old.)

    • “hard numbers of speculative assets meet the fuzzy emotions…”
      Players dream, ‘fuzzy emotions’, Barnum and Bailey et al. That little phrase of yours eloquently sums up what most consumers don’t understand about business. We package joy and they give us their money. No different than selling good fiction. The features and benefits just appease buyer regrets.

  13. “what if..just a thought, the world goes into a financial crisis (I know, that’s just crazy talk) and the currencies around the world become worthless toilet paper – hard assets will rule.”

    In this scenario, hard assets will actually go to hell. Eventually, interest rates will increase reflect such high inflation, meaning it will price out the new buyers and make existing mortgagees default. There will be piles of cheap hard assets out in the market with no takers. See how some bulls are actually the ones who have ill wills on society?

    • “There will be piles of cheap hard assets out in the market with no takers. ”

      The takers will be those who can buy them as an investment and rent them out for a profit, as it’s always been.

  14. @Jesse

    “Are negative real rates a problem? Maybe it will help focus where one’s capital is deployed?”

    Apparently investors are now willing to pay interest on some short-term bonds. This suggests the bond market is preparing for defaults or restructuring of debt for highly indebted European countries.

    No government plans to pay long-term debt at this point. It’s just a paper game that eventually ends.

    • Ralph Cramdown

      I don’t think General Electric plans on completely paying off its long term debt either. The reason middle class people hope to be debt free one day is that they want to retire before they die. Corporations and governments are in it for the long haul, so why not structure their balance sheets appropriately?

      • And how do you create small business and entrepreneurship when banks and major corporations keep getting a bailout? You don’t. Once people lose confidence then the system starts to fall, quickly. History proves it.

      • Ralph Cramdown

        You don’t want to live in a system where small banks get a chance to grow because big banks keep failing. I’d have no problem with shareholders being wiped out, but we tried wiping out banks’ creditors when they failed, up to about 100 years ago. Bad idea.

      • “but we tried wiping out banks’ creditors when they failed”

        Check the scorecard of US bank stocks, including the ones that no longer exist. I don’t think anyone can claim shareholders of American banks didn’t have their asses handed to them on a plate.

        Bondholders also took significant writedowns. It looks like European banks are going to be faced with the same situation, which should come as no surprise. How about Canadian banks? Well it’s quite conceivable that existing investors will get to understand that “dilution” isn’t just for chem lab.

    • “This suggests the bond market is preparing for defaults or restructuring of debt for highly indebted European countries”

      I think you’re referring to negative interest rates on certain duration bunds. Europe right now is in an anomalous situation; real rates are negative in other countries too. It may just be the coming generation will have to work for a living. Sucks I know but that’s the way the cookie crumbles.

      “It’s just a paper game that eventually ends”

      There are wonderful examples through history of how creative governments are at repudiating their debt. The game is unlikely to end any time soon.

      • True, but there are even more examples of how governments have lost control then responded creatively in times of crises. What makes this crises different from any other is a $700 trillion derivatives market. That’s worse then the existing debt itself.

      • I had to find this lecture I watched before…. Nobody can explain the next crises more beautifully then Niall Ferguson: Start at 29min mark. http://youtu.be/VqXQP3eB9W0?t=29m

      • Unfortunately, Dr. J… most prior examples of ‘creative’ governmental solutions to debt repudiation involve “politics by other means”… the key to understanding the current iteration of the GreatestGame [a game whose inexorable conclusion is not, ultimately, decided by the instrumentalities of sovereign monetary or fiscal policy] is to identify the truly dominant actor[s]/correct unit of analysis in what passes for the global system… those actors, today, are neither states nor supranational regimes/entities and they operate predominantly in the space of flows… [i.e. – think TotalGlobalFreedomOfMovement – a gladitorial arena for NewSuzerains where national borders are merely convenient postal boundaries delineating useful proxies/arbitrage opportunities].

        For a more complete treatment (AMS, are you out there – ‘cuz here’s your next read) DearReaders may enjoy Prof. Janine Wedel’s “Shadow Elite”… Here’s a succinct review:

        http://tinyurl.com/845kx4o

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