Sell Now Or Your Capital Will Be Trapped

Okay, so when are interest rates doubling?

If I make twice as much next year my apartment will be half the cost.

JM - what does that mean for the property values of Wayne?

Alan, I think we'll see them going up quiet a bit after the Health plan reform will be voted by the Senate.

Last time it was the Vietnam Conflict debt build-up. At least we don't have anything like that these days.

Yes, i find amazing to see how things go so slowly to withdraw from Irak when we estimate it cost us $700 Millions a day:
http://www.washingtonpost.com/wp-dyn/content/article/2007/09/21/AR2007092102074.html
Any idea if that includes the cost of the war on the Pakistan/Afghanistan border as well or is that extra?

I am struggling with this too. First, we all need a roof over our heads. Maybe it's better if we go back to thinking of housing as shelter instead of as an investment. Second, the example is 40% LTV. Why couldn't the borrower take the LTV up to 70%, do a cash out refi, unlock the "trapped" equity capital, still take advantage of the low rates and save all the moving and transaction costs??

A few things I believe:

1) Mortgage rates are incredibly low and still have some tax deductibility. this is a great time to be a borrower.

2) Inflation is going to be a big problem. Unfortunately, in my view it is going to be a bad inflation lagely driven by a weaker dollar. That means inflation will effect food and energy prices but that wages and salaries will be flat. The prices of life's necessities will be going up but incomes will not. American's will have less disposable income and will a face deterioration in their quality of life.

3) Borrowing money now and locking in these low interest rates is a good idea because rates are very low and you will be paying back nominal pricipal in inflated dollars. The reverse is also true. You do not want to be lending money at today's interest rates. You especially do not wanat o be lending money to the government by buying US Treasuiries at today's rates.

4) Home prices will likely be lower in the future for the reasons mentioned in 1,2 and 3 but I am less sure about this. In any case I need a place to live and I do not need to mark to market my housing decision on a daily or weekly or even a monthly basis. The cheap borrowing costs show up in the bank account every month and the tax advantage of mortgage debt shows up every year on April 15th.

The government is continuing to offer substantial subsidies to home owners through cheap, tax advantaged 30-year fixed rate debt financing. Policy makers are also begging for a nasty bought of inflation. The Fed's zero interest rate policy, quantitative easing, an unprecedented expansion of the Fed's balance sheet an unprecendented fiscal stimulus that has this year's budget deficit at $2TN all lead to inflation.

To boil it down. If housing is shelter and simply a place to live and I have a long horizon, why do I care if prices fall near term? Because I might save a few percent and get to tell friends at the cocktail party that "I caught the botom"? Who cares?? To me the tax advantaged cost of long term debt financing wins. Cash on the barrel head wins. The vagaries and future path of home prices is a guessing game. Nobody knows. And don't let them tell you they do because they don't. If you buy today you will know exactly that 4.5% mortgage costs. Every month for the next 30 years. And I don't know but I will make a guess that one will have substantial opportunity to reinvest that borrowed money at rates of return far in excess of 4.5%.

"JM - what does that mean for the property values of Wayne?"

waverly, you will have to ask stevejhx that question. He has built a model that uses Wayne, NJ YOY mean and median performance to predict Manhattan prices 24 months out. It is truly ground breaking work. I believe he is teaming with a couple of economists to write a whitepaper about the subject. Stay tuned.

It should really be Wayne AND Garth.

jake - The long term argument often makes sense. Why would you try and time the market if you have every expectation your next move will require an estate sale? It's just that the typical shelf life of a "home" purchase in this town is three, maybe five years, for the person looking to trade up or out. Knowing you are paying low interest rates in that period is cold comfort when life decisions require a decimation of capital as you exit into a higher interest rate - lower property value environment.

Juice: hilarious, wry, and awesome posts twice in one thread! although I wouldn't be surprised if Steve has discovered a correlation with some predictive power.

Jake: brilliant. For me, who cares if my Capital Will Be Trapped? Worst case, I can always live in my camper and rent my apt out.