Shot in the Dark

Boom Kill

Joe Doakes from Como park emails:

Mortgage interest rates just broke 5%. I predict a decline in home prices.

I start from the assumption that home buyers have an upper limit to their monthly payment, let’s say $1,000 for principal and interest (not counting taxes and insurance).

$1,000 per month P/I on a 3% mortgage gets you a $235,000 house.

$1,000 per month P/I on a 5% mortgage means you can only afford $185,000 house.

The seller must cut her asking price $50,000 to meet your budget. That’s a big chunk of her retirement fund, gone.

I’m sure Lesko Brandon will blame it on Putin’s invasion, or Donald Trump, or climate change, but let’s not kid ourselves. This financial disaster has the same cause as gas prices at the pump: He did that.

Heckova job, Democrats and Never-Trumpers. But hey, no mean tweets!

Joe Doakes

Rama Emanuels injunction to “never waste a crisis”is useful in the defensive as well as on the attack.

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20 responses to “Boom Kill”

  1. justplainangry Avatar
    justplainangry

    A house in our neighbourhood was reduced in price last week. First time in a while a house was not sold before it went on the market.

  2. Mammuthus Primigenesis Avatar
    Mammuthus Primigenesis

    I have a friend who is in the process of selling his existing house and having a new house, basically a replacement house, built in a nearby town in MN.
    Last summer his architect told him the new house would cost around ~350k to build out.
    Now the estimate he is getting from builders is 480-530k.

  3. Night Writer Avatar
    Night Writer

    We have a rental property near the Vikings headquarters. For over a year now my wife (our CFO) has been getting calls and emails from a company that wants to buy it – and each offer is higher than the previous, shockingly high, offer. The offer that came last week is nearly double what we paid for the property.

    Thing is, what would we do with the proceeds if we sold? If we sat on it we’d pay huge capital gains, but the same market that delivered that offer is the same one where we’d have to try and buy another property at an exorbitant price…just as the market may be falling.

  4. Emery Avatar
    Emery

    ^ Investors who are paying cash and outbidding home (owner-occupant) buyers — paying cash means no appraisal is needed for a loan — so prices can inflate much faster as these purchases become the new comps.

    Home prices and mortgage rates rising this quickly, as investor frenzy and scarcity of homes for sale all suggest that this is a great time to sell and a bad time to buy. We’ve all seen too many boom and bust cycles over the years. I guess the question that needs to be to answered — is this a bubble or the new normal.

  5. jdm Avatar
    jdm

    NW, would your cap gains be long-term or short? The worst you would pay, if I remember correctly, is 20% on long term gains. If your taxable income is less than 517k, you pay 10%. Less than 83k and you pay nothing. Short term cap gains are taxed as regular income.

    As to what to do with those gains, after keeping some to pay the taxes… well, as you say, “just as the market may be falling”, maybe you’re in the catbird seat. Interest rates will continue to rise (as mortgage rates), so you could wait for an opportune deal. Maybe just a bit further away from the price craziness.

  6. mjb003 Avatar
    mjb003

    Housing prices are all in the eye of the beholder. I hope to stay in my house for many more years, decades even. My immediate neighborhood has been lucky enough to not be hit by the boom hitting houses elsewhere. Houses are sitting for sale for a couple months, regular people are buying the houses at prices that seem reasonable. (Regular people mean homeowners, first time buyers, families as opposed to developers and also as opposed to wealthier young people who would want to change the area through bike lanes, cafes and boutiques). I like that for my neighbors. My husband says he likes it because keeping our little enclave away from the skyrocketing housing prices also keeps our taxes down.

  7. justplainangry Avatar
    justplainangry

    MP, building a new house vs buying an old one are quite different but related. All materials have indeed appreciated outrageously over the last couple years. And since people cannot afford to build, they are bidding up prices on the old houses. So situation right now is troublesome – new home prices continue to go up (for the foreseeable future) and yet old home prices are no longer going up in concert. Overall demand is eroding? People can no longer afford to buy single-family homes? Interest rates are going up? Banks are no longer willing to give loans to obvious default candidates?

    Second and third order of Bidenomics: New goobernement regulations to force banks give loans to reprobates? Higher demand for rental units? Less disposable income? All of the above? Of course, one data point does not make a trend, but signs are there.

  8. bosshoss429 Avatar
    bosshoss429

    I’ve been in my house for 27 years. House was built in 1985, so I’ve replaced all of the mechanicals, due to age related failures, installed maintenance reduced siding, soffits, gutters and windows within the past five years. Since I’m 68 and my wife is 65. I was wanting to sell next year, but wifey wants to stay, reasoning that we might as well stay here as long as we are healthy enough to climb stairs and even if we did move, we’ll still have a mortgage. We elected to complete the roughed in bath and bedroom in our basement. Bids ranged from $35 – 85k, last May. The contractor that we chose, just gave us the updated bid, which is almost $8,000 more. We were able to purchase all of the bathroom fixtures, vanity and lighting on our own and I’m going to do the painting, so we saved money in those areas. Even though we will double the investment when we’re done, I have to wonder if in the end, it will be worth it.

  9. Night Writer Avatar
    Night Writer

    jdm – we’re thinking along those lines. Aside from my CFO’s antipathy to anything tax-related, you wonder if you can time the market (a grail as holy as turning lead into gold) to sell, wait five minutes for the collapse, and then buy up the opportunities. Or maybe go into intrinsics, like Beanie Babies.

  10. Joe Doakes Avatar
    Joe Doakes

    Some commenters claim we’re headed for Carter-era inflation, which would require Volker-era interest rates to control it.

    If mortgage interest rates jump to Carter-era rates, will home prices plummet and if they do, what happens to homeowners’ equity?

    If mortgage interest rates jump to Carter-era rates, will new home construction become unaffordable and if so, what happens to the construction industry?

    And most importantly of all: how is all of this Trump’s fault, or Putin’s, or global warming, or anybody but Lesko Brandon’s fault?

  11. Joe Doakes Avatar
    Joe Doakes

    In the column, I used examples of 3% and 5% loans. But when I bought my first house in 1987, the going rate was 10%. The seller had already bought another house so he paid two points to lower my rate to 9.5%. My wife and I were dancing in the street – 9.5%! Free money! That was AFTER the Carter-era interest rates of 13% or more.

    At 9.5% P/I, the buyer can only afford $115,000 house. The seller today would have to cut her sale price in half to meet my budget. Sellers who can’t afford to do that stay in the home – reducing housing supply – or walk away and let their mortgages go into foreclosure. Some will sell on Contracts for Deed having a huge balloon, both sides betting the market will recover, and many of those will default, too.

    This is Lesko Brandon’s lasting legacy.

  12. Emery Avatar
    Emery

    Rising inflation itself doesn’t necessarily cause a recession. In fact, it is often seen as an indication that an economy is growing too rapidly relative to the supply of labor and other resources.

    Yes, the FED could slam the brakes on the economy and plunge it into a deep recession. And there will be countless portrayals and comparisons with this or that period.

    Powell cares a lot about his reputation. So does Yellen. I think they are probably the most competent public officials among the whole cast of characters elected or appointed in the US government.

    But who knows when we’re honest? If the likes of Summers, Stiglitz and Mankiw can’t agree, along with the host of other leading experts, with titles, professorships, even Nobel Prizes, what difference will an opinion from an average reader contribute to the debate .

  13. jdm Avatar
    jdm

    NW, you wonder if you can time the market

    No. But no one can – buying the market at the proverbial bottom is impossible. And besides, the market is not your seller, individuals are. Individuals can sell for all sorts of reasons.

  14. Mammuthus Primigenesis Avatar
    Mammuthus Primigenesis

    I heard Larry Summers say on a podcast the other day that he thought we were headed for 15% inflation. I am paraphrasing, of course, Summers was in fed chairman mode and posed the number as a hypothetical. When asked how long inflation would stay at that rate, he said that it depended on how drastically the fed would respond.
    Oh, and it is almost inevitable at this point that Biden will cancel student loan debt, pushing more money into the pockets of doctors and lawyers, courtesy of the US taxpayer.
    Let’s go, Brandon!

  15. Joe Doakes Avatar
    Joe Doakes

    ” . . . an economy is growing too rapidly relative to the supply of labor and other resources.”

    Yes, I read that New Yorker article, too. And I was struck by the lack of citations: no economist was cited for the quoted proposition, the interviewee simply asserted it ex cathedra. Indeed, the only economist cited – Larry Summers – argued the opposite, for taking action now to raise interest rates to get inflation under control to avoid even more drastic action later.

    And nowhere did the article mention the most important problem of all: inflation is everywhere and always a monetary phenomenon. That’s a problem entirely of Lesko Brandon’s making and pretending it’s all about the supply chain or Putin won’t solve that problem, merely postpone solving it until recession and inflation make drastic action the only possible solution.

  16. jdm Avatar
    jdm

    JD, Some commenters claim we’re headed for Carter-era inflation

    It’s true.

    which would require Volker-era interest rates to control it

    I’m not sure those “in charge” (who are all politicians) have the integrity or the nerve to do what needs to be done. At least as to what they’ve shown so far.

    And most importantly of all: how is all of this Trump’s fault, or Putin’s, or global warming, or anybody but Lesko Brandon’s fault?

    The various fake money devices (QE, zero inflation) stem from the Obama reign to ameliorate the 2008 Economic Disaster!!! They were never removed. Turning up the volume on these devices to 10, the Kung flu spending from 2020 started under Trump: the present inflation trend stems from 2020. The next inflation wave will be Brandon’s fault because they turned up that spending to !!!!!!eleventy!!!!!! We have not yet encountered the Brandon inflation wave except at the gas pump.

  17. mjb003 Avatar
    mjb003

    I don’t want to curse the inflation rates of the early to mid 80s too much. My family was putting savings away in CDs for my college fund, CDs that had very high interest rates. Right now, we’re saving kid’s college fund in stocks. If we do the right ones, we’ll probably be OK. But, I keep watching for rising CD rates. Don’t think they’ll ever be as good as the 80s, but I went to a private college and paid my loans off in 6 months thanks to those CDs.

  18. Emery Avatar
    Emery

    Fed President Bullard was being interviewed yesterday and stated that the markets may have priced in the interest rate hikes already and said the economy will grow above trend. This year we have a different situation than we’ve had in many years, and that is the decimation of the bond market in recent months, with no real end in sight as long as inflation and rising interest rates are still a concern. But as Fed President Bullard said, it could be priced in already (but who really knows?)

    Fed’s Bullard Says 75 Basis-Point Hike Could Be Option If Needed
    https://www.bloomberg.com/news/articles/2022-04-18/fed-s-bullard-says-75-basis-point-hike-could-be-option-if-needed

  19. jdm Avatar
    jdm

    ^ My compliments to you and your family, mjb, for keeping your heads and doing smart things when everyone else is panicking.

  20. bikebubba Avatar
    bikebubba

    Regarding how to control Cartesque inflation rates, it strikes me that even more important than Fed rates is regulation–specifically things like whether drilling permits are issued, whether pipelines are built & opened, and the like. So theoretically, we can put the kibosh on inflation to a degree without increasing interest rates at all.

    It also strikes me that we might say that it is not inflation that causes recessions, but rather volatility in prices, including the price of loans, which makes economic calculation difficult and thus increases the ROI that is necessary before a company risks an investment.

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