Current Commentary

Buy a home recently taking advantage of the 4.5% rates? Congrats; you just lost $27,000.

For the majority of 2009, 30-year fixed-mortgage rates hovered around 4.5%.  The last few weeks have seen them spike about a point to 5.5%.  What does this mean if you bought taking advantage of the 4.5% rates?  It means that your home just fell in value by over 10%.

For example, on an average home with a sales price $250,000 and a 5% ($12,500) down payment, on a $237,500 loan amount your principal and interest payment would be $1203/mo with an interest rate of 4.5%.  The same price, down paymen, and loan amount at 5.5%=$1348/mo.

PEOPLE BUY HOUSES ON PAYMENT.  You don't say, "I can afford $250,000." Instead, you (and your pay stubs and W-2's and an underwriter) say, "I can afford $1200/mo principal and interest."  

At 5.5% your $1200/mo only gets you a $212,000 loan amount which with a 5% down payment only gets you a $223,000 house, $27,000 LESS THAN YOU COULD HAVE AFFORDED JUST A COUPLE WEEKS AGO.

The problem if you just bought is that the same math I just walked you through is applying to every other home buyer out there so that your $250,000 house in just a couple of weeks became a $223,000 house.

Expensive real estate is NOT good for the economy.  You cannot move the price of housing up, but you can move the value of the dollars used to purchase housing DOWN.

It is akin to the children's story Ming Lo Moves The Mountain. The story tells of a Chinese man who is told that -- in order to move a mountain away from his house -- he is to pack up his stick home, face the mountain, and walk backwards.

Thursday, June 04, 2009

INFLATION:
No longer a question of if, but a question of when

From following the various financial talking heads, one thing is clear: No longer is there any debate over whether all of these bailouts will lead to inflation. The debate has now moved into timing, with the central planner cheerleaders quoting figures 2-3 years out, and the freemarketeers saying, "Hold onto your hats! The big one has started." 

Some points to consider: 

• Every country in the world is printing massive amounts of new money. This is unprecedented. 
• At $980/ounce gold is still in the ballpark of the $887 high reach in 1980 in 1980 dollars. 
• Adjusted for inflation, that 1980 high of $887 is the equivalent of $2463. 
• Just 9 years prior to that high in 1971, gold was $35/ounce. 
• We used to be on a system (the Bretton Woods system) where every dollar in circulation was able to be traded in for a preset amount of gold. If we were to return to such a system today, based on known US gold reserves relative to the amount of total dollars in circulation, gold would need to trade at almost $10,000/ounce. 
• What are you going to do, and how are you going to adjust your lifestyle when the basic necessities of life such as food and fuel increase by multiples, but your income remains the same? 
• What are you going to do when money you have saved over the years dramatically loses purchasing power and your savings is effectively cut in half, or worse? 
• When all this happens, will you chalk it off as a natural, uncontrolable, impossible to understand event, or will you attribute it to the price your central planners forced you to pay to keep a bunch of myopic, selfish, delusional, fraudulent, power hungry elitists in power? 

The US Treasury Secretary was in China the other day and was LAUGHED AT by a group of Chinese students when he suggested that Chinese assets were safe in US dollars and US bonds.