Posted on 04/05/2006 11:15:28 AM PDT by ex-Texan
"Maybe the half-million I can afford will get me a mansion instead of a middle-of-the-road townhome!"
It will right now, in the vast majority of the country.
Not in any place I can maintain a similar income level as in the DC area, I'm afraid. I'd have to take a big pay cut unless I went to one of a handful of areas that pay on a similar scale, such as NYC, Boston, or San Francisco, all of which are far more expensive in terms of cost of living. I still like an urban, cosmopolitan lifestyle, or at least easy access to it, so this area is the best compromise for me. I acknowledge that getting less house for my dollar is part of the compromise, but then again, the resellability for a house of that value is much higher here than in the places where it would be a mansion.
Just out of curiosity, how high do you believe the deficit can go before it becomes a serious problem?
Ping for later
Well north of 5% of GDP. The <5% we've been running since Johnson (give or take) seems quite sustainable.
In a macroeconomic sense, deficit spending is like the government printing money: they don't have the cash, so they create it from thin air (as debt instruments). Deficit spending contributes to overall money supply. The impact of too much money is inflation. We don't have inflation, to speak of. Even when we get bouts of inflation, it is usually driven by excessively loose monetary supply by the Fed.
"Inflation is everywhere and always a monetary phenomenon." - Milton Friedman.
The budget deficit pales in comparison to the velocity of money (see Macro Econ 202) managed by the Fed Funds rate.
Further, even if we ran a 3% of GDP budget deficit as a way of creating cash money, that is just about a perfect match for the increase in productivity annually. Ceteris Paribus, that match should cause no inflation or deflation. Indeed, if money supply were not increased to match productivity increases, you would have deflation.
So, I'm pretty sanguine. I haven't been bit by deficits, and I'm a pretty involved participant in the economy. Nobody has been bit that I can see.
Other structural problems in the budget are real: Social Security and Medicare / Medicade will consume most of the budget shortly. But that is a programmatic structural / total spending problem to me, not strictly a "deficit" problem.
I stand to be corrected. My Econ degree is 22 years old next month. If I have ignorance on the subject, it hasn't stood in the way of wealth building!
The bubble areas like Kali and NYC areas are most vulnerable.
The unrealistic markets there have ripple effects here....folks move here house rich having sold there and buy a home beyond their income because they have huge downpayments or pay cash.
and that in turn inflates the market here
Right now some banks are training their personel with seminars teaching them how to properly price foreclosed homes. For Example: May 10, 2006 Regardless of your personal beliefs, banks do take back properties when the loan exceeds the value of the property.
Obviously if somebody is failing to make payments they bank is more inclined to foreclose.
Can you please tell me why it is in the banks best interest to foreclose in the above scenario?
True story to illustrate the mentality of banks. A former business associate of mine ran an art gallery in a nice area of a large city. They were making loan payments regularly. The real estate bubble burst and they found themselves owing more on the loan than on the value of the property. Even though business had slowed, they were still managing the payments. The bank, however, would have none of it. They sent in a 26 year old suit to demand payment of the difference or they'd foreclose. My associate told them to go ahead and foreclose as vacancies were rising in the neighborhood and there were attractive lease opportunities available just a few doors down.
Well, the debt to equity ratio told the bank they had to foreclose, so they did. My associate asked them what they were going to do with the vacant building. The 26 year old suit shrugged and said he supposed they would try to rent it. The bank was called and their leasing agent was sent over. Before a thing had been moved out of the gallery, my friend negotiated and signed a three year lease with the bank. The lease was about 60% of what the payment had been. He socked the 40% savings away and at the end of the three years (just before real estate prices in the area turned north), made a down payment on the building and negotiated a fixed term payment for about the same as the lease.
The bank met their "paper" obligations on debt to equity ratios and my friend ended up owning a building at a substantial discount over the sum for which he had initially purchased it.
Not in your described scenario. But consider owing $ 200k on a property worth only $ 130k (i.e. bubble bursts causing 35% downturn in values). Also see # 51.
You'd be better of renting and waiting for the bubble to pop. It will pop in the next 3 years.
No biggie. The chinese with family and relatives all pooling their money together will swoop in like locusts and buy up all that foreclosed property in California like they have done to large sections of SF and northern california already.
Seattle isn't SF, SD, or NYC.
While real estate did move up at quick pace the past couple years, it nowhere near being a bubble.
Demand is still there.
There are still a lot of people moving up here and the major companies that are here, Microsoft, Boeing, Starbucks, Washington Mutual, Amazon.com, etc... are all doing good business and hiring.
People who leave from California to move up here look like they are having an orgasm when they look at what 500 thousand buys you here compared to CA.
When I see ranch homes going for $160,000.00 in a suburban area that is 30-40 miles away from a major city I know the bubble is going to burst.
I'm not saying it never happens, but no bank would want to do this on a large scale. Their losses would be astronomical.
Did you know that second homes were 40% of the home buying market in 2005? ( report on USA Today). Many of these second homes were bought with debt tied to the first family home. In other words, people are pyramiding property using a debt pyramid scenario. Did you know that 45% of all jobs created since 9-11 were related to real estate, construction and/or mortgage industries? Americans went on an unprecedented spending spree over the last four years. All fueled by mortgage borrowing.
The house of cards is going to fall with a resounding thud heard that will be heard worldwide. Get ready for the ride of the century!
Too soon, IMO. It may well be true that the bubble doesn't "pop". But assuming a long term average increase of about 5%, it will take about 10 years to catch up to current prices because we are so far ahead of the trend. Without declines now and barring hyperinflationary scenarios, the best case outcome is a decade of price stagnation.
My advice for you is get a small cheap condo in a convenient area and save your half million in buying power for better market conditions (possibly as long as 10 years). My colleague just picked up a very nice but small condo in a convenient area in Arlington for 180k. He will live a slightly cramped life, but be able to save and diversify his investments instead of having it all in one speculative market.
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