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> Remember that the inflation that we are talking about is that with regard to consumer prices, which is often related to wages. It does not relate to asset inf

by bko 6y ago

> Remember that the inflation that we are talking about is that with regard to consumer prices, which is often related to wages. It does not relate to asset inflation on things like shares, or house prices, which can behave quite differently, as the last decade’s shown. I like how the article waves off asset inflation. The federal reserve creates trillions of dollars in new money, shares and house prices go up considerably, and we have no inflation. It's a win-win. In a wealthy society like outs, assets are exactly where you would see the inflation. Demand for staple goods isn't going to go up. This is just a transfer of wealth to asset holders.

542458 6y ago
I don’t disagree that house prices are too high, but... House prices are up, but most people don’t pay the price of a house - they pay the mortgage on it. Because interest rates are rock bottom the inflation of the price of a 25 year mortgage is just about in-line with most other goods. If house prices increase by 100% while interest goes from 6% to 2%, cost of a mortgage only increases by about 25%. (One complication here is that the down payment is not affected by interest rates, as so is much larger today in real dollars.)
- dwiel 6y ago
  That is true and means current prices may not be much higher, but it makes homeownership much more risky. If interest rates ever go back up, the price would go down and you could wind up owning a house where your principal is much higher than it's current value. This is ok if you don't want to move. If you ever want to move though, even to a house with an equal price, you may end up owing the bank a lot of money.
  - 7_my_mind 6y ago
    But what are the chances of the housing demand evaporating? In most cities where the housing bubble exists, it exists for a reason. The city is growing because all jobs are relocating to cities and universities located within these cities have growing student populations. The demand is considered very stable so the risk of that happening is quite low. And before anyone says it, I don't think we are going to experience a remote work revolution any time soon.
    - seibelj 6y ago
      It’s not that demand evaporates, it’s that if you can afford $2500 a month mortgage, and interest rates at 2%, the value of house you can afford is much higher than at 4%. The limit on house prices is capped at what a family can pay per month combined with mortgage rate. So if rates go up, and you own a 800k house that is now 600k in resale because people can’t get approved for 800k mortgage now. So you are stuck and can’t move unless you can afford the loss.
      - iso1210 6y ago
        My understanding of US mortgages is they tend to be a fixed interest for the entire life of the loan -- i.e. with a 25 year mortgage at 2% paying $2k a month, if interest rates went upto 10% in 2030, you'd carry on paying $2k/month. In the UK the longest fixed rates I've seen are 10 years
        seibelj 6y ago
        Right but how much loan you can get in the US is tied to how much monthly payment you can afford. If interest rates are 2% the total price of the house can go up with the same monthly payment. At 4% you can’t afford as much house. Housing prices generally fall when rates rise. Once you are locked into a loan, you pay the same amount. But if you need to sell and you only put 5% down on an 800k house, and now the house can only sell for 650k, you would have to make up the difference on the note.
        iso1210 6y ago
        But you won't be kicked out of the house because the monthly repayment increased by an extra $1k a month. I was in negative equity in the UK for nearly a decade after buying in September 2007 and seeing value collapse 40% pretty much the day after exchanging contracts (Northern Rock bank run). A new built flat was always going to deprecate a little, but when the flat directly below us told a year later for 60% the price we paid it wasn't fun. Solution when I did need to move was to rent out the flat (which covered the interest payments and maintenence) and rent somewhere else until 2016, when the price had recovered enough to sell it for the price I bought it at.
- deleted 6y ago
  [deleted]
- pintxo 6y ago
  You still have to pay back the principal though? Price per Unit | Interest | Annuity | Duration [years] | Interest payed -------------- | -------- | ----------- | ------------------ | -------------- 100,000.00 | 5.0% | 12,000.00 | 10.8 | 29,626.35 150,000.00 | 2.5% | 12,000.00 | 15.0 | 30,040.09 200,000.00 | 1.0% | 12,000.00 | 18.2 | 18,876.33 Unfortunately the increase in asset price is not covered by the decrease in the interest rates. And yes, prices here have nearly doubled over the last 10 years. And you could easily get a mortgage for less than 5% in 2011 here.
  - 542458 6y ago
    I was using the monthly cost of a 30 year mortgage. Monthly for 30 years a 500K mortgage at 6% is roughly 3K. Monthly for 30 years a 1000K mortgage at 2% is about 3.7K. So a 100% increase in sticker price with -4% interest change yields an actual cost increase of 25%.
    - lotsofpulp 6y ago
      This comparison of an increase in price and decrease in interest rate is not useful because if interest rates come down, mortgages can be refinanced at the lower interest rate. The 100% more expensive house actually costs 100% more (nominally).
    - monktastic1 6y ago
      Monthly cost of a house tells you very little about the "true cost of ownership" (a concept that I wish were taught more widely). That includes things like taxes, opportunity cost of capital, maintenance, etc. Doubling the price of the house will not quite double the TCO (because maintenance may not increase by much depending on various factors, and taxes can take time to catch up), but it will not be a mere 25% increase either.
- bko 6y ago
  That's a great point. I was curious about his as well so I did some simple calculations and wrote about it. Your intuition is correct, and if you look at median mortgage payment relative to median income, owning is about as affordable as its been since we started collecting data. There's a huge difference in mortgage payment based on interest rate: > To put that into perspective, a $100k 30 year fixed rate mortgage would cost you $1,543/mo at 18.45% and only $442/mo at 3.38%. Points up front is also lower now than it has been historically. I think low rates definitely fueled home prices and of course there are neighborhoods that are exceptions https://mleverything.substack.com/p/buying-a-home-in-the-us-is-increasingly-attainable-31bbae745993 https://mleverything.substack.com/p/buying-a-home-in-the-us-...
simonh 6y ago
You stopped reading too early, the article goes into this in depth. As with a lot of commenters here, in fact pretty much all of them I’ve read so far, you’ve got completely the wrong end of the stick about what this article is saying. For example: “ Now, not everyone was fortunate enough to see the benefit of that. In fact, many households are deeper in debt now than a year ago. Many more just got by. But the best off just got richer. That’s what QE does.”
- boyband6666 6y ago
  In something so long and meandering, that's not a surprise. I also stopped readng before it got any further; to be compelling it needs to be a lot shorter - there is not that much content in it!
  - simonh 6y ago
    It's making a very specific argument on a single subject, the contention that we are likely to see runaway consumer price inflation in the coming years. The article says this is wrong and explains why. I think it makes a very strong case for this. I don't happen to agree with the author's conclusion that therefore government should embark on a massive programme of capital infrastructure spending and such, but the rest of it is well argued. Economics is complicated so it's an extensive argument.
    - boyband6666 6y ago
      So I've a degree and masters in economics, before heading down the more statistical route. I can't say I found it compelling, and some of the issues waved away were too alarming for my liking. The asset price inflation that's happening, and as a result the crazy investments (Softbank style) in search of some return are worrying. These are storing up problems for the future. I don't find the 'return to gold and it'll all be fine' any more compelling. I don't much care for the politics side, and advocating for no vs tons of spending seems to gloss over the very real problems with each approach.
    - imtringued 6y ago
ptero 6y ago
> In a wealthy society like outs, assets are exactly where you would see the inflation. Demand for staple goods isn't going to go up Demand may not go up, but the costs for producers will and those costs are going to get passed to consumers. Prices of many things, from meat to eggs to lumber, are already up a lot. I also see signs "sorry, our costs are rising, so we have to pass a portion of the increase to you" in supermarkets. Printed money (in the real world, especially with a single party railroading it) will, for the most part, benefit those who do not need it. And the portion that will reach the lower incomes will be eaten away by taxes, inflation and rising costs of doing things.

by bko 6y ago

542458 6y ago

I don’t disagree that house prices are too high, but... House prices are up, but most people don’t pay the price of a house - they pay the mortgage on it. Because interest rates are rock bottom the inflation of the price of a 25 year mortgage is just about in-line with most other goods. If house prices increase by 100% while interest goes from 6% to 2%, cost of a mortgage only increases by about 25%. (One complication here is that the down payment is not affected by interest rates, as so is much larger today in real dollars.)

dwiel 6y ago
That is true and means current prices may not be much higher, but it makes homeownership much more risky. If interest rates ever go back up, the price would go down and you could wind up owning a house where your principal is much higher than it's current value. This is ok if you don't want to move. If you ever want to move though, even to a house with an equal price, you may end up owing the bank a lot of money.
- 7_my_mind 6y ago
  But what are the chances of the housing demand evaporating? In most cities where the housing bubble exists, it exists for a reason. The city is growing because all jobs are relocating to cities and universities located within these cities have growing student populations. The demand is considered very stable so the risk of that happening is quite low. And before anyone says it, I don't think we are going to experience a remote work revolution any time soon.
  - seibelj 6y ago
    It’s not that demand evaporates, it’s that if you can afford $2500 a month mortgage, and interest rates at 2%, the value of house you can afford is much higher than at 4%. The limit on house prices is capped at what a family can pay per month combined with mortgage rate. So if rates go up, and you own a 800k house that is now 600k in resale because people can’t get approved for 800k mortgage now. So you are stuck and can’t move unless you can afford the loss.
    - iso1210 6y ago
      My understanding of US mortgages is they tend to be a fixed interest for the entire life of the loan -- i.e. with a 25 year mortgage at 2% paying $2k a month, if interest rates went upto 10% in 2030, you'd carry on paying $2k/month. In the UK the longest fixed rates I've seen are 10 years
      - seibelj 6y ago
        Right but how much loan you can get in the US is tied to how much monthly payment you can afford. If interest rates are 2% the total price of the house can go up with the same monthly payment. At 4% you can’t afford as much house. Housing prices generally fall when rates rise. Once you are locked into a loan, you pay the same amount. But if you need to sell and you only put 5% down on an 800k house, and now the house can only sell for 650k, you would have to make up the difference on the note.
        iso1210 6y ago
        But you won't be kicked out of the house because the monthly repayment increased by an extra $1k a month. I was in negative equity in the UK for nearly a decade after buying in September 2007 and seeing value collapse 40% pretty much the day after exchanging contracts (Northern Rock bank run). A new built flat was always going to deprecate a little, but when the flat directly below us told a year later for 60% the price we paid it wasn't fun. Solution when I did need to move was to rent out the flat (which covered the interest payments and maintenence) and rent somewhere else until 2016, when the price had recovered enough to sell it for the price I bought it at.
deleted 6y ago
[deleted]
pintxo 6y ago
You still have to pay back the principal though? Price per Unit | Interest | Annuity | Duration [years] | Interest payed -------------- | -------- | ----------- | ------------------ | -------------- 100,000.00 | 5.0% | 12,000.00 | 10.8 | 29,626.35 150,000.00 | 2.5% | 12,000.00 | 15.0 | 30,040.09 200,000.00 | 1.0% | 12,000.00 | 18.2 | 18,876.33 Unfortunately the increase in asset price is not covered by the decrease in the interest rates. And yes, prices here have nearly doubled over the last 10 years. And you could easily get a mortgage for less than 5% in 2011 here.
- 542458 6y ago
  I was using the monthly cost of a 30 year mortgage. Monthly for 30 years a 500K mortgage at 6% is roughly 3K. Monthly for 30 years a 1000K mortgage at 2% is about 3.7K. So a 100% increase in sticker price with -4% interest change yields an actual cost increase of 25%.
  - lotsofpulp 6y ago
    This comparison of an increase in price and decrease in interest rate is not useful because if interest rates come down, mortgages can be refinanced at the lower interest rate. The 100% more expensive house actually costs 100% more (nominally).
  - monktastic1 6y ago
    Monthly cost of a house tells you very little about the "true cost of ownership" (a concept that I wish were taught more widely). That includes things like taxes, opportunity cost of capital, maintenance, etc. Doubling the price of the house will not quite double the TCO (because maintenance may not increase by much depending on various factors, and taxes can take time to catch up), but it will not be a mere 25% increase either.
bko 6y ago
That's a great point. I was curious about his as well so I did some simple calculations and wrote about it. Your intuition is correct, and if you look at median mortgage payment relative to median income, owning is about as affordable as its been since we started collecting data. There's a huge difference in mortgage payment based on interest rate: > To put that into perspective, a $100k 30 year fixed rate mortgage would cost you $1,543/mo at 18.45% and only $442/mo at 3.38%. Points up front is also lower now than it has been historically. I think low rates definitely fueled home prices and of course there are neighborhoods that are exceptions https://mleverything.substack.com/p/buying-a-home-in-the-us-is-increasingly-attainable-31bbae745993 https://mleverything.substack.com/p/buying-a-home-in-the-us-...

simonh 6y ago

You stopped reading too early, the article goes into this in depth. As with a lot of commenters here, in fact pretty much all of them I’ve read so far, you’ve got completely the wrong end of the stick about what this article is saying. For example: “ Now, not everyone was fortunate enough to see the benefit of that. In fact, many households are deeper in debt now than a year ago. Many more just got by. But the best off just got richer. That’s what QE does.”

boyband6666 6y ago
In something so long and meandering, that's not a surprise. I also stopped readng before it got any further; to be compelling it needs to be a lot shorter - there is not that much content in it!
- simonh 6y ago
  It's making a very specific argument on a single subject, the contention that we are likely to see runaway consumer price inflation in the coming years. The article says this is wrong and explains why. I think it makes a very strong case for this. I don't happen to agree with the author's conclusion that therefore government should embark on a massive programme of capital infrastructure spending and such, but the rest of it is well argued. Economics is complicated so it's an extensive argument.
  - boyband6666 6y ago
    So I've a degree and masters in economics, before heading down the more statistical route. I can't say I found it compelling, and some of the issues waved away were too alarming for my liking. The asset price inflation that's happening, and as a result the crazy investments (Softbank style) in search of some return are worrying. These are storing up problems for the future. I don't find the 'return to gold and it'll all be fine' any more compelling. I don't much care for the politics side, and advocating for no vs tons of spending seems to gloss over the very real problems with each approach.
  - imtringued 6y ago

ptero 6y ago

> In a wealthy society like outs, assets are exactly where you would see the inflation. Demand for staple goods isn't going to go up Demand may not go up, but the costs for producers will and those costs are going to get passed to consumers. Prices of many things, from meat to eggs to lumber, are already up a lot. I also see signs "sorry, our costs are rising, so we have to pass a portion of the increase to you" in supermarkets. Printed money (in the real world, especially with a single party railroading it) will, for the most part, benefit those who do not need it. And the portion that will reach the lower incomes will be eaten away by taxes, inflation and rising costs of doing things.