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October 26, 2010



Forgot to mention something about inflation. The only reason consumers are spending right now, is because everything is on sale. Trust me, if prices for commodities go up forcing prices of goods up, NOBODY will buy them. If the company maintains there sale prices, there earnings will get eaten away by the higher production costs. Either way, it'll bring the economy down again. We've already had massive monetary and fiscal stimulus, with the results being disinflation. What's to say QE2 will cause inflation? Japan has had multiple rounds of QE and the results are deflation and a strong Yen. Counterintuitive, you bet, but you can't deny thats what the results have been. There are obvious differences with savings rates in the two countries as well as other things, but printing more money doesn't always correlate to inflation and a weaker currency.


I hear ya Richie, in that scenario there just might be a sweet spot. I still see way way way too much inventory and not enough people qualifying for a mortgage. Obviously, things will cycle up at some point, I'm just not sure it'll be for awhile. If a guy was waiting for prices to go down another 15% on a $100k house, thats only $15k, so for some people it won't be worth waiting for. The chances of buying right at the exact bottom aren't that great anyways. Obviously the housing market will go the way of the economy, so if you believe the structural problems in the US are fixed, then its time to buy. If you believe the structural problems aren't fixed, and the economy isn't in a true recovery yet, than housing prices will go lower.

In Canada, its a totally different story, housing is still in a bubble. Average house price - $350K, Average salary - Under $40K. There is no way this is sustainable! Everyone praises Canada for our banking system, but they'll be made fools as well at some point. I will tell you for a FACT, there are PLENTY of people that got mortgages in 2005-2007, that had no right getting that loan. Canadians individuals aren't as smart or frugal with our money as we once were either. We are now at the top of the most indebted individuals in the world. The Bank of Canada is in a very bad spot now. With interest rates low, we've became even more indebted to the point that a 1-2% rate increase would set off a housing collapse. So if we do indeed get rampant inflation, they have absolutely no effective way of fighting it without setting of a crisis.


Oh and that was me, Richie, on the previous comment!


Mondo and Devin,
I hear what you are both saying but the Fed won't raise the rates for awhile. Obviously, if we get "stagflation" which is horrible growth WITH inflation, we are all screwed. And yes, higher rates do KILL housing. BUT there's going to be a "sweet spot", I feel, where prices on ALL hard assets start going up.

If you even look at the Jimmy Carter years of the late 70s with rates at like 20%! housing prices still seemed to tick up. I like to look at the fact that cranes and bulldozers have completely stopped building in this country. And rightly so. But that stuff swings back eventually.

If you've been reading this blog for a bit, you KNOW I have seen some "sick" deals in real estate that have gotten "sicker". As in good. I'm just saying in places like Arizona, Florida, Nevada, we are talking 75% off the top price. 75%! I wrote about my recent trip to Arizona where I found multiple homes I would LIVE in, that I could buy for $100-$125k. You have to admit if you step back a minute, it's getting a little bit crazy. I mean how long can you sit and wait for things to turn around when your mortgage payment is $400-$500 a month? Can you rent a place for that? As I like to say, I like math. This math is quite interesting. Whaddya think?


Mondo Grapes, that was my thought as well. There aren't any houses selling right now at zero interest rates, why would raising interest rates then make them want to buy a house.

I know in Canada here, they said raising interest rates by 1% could set off a housing crash similar to the one experienced in the US.

If we do indeed get inflation, it will out the economy back on its knees.

Mondo Grapes

I believe you are right when it comes to interest and mortgage rates. Sooner or later they are going to start to go up. But if that happens, and mortgages become more expensive, wouldn't that mean that asking prices for homes would come down further? I know that to the people who would have to borrow money for a home this is simply a matter of the old "six of one/half a dozen of the other" situation. But what of the people who were sitting on their cash while this whole menagerie played out? Why not wait for prices to come down further and simply buy a place for cash? Screw the mortgage.

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