Will the real Economists on this board please stand up and answer this question.
I will start this out with a more conventional formula (1+i)(P/Pe), others jump in as I have done my calculations on my theorem, however I would like to hear from others first, I am probably a little rusty.
I prefer the observed reality approach. In school I tended to fall asleep as the algebra problems hit the board. The minute anybody says A plus C equals D, I tend to drift.
A deflationary Economic phase is first observed when you reach into your pocket and see you are out of money and cannot afford an esential such as Bread. Then the price of bread starts to go down and still you are buying it stale and from the back door. You then cut out icecream and start to grow your own weed.
Your boss tells you he cannot afford you anymore but will keep you if you can do the work of Jack and Mike who he is letting go. Of course a small cut in pay.
Prices start to slid all over the place, but in a few instances there is no slide. This is in items not in common use. The stuff only the super rich have a use for. In 1929 it was Rolls Royce Razors. They actualy went up in price. But, thats not common market.
In housing the double triple up starts for real. You get evicted cause you cannot hack it anymore and you move in with a relative who in turn brings in another relative.
Talk about buying REO's from the bank.
No payment for six months to get the property on an even keel and then interest only for three years and then you spin onto a due date note on the mortgage every five years. Etc. Etc. If you have a bank account you can really buy the banks REO.
My Grandfather bought multiple dwellings from Bank of America on the above basis. His first act was to call a tenants meeting. At this meeting he cut their rents from $32.50 and all the way down to $20 a month. If you did not have the money, come see him and he then put you to work usualy on the building in which was your unit. He handed each tenant a little can in which from every check they got for odd jobs etc. they would stick in about 10% toward the rents. My job was to run around on the first of the month and collect and notate all those small sums of money. I was also instructed if there was any observed signs of hungar, you know gray skin color extended tummies. Just to empty the jar into the wifes hands and notate the amount and tell him. They got the sack of rice and sack of beans for free, by virtue of belonging to the same Phylum as my Grandfather. He used to say you cannot survive a depression all by yourself you got to bring a few others along, and, most important you gotta teach them how to survice. Savings, cut backs and trade skills for skills or product.
Now thats how you tell. The start of it is usualy psy wise. People start to talk and act different. Those that give a value in service and product will survive. Those that have been riding the breeze will slide gently under the wave.
The down cycle is loaded with opportunities, you just have to go out and find them. Helping others is in a sense a survival method, as they in return feel a duty to help you and in many instances help you achieve what ever it is you are trying to do.
Rambling yes, but it is an interesting time. I went thru it once in the Big Depression and was lucky to have a very wonderful Grandfather who would teach basic survival. Good times, Bad times, Wartime and Peace??Times.
I wrote a paper many years ago on the Weimer Republic in Germany their crash of the early 20's the results of which were of course the creation of a situation that led to Hitler and of course World War II. Could it have been prevented? Yes, but nobody cared. Ah well, History does repeat rather boring the third to fourth time around. But not to worry. The word is Creative Investing, Creative approaches to anything you do. You should see the funny hat I wear while out cruising.
However, your answer was much better than my mathmatical formula approach because yours was taken from true life experiences.
Alan,
In other words Alan the economists would disagree how it will really effect our industry as a whole because you would have to factor in what area of the country a person lived in.
The basics are as the interest rate goes up, it will start leveling off the appreciation growth on housing, which would be considered deflation in the housing industry.
I really love numbers, it is just that I am so bad at them.
Housing is responsive to interest rates and the presance in our society of a way to make mortgage money available. That is the creation of a secondary mortgage market which spot is commanded by those strange organizations FHA, Freddymac etc.
A bank has so much money to invest in mortgages for steady rate return per month. It invests it. Then, here it comes, it sells the portfolio of loans in the secondary market. Now it has its money back and it repeats the process over and over and over again. Without the secondary market the banks run out of money, stop lending and your real estate market collapses like a snowball in a hot sun.
Between us kids, there have been a little rattling in those August organizations, like they canned the top brass, and there have been some major executives that have just left. What is the problem? Nobody is talking about it. Is it a political deal or is there some basic fear at the high levels that something is wrong? Could they have miscounted their profits or funds on hand or preforming paper? Oops I just said it. A major disruption in this pattern could cause a major real estate depression as without a constant and heavy source of financing we are back to old times.
Now seriously old times were not that bad. Most mortgages never went over 50% of equity. Most people made a downpayment of 50% on their houses. Some banks only wrote for ten years and then the notes were called and you either paid off or you refinanced. Most paid off. How? Simple remember in olden times you never went above 25% of your income for all housing costs. At that figure you could have savings or other assets from which to cover a call on a due date of a mortgage. Or you did a refinance down to 25% of equity and handed the difference to the bank from your savings.
Different world. not too different. Of course you had to start your car by turning a crank being careful not to overgrip with the thumb, but other then that not too bad.
Makes you think and that is the purpose of all these little words strung together.
At the root, inflation and deflation are about changed in the value of currency. In an inflationary economy (as we have had pretty much since 1940 or so) the prices of things tend to go up over time. Or, to look at it from the other point of view, the value of dollars tends to go down.
A hundred years ago you could buy a pretty nice suit for $30. Today the suit is $300 or more. But in the end its a suit, worth about the same amount in terms of its function. The differenc in price is about dollars being woth less, not the suit worth more. You could have paid for that suit with a $30 one-ounce gold coin. Today (apart from the antique value) the coin is worth about $400. So whether you measure your value in suits or gold the value of the dollar has gone way down.
Most of us tend to believe that inflation has always been the case. But this is not so. For the hundred years before 1929 prices actually tended to go down-- in other words when you go to the store you expected to pay less for the same item than you did last week.
This decline in prices had the effect of slowing the economy. Why buy a new suit this week when it will be cheaper next week? Over time this lead to the kind of scenerio Lucius described. Less sales, less work, less work less employment. Still because of the improvements in the efficiency of production (the industrial revolution and all that.) Prices dropped. People stayed home in droves, the economy collapsed.
So the first sign of deflation is widespread declines in prices.
How will it affect real estate prices? Who knows? could be that there will be a period of decline in value or flat prices. Or it could not. More likely than serious deflation I think is what used to be called "stagflation" Prices don't go down much, but they don't go up either.
Thank you, Gentlemen. I really enjoy your assistance!
Of course I pictured my options being --Strange-- because the low price that I first negotiated will become a high price in a recession. I'd fail to exercise my options and lose my option money. Likewise with the conventional loans; my note obligation would continue while I couldn't sell the home.
So what exactly was I looking for? You guys hit it. If I extend my true wishes, they would be (I discover myself with every exploration supposedly of others and other issues): How can I profit at the top of a bubble? There does not seem to be a reasonable way, UNLESS I'm buying something that will strongly be needed in a recession. Houses will be needed, but unaffordable to many it would seem. So what can I buy RE related...
If I'm right I should buy even more selectively, don't join the crowd overpaying for their houses currently, and look to pick up the buying pace if the recession is in full swing. I don't like to slow down, though...
It seems owning a bunch of cheap options could be the way to observe the economy and flip in the narrow window that there may end up being.
Let us now look at the components of this relative price. Let P be the current nominal price level, i the one-period nominal interest rate, and Pe the expected future price level.
Then the price of current goods in terms of future goods - that is, the quantity of future goods one must give up to consume one more unit in the present - is P(1+i)/Pe, or, writing it a bit more conventionally, (1+i)(P/Pe)
More than glad to meet you also.....I should think if I reflect upon this formula until nightfall I shall understand...........hmmm...nothing like stretching the mind's boundaries....
So it could be whereas the last few years the housing industry has produced records in volume and price....now may produce price but not volumes because of the rising interest rates and economy........which would be one form of flattening out.....Is that correct? Or depending upon location such as near military bases could produce both volume and price.......Guess we need to know our area market.
Cool formula, John. I hadn't heard it. If I add numbers to it, and I understand it right, $100,000 + 6.25% interest divided by $125,000 will give us a figure, 0.848.
Our $125,000 is the future price we want to get to before we actually pay $125,000 in payments + interest, I'm assuming.
How do we use the figure 0.848 in our investing? Can we use it, or is it a measurement of past performance?
fearnsa,
Will the real Economists on this board please stand up and answer this question.
I will start this out with a more conventional formula (1+i)(P/Pe), others jump in as I have done my calculations on my theorem, however I would like to hear from others first, I am probably a little rusty.
John $Cash$ Locke
[addsig]
Dear John,
I prefer the observed reality approach. In school I tended to fall asleep as the algebra problems hit the board. The minute anybody says A plus C equals D, I tend to drift.
A deflationary Economic phase is first observed when you reach into your pocket and see you are out of money and cannot afford an esential such as Bread. Then the price of bread starts to go down and still you are buying it stale and from the back door. You then cut out icecream and start to grow your own weed.
Your boss tells you he cannot afford you anymore but will keep you if you can do the work of Jack and Mike who he is letting go. Of course a small cut in pay.
Prices start to slid all over the place, but in a few instances there is no slide. This is in items not in common use. The stuff only the super rich have a use for. In 1929 it was Rolls Royce Razors. They actualy went up in price. But, thats not common market.
In housing the double triple up starts for real. You get evicted cause you cannot hack it anymore and you move in with a relative who in turn brings in another relative.
Talk about buying REO's from the bank.
No payment for six months to get the property on an even keel and then interest only for three years and then you spin onto a due date note on the mortgage every five years. Etc. Etc. If you have a bank account you can really buy the banks REO.
My Grandfather bought multiple dwellings from Bank of America on the above basis. His first act was to call a tenants meeting. At this meeting he cut their rents from $32.50 and all the way down to $20 a month. If you did not have the money, come see him and he then put you to work usualy on the building in which was your unit. He handed each tenant a little can in which from every check they got for odd jobs etc. they would stick in about 10% toward the rents. My job was to run around on the first of the month and collect and notate all those small sums of money. I was also instructed if there was any observed signs of hungar, you know gray skin color extended tummies. Just to empty the jar into the wifes hands and notate the amount and tell him. They got the sack of rice and sack of beans for free, by virtue of belonging to the same Phylum as my Grandfather. He used to say you cannot survive a depression all by yourself you got to bring a few others along, and, most important you gotta teach them how to survice. Savings, cut backs and trade skills for skills or product.
Now thats how you tell. The start of it is usualy psy wise. People start to talk and act different. Those that give a value in service and product will survive. Those that have been riding the breeze will slide gently under the wave.
The down cycle is loaded with opportunities, you just have to go out and find them. Helping others is in a sense a survival method, as they in return feel a duty to help you and in many instances help you achieve what ever it is you are trying to do.
Rambling yes, but it is an interesting time. I went thru it once in the Big Depression and was lucky to have a very wonderful Grandfather who would teach basic survival. Good times, Bad times, Wartime and Peace??Times.
I wrote a paper many years ago on the Weimer Republic in Germany their crash of the early 20's the results of which were of course the creation of a situation that led to Hitler and of course World War II. Could it have been prevented? Yes, but nobody cared. Ah well, History does repeat rather boring the third to fourth time around. But not to worry. The word is Creative Investing, Creative approaches to anything you do. You should see the funny hat I wear while out cruising.
Cheers Lucius 8-) 8-)
Lucius,
I couldn't answer Alan's question either.
However, your answer was much better than my mathmatical formula approach because yours was taken from true life experiences.
Alan,
In other words Alan the economists would disagree how it will really effect our industry as a whole because you would have to factor in what area of the country a person lived in.
The basics are as the interest rate goes up, it will start leveling off the appreciation growth on housing, which would be considered deflation in the housing industry.
John $Cash$ Locke
[addsig]
My Dear John,
I really love numbers, it is just that I am so bad at them.
Housing is responsive to interest rates and the presance in our society of a way to make mortgage money available. That is the creation of a secondary mortgage market which spot is commanded by those strange organizations FHA, Freddymac etc.
A bank has so much money to invest in mortgages for steady rate return per month. It invests it. Then, here it comes, it sells the portfolio of loans in the secondary market. Now it has its money back and it repeats the process over and over and over again. Without the secondary market the banks run out of money, stop lending and your real estate market collapses like a snowball in a hot sun.
Between us kids, there have been a little rattling in those August organizations, like they canned the top brass, and there have been some major executives that have just left. What is the problem? Nobody is talking about it. Is it a political deal or is there some basic fear at the high levels that something is wrong? Could they have miscounted their profits or funds on hand or preforming paper? Oops I just said it. A major disruption in this pattern could cause a major real estate depression as without a constant and heavy source of financing we are back to old times.
Now seriously old times were not that bad. Most mortgages never went over 50% of equity. Most people made a downpayment of 50% on their houses. Some banks only wrote for ten years and then the notes were called and you either paid off or you refinanced. Most paid off. How? Simple remember in olden times you never went above 25% of your income for all housing costs. At that figure you could have savings or other assets from which to cover a call on a due date of a mortgage. Or you did a refinance down to 25% of equity and handed the difference to the bank from your savings.
Different world. not too different. Of course you had to start your car by turning a crank being careful not to overgrip with the thumb, but other then that not too bad.
Makes you think and that is the purpose of all these little words strung together.
Cheers Lucius
Well, John I'll take a shot at Alan's question.
At the root, inflation and deflation are about changed in the value of currency. In an inflationary economy (as we have had pretty much since 1940 or so) the prices of things tend to go up over time. Or, to look at it from the other point of view, the value of dollars tends to go down.
A hundred years ago you could buy a pretty nice suit for $30. Today the suit is $300 or more. But in the end its a suit, worth about the same amount in terms of its function. The differenc in price is about dollars being woth less, not the suit worth more. You could have paid for that suit with a $30 one-ounce gold coin. Today (apart from the antique value) the coin is worth about $400. So whether you measure your value in suits or gold the value of the dollar has gone way down.
Most of us tend to believe that inflation has always been the case. But this is not so. For the hundred years before 1929 prices actually tended to go down-- in other words when you go to the store you expected to pay less for the same item than you did last week.
This decline in prices had the effect of slowing the economy. Why buy a new suit this week when it will be cheaper next week? Over time this lead to the kind of scenerio Lucius described. Less sales, less work, less work less employment. Still because of the improvements in the efficiency of production (the industrial revolution and all that.) Prices dropped. People stayed home in droves, the economy collapsed.
So the first sign of deflation is widespread declines in prices.
How will it affect real estate prices? Who knows? could be that there will be a period of decline in value or flat prices. Or it could not. More likely than serious deflation I think is what used to be called "stagflation" Prices don't go down much, but they don't go up either.
Thank you, Gentlemen. I really enjoy your assistance!
Of course I pictured my options being --Strange-- because the low price that I first negotiated will become a high price in a recession. I'd fail to exercise my options and lose my option money. Likewise with the conventional loans; my note obligation would continue while I couldn't sell the home.
So what exactly was I looking for? You guys hit it. If I extend my true wishes, they would be (I discover myself with every exploration supposedly of others and other issues): How can I profit at the top of a bubble? There does not seem to be a reasonable way, UNLESS I'm buying something that will strongly be needed in a recession. Houses will be needed, but unaffordable to many it would seem. So what can I buy RE related...
If I'm right I should buy even more selectively, don't join the crowd overpaying for their houses currently, and look to pick up the buying pace if the recession is in full swing. I don't like to slow down, though...
It seems owning a bunch of cheap options could be the way to observe the economy and flip in the narrow window that there may end up being.
Alan
_ Still happy, loving work _
John Locke...
Would you please break down your formula for us? Interesting...but I don't know what it means or how to apply. :-?
coiner1,
Glad to meet you.
I would be more than glad to:
Let us now look at the components of this relative price. Let P be the current nominal price level, i the one-period nominal interest rate, and Pe the expected future price level.
Then the price of current goods in terms of future goods - that is, the quantity of future goods one must give up to consume one more unit in the present - is P(1+i)/Pe, or, writing it a bit more conventionally, (1+i)(P/Pe)
John $Cash$ Locke
[addsig]
Thank you John for the explanation..
More than glad to meet you also.....I should think if I reflect upon this formula until nightfall I shall understand...........hmmm...nothing like stretching the mind's boundaries....
Happy 4th......
So it could be whereas the last few years the housing industry has produced records in volume and price....now may produce price but not volumes because of the rising interest rates and economy........which would be one form of flattening out.....Is that correct? Or depending upon location such as near military bases could produce both volume and price.......Guess we need to know our area market.
coiner1,
Exactly!
John $Cash$ Locke
[addsig]
Simply put! When there are not enough users to consume the goods, prices fall, the same with house's
Cool formula, John. I hadn't heard it. If I add numbers to it, and I understand it right, $100,000 + 6.25% interest divided by $125,000 will give us a figure, 0.848.
Our $125,000 is the future price we want to get to before we actually pay $125,000 in payments + interest, I'm assuming.
How do we use the figure 0.848 in our investing? Can we use it, or is it a measurement of past performance?
Alan