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Buying Real Property


I recently bought a house and I picked now to do it for a few reasons:

  1. Interest rates are low
  2. The Fed has just monetized $600 bn of US debt

One reason not to buy a house right now is:

  1. Housing is over a price sinkhole.

Now, reason #2 is a truly spectacular reason to invest in “real” property. This can be land, precious metals (especially silver), ammunition, seeds, etc – anything that you personally own that would be valuable to someone in a society where paper money is worthless. You have to actually have the commodity in your possession – not a voucher.

So why a house if they are over a sinkhole, and what do I mean when I say housing is over a price sinkhole? That’s two questions and I have two answers:

Why a house?

I bought a house because I can live in it and as money becomes worthless through massive inflation (due to monetizing the debt) I will be able to pay off the house very quickly with my worthless money. It is exactly for this reason that the government is taking the first steps to start hyper-inflation in this country to pay off its own debts. Also, inflation rates are set to rise all on their own. I do not believe the Fed will be able to lower them with any monetary tricks. This is because the bond market, which the Fed purchases US debt through, is going to hell when the US’s credit rating is lowered AGAIN (it was lowered earlier this year). In order to sell our crappy bonds, the incentives for someone to buy them will have to go up – that means higher interest rates. If nobody buys the bonds, then no money is raised. Therefore, the bond interest rates will go up and mortgage interest rates (which mortgages are a fairly large portion of what the bonds are based on apparently) will have to go up even more-so in order to cover. Right now the market for mortgages is very volatile.

What do I mean by “housing is over a price sinkhole”?

A marvelous combination of perverse incentives for banks brought to you by ridiculous regulation has caused a really spooky situation in the housing market. The prices appear to be stabilizing, but there are things afoot that will destroy them some more. I envision this like a house on top of a thin piece of crust over a sinkhole that is getting deeper and deeper. The people in the house don’t know it yet, but they will fall a long way when the crust finally breaks.

Here are the main ingredients:

Banks are insured for loans that default for the full remainder on the amount because the government has decided they are “too big to fail”. They don’t get this if they short sell or loan modify, so right now they face a situation where if a loan amount owed is for $200k and the property is now only worth $100k and they adjust to $100k or short sell for $100k they are out $100k. If, instead, they foreclose on it they get the full $200k and they can then resell it as a repo for $100k. They don’t want too many people to notice this – especially with new regulation committees that have sworn to give a shit watching – so they are letting people hang on and aren’t foreclosing as quickly as they could.

If they aren’t selling (and they aren’t much), and they aren’t modifying or foreclosing – the prices have pretty much slowed to a crawl on their downward trend. This lets the politicians say, “Look! Our bullshit Keynesian measures worked! Take that free market!” But in actuality, what they are doing is sending signals to homeowners that are underwater on their loans that it is ok to just stop paying their mortgages. This is a moral hazard because people are less afraid about being evicted than they should be. I say “should be” because what will happen is that the banks will foreclose on all of them at once, claim a massive loss, get bailed out by Congress again, collect their insurance payouts, and rake in massive profits while house prices plummet to new lows.

Now, you might ask, “Why don’t you wait until after that to buy a house? They’ll be cheaper then.” That’s true, but I don’t think they’ll drop more than $50k more and interest rates will have to massively increase for the bailout. So, I just borrowed $100k at 5% interest, but I could have waited and borrowed $75k (my guess) at 25 or 35% interest.

Another reason to buy a house is that money in the bank is useless now, and going to be even more useless in the next year or two when inflation explodes. A house has many uses that precious metals do not, and I’m sure I’ll find some sort of entrepreneurial use for it.

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Categories: Europe, The USA
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