Housing is Currently about 20% Overvalued

[Dave Mittner]

And raising the minimum wage by 100% would cause inflation, which would eat away at debt while also increasing aggregate real wages.

Dat gawt dem gubernet!

Only so long as our outrageous income disparity continues to exist.

If the wealth of this nation were brought down to the middle class and distributed more appropriately among employees, you could afford to pay them more without having to raise prices on goods.

That being said, I'm not a huge fan of just raising the minimum wage. It only benefits the economy if those at the top allowed their wealth to trickle down to pay the difference, but common sense and recent history both indicate that won't happen. And there's no practical way to force that without radical economic changes that would never get political support. Not until there's an uprising, anyway. That seems to be the inedible conclusion when this kind of disparity exists long enough, and the majority are driven far enough into desperation.

 

[austrianecon]

Exactly. Now would you like to have triple or quadrupled what it cost?

First off.. let me start by saying I worked at Lehman Brothers from 2003-2005 in derivatives (housing). I know the game, probably better then anyone on this forum. Short response is You still fall for the scam.

Long answer is..

You can't be serious? TARP, Fannie and Freddie bailouts, discount windows, QE 1 and 2 and stimulus... total $9 trillion as of 2011. Yet not one forced rest of mortgages, not one case of resting housing prices, not one case of write downs for on time mortgages to historical price levels. In 2014 housing prices are just below peak highs.

Sorry, Buddha C.. Government, the Fed, and Politicians screwed over the working class (middle class). Housing prices decline on average $50,000 from 2008 to 2011. That nothing. That's a big middle finger considering we didn't even come close to 2001 levels. A $150,000 home is MUCH more affordable then a $225,000 home to a person then earning an extra $3.00 hour. Earning $3 more an hour, is more taxes paid, so that's actually $1.50 an hour.. Think about that.

 

[Buddha C]

Only so long as our outrageous income disparity continues to exist.

If the wealth of this nation were brought down to the middle class and distributed more appropriately among employees, you could afford to pay them more without having to raise prices on goods.

That being said, I'm not a huge fan of just raising the minimum wage. It only benefits the economy if those at the top allowed their wealth to trickle down to pay the difference, but common sense and recent history both indicate that won't happen. And there's no practical way to force that without radical economic changes that would never get political support. Not until there's an uprising, anyway. That seems to be the inedible conclusion when this kind of disparity exists long enough, and the majority are driven far enough into desperation.

Let's take this to a theoretical, but impractical, extreme.

We double the min. wage.

Now, for some stupid ass reason, real wages don't increase (they would.) in anyway.

So, more money but no more supply? Inflation.

We doubled, so that's 100% Inflation.

In order to keep up with this inflation, the average household now earns roughly 55% more than the year before (in nominal terms, i.e. a drop of -45%)

Now; Let's say Mr. Jones and family make up the average household.

Mr. Jones has 1.3 kids and a wife, they take home 50k a year. (~75k/yr after inflation)

They now live in a four bedroom house @ 300,000 dollars a year.

Let's say their mortgage in gov't insured, and they pay the maximum of 34% of their gross monthly income (pre-tax) in the mortgage of 1,416 PITI.

Now, the mortgage rate on the 300k loan is 3-5% (in nominal terms, as practically all private debt is written). Meaning that, the amount they owe won't change NO MATTER HOW MUCH inflation OCCURS.

So now, paying 1,416 a month only equates to 23% of gross monthly income. (Now apply this to all debts, like a car payment or even past credit card debts)

Do you see what raising the Price Level, De-Valuing the Currency does to debt. Do you now grasp, IN THE MOST UNREALISTIC AND WORST CASE SCENARIO, how raising the minimum wage in what we ALL consider to be a DEBT - Fuelled economy would be good for the AVERAGE American?

Now, there's some macro issues like perceived involatilly and possible loss of reserve currency status further de-valuing and increasing base interest rates for dollar-denominated debts. But this is an extremely simple scenario.

I too, am not pro "Minimum wage". I am pro collective bargaining, I'm pro equality, I'm pro labour, I'm pro begging wages to corporate payroll structure. Hell, I'm even pro net "productivity" bonuses and an entire industry based on that alone.

I just think that a minimum wage hike, federally, is the only politically realistic way to go about it.

 

[Buddha C]

First off.. let me start by saying I worked at Lehman Brothers from 2003-2005 in derivatives (housing). I know the game, probably better then anyone on this forum. Short response is You still fall for the scam.

Long answer is..

You can't be serious? TARP, Fannie and Freddie bailouts, discount windows, QE 1 and 2 and stimulus... total $9 trillion as of 2011. Yet not one forced rest of mortgages, not one case of resting housing prices, not one case of write downs for on time mortgages to historical price levels. In 2014 housing prices are just below peak highs.

Sorry, Buddha C.. Government, the Fed, and Politicians screwed over the working class (middle class). Housing prices decline on average $50,000 from 2008 to 2011. That nothing. That's a big middle finger considering we didn't even come close to 2001 levels. A $150,000 home is MUCH more affordable then a $225,000 home to a person then earning an extra $3.00 hour. Earning $3 more an hour, is more taxes paid, so that's actually $1.50 an hour.. Think about that.

You worked in Housing Derivatives.

You screwed up the market. Congratulations.

I knew there was a reason I never liked you. Besides how you act, how foolish you are in general I always thought something immanently was deranged inside of you. Now I know

And you do know that TARP was about "toxic" asset purchases. How would that have been effected by more housing being foreclosed on? You're basically saying because it was bad, it couldn't have been worse. But that's your expertise, in real life and on these forums. Pure twaddle.

Your Link

"Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion — but also has collected more than $10 billion in dividends and fees. Here is an overview, organized by the role the government has assumed in each case. "

 

[Dave Mittner]

Let's take this to a theoretical, but impractical, extreme.

We double the min. wage.

Now, for some stupid ass reason, real wages don't increase (they would.) in anyway.

So, more money but no more supply? Inflation.

I'm not understanding this.

For the past few decades the amount of wealth that has circulated within the lower and middle classes has been bleeding out to the top 1% who can't possibly spend it as quickly, thereby reducing economic circulation and reducing demand. Moving that money back down to the lower and middle classes would move the circulation back down and take demand back up to previous levels.

If you're suggesting inflation will occur as a result of moving this wealth down, why didn't we experience deflation when the wealth moved up?

 

[Buddha C]

I'm not understanding this.

For the past few decades the amount of wealth that has circulated within the lower and middle classes has been bleeding out to the top 1% who can't possibly spend it as quickly, thereby reducing economic circulation and reducing demand. Moving that money back down to the lower and middle classes would move the circulation back down and take demand back up to previous levels.

If you're suggesting inflation will occur as a result of moving this wealth down, why didn't we experience deflation when the wealth moved up?

You just said "if those at the top allow their wealth to trickle down", I assumed you meant that they'd increase inflation via the velocity of money, and that means that an increase in the minimum wage would ONLY cause inflation. I gave a scenario where that would play into our current national private (and really, public as well) debt structure.

We do experience deflation when the money is moved up. Because the velocity of money decreases, since its held in the wealth class that has a lower demand for cash on hand (i.e. velocity of money). It's just not overwhelming inflation, especially when there's an institution whose sole job seems to make sure that we have relatively consistent levels of inflation.

Let's say =

Our Economy has 1 Trillion dollar base (M1) and our demand for money/velocity of money (MV) is 15.

We have a GDP of 15 Trillion.

Let's say, more of the wealth is funneled into the top 1%, and the MV drops by ~6.7%

M1 Equals 1 and MV is now 14. So our economy has now only 14 Trillion GDP.

The way to fix this is by increasing M1 by 7.1%

M1 = 1.071 * 14 = MV
Roughly 15 Trillion.

Also, increasing debt burdens increases velocity of money for the lower class, which picks up the slack as well.

 

[Dave Mittner]

You just said "if those at the top allow their wealth to trickle down", I assumed you meant that they'd increase inflation via the velocity of money, and that means that an increase in the minimum wage would ONLY cause inflation. I gave a scenario where that would play into our current national private (and really, public as well) debt structure.

We do experience deflation when the money is moved up. Because the velocity of money decreases, since its held in the wealth class that has a lower demand for cash on hand (i.e. velocity of money). It's just not overwhelming inflation, especially when there's an institution whose sole job seems to make sure that we have relatively consistent levels of inflation.

Okay, so returning the wealth back down to where it used to be would simply undue the deflation that occurred as the wealth moved up. I can live with that. We were getting by pretty well before our income disparity problems and the middle class was a heck of a lot stronger.

 

[ALiberalModerate]

A family making $30,000 a year is easily able to save $250 a month. That's beyond reasonable. 10% of your income is a very realistic number.

That is ridiculous. If a family is making 30k a year, then you are bringing home about $975 every 2 weeks after taxes. Thus in most markets at least half your take home pay will go to rent alone. Another 500 dollars a month minimum goes to food to feed your family. That's only leaving about 500 dollars a month for everything else - and that is best case scenario. Frankly, if you are only making 30k a year in your household, you probably need to wait to start a family.

 

[austrianecon]

You worked in Housing Derivatives.

You screwed up the market. Congratulations.

Actually, I didn't screw up the market and my employment in that market was between 2003-2005 when it was small beans. Derivatives was the only way the huge increase in personal housing happened in the US.

I knew there was a reason I never liked you. Besides how you act, how foolish you are in general I always thought something immanently was deranged inside of you. Now I know

You don't like me cause a crap all over your half-assed ideas. I tend to force people to come up with responsible ideas. But alas you are just pushing the same ideas that require the Derivative market to keep funding flowing as a Bank has to have a positive balance sheet and they only way to accomplish that while increasing mortgages is via Derivatives.

And you do know that TARP was about "toxic" asset purchases. How would that have been effected by more housing being foreclosed on? You're basically saying because it was bad, it couldn't have been worse. But that's your expertise, in real life and on these forums. Pure twaddle.

The "toxic" assets being purchased were mortgages that weren't paying off (negative). Government could have forgiven those mortgages and do a principle reduction and reset these mortgages to at Fed rate interest. Despite the Fed owning the mortgages that was not done en masse. That was a $700billion fund and at the time about $4 trillion "toxic" mortgages. That's it. So $4 trillion vs the $12 trillion.

All it took is $3-4 trillion (includes even on time mortgages that was "toxic" of buying all the bad mortgages), resetting them 30 year fixed @ Fed funds rate (which would be 2% at the time) instead of the 7%+ interest rates for FREE. By doing this you cut the payment costs massively. For example... $200,000 home on a 20 year @ 7% is $1,758.93 payment. A $200,000 home on a 30 year @ 2% is $947.57. That's $800 difference. Throw in the Government can also do a principle reduction, you have a plan for success. A stable payment system and incoming payment settles the CDO market and the leveraging that came from it. Then over the next 6 years you can de-leverage responsibly. I.E that extra $800 a month in a family's pocket can slowly pay off Credit Card bills and still leave money in the pocket to spend. For example. Take $200 and pay down Credit card each month.. is $2,400 in reduction of debt, or $14,000 over 6 years. Still leave $600 to play around with each month, that's food, a new car payment, and so on.

But what was done was the complete opposite. To refi, you had to borrow or come up with the refi costs. So that was a hit to the middle class and lower class families. Families lost homes because they couldn't afford the refi. Then you had banks settle for no-fault separation. You give them the keys to the home and you are out on your ass. This lead to inventory build up and inventory build up leads to collapse of prices which ends up putting more people underwater and more failures.

"Through April 30, the government has made commitments of about $12.2 trillion and spent $2.5 trillion — but also has collected more than $10 billion in dividends and fees. Here is an overview, organized by the role the government has assumed in each case. "

$2.5 trillion PLUS QE 1, 2 and 3.. They totaled... $3.7 trillion. So right off the bat what I am telling you should have happened could have happened because a total of $6.2 trillion in funding took place to "save the economy". On top of the $9.7 trillion in commitments.

 

[Buddha C]

Actually, I didn't screw up the market and my employment in that market was between 2003-2005 when it was small beans. Derivatives was the only way the huge increase in personal housing happened in the US.



You don't like me cause a crap all over your half-assed ideas. I tend to force people to come up with responsible ideas. But alas you are just pushing the same ideas that require the Derivative market to keep funding flowing as a Bank has to have a positive balance sheet and they only way to accomplish that while increasing mortgages is via Derivatives.



The "toxic" assets being purchased were mortgages that weren't paying off (negative). Government could have forgiven those mortgages and do a principle reduction and reset these mortgages to at Fed rate interest. Despite the Fed owning the mortgages that was not done en masse. That was a $700billion fund and at the time about $4 trillion "toxic" mortgages. That's it. So $4 trillion vs the $12 trillion.

All it took is $3-4 trillion (includes even on time mortgages that was "toxic" of buying all the bad mortgages), resetting them 30 year fixed @ Fed funds rate (which would be 2% at the time) instead of the 7%+ interest rates for FREE. By doing this you cut the payment costs massively. For example... $200,000 home on a 20 year @ 7% is $1,758.93 payment. A $200,000 home on a 30 year @ 2% is $947.57. That's $800 difference. Throw in the Government can also do a principle reduction, you have a plan for success. A stable payment system and incoming payment settles the CDO market and the leveraging that came from it. Then over the next 6 years you can de-leverage responsibly. I.E that extra $800 a month in a family's pocket can slowly pay off Credit Card bills and still leave money in the pocket to spend. For example. Take $200 and pay down Credit card each month.. is $2,400 in reduction of debt, or $14,000 over 6 years. Still leave $600 to play around with each month, that's food, a new car payment, and so on.

But what was done was the complete opposite. To refi, you had to borrow or come up with the refi costs. So that was a hit to the middle class and lower class families. Families lost homes because they couldn't afford the refi. Then you had banks settle for no-fault separation. You give them the keys to the home and you are out on your ass. This lead to inventory build up and inventory build up leads to collapse of prices which ends up putting more people underwater and more failures.




$2.5 trillion PLUS QE 1, 2 and 3.. They totaled... $3.7 trillion. So right off the bat what I am telling you should have happened could have happened because a total of $6.2 trillion in funding took place to "save the economy". On top of the $9.7 trillion in commitments.

1. Verbose

2. Thanks for conceding that the government needed an expanded fiscal policy, in the form of debt restructure. (Honestly, I don't have a problem with the middle portion of your post: though if you wanted an effective lowering of the housing price level you would need to install principle reduction)

The point of the refis was to rake in commission, that's why the banks were so happy and willing to push customers into them.

And I was using your source, that clearly said in 2011 that 2.5 trillion of the committed 12~ trillion had been spent.

 

[austrianecon]

1. Verbose

1) Needed.

2. Thanks for conceding that the government needed an expanded fiscal policy, in the form of debt restructure. (Honestly, I don't have a problem with the middle portion of your post: though if you wanted an effective lowering of the housing price level you would need to install principle reduction)

2)I conceded nothing but rather pointing out that while the government expanded fiscal policy, it did nothing to address the situation. Debt restructure could have taken place without funneling it to the banks but rather people with mortgages in the form of lower interest rates and principle. That's not expanding fiscal policy such as QE but rather de-leveraging, which is also a form of expanding fiscal policy that doesn't require a printing press. Yes, you would which is why I mention write downs/ principle reduction in the post as well.

The point of the refis was to rake in commission, that's why the banks were so happy and willing to push customers into them.

And I was using your source, that clearly said in 2011 that 2.5 trillion of the committed 12~ trillion had been spent.

3) Absolutely that was the point and Government went with it. So for me as a person who believes in the natural state of the business cycle and not rewarding failure, Government ignored both at the cost of the middle class. My source was to show $2.5 trillion was used and I also included in my post the QE as part of my calculation.. so that $2.5 trillion plus QEs. Guess you missed that.

 

[phattonez]

That is ridiculous. If a family is making 30k a year, then you are bringing home about $975 every 2 weeks after taxes.

I contest this. If you're using the example of a family, then the negligible taxes that they're paying on this is offset by any benefits they are assuredly getting from the government.

Thus in most markets at least half your take home pay will go to rent alone.

Find cheaper housing. Move to a cheaper city.

Another 500 dollars a month minimum goes to food to feed your family. That's only leaving about 500 dollars a month for everything else - and that is best case scenario. Frankly, if you are only making 30k a year in your household, you probably need to wait to start a family.

$30,000 a year is pretty dire circumstances, but $250 a month is almost negligible. What's the excuse for those at or above the poverty line?

 

[faithful_servant]

I'm not well versed in this sort of stuff, so that leads to this question. Is there any way to avoid these real estate bubble bursts? Or are they just inevitable?

Yes. Increase interest rates to encourage people to save for a home instead of borrowing. Over the short term, it will depress the housing market, but over the long run it will stabilize it. As long as it's profitable to borrow money to buy a house in the hopes of flipping it, people will be doing just that. Do enough of it and you saturate the market, leading to the inevitable crash in prices when the market moves from being a seller's market to a buyer's market.

 

[phattonez]

Yes. Increase interest rates to encourage people to save for a home instead of borrowing. Over the short term, it will depress the housing market, but over the long run it will stabilize it. As long as it's profitable to borrow money to buy a house in the hopes of flipping it, people will be doing just that. Do enough of it and you saturate the market, leading to the inevitable crash in prices when the market moves from being a seller's market to a buyer's market.

And investors have mostly pulled out. It would be good advice to follow the big money here.

Big money investors pull out of California dramatically: Large purchases from LLCs and LPs for trustee sales are down by over 80 percent from peak reached in 2012. » Dr. Housing Bubble Blog

NB: I think this data is only for California, but this is going on across the country.

 

[faithful_servant]

And investors have mostly pulled out. It would be good advice to follow the big money here.

Big money investors pull out of California dramatically: Large purchases from LLCs and LPs for trustee sales are down by over 80 percent from peak reached in 2012. » Dr. Housing Bubble Blog

NB: I think this data is only for California, but this is going on across the country.

I live in Central Oregon, also known as Ground Zero for the housing crash. Homes here are selling at asking prices in 1-2 weeks. The majority of the sales are now to private parties and not investment firms as they were in the early '00s. We've also got <2% vacancy rate for rentals and your average 1,800 SF home is renting for around $1,000 - $1,400 month.

 

[ALiberalModerate]

I contest this. If you're using the example of a family, then the negligible taxes that they're paying on this is offset by any benefits they are assuredly getting from the government.

Payroll taxes alone reduces their take home to $1060 every 2 weeks. Do you honestly think that every other tax federal, state, and local on this hypothetical family does not equal another $85 out of their check?

Find cheaper housing. Move to a cheaper city.

If a family can find a place to rent for 975 a month, then they are already living in a city with a cheap cost of living.

$30,000 a year is pretty dire circumstances, but $250 a month is almost negligible. What's the excuse for those at or above the poverty line?

What alternate universe are you living in where $250 a month is "almost negligible" for a family that only earns 30k a year?

 

[phattonez]

Payroll taxes alone reduces their take home to $1060 every 2 weeks. Do you honestly think that every other tax federal, state, and local on this hypothetical family does not equal another $85 out of their check?

Check out what happens when you have a family of 4 (two children and a spouse) that makes only $30,000. Get back to me.

If a family can find a place to rent for 975 a month, then they are already living in a city with a cheap cost of living.

And they have $1500 left over every month to deal with accordingly.

What alternate universe are you living in where $250 a month is "almost negligible" for a family that only earns 30k a year?

One where people in poverty often have satellite dishes, iPhones, and brand new cars. Some place called the USA.

 

[ALiberalModerate]

Check out what happens when you have a family of 4 (two children and a spouse) that makes only $30,000. Get back to me.

I waited until I made a good bit more than 30k a year to start a family. However, I grew up in poverty, so I know what its like. We never took any more of government assistance. You would be surprised at how many poor people there are that aren't on the dole.

And they have $1500 left over every month to deal with accordingly.

How do you figure. If you make 30k a year, your take home bi-weekly is about $975. If you rent is half your monthly net income, and in all likelihood it would be at 30k a year, then you are left with approximately 975 for everything else each month after you pay your rent. Food alone would take up better than half that.

One where people in poverty often have satellite dishes, iPhones, and brand new cars. Some place called the USA.

You obviously have no idea what its like being poor. You only have this caricature of it you have formed in your mind. We never had a satellite dish or new car (or anything within 10 years of being a new car) when I was growing up. Most people that are poor don't drive new cars or have iphones.

 

[phattonez]

I waited until I made a good bit more than 30k a year to start a family. However, I grew up in poverty, so I know what its like. We never took any more of government assistance. You would be surprised at how many poor people there are that aren't on the dole.

So you saw that families with that income don't pay taxes.

How do you figure. If you make 30k a year, your take home bi-weekly is about $975. If you rent is half your monthly net income, and in all likelihood it would be at 30k a year, then you are left with approximately 975 for everything else each month after you pay your rent. Food alone would take up better than half that.

If you're that poor you're not paying taxes. You've heard of the EITC, right?

You obviously have no idea what its like being poor. You only have this caricature of it you have formed in your mind. We never had a satellite dish or new car (or anything within 10 years of being a new car) when I was growing up. Most people that are poor don't drive new cars or have iphones.

Maybe it's different outside of Los Angeles, but that's what I routinely see here.

 

[ALiberalModerate]

So you saw that families with that income don't pay taxes.



If you're that poor you're not paying taxes. You've heard of the EITC, right?



Maybe it's different outside of Los Angeles, but that's what I routinely see here.

Everyone pays payroll taxes. You still pay 6.2% of your income in payroll taxes regardless of how much you make. You are usually subject to at least some state income taxes regardless of how much you make. In many localities you are also subject to a local income tax as well. For example, no matter how much you earn here in Kansas City, you pay 1% to the city.

 

[phattonez]

Everyone pays payroll taxes. You still pay 6.2% of your income in payroll taxes regardless of how much you make. You are usually subject to at least some state income taxes regardless of how much you make. In many localities you are also subject to a local income tax as well. For example, no matter how much you earn here in Kansas City, you pay 1% to the city.

6.2%*30,000 = 1860.

Excluding any deductions like childcare, student loan interest, and mortgage interest, you still receive a refund of $1820. That makes up for payroll taxes.

 

[ALiberalModerate]

6.2%*30,000 = 1860.

Excluding any deductions like childcare, student loan interest, and mortgage interest, you still receive a refund of $1820. That makes up for payroll taxes.

You don't get credits or deductions against your payroll taxes. Only for federal income taxes paid or state taxes paid.

 

[phattonez]

You don't get credits or deductions against your payroll taxes. Only for federal income taxes paid or state taxes paid.

That's what I'm talking about. In the scenario I provided a typical family actually receives about $1,800 from the government on top of their salary.

 

[ALiberalModerate]

That's what I'm talking about. In the scenario I provided a typical family actually receives about $1,800 from the government on top of their salary.

Even in your perfect world where a family that earned 30k a year got to take home every cent they earned, you are still talking about a take home pay of $1,132 dollars every 2 weeks. Which is about $2400 a month. So let's do the math:

Rent: $975 a month.
Food: $600 a month.
Cheap Car: $200 a month
Gas / Maint for car: $130 a month
Insurance for car: $100 a month
Phone: $50 a month
Misc Utilities (what isn't paid for in apartment): Minimum $100 a month.

So far we are at $2155 a month, and have yet to buy anyone a stitch of clothes, buy any incidentals, pay any fees for school or daycare, pay any healthcare related expenses, or even so much as buy a toothbrush. If you are a family earning just 30k a year, you are at best living paycheck to paycheck.

 

[phattonez]

Even in your perfect world where a family that earned 30k a year got to take home every cent they earned, you are still talking about a take home pay of $1,132 dollars every 2 weeks. Which is about $2400 a month. So let's do the math:

Rent: $975 a month.
Food: $600 a month.
Cheap Car: $200 a month
Gas / Maint for car: $130 a month
Insurance for car: $100 a month
Phone: $50 a month
Misc Utilities (what isn't paid for in apartment): Minimum $100 a month.

So far we are at $2155 a month, and have yet to buy anyone a stitch of clothes, buy any incidentals, pay any fees for school or daycare, pay any healthcare related expenses, or even so much as buy a toothbrush. If you are a family earning just 30k a year, you are at best living paycheck to paycheck.

And you're still excluding benefits like the housing benefits and food benefits that such a family would receive, and even then $250 a month is very possible.