Buying a House, please advice....

[PuppetMaster]

Hello,
Im currently in college and I am doing quite well with my poker earnings. I am interested in purchasing a house, but I have some problems. This year will be the first time I pay taxes on earned income, how hard will it be for me to get a loan? If I am interested in a $90,000 Condo, and I put a down payment of lets say $45,000, can I expect to recieve a 30 year 5% APR mortgage?

What about buying property over seas? I realize I would have to pay cash, but the property is so much cheaper I think it could even out in the long run. I would love to buy a condo in Costa Rica for 60-70K cash. What kind of complications does one occur when attempting to purchase property over seas, is it genreally considered a bad idea?

Does anyone know a good message broad or website that has a forum for indepth discussion of real estate?

[GeorgeF]

1) A 50% down payement should get you an excellent rate on the $45K remaining. The question is how many points will they tack on. $45k is a fairly low loan amount.

2) As to investing in real estate outside the US how are you going to manage it? How do you know what comparable sales are? What kind of title insurance will you get? What are the costs insurance + taxes + ect? Do you speak spanish? I suggest that you go to Costa Rica rent for a year learn spanish and their ways, then consider buying.

[morgant]

Costa Rican property laws are extremely tricky. I travelled there for a couple of months and there were some major stipulations to the effect of if someone owns a piece of land and abandons it, anyone can occupy that land, however the original "owner" can come back and reclaim his parcel at any time. The reclaiming process is all a matter of who you know. I could be a bit off, but it is something like the above.

[squiffy]

In general, I think it is very risky to invest in property outside the United States. If anything goes wrong, it will be incredibly expensive and inconvenient to find a trustworthy property manager and or attorney to assist you. I think you need a high level of experience and sophistication before you can invest far away.

If this is your first real estate investment, I would strongly consider living in it. That way, you save on rent and get tax deductions. And you don't have to pay a property manager to rent it out for you. If you have no experience renting property, it's probably better not to rush into things. If you don't check people's credit and background carefully, you could get a deadbeat tenant and end up losing a lot of money.

Unless you are very very sure that you will have trouble earning enough income to make payments on the mortgage, putting 45% down is probably unwise. One of the main benefits of owning real estate is LEVERAGE.

For 5% or 10% down, 20% if it gets you a better interest rate or lower payment, you can OWN AND CONTROL and TAKE ALL THE EQUITY APPRECIATION from a property worth 10x the money you invested.

The amount of your profit is the same whether you pay 100% cash or whether you pay 10% cash and borrow the remaining 90%.

Money is cheaper now than it has been in 20-30 years. And this kind of opportunity to borrow at 5% interest won't come around again for a very long time, especially if we start consistently running budget deficits and trigger higher inflation.

When money is cheap you borrow it and invest it. Because you can earn more on the stock market and in real estate, over the long run, than the money is costing you. So you stand to make a profit over the long run.

Plus, you get a tax deduction for mortgage interest, so the money is really costing you 1-2% less than the stated rate of 5-6%. Plus, as inflation runs at 2-3% on average, over the full period of a 30 year loan, you are paying back the loan with money that is worth less and less, but the fixed-30 year payment stays the same and effectively costs you less and less.

A $500 payment 30 years from now will be worth much much much less than a $500 payment today.

So you should consider putting down a smaller downpayment rather than a larger downpayment.

You should strongly consider going to the bookstore or library and buying or borrowing 5-10 basic books on real estate investing. And READ THEM.

I am not aware of any good websites with discussion boards. If you find any let me know.

You can go to www.dataquicknews.com (http://www.dataquicknews.com) for some good real estate statistics

Make absolutely sure that you buy a home or condo made by a reputable builder. This will be harder to check out if it is built in a foreign country as you won't be able to cheaply spend as much time researching this issue.

While working at the court, I have seen a great many lawsuits involving shoddy construction. And have two friends who are also lawyers, but who bought homes with incredibly bad mold and water leakage problems. One friend bought a condo, and when it rains, rain literally pours though several holes in the roof. Unbelievable!!!!!!!!

I cannot believe how little time and effort many people put into researching the quality of the home they intend to buy. Many people spend more time deciding what kind of wristwatch to buy or what kind of dvd-player they are going to buy than they do researching the quality of the home or condo they are going to buy.

If you plan to pay $90,000 for a condo or $300,000 for a home, it's just plain stupid not to talk to realtors and other homeowners about which builders in town do quality work, and which ones don't.

Also you should start working with a realtor and looking at homes. Go to the bank and ask them to help you figure out what kind of loan you can afford or what more information you will need to provide. Do this now, so that you know what you need to do.

Also, you should mention what city you live in. Real estate is a very local phenonomenon and it's hard to give advice about a different city.

I know Los Angeles, Fresno, and Honolulu. Also Dallas to some extent.

I can tell you that in the vast majority of cities condos have traditionally been a much more risky investment than homes. Though in crowded big cities, the right condo can be fine.

I have recently read an article saying that condos have been hot in many cities.

I think this is a temporary phenomenon. Because credit is so cheap, everyone who cannot afford a home is at least buying a condo. And in crowded expensive cities, many people can only afford a condo.

This is fine. But when the economy heats up and interest rates rise, it may be that many of the people who bought too much home or too much condo with their money, may not be able to make their increasing mortgage payments.

And prices may take a fall.

Still, if you do it at the right time and in the right market, a condo is an affordable way to get into real estate.

But again, you need to be very careful to investigate the builder and talk with current owners to see if they are having any problems with leaks, bad plumbing, etc. And of course have a home inspection.

Look at tons of condos with a realtor. And ask tons of question about noise, leaks, loud music from neighbors, thin walls, etc. Knock on several doors at random and ask people if they would tell you honestly what they think of the neighborhood, noise, etc.

[PuppetMaster]

[ QUOTE ]
In general, I think it is very risky to invest in property outside the United States. If anything goes wrong, it will be incredibly expensive and inconvenient to find a trustworthy property manager and or attorney to assist you. I think you need a high level of experience and sophistication before you can invest far away.

If this is your first real estate investment, I would strongly consider living in it. That way, you save on rent and get tax deductions. And you don't have to pay a property manager to rent it out for you. If you have no experience renting property, it's probably better not to rush into things. If you don't check people's credit and background carefully, you could get a deadbeat tenant and end up losing a lot of money.

Unless you are very very sure that you will have trouble earning enough income to make payments on the mortgage, putting 45% down is probably unwise. One of the main benefits of owning real estate is LEVERAGE.

For 5% or 10% down, 20% if it gets you a better interest rate or lower payment, you can OWN AND CONTROL and TAKE ALL THE EQUITY APPRECIATION from a property worth 10x the money you invested.

The amount of your profit is the same whether you pay 100% cash or whether you pay 10% cash and borrow the remaining 90%.

Money is cheaper now than it has been in 20-30 years. And this kind of opportunity to borrow at 5% interest won't come around again for a very long time, especially if we start consistently running budget deficits and trigger higher inflation.

When money is cheap you borrow it and invest it. Because you can earn more on the stock market and in real estate, over the long run, than the money is costing you. So you stand to make a profit over the long run.

Plus, you get a tax deduction for mortgage interest, so the money is really costing you 1-2% less than the stated rate of 5-6%. Plus, as inflation runs at 2-3% on average, over the full period of a 30 year loan, you are paying back the loan with money that is worth less and less, but the fixed-30 year payment stays the same and effectively costs you less and less.

A $500 payment 30 years from now will be worth much much much less than a $500 payment today.

So you should consider putting down a smaller downpayment rather than a larger downpayment.

You should strongly consider going to the bookstore or library and buying or borrowing 5-10 basic books on real estate investing. And READ THEM.

I am not aware of any good websites with discussion boards. If you find any let me know.

You can go to www.dataquicknews.com (http://www.dataquicknews.com) for some good real estate statistics

Make absolutely sure that you buy a home or condo made by a reputable builder. This will be harder to check out if it is built in a foreign country as you won't be able to cheaply spend as much time researching this issue.

While working at the court, I have seen a great many lawsuits involving shoddy construction. And have two friends who are also lawyers, but who bought homes with incredibly bad mold and water leakage problems. One friend bought a condo, and when it rains, rain literally pours though several holes in the roof. Unbelievable!!!!!!!!

I cannot believe how little time and effort many people put into researching the quality of the home they intend to buy. Many people spend more time deciding what kind of wristwatch to buy or what kind of dvd-player they are going to buy than they do researching the quality of the home or condo they are going to buy.

If you plan to pay $90,000 for a condo or $300,000 for a home, it's just plain stupid not to talk to realtors and other homeowners about which builders in town do quality work, and which ones don't.

Also you should start working with a realtor and looking at homes. Go to the bank and ask them to help you figure out what kind of loan you can afford or what more information you will need to provide. Do this now, so that you know what you need to do.

Also, you should mention what city you live in. Real estate is a very local phenonomenon and it's hard to give advice about a different city.

I know Los Angeles, Fresno, and Honolulu. Also Dallas to some extent.

I can tell you that in the vast majority of cities condos have traditionally been a much more risky investment than homes. Though in crowded big cities, the right condo can be fine.

I have recently read an article saying that condos have been hot in many cities.

I think this is a temporary phenomenon. Because credit is so cheap, everyone who cannot afford a home is at least buying a condo. And in crowded expensive cities, many people can only afford a condo.

This is fine. But when the economy heats up and interest rates rise, it may be that many of the people who bought too much home or too much condo with their money, may not be able to make their increasing mortgage payments.

And prices may take a fall.

Still, if you do it at the right time and in the right market, a condo is an affordable way to get into real estate.

But again, you need to be very careful to investigate the builder and talk with current owners to see if they are having any problems with leaks, bad plumbing, etc. And of course have a home inspection.

Look at tons of condos with a realtor. And ask tons of question about noise, leaks, loud music from neighbors, thin walls, etc. Knock on several doors at random and ask people if they would tell you honestly what they think of the neighborhood, noise, etc.





[/ QUOTE ]
Thank you very much, your post was very informative.

I have a question though, how will the bank look at me if I have never really had a job, and the only money I have reported to the IRS is in the form of gambling winnings.

When do you expect interest rates to begin to rise?

[bunky9590]

With as big a down payment as you are putting down, consider a no doc loan, slightly higher interest rate but no documentation of earnings etc.

That is a pro poker players best friend.

[PuppetMaster]

[ QUOTE ]
With as big a down payment as you are putting down, consider a no doc loan, slightly higher interest rate but no documentation of earnings etc.

That is a pro poker players best friend.



[/ QUOTE ]
Now Im thinking of not putting down such a large down payment. How will this effect a no doc. loan?
I have alot of research to do, might even get my own reality license.

[bunky9590]

Dont quote me on this, but I think you need to lump down 20% on the house to qualify for the no doc. (Check with your mortgage lender) Its typically a point higher due to the risk factor, but if you can't show all your income, its really the way to go.

There are so many ways to get the financing you need.

We did a mortgage ona rental property at 100% financing
80% 1st at 5.5% and a 20% second at 11%, NO PMI.

Quickly paid down the second and the first is really really cheap. Actually got a check at closing with sellers consignments.

[Wildbill]

I would pass on a house until you are certain of what and where you want to live. If you are a poker player first, chances are pretty good you will move at some point in the next few years chasing good games. If you are about to finish college then you will want to leave your options open as you might move or get a good job that will open your doors to a better house. Investing a condo just as a thing to do is rarely a good idea. As they say in trading, plan your work and work your plan.

[PuppetMaster]

[ QUOTE ]
I would pass on a house until you are certain of what and where you want to live. If you are a poker player first, chances are pretty good you will move at some point in the next few years chasing good games. If you are about to finish college then you will want to leave your options open as you might move or get a good job that will open your doors to a better house. Investing a condo just as a thing to do is rarely a good idea. As they say in trading, plan your work and work your plan.

[/ QUOTE ]
The thing is that right now im only in my first year of college. I am yet to declare a major, so right now I dont have too much direction of where I am headed. I am positive that I will not become a pro poker player, and that poker will not be my main source of income, however at this juncture, poker ahs been very good to me and I have accumulated a large amount of money that is sitting dead in my savings account, and various safety deposit boxes.
I figure investing in a house with interest rates this low is a no lose situation.

[adios]

Keep in mind that there's a theshold of the loan to value ratio where it's generally accepted that the lender can't lose money. The number I've heard is .7 i.e. if the loan is 70% of the value of the property. Put enough down on the house and you should be in a good bargaining position for a low interest rate loan.

[squiffy]

The bank will probably not like your poker winnings. They will seem too frivolous and uncertain. They would probably prefer earned income from a steady job. You may wish to consider taking a simple part-time job to start building an income history. But the best thing to do is to go to the bank and find out exactly what they require. If you fear rejection, go to an unfamiliar bank for info. If they reject you, no big deal. Then, when you are sure you have met the criteria, then go to your regular bank and apply.

Even if you do not qualify today, you should start to work toward your goal and make plans for future home or condo ownership.

No one can say, with precision exactly WHEN interest rates will rise. Anyone who says they can is either a liar, a conman, or just a lucky guesser. No one can predict the future with absolute certainty and precision. We can only make rough guesses based on past history and past economic cycles. But there are just too many variable and too many complicated interrelated factors to make an easy prediction.

The bottom line question is WHY DO INTEREST RATES TEND TO RISE? WHAT FACTORS AFFECT INTEREST RATES?

(1) Consumer Demand for capital. Are people borrowing money to buy homes and cars? Yes, since interest rates are low, people are borrowing money cheaply to buy cars and homes. The more they buy, the more they will tend to push up prices, if demand starts to outstrip supply. Automakers have no trouble trying to pump out enough cars, but it's a lot riskier and a lot more expensive to build homes, so it is much easier for home demand to exceed home supply and for home prices to start to rise.

(2) Business demand for money. Again, interest rates are the price of borrowing money. As consumer demand for products increase, businesses will start to want to produce more to meet that demand and earn profits. They will start to hire more employees, build more factories, lease more office space, open more showrooms, buy more raw materials to make products. This costs money and many corporations will start to borrow large amounts. They will compete with consumers for available capital lent by banks.

As business and consumer demand for capital increases, long-term interest rates will tend to increase. If there is more demand for capital, the banks or lenders who are selling capital can charge more for it. And if many people are bidding for capital, the buyers will have to bid more and more to get capital.

(3) Inflation. If we start running budget deficits to to trade imbalances and/or war spending, the government will print more money or issue more bonds to pay its debts. This means that America has the same quantity of natural resources and goods, but more money chasing it. So as the money supply expands while the supply of goods stays constant, each dollar will be worth less and we will have inflation. We almost always have some inflation of 2-3%, but inflation should increase.

As inflation and fears of inflation increase, lenders will start to demand more and more interest for their loans, to protect them from the fact that in the future, they will be repaid with money whose buying power is rapidly declining.

(4) World economy. If Europe, Russia, Japan, China and the rest of Asia all start to recover and grow faster at the same time (which tends to become more likely as world economies become more interdependent, then the world demand for oil, energy, capital, and natural resources will increase, further driving up prices and costs. This will cause the costs of capital on world markets to rise.

I am no expert. But I think that in general, interest rates rise as the economy heats up. So as the economy heats up, long-term interest rates should start to rise. And the Fed will respond by raising short-term interest rates on loans made to banks.

So the question is whether the economy is growing and heating up and how much and how rapidly?

Major American corporations on the stock market are clearly rreporting higher profits, some due to cost-cutting, some due to higher productivity, and hopefully some due to higher consumer demand and purchasing.

Employment is still not growing, but when it does that will trigger a sharp rise in interest rates.

Also, I suppose people look at consumer sentiment and consumer spending.

There are probably many other factors to consider, but that is my understanding in a nutshell. Still trying to study and learn more each day.

You should try to take a basic course in Economics at school and read BusinessWeek, the WallStreet Journal, Fortune, and the business section of your newspaper to start to get a feel for the basic theory of economic principles and the practical workings of how market forces actually operate.

[adios]

One thing should be noted about interest rates in general. Since Paul Volker took over as Fed Chairman at the end of the Carter administration, interest rates have declined significantly. So have inflationary pressures on the US economy. Monetarism has been the linchpin of Fed policy from Volkers leadership to the present. There has been a huge economic expansion in the US since that time. The last Fed tightening occurred due to fears of inflation as a result of all time lows in the unemployment rate. We didn't see any kind of runaway inflation, just the fear of it. IMO the long end of the yield curve reflects inflation expectations and from 10 years to 30 years it's flat and yields are low.

[squiffy]

10 year bond yields are based,in part, on the market's expectations of inflation in ten years.

In 1963, did the market accurately predict the inflation rate for 1973 after the cost of the Vietnam War and the Oil Embargo? No. The market couldn't because individual bond traders could not accurately forsee the future.

It is human nature to predict the internet stocks would continue to rise, yet another year, because they had risen the year before. And it is human nature to predict that inflation will continue to remain low, because it has remained low in the past.

A budget deficit, high oil costs, a war in Afghanistan and Iraq, and a growing American and world economy are inflationary.

When interest rates are the lowest in 10, 20, or 30 years, that means they are way below the historical average. Why would you expect that 10 years hence the inflation rate will still be many standard deviations below the average???

Seems unlikely to me, given the reality of economic cycles and the tendency of American governments not to balance their budgets.

[Wildbill]

Considering you are looking for a cheap place, a condo or whatever you decide on, if you can qualify get an adjustable rate. You sound likely to sell in 3-5 years so a 5/1 ARM probably would suit you well and save you a lot on the interest costs, not to mention make you more easily qualified. If you are looking at an 80-100k condo, at these rates all you have to do is prove you make $1500 a month, not much at all. That equates to about a $9/hour job. With enough of a paydown and maybe a second loan, you should be able to swing this. The key though is that you indeed are going to get a place that cheap.

[adios]

First comment is that I addressed this in the post you responded to as to why I see the monetary environment being much different than in 1965-1980 let's say. Simple question to answer really, why have interest rates been in a long steady decline since around 1980 as well as inflation pressures receding, during a tremendous economic expansion, a massive defense buildup in the 80's, massive budget deficits in the 80's (bigger than today's when normalized for GDP) when the Fed embarked on a different' monetary policy? Certainly your entitled to your opinion but I'm right about the change in monetary policy since 1980, the decline in interest rates since 1980, and the easing of inflation pressures. The data speaks for itself. Perhaps you could actually try and make a case for your opinions regarding inflation, interest rates with real data. I would just caution that a correlation fallacy is a common error in analyzing data. Perhaps the change in Fed monetary policy and the long decline in interest rates is a mere coincidence. The statement I made in another post is valid as well. Interest rates covers a lot of durations and a lot of debt securities. The notion that a spike in mortgage rates will cause mortgage company earnings to dry up is just plain wrong. Time will tell what happens in the future and that's what makes a market.

[squiffy]

Decline in interest rates in the early 90's was due to increased productivity of American workers due to computers and the internet, and fall of the Berlin Wall and collapse of the Soviet Union in 1989 or thereabouts, which meant reduced defense spending. It's about guns vs. butter. Also under Clinton we started to balance the budget and could do so because of reduced defense spending.

The budget and defense spending drive money supply, not the other way around. I am not saying money supply is irrelvant. Just that spending decisions by the government, business, and consumers determine inflation and value of money.

Government does not print money and inflate the money supply for no reason. It does so in response to pressure to spend on war or on public programs and pork as in Johnson's great society campaign.

As far as I can tell monetarists have it backwards. Perhaps monetarism was more relevant to more primitive economies based on gold or cowrie shells.

Once you go to dollar bills and credit cards and electronic credit, I think economic conditions dictate money supply, rather than money supply dictating economic conditions.

We are in the middle of a technology and communications revolution, which like the industrial revolution has generated tremendous productivity.

And America has benefitted from the rise of a product -- computers and computer chips that we dominate and benefit from.

Contrast this to the declining American auto industry.

[squiffy]

In other words, once you have a fully developed modern economy based on credit, regulating the money supply really isn't a problem.

Money is just a counter or place holder. What matters, ultimately, is how much wealth the nation is creating through the goods and services it produces and through foreign trade.

And also whether you have a balanced budget, whether you are spending more than you have, or saving and investing.

In the late 1970's and early 1980's American steel and auto industries were declining. High wages, poor quality, aging factories, stiff competition from Japan. We were spending huge amounts of money on defense and still suffering from the inflationary effects of the Vietnam War.

With the rise of computers, now we have a burgeoning new cash cow industry that we dominate. We no longer had to counter the Soviet threat with huge defense spending.
And computers and the internet were revolutionizing communication and information and services in the U.S. economy.

Look how many banking transactions we can do on the computer or on an ATM, and how quickly. Look at how easily checkers can scan goods at the grocery store.

That is where the wealth is coming from. And that is why we don't have high inflation. We are producing a lot of wealth very rapidly and efficiently, and we are not flushing as much wealth down the toilet in defense spending.

But that is changing now, with the war in Iraq, Afghanistan and against terrorism. Sept. 11 also changed the efficiency of our transportation system and has reduced the amount of cheap travel that Americans do and has increased the cost of domestic security.

This is all expensive and bodes ill for America's overall economic health in the foreseeable future.

[adios]

[ QUOTE ]
In other words, once you have a fully developed modern economy based on credit, regulating the money supply really isn't a problem.

[/ QUOTE ]

Apparently Milton Friedman disagrees with you:

COMMENTARY

The Fed's Thermostat

By MILTON FRIEDMAN

Fifteen years ago, in an op-ed on this page entitled "The Fed Has No Clothes" (April 15, 1988), I wrote, "No major institution in the U.S. has so poor a record of performance over so long a period as the Federal Reserve, yet so high a public recognition." As I believe my column demonstrated, that judgement is amply justified for the first seven decades or so of the Fed's existence. I am glad to report that it is not valid for the period since.

* * *
The basic responsibility of the Federal Reserve is to produce as close an approximation as possible to price stability. Chart 1 provides evidence on how well it has performed that function. It plots for each quarter the annual rate of inflation in a comprehensive price index -- the deflator used to calculate real GDP.

The contrast between the periods before and after the middle of the 1980s is remarkable. Before, it is like a chart of the temperature in a room without a thermostat in a location with very variable climate; after, it is like the temperature in the same room but with a reasonably good though not perfect thermostat, and one that is set to a gradually declining temperature. Sometime around 1985, the Fed appears to have acquired the thermostat that it had been seeking the whole of its life.

A convenient way to explain the Fed's problem is with a truism called the quantity equation of money: the quantity of money (M) times the velocity of circulation (V) equals the price level (P) times output (y), MV=Py.


The Fed does not control directly any of the variables in this equation. For all practical purposes, the Fed controls one thing and one thing only: the volume of its own obligations -- that is, high-powered money or the base. (The Fed controls the amount of high-powered money through open-market operations: when it buys securities, it adds to the base; when it sells securities, it subtracts from the base. In addition, the Fed can change the discount rate and, to some extent, reserve requirements. But those powers are of minor importance compared to open-market operations and serve only to obfuscate the analysis.)

Control over the base enables the Fed, if it chooses to do so, to control within narrow limits any one of a number of monetary aggregates, such as M1, M2 or M3 (corresponding to each aggregate, there is a matching velocity). Its control over these is absolute. It could make the chosen aggregate rise or fall at the annual rate of 2% or 5% or 10%, or you name it, not day by day or week to week but certainly quarter to quarter and year to year. Control over the base also enables the Fed to peg any of a number of interest rates, such as the federal-funds rate or the three-month Treasury bill rate. In practice, the Fed employs a changeable peg of the federal-funds rate as its operating instrument. It pegs the fund rate by open-market operations, in the process determining the rate of monetary growth.

To keep prices stable, the Fed must see to it that the quantity of money changes in such a way as to offset movements in velocity and output. Velocity is ordinarily very stable, fluctuating only mildly and rather randomly around a mild long-term trend from year to year. So long as that is the case, changes in prices (inflation or deflation) are dominated by what happens to the quantity of money per unit of output.

Prior to the 1980s, the Fed got into trouble because it generated wide fluctuations in monetary growth per unit of output. Far from promoting price stability, it was itself a major source of instability, as Chart 1 illustrates. Yet since the mid '80s, it has managed to control the money supply in such a way as to offset changes not only in output but also in velocity. This sounds easy but it is not -- because of the long time lag between changes in money and in prices. It takes something like two years for a change in monetary growth to affect significantly the behavior of prices.

The improvement in performance is all the more remarkable because velocity behaved atypically, rising sharply from 1990 to 1997 and then declining sharply -- a veritable bubble in velocity. Chart 2 shows what happened. Velocity peaked in 1997 at nearly 20% above its trend value and then fell sharply, returning to its trend value in the second quarter of 2003.

The relatively low and stable inflation for this period documented in Chart 1 means that the Fed successfully offset both the decline in the demand for money (the rise in V) before 1973 and the subsequent increase in the demand for money. During the rise in velocity from 1988 to 1997, the Fed kept monetary growth down to 3.2% a year; during the subsequent decline in velocity, it boosted monetary growth to 7.5% a year.

Some economists have expressed concern that recent high rates of monetary growth have created a monetary overhang that threatens future inflation. The chart indicates that is not the case. Velocity is precisely back to trend. There is as yet no overhang to be concerned about.

The obvious question: whence the new thermostat? Why just then? Given the near coincidence of the improved behavior and Alan Greenspan's tenure as chairman of the Fed, it is tempting to conclude that Mr. Greenspan was the new thermostat. I am a great admirer of Alan Greenspan and he deserves much credit for the improvement in performance, yet this simple explanation is not tenable. It is contradicted by the simultaneous improvement in the control of inflation by many central banks at about the same time, including the central banks of New Zealand, the United Kingdom, Canada, Sweden, Australia, and still others. Many of these central banks adopted a policy known as inflation targeting, under which they specified a narrow target range for inflation -- 1% to 3%, for example. But inflation targeting and non-inflation targeting central banks did about equally well in controlling inflation, so explicit inflation targeting is not the answer.

Yet it does, I believe, suggest the answer. Central banks the world over performed badly prior to the '80s not because they lacked the capacity to do better, but because they pursued the wrong goals according to a wrong theory. Keynes had taught them that the quantity of money did not matter, that what mattered was autonomous spending and the multiplier, that the role of monetary policy was to keep interest rates low to promote investment and thereby full employment. Inflation, according to this vision, was produced primarily by pressures on cost that could best be restrained by direct controls on prices and wages.

That Keynesian vision was thoroughly discredited by experience in the '70s and '80s. It has since been replaced by what has become known as New Keynesian Economics, which incorporates some key quantity theory (monetarist) propositions: that inflation is always and everywhere a monetary phenomenon; that monetary policy has important effects on real magnitudes in the short run but no important effects in the long run (the long run Phillips curve is vertical), the crucial function of a central bank is to produce price stability, interpreted as a low and relatively steady recorded rate of inflation. Once the banks adopted price stability as their primary goal, they were able to improve their performance drastically.

* * *
Admittedly, this is an oversimplification. The accumulation of empirical evidence on monetary phenomena, improved understanding of monetary theory, and many other phenomena doubtless played a role. But I believe they were nowhere near as important as the shift in the theoretical paradigm. The MV=Py key to a good thermostat was there all along.

Mr. Friedman, a Nobel laureate in economics, is a senior research fellow at the Hoover Institution.

Updated August 19, 2003

Unfortunately I can't provide a link to the article to show the chart but the velocity of money went wild in the late nineties.

[squiffy]

First, Friedman asserts that money supply makes a difference. He does not prove it.

Second, he admits that the Fed exerts little or no contral over all of the variables of money supply save one. So assuming excellent control of the money supply was the reason for low inflation makes little sense.

Third, even if you could control money supply, you have little or no control over velocity. Velocity is determined by business and consumers and government spending and transactions.

Of course velocity increased in the 90s if productivity and wealth creation increased. What else would you expect?

Fourth, Milton Friedman is a theorist. I took a class from a Nobel Prize winning Professor Myron Scholes at Stanford Law School. Several years later he and the hedge fund he was later associated with went bust. You may be interested in reading about it in When Genius Failed, by Rodger Lowenstein. Scholes is brilliant and helped come up with an equation or algorithm for valuing options. That does not mean his financial decisions, or predictions about market forces, or economic forecasts, or understanding of the U.S. economy are perfect or foolproof.

Fifth, show me an article by Robert Rubin, Alan Greenspan, or Bill Clinton about the paramount importance of money supply, and I will believe it. In his most recent speeches to Congress, Greenspan has publicly emphasized the importance of a balanced budget. I am not aware that discussions of money supply figured prominently in his analysis.

Sixth, dollar bills are representations of wealth. Of course, you need to try to prevent having too little or too many bills in circulation, within very broad parameters. One bill would be too little and 500 quintillion might be too many.

But what really matters is how much genuine wealth a nation is creating and whether it is spending more wealth than it creates and going into debt, or investing that wealth wisely in ways that ensure future productivity and prosperity.

Saying money supply is the key to inflation and economic health is like saying that the capacity of your gas tank is the key determinant in whether your race car will win the Indy 500. Well, if your gas tank is too small and only carried one gallon, yes, it will hurt your chances to win. And if your gas tank is huge and carries 10 million gallons, yes it's too big and will slow you down.

But so long as your gas tank carries a reasonable amount of fuel, what matters is the efficiency and power of your engine, the aerodynamics of your car design, the talent and endurance of your driver, the speed of your pit crew, and the traction and stability of your tires.

There are simply too many other fundamental economic factors far more important than money supply.

[squiffy]

Another possibility is to take an adult education class in real estate from a local university or college. This won't be enough, by itself, but at least it's a start and you may meet other people interested in real estate investing.

I get brochures for these things all the time. Otherwise you can search the web for classes offered by your local schools and colleges.

[squiffy]

Here is an article in which a monetarist argues that money supply has been increasing as of 2000, and that inflation will not be far off. Yet inflation remained low even after 2000. So if money supply increased rapidly, why didn't inflation increase?

http://www.fff.org/comment/ed0500d.asp

[squiffy]

Some of our discussion may be a matter of semantics. First, I suspect that the degree of control and the precision of control the Fed exercises over inflation and money supply is highly overrated. And I think the Fed consciously tries to perpetuate the myth of Fed ability to affect inflation and money supply.

The Fed needs to maintain this myth of power because the myth of power helps affect the psychology of the marketplace, businesses, and consumers. So if people think the Fed has power and respond to its pronouncements and decisions, then the Fed does exercise some indirect power.

But saying that the Fed can take some actions that will tend to offset the effects of inflation is different than saying the Fed can actually stop or create inflation or precisely manage the money supply.

Market forces create inflation and the Fed can only try to ease or attack the symptoms of inflation.

For example, if the U.S. is involved in a 100 year long Vietnam War and runs a budget deficit for 100 years straight, and runs a 100 year trade deficit, those factors tend to create inflation.

The Fed can take steps to ameliorate or counteract inflation. It is not clear that it can actually control inflation or control the factors that are creating the inflation.

Keep in mind how much Greenspan has publicly and privately emphasized the importance of a balanced budget. He cannot publicly admit that balancing the budget is the key to inflation and that if we fail to balance the budget the Fed may be powerless to control the inflationary effects. He cannot puncture the myth of Fed power, because that myth is very important.

The Fed sets the federal funds rate, then buys and sells treasury bonds to achieve that rate, and also sets reserve requirements that banks must meet. These factors indirectly affect money supply and the short-term price of money. But the Fed does not control long-term rates.

The following passage from Greenspan: The Man Behind the Money by Justin Martin (p. 200) is an interesting echo of Greenspan's public and private statements about the dangers of a budget deficit.

"But (on Dec. 3, 1992) Greenspan was immediately struck by Clinton's grasp of the issues. The topic soon turned to one of Greenspan's gravest concerns, the budget deficit. It had soared in recent years, reaching nearly $300 billion in fiscal 1992. Greenspan explained to the president-elect -- as reported by Bob Woodward in his book THE AGENDA and independently confirmed -- that the Fed was relatively powerless as long as the deficit remained at record levels. The problem with deficits is that they crowd out other types of investments. The government is literally borrowing money from its citizens, money that they might otherwise choose to invest elsewhere -- in the private sector, say."

"If the deficit climbs high enough, Greenspan suggested, the Fed's monetary policy ceases to have its desired effect. The reason: Long-term interest rates stop falling in tandem with the short-term rates that the Fed controls. And it's long-term rates -- paid by mortgage holders and corporate borrowers -- that are most critical to the health of the economy."

"In Greenspan's view, this was the key to the economy's current malaise. The funds rate was all the way down to 3 percent; the Fed couldn't go much lower or it would be giving money away. But thanks to towering deficits, long-term rates had a built-in inflation premium. They were hovering several percentage points above their historical levels. Bring down the deficit, urged Greenspan, and long-term rates will follow. Then and only then would the economy pick up momentum."

"It was a splendid performance. Greenspan had been waiting a long time to deliver this spiel. He'd offered to meet with Bush's transition team to discuss deficit reduction and had been rebuffed, but Clinton was all ears."

[squiffy]

And if you admire Milton Friedman, note how much he emphasizes holding down government spending and maintaining a balanced budget. He concedes that the economic prosperity under Clinton was due to low government spending, which he attributes to deadlocks between Congress and Clinton preventing excessive government spending.

http://www.rightwingnews.com/interviews/friedman.php

Note this comment about currency vs. creation of wealth.

John Hawkins: If the euro were to replace the dollar as the medium of exchange, if everyone bought and sold their goods in euros instead of dollars, would that have an impact on the US economy?

Milton Friedman: The success of the United States will depend on how much it can produce at home, how much it can sell abroad, what it buys from abroad. It's of less importance whether it is denominated in dollars or euros.

John Hawkins: So in the end, that is really not going to make a big difference one way or the other...

Milton Friedman: That's not going to make a great deal of difference. What's going to make the difference is the productivity of the different countries. But personally, as I say, I believe the Euroland is going to run into big difficulties. That's because the different countries have different languages, limited mobility among them, and they're effected differently by external events.

[adios]

Four posts in response to one of mine? Sorry Squiffy I just can't keep up at that pace nor do I want to. All I did was give an alternative viewpoint to your prognostications with some facts. Use your crystal ball however you like. That's what makes a market.

Here's my take on the federal budget deficits and spending:

-- In normalized terms, normalized for GDP, the budget deficit is not even close to a record.

-- The economic slowdown in the early 2000's has been a drag on federal government revenues for obvious reasons.

-- The biggest problems with the federal budget i.e. where structural problems exist is in entitlements namely medicare/medicaid and social security. Growth in medicare/medicaid outlays is increasing at non linear rate during the Bush administration. In fact if you back to before the Clinton administration you'll see that this was the case also. During Clinton's tenure, medicare/medicaid spending more or less grew at the rate of GDP. This is what we want IMO. I believe there are some lessons learned from the Clinton administration about medicare/medicaid. Clinton did a lot of talking about keeping medical prices under control and IMO was much tougher on medicare/medicaid fraud than the current administration let's say. I realize that there are other contributing factors to medicare/medicaid non linear spending increases but I still think there were lessons learned from the Clinton administration. The bottom line is that medicare/medicaid needs to be fixed. Congress has made attempts towards that end, it's still a a major issue for the government. We'll see what happens and I'm watching developments carefully. I don't even want to get started on social security because I try to add as little stress as possible to my life. Social security is currently running a surplus but it's a flawed system and when the baby boomers come of age for retirement let's just say it will be running a huge deficit if nothing changes and I believe it will have to change (I believe this is true for medicare/medicaid as well i.e. it will have to change). The Feds are starting to make noises about it so we'll see.

-- The amount and level of defense is certainly open to debate. In Clinton's administration defense spending as a percentage of GDP declined precipitously and reached levels not seen since immediately after World War II. I might add that in retrospect there was some justification for this due to the cold war ending. What I've seen when I look at the historical data for defense spending is that the feds can control defense spending. The issue on defense spending is what is our policy going to be. Again it bears watching.

-- Other discretionary spending gets a lot of headlines but my opinion is that fixing the biggest and nastiest problems is required first i.e. fixing medicare/medicaid along with social secuirity as well as a viable defense strategy are what's required to reign in government spending.

-- The federal deficit has been financed at a much lower cost due to the decline in interest rates.


As far as tax cuts and the budget deficit. I think you cut taxes first and then cut spending not the other way around. So yes I do see the tax cuts as leading the way to lower spending as a percentage of GDP.

[Wildbill]

Once you think something is no lose, well you know what happens.

I know it seems like things are a slam dunk now, but just be patient with it. Buy a house for the right reasons, not just because you think it is a great idea. Reading your response makes me even more sure you probably aren't in it for the right reason. Investors that are older are better off buying houses and making big investments in them. They have shorter investment time frames, bigger and more reliable incomes, and less tolerance for risk for good reasons. People your age should be focused on investing in the market and other higher risk situations. If you have a stumble, you have many decades to make up for it. In the long-run, chances are pretty good that your average investment return will be closer to the long-term expectation than someone that has only 10 years before he needs the money.

Even worse, what difference do low interest rates make to you as it is? You are buying something that will be a first home. You are almost certain to outgrow it in short order. You will get those nice low rates for those years, but then when you want to move on you will be at the mercy of the markets and that great deal you got won't mean much unless you plan on renting this place out for the rest of your life.

Fact is right now in most cities I know of, rent is a screaming bargain. I just got back from Seattle. Rent right now there is about the same as it was when I last lived up there in 1994! Housing prices have about doubled since then, but you can still rent a very nice 2 bedroom apartment for about $800-900. When the median home price is over $300k and the rent in a place, albeit a smaller one, is less than a grand that is a bargain. Same thing in San Diego, you can't buy a place for under $350k, but you can rent for $800-$1100 no problem. The expectation of housing price appreciation has made rentals wacky so paying for rent isn't half as bad as a real estate broker might make you think.

[deathtoau]

[ QUOTE ]
-- The federal deficit has been financed at a much lower cost due to the decline in interest rates.

[/ QUOTE ]

The problem is that the deficit is being financed with short term bonds. Once interest rates start to rise again, and everyone knows they will, the cost of refinancing the existing debt and adding to it if we continue to run budget deficits, will be a frightening weight on real GDP growth prospects.

It is simple Home Economics 101

Rule 1
Don't spend more then you have.
Rule 2
Save for the inevitable emergencies.


Our failure to adhere to both rules is the single largest threat to continued economic growth (IMHO). /images/graemlins/confused.gif

[Senor Choppy]

[ QUOTE ]
Hello,
Im currently in college and I am doing quite well with my poker earnings. I am interested in purchasing a house, but I have some problems. This year will be the first time I pay taxes on earned income, how hard will it be for me to get a loan? If I am interested in a $90,000 Condo, and I put a down payment of lets say $45,000, can I expect to recieve a 30 year 5% APR mortgage?


[/ QUOTE ]

I've gotten no doc loans with 10% down and 25% down, but my credit is very good (my FICA score was 700+ both times, which is the only thing they looked at). If you have excellent credit, you can get a loan for literally millions (I had a terrible time finding an apartment but I've been approved for $1.25 million home loans before)!

The last lender I talked to showed me a rate chart for every FICA score, and he would approve anyone with any score as long as they were willing to accept insanely high rates (up to 20+% if I recall correctly). I would imagine once you're willing to put up 50% or so, lenders would be flocking to you. I think the rate you get will depend on your credit history though.

Whatever you do, shop around.

[webiggy]

[ QUOTE ]
Scholes is brilliant and helped come up with an equation or algorithm for valuing options.

[/ QUOTE ]

Ah yes, the Black-Scholes model. FAS 123 - a blight on accountancy and financial reporting that will ultimately result in a permant depression stock valuations and kill stock option grants as a means of compensating employees.

Squiffy, I agree with you. In another thread, I posed an issue re: increased consumer and government deficit spending MUST effect interest rates in accordance with the laws of supply and demand. Budget surplusses gave Greenspan latitude to reduce short-term interest rates because the government, who is first in line when it comes to obtaining credit, was actualy reducing the national debt. The demand for new debt created through deficit spending MUST put pressure on interest rates if there is not also a marked increase in domestic productivity because the international money markets will start to demand higher interest rates for incremental debt.

[adios]

[ QUOTE ]
Ah yes, the Black-Scholes model. FAS 123 - a blight on accountancy and financial reporting that will ultimately result in a permant depression stock valuations and kill stock option grants as a means of compensating employees.

[/ QUOTE ]

Actually many companies are expensing options now and they're still issuing them.

[ QUOTE ]
Budget surplusses gave Greenspan latitude to reduce short-term interest rates because the government, who is first in line when it comes to obtaining credit, was actualy reducing the national debt.

[/ QUOTE ]

Actually Greenspan had a tightening policy in place while the Feds ran a surplus and interest rates were rising.

[ QUOTE ]
The demand for new debt created through deficit spending MUST put pressure on interest rates if there is not also a marked increase in domestic productivity because the international money markets will start to demand higher interest rates for incremental debt.

[/ QUOTE ]

There was an article in the Journal yesterday stating that in 2003 thte Bank of Japan (BOJ) bought 300 billion in US $ and "sanitized" the vast majority of the Yen that was used by buying US treasury debt. In January and February of 2004 the BOJ bought 100 billion of US $ and sanitized the yen used to buy them by buy US treasury debt. The BOJ for one (they're not the only CB either) doesn't mind buying up US debt at current interest rates.

[webiggy]

[ QUOTE ]

Actually many companies are expensing options now and they're still issuing them.

[/ QUOTE ]

Yeah, I know, but expensing them is nonsense to me since the Company's cost of their employees exercising options is vaguely economic, require no actual cash outlay by the company. Besides, the BS model figure prominently in fully diluted EPS anyway, so what's the point. Congressional leaders don't know how to read financial statements and are pissed they're not getting any of the action. Soooo political.

[ QUOTE ]

Actually Greenspan had a tightening policy in place while the Feds ran a surplus and interest rates were rising.

[/ QUOTE ]

You're right and my point wasn't very clear here. When the stock market and the economy began to tank, Greenspan started dropping s/t interest rates. The only way he could have done this imo is because he had the residual benefit of budget surplus and debt reduction. I only believe if the budget deficits had not been eliminated during the prosperity of the mid to late ninties we might not have had such great interest rates. With tax cuts and a slow econmony (translation - sharply decreased tax revenue) combined with increased government spending , interest rates are currently artificially low. Every banker I've spoken with in the last year are waiting for the other shoe to drop.

[ QUOTE ]
There was an article in the Journal yesterday stating that in 2003 thte Bank of Japan (BOJ) bought 300 billion in US $ and "sanitized" the vast majority of the Yen that was used by buying US treasury debt. In January and February of 2004 the BOJ bought 100 billion of US $ and sanitized the yen used to buy them by buy US treasury debt. The BOJ for one (they're not the only CB either) doesn't mind buying up US debt at current interest rates.

[/ QUOTE ]

Today, maybe. What about a year from now when the budget deficit is greater than it was since the Reagan administration? Do you really think that they will continue to lend at current market rates?

[Jim Kuhn]

Rent - don't buy! You are young and your situation will change greatly over the next few years. Your future employment is 'iffy', you will probably meet your future spouse, etc. Don't tie yourself down by buying a house. They are a money pit.

If you resell you will have to pay the realtor several thousand dollars. Maint, insurance, property taxes, interest, etc. will add several thousand dollars per year. If you now claim the standard deduction you will lose it due to interest deductions.

I would think long and hard prior to purchasing. Renting can have many advantages over buying. Some people feel much better with a sense of ownership - I would feel much better having the liquidity of cash. Good luck in your decisions.

Thank you,

Jim Kuhn
Catfish4U
/images/graemlins/spade.gif /images/graemlins/diamond.gif /images/graemlins/club.gif /images/graemlins/heart.gif

[adios]

[ QUOTE ]
Rent - don't buy! You are young and your situation will change greatly over the next few years. Your future employment is 'iffy', you will probably meet your future spouse, etc. Don't tie yourself down by buying a house. They are a money pit.

[/ QUOTE ]

Caveat I'm making mortgage payments. I'm really glad that you posted this because it is something to consider. There is maintenance on a house and upgrades have to be done periodically. It does seem that it's a renters market as well. For myself it's better to own but it's not necessarily the right choice for everyone.

[ QUOTE ]
If you resell you will have to pay the realtor several thousand dollars.

[/ QUOTE ]

Probably more than that. You'll have to pay a realtor 6% or 7% of the sale price if you use a realtor from my experience. So if you plan to sell using a realtor, you start off in the hole most likely.

[Ray Zee]

250000 or 500000 if married of your gain is fully tax free if you live in the house as a priciple residence for two of the last five years. that in itself is the reason you should always own your own home. it can even be a boat.