The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice. -- Mark Twain

Buy When They’re High – A Graphic

Posted: January 27th, 2012 | Author: | Filed under: Uncategorized | No Comments »

I ran across a great chart this morning that clearly illustrates how the best time to buy a home is when mortgage interest rates are high.  This is important to understand in today’s market, when the contrary notion that low interest rates offer some sort of rare savings opportunity is used so heavily in marketing homes and home-buying financial products.  This is a great time to refinance, but it is not a great time to buy a home.

This chart offers a nice visual depiction of how interest rates relate to home prices over time.  (Click on image to enlarge.)  When interest rates move lower, prices move higher and counteract any savings you might think you’re getting with the low rates.  Notice the dotted line across the lower third of the chart indicating the long term median home price.  Look at how much higher today’s median is, as indicated by the blue line.  Home prices are still quite high historically.  Remember, this chart represents the US national market, not hyper-inflated urban areas like Los Angeles and Manhattan, which remain well above the national average with the lingering effects of bubble euphoria still at work.  Secondly, notice the pattern the red and blue lines make – how the blue price line travels in the opposite direction of the red interest rate line.  You can clearly see how prices move up as rates move down, and visa versa.

If you’d have bought a house in 1981 when rates were around 18%, you’d also have been buying when prices were far below the historical norm. You’d then have had the chance to follow the interest rates down over time by refinancing at a much lower rate shortly thereafter (and again later, etc.), while maintaining the benefits of having purchased at a great price.  If on the other extreme you’d bought a house in 2006 when prices were at their peak, you’d have paid a much lower rate of interest but you’d never have the opportunity to renegotiate that price (and, normally, the tax amount you’d have signed up to pay on that purchase).  Refinancing as rates fell further would only have been possible if you were not “upside down” on your mortgage, owing more money on the house than the price it would sell for in the falling market.  So, you can see clearly here it is much better to buy when prices are low than when interest rates are low.  With today’s interest rates at historic lows and with bubble distortion still priced into the market in many areas, home prices have plenty of room to fall.

For a more in depth discussion please refer to Interest Rates: Buy When They’re High.

Financial Sense
Why Home Prices Have Much Further to Fall
Lance Roberts
January 26, 2012

Predictions 2012

Posted: January 8th, 2012 | Author: | Filed under: Uncategorized | No Comments »

The Paper Boat returns to open waters, after an extended holiday tied up at dock. Happy New Year to all! Let’s take a moment to look back at the events of the past year, and then we’ll move on to see what may be in store for the year ahead. Largely, we were right on target with last year’s predictions. How 2012 will unfold is slightly murkier, but we do have several good ideas we’d like to share.

 The Paper Boat offered a list of predictions for last year in Crystal Visions 2011. On the economic front we were spot on concerning the deteriorating US housing market, popping housing bubbles in Australia and China, the collapsing Eurozone, continued bank closures, high unemployment, a slowdown in commodities, further tightening on lending and shrinking credit availability, further quantitative easing and covert bailouts, pressure on unions, rising poverty, emerging political unrest and protest, growing public interest in economics and policy, loss of civil liberties and the growing popularity of Libertarianism, youth led grass roots movements using the internet to organize, and a general mounting distrust for government.

A couple of our predictions missed the mark to some degree or another. Concerning a crisis in municipal bonds, I had imagined something extreme happening. I admit I was somewhat swung by Meredith Whitney’s erroneous warnings at the time that doom was imminent. While cities and states have been hit hard with falling revenue, in some cases even facing bankruptcy, movement in the municipal bond market saw no meltdown. We also averted a crisis in public pensions last year. This will come to a head eventually, but 2011 was a premature call regarding when it would take place. I expected also to see more public attention paid to green tech and bioengineering. The dismal economic news sucked focus from scientific and environmental issues, though developments have been made in those areas. Overall, however, our 2011 predictions were pretty much on the mark.

So that said, you may wonder what sort of tidbits and treasures are to be reaped from the salty brine as The Paper Boat casts its nets upon the waters ahead. The view as seen from The Paper Boat is a broad one, based on extensive research of what the most accurate economists and innovative thinkers of our time have to offer. We focus on trends and the shifting tides of human psychology, with a perspective born of the humanities as well as economics. We do not collect or analyze data nor crunch numbers, though remain ever grateful to and respectful of those who provide such essential raw materials upon which to develop the theoretical. In light of this, we offer that while our predictions are largely accurate they do not offer investment advice as much as provide an exploration of financial possibility. As I have said in the past, things can transpire more or less rapidly depending on many factors and so some of the trends we see forming may take longer than the year to finally play out.

Here, then, is a list of the important events and trends we expect to see in 2012:

Economy continues to decline despite the current media talk of a turnaround. Possible recession.

Housing market continues deleveraging process. Prices fall as sales and investment weaken further, while foreclosures continue to add to inventory.

Unemployment stays high, perhaps even seeing a rise later in the year. Banking, retail and public education suffer.

Public pension problems come into focus.

Local sustainability movement grows, but is met with much resistance from state, federal and corporate powers.

Internet freedom threatened. Issues of cyber terrorism, security, copyrights and freedom of speech.

Growing concerns over loss of civil liberties and the closing of free society.

European Union deteriorates and heads into severe recession. Core unity is threatened politically and economically – perhaps even lost altogether.

Technocrats to the rescue. Bankers gain political power.

Canadian housing bubble pops.

China faces painful deleveraging as real estate bubble collapses and growth reverses. Social unrest escalates.

Commodities lose value.

Equities take a hit with fallout of EU and lower demand for commodities and consumption.

Dollar safest investment, though it’s more a hiding place than a money maker.

Global trade slows.

Trade wars. Trouble with Iran over oil, drones and nukes. Possible trouble with China over Iran and tariffs.

Possibility of real war developing out of trade wars.

Iraq occupation continues in the form of mercenary activity.

Class war. Wall Street occupation grows stronger as divide between rich and poor continues to expand.

This is an election year, so trends may play out differently depending on who ends up as President. I predict Obama will win another term in office because he is perceived as the most populist of the candidates at a time when the masses are being squeezed from above. He will gain success by aligning himself with the Occupy Wall Street movement, which has been painted as an anti-Republican action by the mainstream media. However, as usual Obama’s real actions will be less than radical, as he is actually more closely aligned with the one percent and will make every attempt to attain reelection by playing to the polls, bankers and union sponsorship. If Romney wins we will likely see trouble with China and probably more war, as he has already declared his intent to proclaim China a currency manipulator and raise tariffs on Chinese produced goods. Romney is not adverse to taking action against Iran over their attempts to build a nuke, either. If Ron Paul is elected we will not see World War III, but we may see a more dramatic economic downturn, as the social support net is diminished and government and Federal bank stimulus is curbed. Future events and the timeline within which they take place are made somewhat murkier in 2012 because of elections, though this factor will actually have a greater effect on the years that follow.

Fashion forward…  Corporate backlash.  Sustainability.  Less is more.  Demand for quality, practicality, ethics, affordable elegance. Mom-n-pop vs the chains.  Conscientious consumption vs. flash-sale feeding frenzy. Tortoise vs. hair. Social responsibility, artisans, Marx. Transparency and traceability. Renting. Time banks. Seed banks. Burning banks. Austrian economics, Mayan calendar, and Middle Eastern textiles. Individual expression, DIY, vintage, recycled, natural beauty, elaborate surfaces, handmade. Spiritual strength. Intellect. Vegan expansion. Vegetable dyed, neutrals, herringbone, insects, brights, glittery glamour, tamed manes, French twists and faux bobs, brooches, hats, softened jumpsuits. 3D. Digital crafting. Lo fi. Made in the USA. Divination, speakeasy, microbrew, romanticism.