4 votes

Go Buy a House That You Can't Afford.

It may directly oppose our fiercely self-reliant sensibilities to suggest that it would be wise to put ourselves into debt. But we may be staring directly into an opportunity today to obtain present assets with real capital value in exchange for future assets that are most certainly going to be worthless before the contractual obligations are fulfilled. In other words, inflation is going to erase all of our debts.

Our central economic indicators are interest rates. We can all look back and remember a time when six, seven, eight or even nine percent mortgage rates were the norm, but do we ever ask ourselves why the rates today are at all-time lows? What causes the fluctuation in interest rates and when will it go back up to historically normal levels? The rate that you might get for a thirty year mortgage is not the real focus of this discussion however. That rate is part of a larger market based on current time preference for capital. The rate that we will be focusing on is the rate at which banks lend to each other and the rate that banks and investors lend money to our government. The truth is that the government cannot afford to pay an interest rate higher than the near zero number that they pay right now. However, the rates must come up to clear the market of the malinvestment that has added up as a result of the artificially low lending rates and the continued influx of new liquidity into the market.

It is not hard to understand how the problem is compounded by the continuation of government stimulus and credit expansion. The longer the government continues to amass debt beyond what it can possibly afford to pay back, the higher the rate must go to draw real, healthy investment into the US bond market after the Fed can no longer afford to support the high premium being paid today for US debt. In a miss-guided effort to keep rates low, driven by Keynesian economic philosophy, the Federal Reserve continues to purchase eighty five billion dollars of US treasury bonds a month; tricking the market to make it appear as though there is legitimate demand for United States debt at the current high price.

Hyper-inflation is not what will cause the market correction that is coming, nor is it a necessary companion to a depression following the model of what is known as the Austrian Business Cycle Theory. In a normal depression, interest rates swing up after the malinvestment is realized and investors tighten their spending and save for sound, new investments and prices will tend to go down. Such a deflation is part of a natural healing process for the market. But in today’s market, with the staggering growth of the US monetary base and the obvious inflation of a bubble in the bond market, any market correction which may shed light on this obvious malinvestment can set in motion a hyper-inflationary situation.

The Federal Reserve and the US government have taken the position that they will not allow their banker friends to fail; no matter how poorly they have invested. This partnership is precisely what would lead to a situation in which we pay for new bailouts through a loss of value to the currency in our bank accounts. The banks that were bailed out in 2008 are still not solvent and the only reason that their investments appear to be growing is because the Federal Reserve is keeping them afloat with money that they are creating. When the market takes a downturn and investors are forced to sell their treasury bonds back to the government it does not seem likely that the government will simply turn their back on their buddies and default right away. I would think that before they defaulted and screwed Joe-401k-owner they will print enough money to bail out their friends. The recipients of the bailouts will take the massive amount of freshly created money and buy other assets before inflation sets in. Basically, the banks will cut their losses by dumping them onto our front lawns.

A sharp rise in the rate of interest will not be enough to save the dollar; investors will have to turn elsewhere to save and restructure their portfolios. This is why gold and other physical assets are so appealing to anyone that understands true economics. And why the debt that we accumulate now will be erased by inflation. In such a situation, the dollars that people have agreed to pay back to the bank will be worth very little and most likely very easy to obtain because nobody will want them. Hundreds of thousands of future dollars might be worth tens of dollars in today’s money.

It may be coming up on a time when having a house or a piece of property that you think you cannot afford now will start to look like a good trade for future dollars that will be worthless. Think about the fact that even today when the rate of interest is lower than the real rate of inflation, the United States Government spends about twelve percent of the annual budget on interest. The percentage of the budget taken up by interest payments will go up at an exponential rate as the rate increase. It would not take more than a few percentage points to bring it up to a burden that is beyond what is manageable. Then if you take into account the fiscal gap, which is many multiples of the GDP by anyone’s figures, it means that the government is already in more than far enough over its head to arouse our worries about a catastrophic economic downturn happening at any second.

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Maybe I'm wrong,

Wasn't the housing crisis caused by banks luring people that couldn't afford their homes with Zero Down Adjustable Rate Mortgages that ballooned before they could obtain a Fixed Rate Mortgage? Property values rising way over their true value? I didn't hear him say to buy a home that you can't afford as much as purchasing homes as an investment to a more solid financial future. I like how everyone is able to discuss this without disrespect. This is why I have come here for the last 7 years. Michael Nystrom if you never do anything more in life this website is something that to be very proud of!!

Maybe I'm wrong,

Wasn't the housing crisis caused by banks luring people that couldn't afford their homes with Zero Down Adjustable Rate Mortgages that ballooned before they could obtain a Fixed Rate Mortgage? Property values rising way over their true value? I didn't hear him say to buy a home that you can't afford as much as purchasing homes as an investment to a more solid financial future. I like how everyone is able to discuss this without disrespect. This is why I have come here for the last 7 years. Michael Nystrom if you never do anything more in life this website is something that to be very proud of!!

Althoug i get the point its still hard to break through the

barrier of not wanting to acquire debt. As a renter I know i'm loosing out by not buying (especially the high rent cost in Denver) but its all a matter of timing. if i buy a house and it still takes five years for the hyperinflation to initiate, I'm living in poverty the next five years paying my mortgage. On then on the other hand, do i really want a overpriced, cheaply built house anyway?

I totally get the hesitation.

It would definitely be a timing thing. I would rather suggest to buy property also. A place where you could grow or raise your own food.

wolfe's picture

Which they will take from you...

As soon as you can't afford the financed endeavor.

I hope that you are well meaning, but you shouldn't presume to give financial advice when it is this poor.

The Philosophy Of Liberty -

Who will take your stuff from you?

Do you not know dozens of people that stopped making their house payment in the last crisis? An acquaintance of mine owned ten up-scale homes in the Portland area, all of them financed and re-financed with no money down just before the market tanked. When the housing market collapsed he stopped making his payment and had renters in each of the houses. It took the bank many months to forclose on them and this guy declared bankruptcy when they tried to come after him. It was super shady for sure, but he came out pretty damn well. He kept his own house and successfully hid the hundreds of thousands of dollars that he got from the refinancing and the rent that he took without making payment. When the government came after him he got off because all of the loans that he got had been sold many times over in the subprime market. And I know many more people that got away with just not making their payments and restructuring their loans.

wolfe's picture

I went through the system on two homes...

And watched many others as well. Did some people get away with it? Sure. Did everyone, or even most folks? Nope. Not even close.

Because let me explain what happens. Once you are foreclosed on, or file bankruptcy, the bank issues a 1099 for the written off loan. So with what you suggest, let's say for a $400K home. Let's say you make 100K a year. So now, you tax bill is on roughly $500K, which classifies you as "rich" and yet you didn't/weren't able to take appropriate financial precautions AND you never saw a DIME of that 400k$ home.

So you now owe the IRS roughly 150K-200K$, at around 21% (including interest and fines). Now, the second you owe over 25k, they pay attention. Owe over 40k$ and you get Tax liens and attachments fast tracked. You would lose everything you own. Unless you have up to 25k$ (possibly a great deal more) for a tax attorney to get you out of the mess, which takes years, and isn't always successful.

As far as your friends, a fool getting lucky, does not make him wise.

Hell, my tax attorney fixed most of my problems and I still ended up in debt to the IRS after it was all said and done. I am projecting that they will be paid off by the end of this year, which will require them to find a new way to rape me. And rape, it is. Every technical glitch that they have with their system has added a few grand to the total bill even with their admission that it was their fault. It would likely be paid off already if it weren't for those "glitches".

The Philosophy Of Liberty -

Yes, how do you pay off a 50-60 trillion $ debt ?

With "Zimbabwe" type $1,000,000,000,000.00 bills. Not a good time to have cash (FRNs) on hand or in a bank.

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people that pay no price for being wrong.
Thomas Sowell

How will homes retain value

How will homes retain value when everyone is broke?

The housing market will probably take another huge hit

initially with a rate hike. But you are not buying a house for an investment or to build equity. But a nice house is still something that will enhance your living standard, and it is something of tangible value. You sign a contract with the bank that gets fulfilled when you give them the cash agreed upon. And any day of the week after hyper inflation you will still rather have the house than the cash.

Interest rate hikes also drop

Interest rate hikes also drop home prices because people can't bid as high.

I understand the live-large argument for inflation, but the article was indicating a time value of money or safe harbor argument.

When interest rates increase, when everyone else around is broke, there won't be anyone to bid prices up. The money still goes poof if one has to sell. Maybe after the reset there will be something. Maybe.

I knew the crash of 2008 was coming. I prepared for it. But I was child of the high interest rate Voker years. So what I expected after the inflation, after the crash, were interest rate hikes. To 14%. I didn't know it was called Austrian business cycle theory, I arrived at it on my own and then found it confirmed when I started reading LRC.

Anyway, it's been a lot of years and no interest rate hike. It won't likely happen next time either.

DJP333's picture

The government will take what they want

In a catastrophic economic downturn the government will just steal by taxing the hell out of everyone. If you have a house, its probably going to be new increases in property taxes.


"It’s not pessimistic, brother, because this is the blues. We are blues people. The blues aren’t pessimistic. We’re prisoners of hope but we tell the truth and the truth is dark. That’s different." ~CW