Tuesday, February 21, 2017

Debt Is Not Just Mortgages Anymore

Calculated risk posted the following Mortgage debt to GDP chart:

Here is total debt to GDP debt to GDP chart:
Not as reassuring. 

65 comments:

Mike said...

what is this "debt" thing you speak of... ;<)

Rob Dawg said...

I could be paying off the mortgages on the rentals and personal use home(s) but would lose the deductions. So relative to being debt free I am doing a whole lot better. Of course not everyone is me and they are damn glad of it.

Lawyerliz said...

Isn't Japan's well over 100%?

Lawyerliz said...

I presume you rates are low, the loans are interest only and therefore you are paying some down every month.

Lawyerliz said...

NOT INTEREST only.

Mike said...

I guess if it's a dollar for dollar write-off..your net benefit would be the interest you earn on the otherwise spent cash?? it's still early so I may be missing something.. :<)

Rob Dawg said...

The rates are low but still Schedule C deductible.
We are paying down faster so there will be some small payoff balance by the time we plan to retire.
I figure by then the free cash flow from the income properties will finance an autonomous RV. Press the "Yellowstone" button and take a nap. I wonder if I will still have to get out at the charging station to plug in.

Mike said...

The main advantage I see to using debt for RE transactions is the "optionality" it affords you. Prices go up?? sell and pocket the profit. Prices go down?? hand it back to the bank. Rates go up?? sit tight. Rates go down?? refinance...

so you have control over a much higher valued asset(s) than you otherwise could afford..with all of the upside and very little of the down..

Lawyerliz said...

I am presently reading the ugly Renaisance, which I bought several years ago and forgot I bought. The chapter on the Renaisance money men could be writhen about our money persons, with the interesting twist that they really did think that charging interest was wrong, which they called usury. By that they meant any interest, not, say 30%. I don't think anybody thinks rates chared on mtges today are "usorious", but the Medicine would have. Therefore they comissioned a lot and paid for many masses to be said. Essentially buying their way out of Purgatory. Nobody seems to have just handed money over to the poor. Or the church either. . . They wanted chapels and masses. I think nobody, then or now understands a certain amount of simplicity is a good thing. The author poinTs out even the big houses, unlike today, we're not too bog to fail!! Which they did when loaning to unsuccessful kings. The Perruzzi, for example.

Mike said...

I figure by then the free cash flow from the income properties

article today (WSJ??) about how banks are pulling away from lending to RE developers (multi-family). Huge waves of supply coming onto the market over the next 18-24 months..will be interesting to see what happens to rent levels...especially if immigration inflows (legal and otherwise) are curtailed.

Lawyerliz said...

Forgive the typos. Too big to fail.

Mike said...

One of the local malls is going thru a major rehab. Used to be a traditional "big box" mall with the "old school" anchors (Macy's, JC Penny, etc)...now being transformed to a "mixed use" facility....anchor will be Whole Foods + specialty stores + restaurants + 800 "luxury" apartments.

This is just one of several such projects going on around town...#popcorn

Rob Dawg said...

That last one sounds like the Natick Mall.

Lots f great comments this morning. I'm out running errands but will catch up later. And yes the rental market is setting up a perfect storm.

Lawyerliz said...

I can't wait til tomorrow to see if there is any drought left on the drought map!!

Mike said...

yeah..I think the big run-up in rents this decade has been because of the confluence of three factors..

1) millennials getting out of school and into the workforce
2) huge influx of immigrants (legal and otherwise)
3) displaced former home "owners" that got wiped out on that last downturn

I don't see any of those trends continuing in the near to medium term..in fact there may be a reversal going on..

Mike said...

I can't wait til tomorrow to see if there is any drought left on the drought map!!

it's funny the NOAA still has parts of Kali in drought...the Long term Palmer
map has the northern half categorized as "Extremely Moist"..the rest drought free

Mike said...

oh..and a fourth demographic trend that probably goosed demand for rental properties was former military folks coming back to the states and transitioning to civilian life..

certainly was a "perfect storm" for landlords this decade..and those hedge funds that scooped up all those foreclosure properties and turned them into rentals must have made a killing..

watch for those properties to be transitioned back into the traditional housing stock as rental demand wanes..

Lawyerliz said...

First time buyers, or those who'd like to be first time buyers, s till can't buy.

Rob Dawg said...

Liz. The drought map comes out Thursdays 7:30AM Eastern. Hang in there.

Oh, and get this. It is raining again. Real albeit light rain when we weren't supposed to get any. This is great even if it won't likely make it to the drought map this week. There are delays.

Remember those waterfall pictures last week? The road up to there is closed. A rock the size of a Fiat came down on the road.

Mike said...

First time buyers, or those who'd like to be first time buyers, s till can't buy.

if you can pull together a decent dp...it's actually cheaper to buy up here than rent..

Seattle example..

1/1 condo..selling for for $180K-$200K...10% down leaves you with monthly cost (all in) of about $1,200 per month..

Rent is probably closer to $1,400/$1,500

Rob Dawg said...

Mike said...

I guess if it's a dollar for dollar write-off..your net benefit would be the interest you earn on the otherwise spent cash?? it's still early so I may be missing something.. :<)


Taxes are a Chinese monkey puzzle. Interest against income in a high tax bracket. Having the cash probably costs less than a percent after offsets. Having the cash also makes people pay attention to us.

The leverage aspect doesn't mean anything to me. The intent is ultimately ownership.

I do see lending drying up for anything investment CRE or rentals.

When the up and coming generation gets tired of renting my SFR rentals are going to command higher rents although if it gets bubbly like in 2006 I will do what i did then and sell. Put my kids through college.

Rob Dawg said...

We need to get josap in on this discussion.

Mike said...

renting my SFR rentals

where are your properties located..LA metro??

if I were going to go the landlord route I would try to get located near a college/university...that's as guaranteed of a rental demand as you can get.

College students for tenants do come with their own set of headaches of course..

Mike said...

the other good strategy I've pondered is buy a fourplex..live in one unit and rent out the other three (use a prop mgr so nobody knows they are paying rent to you though..) :<)

Rob Dawg said...

SCE just killed the power to the neighborhood. No idea how long. One of the nastiest utilities anywhere. So back on the iPhone.

My rentals are in Wrightwood, CA.

Mike said...

I do see lending drying up for anything investment CRE or rentals.

the bankers must be getting wary from seeing so many proposals modeled on 95% occupancy rates and annual 7% rent increases..lol

Lawyerliz said...

Gee, that's unusual. They learned something.

Lawyerliz said...

They learned something. . . Oh noez!!

Lawyerliz said...

Because of rain?

Mike said...

They learned something.

it's been a while since they've been spanked on Multi-family..so no..probably not.. lol

Lawyerliz said...

Some have done that aouccessfully.

Rob Dawg said...

We have underground vaults so the rain probably made long standing issue no longer ignorable. Leaky rusted transformers dripping PCBs from 1960 are being replaced with oil filled new designs. No I did not get close.

Lawyerliz said...

Are the transformers exploding?

Walt Tucker said...

Maybe this is why there is so much debt:

https://www.nytimes.com/2017/02/20/opinion/no-robots-arent-killing-the-american-dream.html?_r=0

Rob Dawg said...

Still no power. The old transformers lasted 56 years. SCE says the replacements won't last half that. They weren't failing but even quarter inch steel in marine paint corrodes underground. I don't want to know what it costs to dispose of 200 gallons of PCB.

Rob Dawg said...

NYTimes can't get out of their own way. Trump wrong. Obama had it right. On and on. Robots are ultimately good but disruptive. What they don't understand is that the old winners cannot be the new winners. Reference their circulation numbers.

Lawyerliz said...

Bah, bet they just dump it iut.

Lawyerliz said...

The old ones were above ground?

Rob Dawg said...

Power just came back. No these are refrigerator sized 16kva units in underground bunkers. There were 4-5 Hazmat vehicles to handle the PCBs. Then SCE installed the new transformer.

You know. Maybe the reason we don't have manatees is because they do dump the chemicals. 🙈

Mike said...

I know they killed all the grizzlies in California..but this is news to me about the manatees.. ;<)

Rob Dawg said...

Nah, the California manatees couldn't afford beachfront around here so they sold and moved to Florida.

Lawyerliz said...

What, exactly did the Times do?

Rob Dawg said...

Hey a question. Is your 30th wedding anniversary a big deal? Asking for a friend. 🤔

Lawyerliz said...

Actual Manatees aren't even Florida natives. But they loves it here.

Havent heard anything about pythons lately. Guess the media is bored wit them.

Mike said...

it is if you want to see your 31st.. :<)

Rob Dawg said...

Their editorial supposedly about robots and automation was nothing but a wistful pining for what might have been had the election gone differently.

Mike said...

I always forget..who owns the Times these days??

Is that Mexico or the Saudi Arabia??

Rob Dawg said...

Complete answer:
https://www.fws.gov/northflorida/manatee/manatee-native-facts.htm

Mike said...

Manatees evolved from New Jersey pensioners..right??

Rob Dawg said...

It wouldn't be possible to devolve.

Lawyerliz said...

Hahaha

Lawyerliz said...

Manatees are from the west Indies. I think.

Lawyerliz said...

Flood report Rob?

LBD said...

Good Morning! Another busy day.

Give me liberty or give me debt!

Rob Dawg said...

Morning all. Local rain stopped until the next storm Sat/Sun and that less than 2 inches. That's perfect.

Up north a different story. Decades of infrastructure disinvestment combined with corrupt development planning has this weather revealing cracks in the system literally. SF to Sacto potholes are proliferating. Embankments undercut. And by now you've been seeing video of damaged levees. But in six years you can take a train from Bakersfield to Oakland. Just about the same time you will be able to have your driverless car drop you off at the station and then drive itself to pick you up in time at the other end.

Mike said...

Manatees are from the west Indies.

Build that wall!!

G' morning from the great wet Northwest..

LBD said...

Record warm yesterday of 79f, 1-2" snow maybe tomorrow. You guys are really ringing those clouds dry.

Mike said...

we're at 13.2 inches mtd...with more in the forecast this week. Total month historical avg is 5.6 inches..yikes

Lawyerliz said...

Was raining here, but overall, kinds dry
.

Lawyerliz said...

Looking for update on drought monitor. Err, forgot about time difference.

Mike said...

NOAA updates on Thursday morning...right??

Rob Dawg said...

Thursday 7:30AM Eastern. Dats claimed to be effective for the Tuesday before but there are lags from the reporting end.

The local watershed has a nifty map:
http://www.vcwatershed.net/fws/gmap.html

Set for "season total" in the upper left.

W.C. Varones said...

I prefer Total Credit to GDP.

Because those same households are going to have to service government debt as well.

Graph.

Rob Dawg said...

Excellent point WC although I'm not going to pay it back. Are you going to pay it back? It means higher rates, lower growth and higher taxes. Not quite the same thing as owing real money.

W.C. Varones said...

True it will much more likely be inflated away than ever paid back.

But I think Total Credit / GDP is a good measure of a country's capacity to service its debt load.

For households, I like household debt to household income. Keeps it on apples to apples comparison. I can't pay my mortgage with GDP you know!