Janet Yellen confirmed as the new QEeen

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Arariel
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Janet Yellen confirmed as the new QEeen

Postby Arariel » Wed Jan 08, 2014 4:44 am UTC

NPR wrote:The Senate has voted to approve the nomination of Janet Yellen as the next leader of the U.S. Federal Reserve. With Monday's vote, Yellen, 67, will become the first woman to serve as America's banking chief, heading an institution that was established in 1913.
...
The final tally confirming Yellen's nomination was 56-26.


Truly, I expect great things from the lady who made such statements as:

Janet Yellen wrote:...

In my view, it makes sense to organize one’s thinking around three consecutive questions—three hurdles to jump before pulling the monetary policy trigger. First, if the [housing] bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?

My answers to these questions in the shortest possible form are, “no,” “no,” and “no.” In the most thorough possible form, my answers might take a few hours, and would give full play to the many gray areas that are involved. Since the short answer is not satisfactory and the thorough one overwhelms our time limits, I will compromise and give just a brief explanation for my trio of “nos.”

In answer to the first question on the size of the effect, it could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock. For example, a reversion to the long-run price-rent ratio would appear to represent a shock that is only about half the size of the U.S. stock market collapse in 2000 and 2001.

...

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Re: Janet Yellen confirmed as the new QEeen

Postby JudeMorrigan » Wed Jan 08, 2014 8:06 pm UTC

Good deal. She's eminently qualified and should to a fine job.

(Yes, I realize you were being snarky. I'm not.)

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Re: Janet Yellen confirmed as the new QEeen

Postby nitePhyyre » Wed Jan 08, 2014 10:03 pm UTC

JudeMorrigan wrote:Good deal. She's eminently qualified and should to a fine job.

(Yes, I realize you were being snarky. I'm not.)
Should do a fine job. Using voice recognition, I assume?
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Re: Janet Yellen confirmed as the new QEeen

Postby Ormurinn » Fri Jan 10, 2014 2:20 pm UTC

It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?

That's what effects if people can buy or not. If homeowners are better off financially than renters, that doesn't mean shit to someone like me who will never be able to buy unless prices drop to a reasonable level.
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Re: Janet Yellen confirmed as the new QEeen

Postby Tyndmyr » Fri Jan 10, 2014 2:42 pm UTC

Ormurinn wrote:It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?

That's what effects if people can buy or not. If homeowners are better off financially than renters, that doesn't mean shit to someone like me who will never be able to buy unless prices drop to a reasonable level.


*affects.

I have no particular opinion on her(don't know her well enough), but price-rent ratios are definitely interesting from a few perspectives. The relationship between house price to income is also interesting, though. One of the positive aspects to the housing bubble collapsing was housing becoming slightly more affordable again. Sure, we'd all have been better off if the bubble hadn't gotten inflated to start with, but that's pretty much water under the bridge now.

I fear that in subsidizing home loans(mortgage interest exemption), the government has focused overly much on debt as a means of encouraging home ownership. This inflates the importance of credit scores and such. Likely home prices as well. I'm not sure it was actually a good long run strategy for making homes affordable and accessible. A lot of those factors simply aren't handled at the federal level, sure...but solving problems via trying to lower overall cost is, IMO, less likely to have horrible side effects than trying to force better financing terms.

See also, student loans.

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Re: Janet Yellen confirmed as the new QEeen

Postby Ormurinn » Fri Jan 10, 2014 8:15 pm UTC

Tyndmyr wrote:
Ormurinn wrote:It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?

That's what effects if people can buy or not. If homeowners are better off financially than renters, that doesn't mean shit to someone like me who will never be able to buy unless prices drop to a reasonable level.


*affects.

I have no particular opinion on her(don't know her well enough), but price-rent ratios are definitely interesting from a few perspectives. The relationship between house price to income is also interesting, though. One of the positive aspects to the housing bubble collapsing was housing becoming slightly more affordable again. Sure, we'd all have been better off if the bubble hadn't gotten inflated to start with, but that's pretty much water under the bridge now.

I fear that in subsidizing home loans(mortgage interest exemption), the government has focused overly much on debt as a means of encouraging home ownership. This inflates the importance of credit scores and such. Likely home prices as well. I'm not sure it was actually a good long run strategy for making homes affordable and accessible. A lot of those factors simply aren't handled at the federal level, sure...but solving problems via trying to lower overall cost is, IMO, less likely to have horrible side effects than trying to force better financing terms.

See also, student loans.


We have "help to buy" over here, which is basically the government committing to keep houses overpriced.

We also have cross party support for minimum wage hikes at a time of record youth unemployment, and the opposition have pledged honest to gods price controls on utilities.

Its as if no one with a ministerial portfolio has ever taken an introduction to economics class.
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Re: Janet Yellen confirmed as the new QEeen

Postby mosc » Fri Jan 10, 2014 8:34 pm UTC

Tyndmyr wrote:I fear that in subsidizing home loans(mortgage interest exemption), the government has focused overly much on debt as a means of encouraging home ownership. This inflates the importance of credit scores and such. Likely home prices as well. I'm not sure it was actually a good long run strategy for making homes affordable and accessible. A lot of those factors simply aren't handled at the federal level, sure...but solving problems via trying to lower overall cost is, IMO, less likely to have horrible side effects than trying to force better financing terms.


Of course something like 60% of Americans own a home and have Mortgages as their single biggest expenditure year in and year out. Basically, debt and lending as a percentage of the CPI is quite large. Lending side economics dominate, which is the fed's bread and butter lets not forget. Setting the reserve rate is what we created them for so it's no accident that they evaluate moving it as their primary control mechanism.

The Fed itself is not really concerned with home ownership. Their goal is inflation controlled growth. They'll say employment rates too but that's mostly because they see those as a way of leveraging more growth.
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Re: Janet Yellen confirmed as the new QEeen

Postby Zamfir » Sat Jan 11, 2014 10:12 am UTC

It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?

That's what effects if people can buy or not. If homeowners are better off financially than renters, that doesn't mean shit to someone like me who will never be able to buy unless prices drop to a reasonable level.

Central banks are not really interested in that ration because they have an interest in housing. They want to know what happens with investment, and individual house ownership is an important part of the country's total investment. It's also an idiosyncratic form of investment: most investment decisions (by volume) are made by professional investors, either on their own behalf or as agent for others. But houses are bought and sold by a far larger group of people, whose behaviours are different from the standard investment professionals.

A problem for central bankers is that individual house ownership is a combination of investment and consumption. People buy houses to have a house in the future, but also to have a house right now. So they look at renting as a comparison: renting is the closest thing to house ownership without the investment aspect.

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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Mon Jan 13, 2014 4:47 pm UTC

Do we need an Econ thread in N&A? I think I should create one for things like this.

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Re: Janet Yellen confirmed as the new QEeen

Postby sardia » Mon Jan 13, 2014 5:23 pm UTC

It's a good idea, as long as we avoid the "under theory A this happens, but under theory B, the opposite happens."

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Re: Janet Yellen confirmed as the new QEeen

Postby Dark567 » Wed Jan 15, 2014 2:04 am UTC

Ormurinn wrote:It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?
Its said to be very predicative of housing bubbles. If a one bedroom costs $500000, but the same place is only $300/month in rent, its pretty clearly a bubble situation.
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Re: Janet Yellen confirmed as the new QEeen

Postby nitePhyyre » Wed Jan 15, 2014 4:02 am UTC

Dark567 wrote:
Ormurinn wrote:It seems odd for her to be focusing on price-rent ratios. They're of course relevant to whether it's better to rent or buy, but on a macro level, surely the ratio of house price to mean annual income is more important?
Its said to be very predicative of housing bubbles. If a one bedroom costs $500000, but the same place is only $300/month in rent, its pretty clearly a bubble situation.
What does it indicate if things are the other way around? Renting prices being as high or higher than buying? Let's say a monthly rental costs $300 more than a house in the area with a 20 year mortgage a 5% down?
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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Wed Jan 15, 2014 4:18 am UTC

If rent rises above mortgage/maintenance (inc. tax) payments, people will buy homes instead.

Basically, there is a 'healthy' range for rents and home prices. The rent should be between the maintenance costs and the mortgage+maintenance costs. Rental properties should only generate 'profit' on top of a mortgage and maintenance if the owner can get a decent discount on either.

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Re: Janet Yellen confirmed as the new QEeen

Postby Tyndmyr » Wed Jan 15, 2014 6:05 am UTC

CorruptUser wrote:If rent rises above mortgage/maintenance (inc. tax) payments, people will buy homes instead.

Basically, there is a 'healthy' range for rents and home prices. The rent should be between the maintenance costs and the mortgage+maintenance costs. Rental properties should only generate 'profit' on top of a mortgage and maintenance if the owner can get a decent discount on either.


Well, there's also a certain degree of managing things in bulk, etc...and there's also some frictional effects. For instance, if you're going to move in a year, it's rarely worth buying a house because closing costs are gonna eat the equity gained.

If mortgage restrictions are tight, I'd imagine that would also contribute to renting being higher relative to buying.

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Re: Janet Yellen confirmed as the new QEeen

Postby Chen » Wed Jan 15, 2014 12:33 pm UTC

CorruptUser wrote:Rental properties should only generate 'profit' on top of a mortgage and maintenance if the owner can get a decent discount on either.


Well this isn't necessarily true. Not all people can get mortgages for one thing. Many people cannot save up enough for a down payment either, which pushes people to renting. As Tyndmyr says too people who don't want to stay in an area long (or think there is risk in them moving) may not buy either. Another big reason is that people are not always rational when it comes down to money and big expenses like that. Some people have an irrational fear of debt which leads to avoid mortgages and the like.

All these can (and do) lead to situations where it is possible to profit from rental properties such that you can charge more in rent than you're paying in upkeep/mortgage.

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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Wed Jan 15, 2014 1:31 pm UTC

Unless you are dealing with a tiny town, such scenarios lead to more than one landlord entering and/or expanding into the market. So long as collusion doesn't occur (which it does, a lot), either home prices rise or rent prices fall. Really, most likely home prices rise...

Also as a personal top from experience, always try to rent from someone who lives on the same block. It's not nearly as available in the larger cities, I know, but if you can find such rentals it's usually a good sign. People tend to avoid shitting where they eat.

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Re: Janet Yellen confirmed as the new QEeen

Postby Chen » Wed Jan 15, 2014 3:08 pm UTC

CorruptUser wrote:Unless you are dealing with a tiny town, such scenarios lead to more than one landlord entering and/or expanding into the market. So long as collusion doesn't occur (which it does, a lot), either home prices rise or rent prices fall. Really, most likely home prices rise...


Overall prices will rise yes. Not so much to make this unfeasible though. People buy properties to renovate and then rent out (at profit) fairly often. I know people who do that here in Montreal and make a fair bit of money on it. They've been doing it for a long time and imagine will continue to do so. It's not that hard to do, though it takes a fair bit of initial capital.

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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Wed Jan 15, 2014 4:27 pm UTC

But do they do so on a mortgage? And do they do their own renovations or contract out? It's a lot easier to turn a profit when you don't have to share with the bank.

NYC, rental properties are usually 12x rent roll. That means that your revenue is 8.5% of your assets. Sounds like a great return on investment, but that's not profit. Taxes, maintenance, etc, will eat that up until you are looking at 3% ROI. Which in today's marketplace, is a decent return. But if you have to take out a loan at anything greater than 3%, you are looking at a loss. This does bias the market towards consolidation, as a person with 20 properties can probably get much better interest rates than a person with 1 small property. Plus there are ways to defraud the banks to avoid paying any mortgage at all.

In my hometown, a couple of guys from NYC did that with the local crackdens; two people buy up the whorehouses and crackdens for $10k each, then sell the slums to each other for $50k each. Use the $50k homes as collateral on loans. Disappear, and the bank is left holding a bunch of useless crackdens.

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Re: Janet Yellen confirmed as the new QEeen

Postby Chen » Wed Jan 15, 2014 5:49 pm UTC

CorruptUser wrote:But do they do so on a mortgage? And do they do their own renovations or contract out? It's a lot easier to turn a profit when you don't have to share with the bank.


There are plenty of those renovation/rent type shows on TV that show people doing this type of thing with mortgages. And yes the people I mentioned knowing do it with a mortgage. Hell, looking at rental prices for nice condos in my area I could do it with the mortgage I'm paying now and maybe come out with +/- $100/month and that's not having put any effort into maximizing my rental profitability.

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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Wed Jan 15, 2014 6:33 pm UTC

Those TV shows have people personally renovating the homes. That isn't just sitting back and collecting paychecks.

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Re: Janet Yellen confirmed as the new QEeen

Postby Chen » Thu Jan 16, 2014 12:49 pm UTC

CorruptUser wrote:Those TV shows have people personally renovating the homes. That isn't just sitting back and collecting paychecks.


Actually a fair number have people throwing money at contractors and having them renovate the home. Which is basically just like paying more for the house to begin with (especially if the renovation money came out of the mortgage). Now clearly the TV shows are not going to show the spectacular failures that can occur with rental properties, but the point is, its very possible to buy a property to rent out and make a positive cash flow on it in the end, including your mortgage payments. You can even deduct the interest on your mortgage loan from your taxes when buying a property for rental as opposed to when you live in it, which certainly helps with the numbers.

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Re: Janet Yellen confirmed as the new QEeen

Postby CorruptUser » Thu Jan 16, 2014 1:32 pm UTC

AFAIK, the tax deductions only apply to income, and only if it's your primary residence. That is, you have to be making money to receive any benefit, and only for one building.

Honestly I think it should apply to the first $500k of a home; we shouldn't be subsidizing all of a millionaire's home.

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Re: Janet Yellen confirmed as the new QEeen

Postby Chen » Thu Jan 16, 2014 2:08 pm UTC

CorruptUser wrote:AFAIK, the tax deductions only apply to income, and only if it's your primary residence. That is, you have to be making money to receive any benefit, and only for one building.

Honestly I think it should apply to the first $500k of a home; we shouldn't be subsidizing all of a millionaire's home.


In Canada there is NO tax deduction for mortgage interest on your primary residence (there's a way around this, but it's a somewhat risky investment method). You CAN deduct mortgage interest if its for a building that is used for business purposes, such as a rental property. It can be considered a business expense in that case.

Apparently what you mention about a $500k limit is already in place (though its 500K per person).

[quote=Wikipedia]Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions must exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, ($500,000 if filing separately) or the first $100,000 of home equity debt regardless of the purpose or use of the loan.[/quote]


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