Wednesday, August 23, 2023

Is "work-from-home" why the housing market is tanking?

 

Karl Denninger offers an intriguing suggestion.  Emphasis in original.


The problem is that the dynamic of virus restrictions along with wildly ridiculous fiscal and monetary policy drove a dynamic that was utterly unsustainable and, fundamentally, stupid as a whole although for the people doing it the act looked smart at the time.  There were several elements of this:

  • Work-from-home on a near-universal basis was forced by many employers.  This, in high-cost areas, drove employees to think they could arbitrage their higher salary (a result of the high cost of living where they were, such as in Chicago, New York, San Francisco and similar) and keep it while moving somewhere much cheaper, such as Tennessee or Florida.  For those who pulled this it was a massive windfall, provided they could sell their home in the high-cost place.
  • Forced-low interest rates meant mortgages were extraordinarily cheap.  The brokers of same -- banks, independent shops and similar -- feasted on the fees, both for purchase money (see above for the flow on that!) and refinances.  Many of those refinances were strategically wise, being committed just a few years after origination and not materially-lengthening the amortization clock.  All of them wildly increased available consumer funds for spending, however, by reducing the monthly payment amount.

These two dynamics skyrocketed home prices.  The All-US index went from ~450 to 625, a roughly 40% increase in two years ... There were plenty of areas, including where I live, that prices of "real" (not AirBNB friendly) single-family homes roughly doubled...

All of this was ridiculously stupid.  The premise that employees operated on -- that they'd never have to set foot in an office again -- was crap.  As the pandemic ended so did the curtailment of occupying office space and the cities could not survive with all that office space empty; the tax revenue plus all the retail business activity associated with those people being in the buildings during the day is utterly essential to their fiscal survivability.

Those who thought they could arbitrage their cost of living while keeping their "bonused up" salary are now getting a rude shock: Come back to the office, which we have leased and have to pay for, or be fired.  Except..... those employees now live hundreds or even a couple thousand miles away!  Worse, they bought houses on <3% mortgages and spent the rest and, while their "price paid" is what it is nothing is moving.

. . .

The market is basically locked up and the reason is quite-clear: Those who bought at the top can't move; they have 3% mortgages and that $500,000 place has a $2,100 payment.  The same $500,000 house at 7% carries a payment of $3,326!

The net present value of that payment on their house today is $316,000, a $184,000 loss!


There's more at the link.  Mr. Denninger also considers elements such as increases in property rates and taxes, higher insurance premiums, etc. as factors restricting the sale of expensive properties.  Prospective buyers of property are looking at those expenses and deciding they can't afford them on top of higher-interest-rate mortgages.

I think he's probably correct.  Certainly, in our small town we've seen the market value of our property, and those of our friends' homes, more than double compared to what we paid just a few years ago.  Our rates and taxes have gone up in line with higher property values, although we're shielded to some extent because they can't legally be increased more than a certain percentage per year.  Nevertheless, it's not easy for some folks who live in properties they've owned for decades to find the money for their increased tax bill.  Those who are retired are often the hardest hit, because their income doesn't increase to cover those costs.

On the other hand, those who've been fiscally conservative have benefited from the rise in housing costs.  For example, through putting down a 20% deposit and paying extra to reduce the mortgage capital each month, Miss D. and I had already achieved a 45% equity stake in our home at the price we originally paid for it.  However, thanks to the rise in property prices, our equity stake today is probably of the order of 75%, because what we owe is so much less as a proportion of the current market value of our home.  This does our credit rating nothing but good.

The problem, of course, is that sooner or later inflated property prices are going to have to drop.  It's inevitable, because sales are drying up as homes (and mortgages) become unaffordable for the average buyer.  That means those who paid high for houses over the past few years, but need to move, are likely going to have to take a loss in order to sell them.  Some won't be able to afford that, and will end up much deeper in debt to pay off the difference.  Some banks and mortgage holders are probably going to go bankrupt as their loan "assets" turn out to be liabilities.

We noted over the past couple of years that builders erected houses nearby that were similar to ours in terms of size, amenities, etc., but priced at more than double what we paid for ours.  They marketed them almost exclusively to Californians and West Coast residents wanting to move, and sold them all very easily.  The West Coasters moved here after selling their (relatively expensive) houses there, bought the new houses, and still had a chunk of change left over (which they promptly spent on other consumer goods).  Some of them are now being called back to work at offices in the cities they left, but they can't afford to go back there, because they've spent all the profit they made on their West Coast houses and thus can no longer afford to buy or rent in those markets.  They can't find jobs here at similar salaries - ours still pay half to less than half of comparable jobs in, say, Los Angeles or San Francisco, and there aren't as many of them available, particularly in industries that are prevalent there, but not here.  Those people are well and truly stuck.

I hope and pray that most of my readers aren't in that position.

Peter


28 comments:

  1. Rising property values are all well and good if you have the intention of selling your home or taking out the equity in some other way. If not, you are getting an ever increasing property tax burden that you may not be able to maintain. A friend put it this way. Property value goes up and down. With your property tax being based on the current value, you are being taxed on an unrealized value increase that can also have a future decrease.

    So, last year your property tax is based on a $200k value. This year it's based on a $250K value and next year if the market tanks it could be taxed at $200k value again (Good luck in getting that decrease no matter what the market is doing). In the middle year you pay extra taxes on an unrealized value increase. In some states property tax isn't a big deal but states like Texas and Florida use property tax as a main source of state income.

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    1. If my facts are right , Texas JUST excluded first $100K from prop tax

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  2. My parents' home has tripled in price the last three years; we're lucky we have a couple of rentals, which money we use almost exclusively to pay the taxes. We lived like paupers when I was little, but my dad paid off 2 15-year mortgages in 14 years by making double payments because he hates being in debt (even for a good cause) so much. That's paying off now that he's retired because he can afford (barely) the increased property tax. Also, because he bought the house next door, we get to choose our neighbors.

    The downside is that we are constantly hounded by mailed letters, phone calls, and texts about selling our properties. No thanks! This is where we live, thank-you-very-much, and I don't care if it's prime real estate just down the street from the nearby university, we don't want a high-rise next door. I understand that we need more housing, but harassing long-time residents is not the way to go about it.

    Also, I know there are people fleeing California and New York because they can't stand the crazy, but I wish they would stop coming here. They're rude and entitled and have no respect for local customs, and the developers keep buying up good farmland to use for housing, which is a bad deal all around.

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    1. The new people and tourists need to be driven out. They are locusts, parasites. If you ain't from here don't come here.

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  3. I didn't see it mentioned but if you're buying, check with your financial institution about how you can pay your monthly charge.
    My wife and I bought our home in 1989. The president of our lending institution mentioned a bi-weekly payment schedule during the loan process. I figured that it was just a gimmick but my wife zeroed in on that immediately.
    We signed up for the bi-weekly repayment and the result was that that 30 year mortgage was fully retired in just over 17 years.
    Just a f.y.i.

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    1. Double check that mortgage holder allows that. Some don't since so many mortgages are now bundled as "CDOs" (collateralized debt obligations and magically turned into "bonds"

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  4. I had purchased a home 200 miles away from my current residency (Alexandria VA) with the intention of retiring there back in early 2019. I was 64. The rural housing market was not over-heated and mortgage rates were under 3%.

    Covid hit around December 2019/ January 2020. I was instructed to WFH in March 2020. I immediately relocated to the new place and worked from there.

    I spent late 2020 and early 2021 moving my stuff out of the Alexandria townhouse and put it on the market in February 2021. It was listed on a Friday, and I had four above-asking offers by Monday afternoon. I turned a nice profit.

    August 2021 the word came down that they wanted us back in the office in Arlington. I was now 66. Since I no longer had a place to stay in Alexandria, that was a no-go. But I was of an age where retirement was a reasonable choice. My employer asked me to stay on into October and suspended their return-to-office requirement for me. I retired in October.

    So in essence, I avoided the return-to-office problem by retiring.

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  5. Two extra payments a year can make a difference for sure. Add an additional amount to pay down the principal to each payment and the balance will drop like a rock. Lenders hate that because you are killing their profit stream, but better get payments on a loan that stays current than dealing with a default. Our loan got sold a couple of times, as I recall one lender didn't offer bi-weekly payments but they all have to accept additional payments against principal.

    We left CA last year for central AZ and we are doing our darnedest to not be Ugly Californians, it helps that we were in a Purple county (and city) and I was raised conservative too.

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  6. So maybe one of the major causes of home property taxes to rise is that the loss of business taxes need to be made up.

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  7. A few areas remain in-demand, despite the higher mortgage interest rates.

    This leads to weird deformations of behavior - due to where we live, our house is worth nearly 5X what we paid for it 25 years ago. And it was (to my mind) overpriced then.

    Except because the capital gains exclusion hasn't increased from the year we bought it, despite our married exclusion we'll still be paying taxes on more than its original purchase price if we sell. And since we live in California, which treats capital gains as ordinary income, we'd be paying at California's top rate for most of that (yes, the federal cap gain rate would apply on the fed side. Still too much). I'd always planned on selling and moving out when I finally retire, but if we do, we'll end up paying more money in taxes than the total we EARNED the first few years we were married - and we had, for the time, fairly high paying jobs.

    So unless the law changes, when we retire in couple of years we'll likely just stay where we are instead of moving somewhere cheaper? Why not? Since our mortgage is long paid off and property tax increases are capped (the family next door, who bought 4 years ago, are paying ~4x the taxes we do) there's no incentive to move, and many downsides. Which means our house is not available for someone moving into the area.

    FWIW, our neighborhood seems to be a mixture of very highly paid 2 income families and lots of retirees. Without the perverse incentives, I suspect it would be mostly families and overall prices would be at least a little lower.

    We're in "Silicon Valley", but the same pressure applies anywhere with a surplus of high-paying jobs and limited housing.

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  8. Yup. I’ve got a relative in this trouble as he has been told to report to his job in Chicago but he is now living in Denver. They gave him a three year window to report or leave.

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  9. That's just expensive housing though. Here, even the inexpensive housing in dicey neighborhoods is radically overvalued, and out of reach financially for the people who are actually willing to live in those neighborhoods.

    We know, because we tried to buy a home last year, and have been watching the local market ever since. Nothing's changed. The whole market at our price level has been completely, radically, warped around the needs of investors who buy up lots and lots of cheaper properties, reno them up to *just barely* good enough to rent out, and then become slumlords.

    There was a time when it was possible to take out a small mortgage, buy a fixer-upper, live with a certain amount of decrepitude while you fix the place up as funds allow over several years, and own a house that way. Apparently this is no longer possible. Regular lenders will not lend the money for a house if it is not immediately up to spec. If it needs a new HVAC system, if the floors are ugly, if the wiring's too old, if there's no sink currently installed in the kitchen, if the third bedroom needs drywall, anything (I mean, bloody hell a utility sink at lowe's is like $100 and I can install it in 5 minutes and it'll do until I can get cabinets and counters in there)... they will not lend you the money. It has to be 100% currently up to spec such that you could immediately turn around and rent it to someone. OR you can get an HSA loan which will let you buy a crap house, borrow the cost plus cost of repairs, and it will end up costing you same or more, because you are not allowed to do those repairs yourself-- you have to contract them, and they have to be to the loan company's specs, and on the loan company's timetable (6 mos?)

    We are now considering going the mobile home route instead. Buy an empty lot. Finance the MH.

    I think Charles Hugh Smith has the right of it, in his post here:
    https://charleshughsmith.blogspot.com/2023/08/the-problem-isnt-housing-shortage-its.html

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  10. We ducked out of California almost 18 years ago at the top of one of the regular real estate price swings. One guy I knew had a nice business at the bottom of each cycle appealing property tax valuations. He'd charge something like $100 for what, for him, was a form letter and a stamp. I paid for my own stamp, wrote my own letter, and saved quite a bit over the years. The market here is a tad more temperate. No huge swings up, no huge swings down, and property taxes have increased an average of only $55 a year.
    Our place is California? Now worth six times what we paid some 37 years ago. I'd like to sell it again.

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  11. I didn't relocate, but took a promotion while it was remote. Now that they're directing a return to office, I'm planning to step back down to the lower (local) position. Relocating in this environment (esp. from my small town near family to a big metro) is a bad idea for us.

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  12. "All of this was ridiculously stupid. The premise that employees operated on -- that they'd never have to set foot in an office again -- was crap. As the pandemic ended so did the curtailment of occupying office space and the cities could not survive with all that office space empty; the tax revenue plus all the retail business activity associated with those people being in the buildings during the day is utterly essential to their fiscal survivability."

    Deninger being Deninger.
    What the cities need to survive impacts businesses to the sum of Doodly and Squat.

    Apparently the collapse of commercial real estate, and the growing retail apocalypse are both news to him.
    One suspects the collapse of cities dependent upon that newly non-existent tax base will come as quite a shock to him when it comes to pass.

    Somebody ought to suggest to him that he google "Detroit: Fate Of..." for a major cluebat.

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  13. For every house I have purchased I printed out an amortization table on the loan (the lender will give you one if you ask for it). The table lists every payment - all 360 for a 30-year, or 180 for a 15-year - and the principal and interest for each payment (I'm assuming a fixed rate mortgage, not an ARM).

    You will notice that for payment #1 the principal is a pittance compared to the interest; for example, one mortgage I had showed $18.50 principal and $1115 interest for payment #1. So, adding about $100 extra to payment #1 as "additional principal" - and make sure it's listed that way, many lenders will not automatically apply amounts greater than the payment to principal - makes the next payment you make payment #7, not payment #2. But, you're not going to be paying that ~$1100 interest on each of #2 through #6.

    The more you can attack the principal early, the more money you will save. It's worth scrimping on other areas of the budget for the first year - or two, or three - to drive your payments as far down the amortization table as you can so that more of your payment applies to principal, shortening the loan.

    The Holy Grail is to reach the point where greater than 50% of your payment is going to principal. But, if your budget is built around an extra $100, or more, going to the mortgage, DON'T STOP. It won't make as big a dent in the payment schedule as it did earlier, but it still counts by lowering the principal. The faster the principal gets paid, the less money you spend on the entire mortgage, and the sooner you own the property free and clear. As SK said (above), a bi-weekly payment schedule helps, too, but do not forget to add additional principal payments to each bi-weekly payment.

    Pro Tip: Once you do own the property outright, do not stop making the payments - just start making them to yourself rather than the mortgage company. Your budget is already built around paying that much each month, now start paying it to yourself. Build a strong, healthy emergency cash fund, fund a Roth retirement account, etc.

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  14. The taxes themselves are where a big hit is. Where I live in Wyoming it's not bad compared to other parts of the country even living in a town that has the University stationed in it which drives up property costs. Well turns out our county assesor just uses Zillow to determine what your property taxes should be. My house doubled in price in 5 years so this year a 50% tax bill increase. Good times, so there's going to be a limit who can afford what. Also when covid hit, we saw a huge increase in NY, NJ, CA and other high tax states. Those same properties around the neighborhood have gone up for sale as the companies have dictated a return to office. But the taxes till remain

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  15. An interesting new title I just read:

    NYC lost over one Trillion Dollars in taxes over the past year.

    Seems more than just workers working from home (although that also HURTS even the restaurants, bagel shops etc. nearby) because major financial firms have moved out due to unfriendly business laws, regulations and street crime issues.

    What did Wilder just post about Leftist Death Cults? Killing off their own cities? I seem to remember AOC BRAGGING she kept Amazon OUT Of NYC and all that tax revenue also lost. Crickets about the taxes lost I noticed.

    The Deninger article is well researched and accurate. However, it takes more real world(tm) knowledge of Finance to understand him properly.

    Not a finical expert but I have made some nice money from reading Deniger and many other finical folks I pay subscriptions too.

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  16. What Deninger gets, he gets.

    What he doesn't get, however, is like reading a trash truck driver trying to explain Einstein's Theory of Relativity.
    He doesn't know what he doesn't know, and expertise in one area doesn't always translate to similar expertise outside that region.

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  17. What he doesn't get, however, is like reading a trash truck driver trying to explain Einstein's Theory of Relativity.
    He doesn't know what he doesn't know, and expertise in one area doesn't always translate to similar expertise outside that region.

    Does that apply to internet bloggers also Aesop?

    Btw inquiring minds are looking for your answer over at police article.

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  18. BTW Karl Denninger has a net worth in excess of 17 Million dollars.

    I'd say he has a pretty good idea how business and economics work don't you?

    Yeah, he's a piker compared to California Democrats.

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  19. :-) Well, as one of those who moved here to WF a bit over 3 years ago now and with my wife working a "remote" job back in Illinois for the University we both worked for... Well, got REALLY lucky with the house purchase a the lowest interest rate and the VA loan... Did NOT come from a particularly high cost area as Champaign IL is ~ the same as WF, TX in many ways, but I would dread having to move at this time. Despite the "value" of our new home skyrocketing, so have all the rest of them if only for tax purposes or to cover the false value of the "asset". So, hopefully we're for the longer haul...

    I'm not sure that the original poster is completely correct, or at least not for my industry (IT). For IT workers, there are a LOT of "remote only" or "mostly remote" jobs out there since there is still a shortage of qualified IT workers... Even at the University I work for, we are having to adjust to that reality and I have a number of folks working at least partially remote... I do not see this changing going forward as I am struggling to keep the folks I have these days...

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  20. Michael,

    Deninger's worth is nice, for him.
    But that's all it is.
    It doesn't necessarily convey authority, even on financial matters.
    And I've documented times beyond counting huge black holes in what he doesn't get as soon as he gets into health care, because it's like waving a red flag in front of a bull with him, and he demonstrates his widespread informational deficits within a paragraph.
    Not that it stops him.

    The guys who ran the last twenty failed Fortune 500 corporations had similar net worth.
    So they ran their companies into the ground because they too knew all about economics and finance?
    Tell me how that's working out for Dick's Sporting Goods.
    Or Gilette.
    Or Black Rifle Coffee.
    Or Bud Light.
    Or Disney.
    And on and on and on.
    Having money demonstrates mastery of economics and finance: said no economics and finance reporter ever.

    I could name any number of televangelists with similar or greater net worth.
    Any guesses how authoritative their answers on anything biblical are?

    Epstein was worth more than 17M.
    Tell us how authoritative his advice was.

    Fat Bill and Shrillary are worth - what? - tens of millions?
    How authoritative are their pronouncements?

    Meanwhile, if you want to take pot shots at what I do and don't know, don't pussyfoot around.
    All I get from you and any hundred Brave Anonymous Trolls is endless gainsaying, 24/7/365. Unsubstantiated talk is cheap. All bun, and no beef.
    Make a case on merit, or get back on the porch with the yappy little dogs.

    Deninger's non-sequitur is assuming that what cities need (tax revenue) has Jack or Squat to do with how private businesses will or won't expend resources.
    One of these things has nothing to do with the other.
    Like I told you.
    In fact, as a rule, businesses will do everything within their ability to deny paying any taxes to anyone, on the general principle that they aren't morons.
    Any business management team that won't should have its directors sued for malfeasance and breach of fiduciary responsibility to stockholders and/or co-owners. It's literally a criminal act.

    If you need that explained to you more succinctly, or cannot grasp the obviousness of it in the time it took to read it, you have bigger problems than anything that can be addressed on a blog.

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  21. LOL Classic Aesop, distract, deflect and create strawmen to boldly destroy with his MIGHTY Keyboard.

    Oh, and random threats. Shuddering...chuckling.

    Denning was speaking NOT about Medical stuff here, PAY ATTENTION. He was speaking about money and business as it involves cities.

    You know that place you live in, supported by taxes and services paid for BY those taxes.

    And what happens when you destroy that TAX BASE.

    Strawman flurries about random religious folks and such is feeble. Noisy. full of fury but feeble. Like a nursing home man throwing his sippy cup feeble.

    Also, you FAILED to reply to the question so here it is again Aesop a quote from your mighty pen and my idiot questions in reply:

    "What he doesn't get, however, is like reading a trash truck driver trying to explain Einstein's Theory of Relativity.
    He doesn't know what he doesn't know, and expertise in one area doesn't always translate to similar expertise outside that region."

    Does that apply to internet bloggers also Aesop?

    Btw inquiring minds are looking for your answer over at police article.

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  22. Your imagination is running wild, and on overtime, Michael.
    1) There was no deflection.
    2) I made no threats.

    3) Pay attention your own self:
    Deninger was talking out of his fourth point of contact in the excerpt in the OP, and is demonstrably and obviously wrong about it.
    If he can get something so utterly simple supposedly within his own area of expertise so horribly and obviously wrong, good luck with pronouncements about more arcane matters, and doubly so those far outside his lane.

    I brought up medical matters, because it demonstrates that he has a chip the size of a redwood log on his shoulder about certain topics like that one (anyone, stop me if this reminds you of someone else who keeps trying to drag out debates over their own pet causes on other people's blogs) which blinds him to obvious realities, and he does it over and over again.

    4) What happens when you destroy a tax base is that the government fails. Business, OTOH, just packs up and moves on to greener pastures.
    You could look it up. There are only a million current examples locatable within the radius of a swung dead cat.

    E.g.: Detroit is a wasteland.
    So, tell the class how Ford and GM are doing despite that, and whether those corporations give a flying fornication for the fate of Detroit, then, now, or ever.
    Show your work.
    When you fail, because you cannot do otherwise, own your defeat.

    5) Pointing out that your appeal to a person's wealth is fallacious isn't a straw man, it simply and succinctly undermines your entire premise re: Deninger and the limits of his expertise.

    Money≠brains, nor truth, ever, in all of human history.
    The list of feather-headed rich people in every age is legion.
    And reality cares not a whit for how much you wish it were otherwise.
    You lost that point. Take your whipping quietly.
    Dulce et decorum est.

    6) What I said applies to some people, and not to others. I referred solely to Deninger. Period.
    If you want to apply it to others, that's your business.
    Show your work, and make your case. One hopes you'll do it better justice than you have here, with this one.

    7) As I've pointed out to you on multiple occasions, the dog whistles you obviously hear on so many topics aren't heard by anyone else. That isn't a gift, btw.
    Specifically, I have no wild idea to what thing "police article" you keep naming refers, as if that alone was supposed to be a reference intelligible or decodable by ordinary people with no idea of the machinations inside your own cranium.
    Given your repetitive and ineffective flailing on this topic, you can perhaps understand my near complete lack of interest in a plain answer from you to that, let alone providing a further response, but I'm giving you a fair chance to spit it out in plain English, if only to give you good odds to attempt something at which you can succeed.

    What any of this quixotic quest of yours has to do with any reply to the original post here, God alone knows.

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  23. LOL you "win" again.

    I do enjoy your predictable arrogance.

    Thanks, Peter, for humoring this exchange on your fine blog.

    ReplyDelete
  24. So, having killed a ton of electrons and wasted everyone's time to no good purpose, you abandon your indefensible arguments, fold your tent and depart, having proven nothing, and maintaining the internal integrity of labyrinthine machinations of nonsense you alone can follow.

    Well-played.

    Yet again, I suggest (doubtless in vain) that you confine your comments to things that have anything to do with you, rather than going on rants on things you can neither grasp nor surmount. That oyster's too big for you.

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  25. LOL arguing with you is the same effect as Sisyphus rolling the rock up the mountain.

    Thus, like the Roman Legions seeing the Greek Phalanx drawn up before the town they were defending I laugh and march around you.

    So, yeah, Greek Hero you "Won", I fold up my tent and laugh about your predictable arrogance.

    Well played Hero.

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