Fireside Finance

From Yahoo Finance: Couldn't have said it better myself

2008-06-12T08:53:00.002-04:00

Laura Rowley Money & Happiness

Has the American Dream Become a Fairy Tale?

Excellent (113 Ratings): 4.097346/5

Posted on Wednesday, June 11, 2008, 12:00AM

Once upon a time there was a greedy young man with shiny wingtips and important degrees. His father, an advisor to the king, had paid the young man's way through an Ivy League college and got him a job managing the village's pension investments.

The greedy young man went to his magic mirror and said, "Mirror, mirror, I'm at the top of my field, I'm entitled to a higher yield. I'd like to earn that yield today, so I get a bonus with my pay. Tell me now, because here's the thing -- I'm really entitled to earn more than the king."

The mirror replied, "Call Wall Street please, and invest in mortgage-backed securities. Don't worry whether the yield will last, this way you'll get your bonus fast."

And the greedy young man went on television, where the media declared him a genius.

The Investment Banker

Once upon a time there was a greedy investment banker with shiny high heels and important Ivy League degrees. She went to her magic mirror and said, "Mirror, mirror on the wall, I'm clearly entitled to a windfall. I'm putting upon you the onus -- what's the best way to boost my bonus?"

The mirror replied, "Here you'll find the recipe -- sell this hot security: Bundle good and bad mortgages together, slice and dice them and sell them as treasure. Don't worry about what's really inside -- anything foul the rating agencies can hide. If you follow my advice today, surely you'll increase your rate of pay."

And the greedy investment banker went on television, where the media declared her a genius.

The Bank President

Once upon a time there was a greedy bank president with a fancy gold watch and important degrees. He went to his magic mirror and said, "I find myself on the executive floor -- I'm really entitled to be earning more. If the stock went up I'd have no cares, since I own about a million shares. Ten other banks have opened on my block -- tell me how to boost my stock."

The mirror replied, "Hand out mortgages across the land, and sell them to Wall Street as fast as you can. Heed my word in this endeavor, and your stock will go up and up forever."

And the greedy bank president went on television, where the media declared that his bank's stock would likely go up forever.

The Mortgage Broker

Once upon a time there was a greedy young man with a not-so-fancy degree and a leased Porsche. He went to his magic mirror and said, "Mirror, mirror, I want to be rich, tell me where I can find my niche. I've read 'The Secret' and I'm ready for action, I'm familiar with the laws of attraction. My ambition is so thoroughly unbridled, I think you'll agree that I'm entitled."

The mirror replied, "Now my friend don't fret or frown, but make some loans with no money down. Become a mortgage broker and get on the phone; get some expertise in the 'liar loan.' Find suckers with no income to sign on the line, tell them when the rate adjusts things will be fine. Or sign yourself, who needs permission? Just make sure the loan has the biggest commission. Since you're lending the bank's money there's no hitch, just close those loans and you'll be rich."

And the mortgage broker went on television, where he starred in a commercial as Crazy Morty the Mortgage Broker, urging would-be homeowners to call him at 1-800-555-4567.

The Greedy Townsperson

Once upon a time there was a greedy townsperson who lived in his parents' basement and spent most of his time watching television. He saw the mortgage broker's commercial, went to his magic mirror, and said, "I don't have a job or a fancy degree, but I'm smarter than those geniuses on TV and I'm entitled to a home for free. Should I call the number that I see?" And the mirror replied, "Yes, and then cash out your equity."

He bought a McMansion and, six months later, cashed out the equity and bought a Lexus.

The Hard-Working Townsperson

Once upon a time there was a hardworking townsperson, the neighbor of the man who bought the McMansion. The hardworking man toiled in IT for the bank, where he received raises of 4 percent a year. Unfortunately, his expenses -- food, gas, utilities, taxes, health insurance, college tuition, even the cleats for his kids' soccer shoes -- were rising much faster. He drove an 8-year-old minivan, and had scrimped and saved to buy a house he could afford -- even putting 20 percent down.

He went to his magic mirror and said, "Mirror, mirror, I'm exhausted. Today at work I almost lost it. I come home from my toil and fall into bed. What can I do to get ahead?" And the mirror replied, "I have no schemes for such an honest dude -- I sincerely hope you don't get screwed."

The Moral

And as it turned out, the mortgage-backed securities were not treasure, and the pension fund went broke. The king made up for the loss by doubling taxes. The greedy young man and the greedy investment banker both got lucrative new jobs at a hedge fund run by an Ivy League pal.

The bank stock didn't go up forever -- it crashed to $5 a share -- but the bank president received a bailout worth $160 million and retired to the Caribbean. The mortgage broker moved to the Caribbean as well, where he was recognized by the banker who had enjoyed his Crazy Morty TV commercials. The banker got him a job running the country club's caddy shack.

The townsperson who bought the McMansion couldn't afford his mortgage when the rate reset, so the government bailed him out. The hardworking townsperson was laid off with no severance (that money had been given to the bank president). The hardworking townsperson's home plunged in value and his taxes went up (to bail out his neighbor and the kingdom's pension fund). His IT job was sent overseas, where the bank hired a programmer for $8,000 a year.

And the mirror just sighed at all the trouble. "Another mania, another bubble. The winners get out before it bursts, the man who follows the rules is cursed. With a sense of entitlement and plenty of greed, you can win this game with lightning speed. I've told the tale, and now I'm finished."

And the American Dream was greatly diminished.

Angry Renters Oppose the Mortgage Bailout

2008-05-08T13:33:00.001-04:00

Video of the Day: Renter's Take on Housing Bailout

2008-04-28T10:16:00.000-04:00

2008-04-23T15:12:00.002-04:00

From Barry Ritholtz at The Big Picture via James Bednar at the New Jersey Real Estate Report via RentingInNJ comes an excellent graphic that basically sums up the credibility of the National Association of Realtors, wholes sole existence is to create home sales (change the direction of the line below) and enrich its members to the detriment of house buyers everywhere.

1. "There's no question there is a strong demand for housing from a growing population." -David Lereah, NAR Chief Economist

2. "For the foreseeable future, the demand for homes will continue to outstrip supply" -Al Mansell, NAR President

3. "We've been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream." -David Lereah, NAR Chief Economist

4. "We are returning to more balanced markets between home buyers and sellers… We feel confident that housing is landing softly as rates continue to rise." -David Lereah, NAR Chief Economist

5. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid…" -David Lereah, NAR Chief Economist

6. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels." -David Lereah, NAR Chief Economist

"After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future." -Thomas M. Stevens, NAR President

7. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing" -David Lereah, NAR Chief Economist

8. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it'll likely take some months for price appreciation to rise." -David Lereah, NAR Chief Economist

9. Existing-home sales stabilized at a sustainable pace in August -NAR

10. "…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market" -David Lereah, NAR Chief Economist

11. "It looks like we're moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices." -David Lereah, NAR Chief Economist

12. "Fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers," -David Lereah, NAR Chief Economist

13. "We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers." -David Lereah, NAR Chief Economist

14. "Buyers who've been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won't be as good as they are now." -Pat V. Combs, NAR President

15. "The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom. Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path." -Lawrence Yun, NAR Chief Economist

16. "The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales…Once we get through these disruptions, we'll get a better sense of where the actual market is in late fall as conditions begin to normalize," -Lawrence Yun, NAR Chief Economist

17. "Existing-Home Sales Rise in November, Market Likely Stabilizing" -NAR

18. "Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate," -Lawrence Yun, NAR Chief Economist

19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NAR

OPPOSE THE HOUSING BAILOUT

2008-04-16T09:53:00.003-04:00

Take a moment from your day and oppose the coming housing bailout by clicking here. None of us, especially those paying our mortgages on time or who avoided taking out mortgages we couldn't afford altogether and rented, wants to be rewarded for our good behavior by paying for other people to remain in their mansions.

It's simple... it's just the wrong thing to do, even setting aside the fact that a bailout won't work.

-eternitus

This just in: Bullshit is Most Important Issue for 2008 Voters

2008-04-03T16:02:00.001-04:00

Poll: Bullshit Is Most Important Issue For 2008 Voters

Hillary Says to Copy Japan?

2008-03-31T08:49:00.004-04:00

Sometimes, I can't believe what I hear from our politicians. But then, I realize that our politicians know as much about economics as they do about, well, anything else except politics (no, they are not smarter than a 5th grader). So, in essence, they know what is spoon-fed to them by their overworked, underpaid and understaffed staff, which is often incomplete and sometimes dead wrong.

At first, I was delighted to hear 1990s Japan brought into the discussion. That is, until I heard Hillary say that we should be more like Japan. Then I was shocked. Yes! Bring on the agonizing, torturous 15-year funk that was Japan after 1990! What amount of self-loathing would actually lead someone to desire such an outcome? Is she going to try to legislate mandatory self-flagellation for 5 hours per day, and bi-weekly root canals with no anesthetic, as well? Sometimes, we just have to gape in awe at the folly of our fellow (wo)man.

Saying we should try to emulate Japan is no different, IMHO, than holding up the Pittsburgh Pirates as the blueprint for baseball success (I still love you, Buccos, but your 15-year funk puts you in the same category as Japan's economy as far as futility is concerned, though on a slightly different scale).

At least someone is paying attention.

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Hillary's Bad History
March 31, 2008; Page A18

No, not sniper fire in Bosnia. We're referring to Hillary Clinton's lament last week that the U.S. is flirting with a 1990s Japan-style deflation. Perhaps it's a good time to remind everyone what really happened in Japan, so Mrs. Clinton and the rest of Washington don't make the same mistakes.

"I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone," Mrs. Clinton said in the interview with Journal reporters. "I think the Japanese tried that and tried and tried that." She added Japan should have relied more on fiscal stimulus spending and aid to banks and homeowners, which is what she wants Washington to try now.

The Senator needs a refresher in Japanese economic history. Far from easing monetary policy, the Bank of Japan kept money too tight for too long in the early 1990s. Japan's stock market slide began in early 1990, but its central bank raised interest rates through most of that year and didn't cut them until July 1991. While the Bank of Japan eventually chased interest rates down to zero, it was always too late to break the deflationary spiral.

There's little sign the U.S. is facing a similar danger today, given that the Federal Reserve has been dropping rates quickly as the economy has slowed. If anything, the problem is the opposite, with the Fed risking future inflation by putting rates into negative real territory and devaluing the dollar. (See Ronald McKinnon nearby.)

Japan also made the mistake of refusing to make banks pay for the mistakes they made during their global lending spree in the late 1980s. As the world economy fell into recession in 1990, so did Japan. But rather than letting banks take their losses, the Liberal Democratic Party kept bailing them out. This merely delayed the day of reckoning, as insolvent banks were allowed to exist as "zombies," alive in name but unable to lend.

The government also raised consumption taxes, burdening consumers at exactly the wrong time. Meanwhile, with encouragement from the Clinton Treasury, Tokyo launched a vast Keynesian spending program. Roads, bridges, trains -- you name it, Japan built it. The nearby chart shows the impact this spending had on overall Japanese government debt, which exploded over the decade. The nearly annual spending programs led to several false recoveries with growth blips, but they never changed incentives enough to revive domestic risk-taking.

Yet this is exactly the policy that Mrs. Clinton now wants the U.S. to emulate. Rather than let housing speculators and lenders take the hit for mispricing credit and allow the market to clear, she wants a 90-day freeze on foreclosures and a five-year freeze on mortgage resets. She also wants the feds to buy up mortgage-backed securities and guarantee troubled mortgages. Rather than let housing markets find a bottom where they can begin a recovery, she and her allies in both parties would prolong the agony. While some homeowners and banks would be saved from foreclosure or greater losses, the cost would be to lengthen the housing recession.

A better model is the one the late Al Casey put into practice during the savings and loan crisis in the early 1990s. As president of the Resolution Trust Corp., Mr. Casey sold almost $400 billion of bankrupt assets as rapidly as he could. Declaring that his purpose was to "put the RTC out of business," Mr. Casey let investors buy those assets even at "vulture" prices. The real estate market was able to find a bottom, and the recovery came so fast that Bill Clinton inherited an economy that grew by 3.3% in 1992.

The Beltway class also now wants to indulge in the same Keynesian "stimulus" that failed in Japan. Mrs. Clinton's "Rebuild America Plan" would invest $10 billion over 10 years in an "Emergency Repair Fund" -- a plan she claims would create 48,000 jobs for every billion dollars spent, or close to half a million jobs. She would build ports, railroads, airports, public transit, tunnels and roads. Senate Democrats are proposing more than $35 billion in new spending -- on top of their $168 billion in tax rebates. These may also lead to false recoveries, but they won't ignite a new round of risk-taking and investment.

Japan finally emerged from its funk earlier this decade after it realized its bank losses and caught the updraft from global monetary reflation. Still, its economic growth remains mediocre -- a level that wouldn't be tolerated in the U.S. and may not be enough even in Japan. Sluggish growth has already sunk one Prime Minister and could prove fatal to the current leader, Yasuo Fukuda, whose approval ratings are dropping fast.

The way to revive U.S. growth is by learning from Japan's mistakes, and doing the opposite. The U.S. needs monetary policy that maintains a stable price level, bank supervision that recognizes mortgage losses and lets markets clear, and marginal rate tax cuts that boost incentives to work and invest. In short, the American policies of the 1980s, not those of Japan's lost decade.

Waiting for that one, dumb home buyer

2008-03-28T14:46:00.001-04:00

Tim Iacono, in his fantastic blog "The Mess that Greenspan Made," has some great points in his post below.

Waiting for that one, dumb home buyer

Amid the very low real estate sales volume in many parts of the country today, the prices of those few homes that are sold are now falling much faster than the asking prices of homes currently for sale.

That fact is clear to see in many neighborhoods as sellers sit and wait, either not knowing or not caring that they have little chance of getting anywhere close to what they're asking unless that one, dumb home buyer shows up who knows less about real estate market conditions than they do.

The New York Times had a story about this yesterday - what some call "riding the market down" - and they touched on a couple of the key issues:

In most other areas of the economy, this combination of plummeting sales and stable prices would not happen. When demand for airline tickets drops, the airlines cut their prices until they have sold their seats. When stocks become less appealing, share prices fall, sometimes sharply.

Just try to imagine stock prices staying roughly flat over a three-year period while sales volumes sank because investors considered the market overvalued. Bear Stearns is still worth $150 a share, and I’m not selling until someone pays me $150!

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation.
That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.
...
In many ways, it would be better if the housing correction would happen more swiftly and sharply. The pain might be worse, but it would be over quickly. We seem to understand this principle when we’re removing a bandage. Why, then, is it so much harder with housing?

Because houses are almost perfectly engineered to trick owners into overvaluing them.

For starters, people have an obvious emotional connection to their house. After you have raised a family or enjoyed long meals with friends there, you are naturally going to place a higher value on it than a dispassionate buyer would. It’s your home.
...
David Laibson, a leading behavioral economist, categorizes this sort of behavior under the heading of “the principle of the matter.” His point is that people often go to great lengths to avoid taking a loss — or simply having to acknowledge one. “Even a small loss evokes a sense of frustration,” said Mr. Laibson, a professor at Harvard. “There’s something magical about ‘at least breaking even.’ ”

Often, this hurts no one so much as it hurts the would-be sellers. They stay in homes where they no longer want to live, rather than accepting their loss and moving on. Or they move but endure the hassle of renting out their old home, waiting, usually in vain, for the mythical buyer who understands its charms. All the while, their money is tied up in the house, and inflation is eating away at its real value.

There are a bunch of houses in our neighborhood that have been on the market since 2006 and the asking price hasn't budged. In some cases the price has been lowered by a tiny amount - for example, from $595,000 to $589,000 - in what seems to be a mini-capitulation for the benefit of either themselves or their real estate agent.

They look ridiculously out of place now that bank foreclosures are coming onto the market priced hundreds of thousands of dollars lower.

Blecch! NAR's Yun Named Top 10 Forecaster by USA Today

2008-03-19T12:40:00.002-04:00

Isn't he the guy who revised his forecast on a monthly basis because he was wrong?

There must only be 10 economic forecasters...

NAR Economist Among Top Forecasters
THE NATIONAL ASSOCIATION OF REALTORS'® Chief Economist Lawrence Yun has been named among the top 10 economic forecasters by USA Today. Yun is ranked fifth on the list and is responsible for NAR’s real estate statistics and economic forecasting. The annual list recognizes accuracy in forecasting.

“NAR is proud of USA Today’s recognition of Lawrence Yun and his economic forecast accuracy. He is a highly regarded economist, and the housing and real estate industry have come to rely heavily on his economic analyses,” says Dale Stinton, NAR executive vice president and chief executive officer. “This acknowledgement contributes greatly to NAR’s reputation as the leading innovator in housing-related research.”

Yun was named NAR’s chief economist and senior vice president of research in November 2007. He has been with the association since 2000, previously serving as vice president and senior economist. He pioneered the development of the Commercial Leading Index after helping develop the residential Pending Home Sales Index.

“I’m honored to be recognized among some of the best economists in the country,” says Yun. “The economy and housing industry are facing many challenging issues at this time, which makes this an interesting and stimulating position.”

USA Today enlisted the help of the Federal Reserve Bank of Atlanta to determine the most accurate forecasters among the economists surveyed in the newspaper’s quarterly survey on the U.S. economy.

The economists, whose identities were unknown to those gathering the data, received four scores — one for each quarterly survey — and were ranked on the average of those four scores. FRBA used statistical methods to assess the joint accuracy of the predictions rather than assessing the accuracy of each forecast variable separately, as is commonly done.

Before joining NAR, Yun worked as an economic consultant to the U.S. Department of Veterans Affairs and the U.S. Department of Education. As a research associate at the University of Maryland, Yun developed the graduate economics curriculum for and taught free-market economics in the former Soviet Union as that country transitioned from communism to a free-market system.

Yun received his Ph.D. in economics from the University of Maryland in 1995. He received a B.S. degree in mechanical engineering from Purdue University in 1987.

— REALTOR® magazine online

Japan, Here We Come!!!

2008-03-04T16:41:00.005-05:00

We are at a crisis point, indeed. However, lost in all of this hoopla is that this isn't a foreclosure crisis, but a housing affordability crisis. You need no proof aside from the fact that foreclosures began to spike in a time of extremely low unemployment and a generally strong economy. Prior, foreclosures have largely been a symptom of economic hardship, not the cause. Many cannot afford to handle a "market" housing payment even at today's somewhat reduced values. For those who can, paying off our housing debt continues to suck up valuable income that can be used to buy goods and services and stimulate the economy.

As I've said before, either incomes must rise dramatically (unlikely given the economic outlook) or housing prices must fall dramatically (10-15% with stable interest rates) before the system regains equilibrium. In this housing fiasco, where the order of magnitude stretches into the trillions, there is literally nothing we can (or should try to) do to stop this process from occurring.

Unfortunately, some of us, especially those desperate to hold onto political offices, feel like we should try. Some folks across the Pacific in Japan thought the same thing back in the 1990s. Let's see how that turned out...

Thanks to Charles Hugh Smith, from whom I borrowed the chart above.

From Wikipedia on the Japanese RE bubble:

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many "zombie businesses".

The time after the bubble's collapse (崩壊, hōkai^?), which occurred gradually rather than catastrophically, is known as the "lost decade" (失われた10年, ushinawareta jūnen^?) in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003 before resuming an upward climb.

Instead of letting things get back to normal, where people had to be able to pay for stuff out of their incomes, Japan struggled mightily to prop up failing banks and dwindling asset prices. Despite Japan's sincerest efforts, this only served to prolong the agony and balloon the national debt, leading to Japan's "lost decade." Today, due to the bloated cost of government bailout programs during the last 15 years, 70% of Japan's tax revenues are dedicated to servicing debt, up from about 30% prior.

The lesson: We have to take our medicine one way or another, and quick and painful seems much better than prolonged and agonizing.

We haven't seem to have gotten the message. Just when I thought we couldn't get any denser, Ben Bernanke comes out of the woodwork and says that lenders should simply reduce the amount people owe on underwater loans. Am I missing something here? Gee, instead of keeping the loans the way they are and the lender collecting 3/4 of the money... why don't we all just "fuhgeddaboudit" and reduce the principal wholesale, so the lender loses the 1/4 he was going to already along with the 3/4 he would have collected anyway? Who needs all those hundreds of billions anyway? Brilliant (sarcasm).

That's even better than the "negative amortization certificate" idea where banks would buy underwater loans, reduce the principal owed and get a warrant for the reduction amount, which they could collect with interest when the house is eventually sold, provided it sells for enough to cover both the mortgage and the warrant. Hmmm, so why wouldn't I just sell my house to get rid of your warrant and buy a similar house? That way, I wouldn't have to pay anyone when I sell...

Ridiculous... I hope we all don't lose a decade because of this...

Bernanke Says Homeowners
Need More Help on Loans

By MICHAEL R. CRITTENDEN
March 4, 2008 4:35 p.m.

ORLANDO, Fla. -- More needs to be done to help troubled homeowners, including a broader effort to write down the principal of some problem loans, Federal Reserve Chairman Ben Bernanke said Tuesday.

"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Mr. Bernanke said in prepared remarks. (Read the full speech.)

Speaking at the Independent Community Bankers of America conference in Orlando, Fla., Mr. Bernanke said the current turmoil in the housing market "calls for a vigorous response."

"Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done," Mr. Bernanke said.

Though most loan modifications by lenders have focused on reducing the interest rate on a borrower's loan, Mr. Bernanke said a reduction in the principal might be more appropriate. Specifically, with many borrowers owing more on their home than the value of their mortgage, "a reduction in principal may increase the expected payoff by reducing the risk of default."

Mr. Bernanke also suggested a number of policy options that could help the current situation. Reforming the Federal Housing Administration, including giving the agency more latitude to set underwriting standards, could help reduce foreclosures.

Additionally, Fannie Mae and Freddie Mac could have a bigger role in dealing with the current problems if both companies raise more capital, Mr. Bernanke said.

"New capital raising by the GSEs, together with congressional action to strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize," Mr. Bernanke said.

Write to Michael R. Crittenden at michael.crittenden@dowjones.com

Eternitus 1, Economists 0: Looking Back 9 Months

2008-02-16T09:31:00.004-05:00

I think someone mentioned this post in a comment. Looking back, I'm quite proud of what I said. However, this was simply the byproduct of sitting down, analyzing the state of the world, challenging assumptions ("house prices never fall") in light of the facts ("people need to be able to pay their bills out of their incomes, eventually") and finding the logical outcome.

At the time, I was more of a "chicken little" as the stock market was surging toward new highs each day, though it's a fact that there were savvy money managers who knew what I knew... and probably timed their trades better.

Of course, I was just a 25-year old "kid" at the time. What did I know?

Friday, May 11, 2007

"The Worst is Over".... Yeah Right

Check out the rather humorous Wall Street Journal Article below my diatribe...

It looks like many of these economists went to the same school as David Lereah. We have gone from "The economy is strong... The housing issue is contained as consumers continue to spend" to the "the worst has passed" in only one quarter. Economic cycles take much longer than that. I suggest they start paying attention to Nouriel Roubini. Of course, it's too late and the train wreck has begun.

I think the debt-laden consumer is starting to feel like the guy in the picture running from a tsunami. Unfortunately, since he's the average guy, he doesn't have the "high ground" of savings to run to.

Here are my reasons why it's going to get worse before it gets better:

1. False Expansion: The recent economic expansion was not precipitated by a growth in productivity or incomes. Instead, the economy was dragged out of a slump by spending through a massive increase in consumer debt. That debt has to be repaid, and the average consumer's income hasn't grown by an amount necessary to compensate for this. Takeaway: The consumer now has to restrain spending in order to pay for past consumption. We simply traded in future consumption to pay for current consumption, with interest.

2. Misallocation of Capital: Why hasn't the consumer's income grown enough? That one's easy. We borrowed massive amounts to pay for a capital good, housing, which has no payoff in productivity. In Econ 101 - Higher Productivity = Higher REAL incomes (meaning income growth greater than inflation... so you are REALLY earning more). A lot of that money should have been spent on infrastructure and technology that would have helped us become more productive and thus earn more. Typically, borrowing is not a good investment if the cost (interest) exceeds the benefit of using those proceeds. Takeaway: Our incomes haven't grown because we flushed away trillions of dollars on assets that don't help boost our incomes. We now have to pay that money back with interest.

3. Negative Savings Rate: Notwithstanding the fact that we are borrowing a lot more, we are borrowing to consume more than we earn. That hasn't happened since the two years before the great depression. Too many of us are relying on paper gains and asset bubbles to support ourselves. Unfortunately, asset bubbles don't make the economy as a whole richer (only producing more goods and services per person does). Low savings rates mean that the average person has much less of an ability to withstand an economic downturn... especially if he has high monthly debt payments to worry about. When the asset bubble deflates, and we haven't saved, we are no better off than when we started.

Negative savings rates are bad for long-term economic growth as well. Using savings instead of debt to pay for investment that improves our lives means that we get all the benefits without having to pay interest. Productivity rises, we earn more, and we get to keep it all. Takeaway: We have severely hindered our long-term ability to earn more by failing to save.

4. The Big One - Consumer Running Out of Credit: Following up on the negative savings rate, a consumer can live above his means as long as there is someone to supply the credit (See: U.S. Government). Consumer debt is already at record highs, and many consumers have little room left to borrow. Mortgage equity withdrawals accounted for a significant portion of economic growth recently (their use has perhaps increased tenfold over the year 2000). Our economic growth has become dependent on consumers continuing to spend at the rate they have been (i.e. spending more than they earn)... which can't be sustained.

The consumer will have to cut back on consumption, soon (he is already beginning... check the retail sales data). When that reality takes hold, the economy will dip into recession... consumers will default on their loans in record numbers (commensurate with the record amounts of debt) and we will be faced with a significant financial crisis. Takeaway: We're screwed.

Nope, the worst is yet to come....

Economy Is Clawing Back, but Not Much

Economists See Signs of a Rebound in Growth,
But 2007 Is Still on Track as Weakest in Years

By PHIL IZZO
May 10, 2007

The worst of the economic slowdown has passed, private economists said in the latest WSJ.com forecasting survey. But they don't see any reason to expect a significant acceleration.

By a more than 5-to-1 margin, the economists said they believe the first quarter's 1.3% growth -- the weakest in four years -- marked the low point in the slowdown that gripped the economy much of last year. However, they expect growth to stay below 3% into early 2008, leaving 2007 on track to have the slowest economic growth since 2002.

CHARTS AND FULL RESULTS

See and download forecasts for growth, inflation, interest rates and more. Plus, items on the dollar, the alternative minimum tax and the outlook for a new high in Nasdaq stocks. Survey conducted May 4-8.

• Washington Wire: Economists See No AMT Overhaul

The economists don't see any new engines for growth this year. They expect continued weakness in consumer spending, for instance, which accounts for 70% of the economy.

"All of expected growth is addition by subtraction of drags," said Bruce Kasman of J.P. Morgan Chase & Co. "Drags from housing and inventories of manufacturing are fading," he said. Business spending may pick up a bit from its recent lull, said Allen Sinai, of Decision Economics.

On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.

Mickey Levy of Bank of America said he expects home construction to provide a slight boost to the economy by late in the year, after dragging down growth the past six quarters. But economists don't expect a big housing rebound. They predict home prices will fall more than 1% this year, as measured by an index calculated by the government's Office of Federal Housing Enterprise Oversight.

Inflation risks continue to loom, a concern that was reinforced yesterday by the Federal Reserve, when it voted to leave interest rates unchanged and cited inflation as its primary policy concern. Amid the inflation threat, the Fed is reluctant to cut rates, something that could boost the economy. And with energy prices high, particularly for gasoline, consumer spending is crimped.

ABOUT THE SURVEY

The Wall Street Journal surveys a group of 60 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the monthly survey for May. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

Economists, on average, increased their estimates for consumer price growth from the previous survey, seeing 2.4% growth this month and 2.8% in November. When asked in April, the economists had forecast 2.1% and 2.7%, respectively, for the periods.

When asked which presents the bigger risk of triggering a spillover of inflation pressures in the overall economy, 67% of respondents chose energy prices, while 33% said food prices. While some economists said that the spillover risks remain small, Mr. Sinai expressed concerns about their affect on wages.

Last year, inflation appeared to shrug off a spike in energy prices, but Mr. Sinai said that was earlier in the inflation process. "When workers bargain, they don't bargain on core [consumer prices, which exclude food and energy]," he said. "Does anyone really think gas prices are going to go down much?"

Of course, the biggest risk to growth remains the unknown. "The economy is more levered here. Something is going to give, either on the upside or the downside," Mr. Kasman said. "I'll be surprised if we just chug along."

Among other findings of the survey:

• More than three-quarters of economists said that a widening income gap in the U.S. -- where a growing share of income is going to the top 1% of households -- is a worrisome development. But the majority said the government shouldn't seek to restrain it.

• When asked if the Fed is currently behind the curve, just right or too tight in light of its goal of price stability, 75% said it is just right. Just a few economists see the Fed changing rates at its June meeting, but 35 expect a change by the end of the year: 26 see a cut and nine forecast an increase.

• While the Dow Jones Industrial Average continues to set records, economists don't see the Nasdaq Composite breaking its high -- which is nearly twice its current level and was set in 2000 -- any time soon. Nine out of 10 said they don't expect a Nasdaq record until 2010 or later.

• Almost three-quarters of the economists expect the dollar to fall further this year, and, on average, they expect a 3.42% decline.

Write to Phil Izzo at philip.izzo@wsj.com

This week's sign of the apocalypse

2008-02-01T12:40:00.000-05:00

OK.... Sorry for not putting together a post in quite a while... A lot going on at the workplace.

This company is called "You walk away," and specializes in helping people stiff banks by as much and for as long as possible. I can't believe it... I wish I had the gross lack of morality that it takes to dream up something like this. You can find the link to the actual site here. Walk Away

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Messed Up Situation

2008-01-16T12:05:00.000-05:00

OK... I can't help but smell a rat when the guy who engineered this housing bust joins a hedge fund that made $10+ billion from said housing bust.

We need more videos like this one

2007-12-31T17:49:00.001-05:00

Hats off to whoever made this. It sums up the whole real estate ridiculousness of the past few years quite nicely.

Happy Holidays!

2007-12-26T10:28:00.000-05:00

I will post again in the new year!

- eternitus

The Clinton Housing Bubble

2007-12-19T11:58:00.001-05:00

It is comforting to know there are brilliant guys (nobel prize winner in Economics - 2002) who see the light. If I were really that vain, I'd say he reads my blog. However, all of my arguments are logical, and, if you use logic grounded in reality, as the night follows the day, you will come to the correct conclusions, as Dr. Smith did.

Enjoy,

- eternitus

The Clinton Housing Bubble

By VERNON L. SMITH
December 18, 2007; Page A20

The joint housing and mortgage-market crisis once again reminds us that all financial implosions stem from the same cause: borrowing short and lending long without enough equity to weather periodic storms in the gap between.

But this bubble was different. Besides being fueled by housing purchases and repackaged loans, each with inadequate equity -- doubling down with other people's money -- at the end of the capital-gains rainbow was the right to take up to $500,000 of profit, tax free.

Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.

Once again, try as we might and in spite of our political rhetoric, we have failed to help the poor in applauding government action intended to help ourselves.

The consumption binge is now over, and there is more than enough blame and souring loans to spread around. Congress, if its members can stop squabbling, wants desperately to sanctify it all with actions sure to launch at some future date the grandmother of all housing and mortgage-market bubbles. This august body has long forgotten that it set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, as housing lenders of last resort.

Financial market innovators who invented securitization as a mechanism for creating a liquid national market for mortgages are now criticized for having caused an "agency problem." This is jargon for management not having good incentives to provide investors with "truth in packaging" of the underlying economic risk. But what does truth matter at the height of a bubble? These critics would solve the agency problem with more government regulation. Excuse me, but does not the political process have the biggest agency problem of all?

The Federal Reserve, with a default-risk tiger by the tail, feels handcuffed by its accountability and responsibility for avoiding a cascade of defaults in the highest quality obligations, as well as the bad investments seeking an asymmetric tax-free profit. Shades of Long Term Capital, the Savings and Loan crisis, and heyday of the myth of Portfolio Insurance -- historical cases of borrowing short to lend for what may turn out to be longer than expected. They are all conditioned on the existence of liquidity for sellers that can dry up with frightening speed.

Consequently we have the "independent" Fed being driven by market forces to accommodate the long-evident and glaringly least-defensible features of the housing/mortgage markets. Moreover, the moment the Fed abandoned its stance against inflation, the dollar, gold, oil and commodity prices signaled inflation, and now two months later consumer prices have confirmed the signal.

More daring than the action to exempt real estate from the capital gains tax -- and in lasting service to the poor -- would have been actions allowing capital gains on all assets to go tax free, provided that the capital was reinvested -- i.e., not consumed, and yes, good citizens, housing counts as consumption.

Unlike the latest housing bubble, the stock market "excesses" of the 1990s financed thousands of new ventures, some of which found innovative ways to manage the proliferation of new technologies. The result: astonishing, long-term increases in productivity still evident in the most recent quarter.

Adam Smith in his "The Theory of Moral Sentiments" (1759) saw the subtle truth that consumption by the rich has little effect on the welfare of the poor. That's because the income of the rich is largely invested in the tools and knowledge of production, which provide future long-term value for everyone: "The rich only select from the heap what is most precious and agreeable . . . though they mean only their own conveniency . . . [and] . . . the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements."

Expenditures on housing construction are not "improvements" yielding increased productivity and future new wealth to be divided with the poor. They are more akin to satisfying government-subsidized vanity.

Mr. Smith, a professor of law and economics at George Mason University, is the 2002 Nobel Laureate in economics.

Greenspan: Captain Insano

2007-12-18T16:01:00.001-05:00

Either Greenspan is suffering from dementia, or he is a nut and we didn't know it all these years because he hardly talked. I'm amazed that he continues to deny responsibility for this mess even though he is obviously at fault. He is simply lying to himself, and if he believes it he's an absolute fool.

Way to continue to damage whatever is left of your legacy, Mr. Greenspan...

I'm not sure I need to say any more about the following.

-eternitus
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Alan Greenspan appeared on ABC’s This Week and discussed the odds of recession, as well as the merits of helping out stressed homeowners. Here is an excerpted transcript from his appearance:

HOST GEORGE STEPHANOPOULOS: Several … say that there is a 50 percent chance of a recession now. Are they right?

GREENSPAN: Well, that the probabilities of a recession have moved up to close to 50 percent — whether it’s above or below is really extraordinarily difficult to tell. I think that’s correct. You know what the real story is, with this extraordinary credit problems we’re confronting, why the probabilities are not 60% or 70%?

STEPHANOPOULOS: Why aren’t they?

GREENSPAN: The reason, which is fascinating, if you look at the data, is that because of the decline in long-term rates, interest rates for a protracted period of time, American business was able to fund … [a] significant part of its short-term liabilities, and take out low-cost, long-term debt. So the debt credit needs as such have not all been all that large, and so with credit tightening, ordinarily historically that would have been a very major problem for the American economy. It is clearly less so today, because consumption expenditures, even though they’re being pressed by rising energy prices, are actually moving at a reasonably good clip, and the economy, even though it is slowing down — and the way I put it going to stall speed. I mean, the rate of growth is getting to levels which are such that like a human — like a human system when you get vulnerable, you essentially are open to shocks of one form or another. In other words, when our immune systems go down, we get all sorts of diseases. The economy is similar to that.

STEPHANOPOULOS: One of the shocks we saw back in 1970 I think for the first time was what became known as stagflation…How worried are you about it right now, and what should policymakers do?

GREENSPAN: Well, I’m most concerned about it, as I point out in my book, in the sense that the period that — the last 20 years or so has been a remarkable period in which — without going into any of the details — because of the tremendous geopolitical shifts that occurred at the end of the Cold War, we’ve had a period of remarkable disinflation. That period is now coming to an end, and the evidence is clearly there in rising export prices coming out of China. It’s coming out — it’s showing up in a slowed rate of productivity growth in the United States and elsewhere, and we are beginning to get not stagflation, but the early symptoms of it.

STEPHANOPOULOS: And what do we do about it?

GREENSPAN: Well, the one thing we can do is to recognize that one of the lessons of the last 20 years especially is that low inflation is the major contributor to economic growth overall, and that fundamentally, inflation must be suppressed. And it’s ultimately the Federal Reserve in this country which is the key architect of doing that, and it’s critically important that the Federal Reserve is allowed politically to do what it has to do to
suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer term period.

STEPHANOPOULOS: Some have pointed out … now the historic ratio of price of homes to income and rents is about 30 percent higher than it is historically. Does that mean we have that far to fall in the housing market?

GREENSPAN: There’s a big dispute as to what the basic level will turn out to be. In my judgment, the prices will stabilize when the rate of liquidation of this very large overhang of newly built single-family homes is at a maximum. Not when we completely get rid of the excess, but when we are well under way. Then the market will begin to stabilize. And at this stage, there is some evidence that sales of homes, new homes, are beginning to flatten out. … And if we can get a further drop in housing starts and housing construction, we can begin to really liquidate that excess of inventories. When we’ve got that well in hand, then, I think, prices stabilize. And I think the ratios of income to rent to all various
other financial aspects is important but not determinate. There are going to be significant losses [on Subprime and Alt-A mortgages]. And there are loss ranges, now — the minimum, now, is $200 billion. But it’s easy, by some calculations, to get to $400 billion.

STEPHANOPOULOS: That’s enormous.

GREENSPAN: It is enormous — except, we have to remember that, as a result of globalization and this extraordinary growth over the last couple of decades, aggregate amount of what we call arbitragable long-term assets, which is all sorts of financial instruments, are close to $100 trillion. And while $400 billion is a very large number, we have to put it in the context of how much damage it can do in this very huge system.

STEPHANOPOULOS: The political world is now looking at the immediate pain. And Senator Clinton looks — has called for a freeze on foreclosures. Senator Edwards called for a rescue fund to be set up by the government for people who are facing these kind of foreclosures. What do you think about those ideas?

GREENSPAN: It’s important to help those people … without affecting the mortgage rates and without affecting the structure of markets. Cash [from the government] is available and we should use that in larger amounts. … It’s far less damaging to the economy to create a short term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.

STEPHANOPOULOS: But by infusing cash, it sounds like you agree, then, with former Treasury secretary Larry Summers, who says that, right now, given this crisis, there has to be a bias toward activism.

GREENSPAN: It depends what you mean by activism. If you mean
doing something that works, absolutely. If you mean doing something just for the sake of perceptions, that’s very costly. I don’t know if [infusing cash] would work, but it would certainly help people — it would help their incomes; it would help their personal state, without affecting the structure of the way markets are behaving and the way adjustment process is going on. It’s very critical that this thing reach a selling climax — if I may put it in other words, exhaust itself. It’s only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony.

Humorous Video on the Financial Crisis

2007-12-10T15:15:00.001-05:00

I saw this and just had to share it with you - enjoy

Mortgage Madness: What is Wrong with America?

2007-12-03T09:38:00.000-05:00

Sometimes, with Louis Armstrong playing in the background, I think about the wonderful country we live in, where our leaders make good decisions, our citizens are free and brave, markets are free and the most deserving receive the greatest reward. God bless America.

Then I wake up... Ladies and gentlemen, our country is nuts. I didn't need any more evidence after I saw a gaggle of house "owners" outside of a Countrywide office protesting because they didn't want to or can't pay their debts. I am dumbstruck that a person who receives hundreds of thousands of dollars to buy something is painted as a victim when he/she doesn't pay the money back. And the lender is the bad guy because... gasp!... he wants to receive interest in an amount that would cover his expected losses. These people with crappy credit histories should feel fortunate to receive credit in the first place. Instead, they feel entitled to the same rates that us borrowers who actually pay our debts receive. This is absolute lunacy.

Note the sign that says "My life is not adjustable... stop adjustable rates." A few questions here: If that is the case, lady, why did you enter into an adjustable rate contract? Would you be protesting to give back all of the capital gains you got because the big bad lender gave you money if the housing market were still hot? Didn't you know your rate would reset and that could cost you money? How is it possible not to know what you are getting into when you enter into a financial obligation for an amount of money equal to 10 or 20 years your annual pay?

I'm willing to bet that most people knew what they were getting into and accepted the risk. When they found out how boneheaded their decision was, they wanted to back out. We are a nation of children, with a profound sense of entitlement and a complete lack of personal responsibility. Unfortunately, we are led by politicians who shamelessly pander to these children.

Rate Freezes and Moratoriums

When I first began writing this over the weekend, I thought that the government was getting on the boneheaded train with a "Mr. Freeze" plan, where Hank Paulson shoots all of the subprime mortgages in the U.S. with a freeze ray and locks their rates in for five years, which would be a total disaster. It turns out that his "plan" is for loan servicers to try to figure out which borrowers cannot afford higher rates, but can afford to stay in debt slavery by paying normal interest rates, and charge them those normal interest rates. Well, I have news for you... The servicers already do this!

Hank Paulson as Mr. Freeze? Not Quite

I'm glad that Hammerin' Hank Paulson realizes that an actual blanket rate freeze is a terrible idea (I think we all know how well price controls work). If lowering rates magically turned subprime borrowers into prime borrowers, well, then everyone would be charged the prime rate. It doesn't work that way. Subprime borrowers are charged higher rates because they tend to default more (a lot more) on their payments than prime borrowers. The high rates make sure I can earn a decent return on my investment after accounting for the high loss rates that I'll sustain by giving money to people with shaky credit histories. Freezing subprime rates at low levels virtually guarantees a loss on investment. With legislation pending in congress that makes the investor liable for "predatory" lending practices even though he never saw or met the borrower (he has to take someone else's word for it) and if the interest rates on loans can be reduced whenever politically expedient, who would ever take on such an investment? Any hope for private sector financing of subprime borrowers (what little is left) would be completely gone. As it stands now, subprime financing won't recover for some time.

We all can see what is going on: Most of the subprime "proposals" are desperate, self-serving attempts to put a floor under house prices, all of which are destined to succumb to economic reality. It all boils down to house owners not wanting to admit that their homes are worth less than they thought, and pandering politicians, who know otherwise, but pander to the house owners nonetheless. Now that the Ponzi scheme is over (they always end), house prices will have to re-set to levels that are affordable to the population, regardless of the amount of foreclosures. Forced sales simply expedite the process. Short-sighted policies, like freezing rates, a moratorium on foreclosures, or expanding the FHA to include ever-riskier borrowers (Yeah, were thinking about eliminating the 3% down payment and raising the loan limit to let the government extend no-money down loans to crummy credits in high priced areas - who do you think is going to pay for that one when they all blow up?) only delay the inevitable, and will end up doing much more harm then good.

-eternitus

Happy Thanksgiving! (One Day Late)

2007-11-23T09:09:00.000-05:00

Thank you for reading and sharing your thoughts on this blog!

A discussion of Ron Paul

2007-11-16T12:01:00.000-05:00

I have recently become aware that there are allegations on the internet that Ron Paul is a racist. After examining the facts, I must say that most of the things used to support the allegations were "snippets" compiled by a Democrat running against him in a congressional election in 15 years ago in 1992. As I can't examine the context of the statement or the validity of the claims, I cannot pass judgment, though it would be very easy to. While I generally like "easy," it has become painfully apparent to me in cases of character attacks that easy is often unfair. What I can tell you definitively is that Senator Paul has written several essays on racism in the 15 years since then , including the one below. I'll also take a moment to comment on how certain factions in the media and academia use such "branding" to the general detriment of intelligent dialog.

Government and Racism

by Ron Paul
by Ron Paul

The controversy surrounding remarks by talk show host Don Imus shows that the nation remains incredibly sensitive about matters of race, despite the outward progress of the last 40 years. A nation that once prided itself on a sense of rugged individualism has become uncomfortably obsessed with racial group identities.

The young women on the basketball team Mr. Imus insulted are over 18 and can speak for themselves. It’s disconcerting to see third parties become involved and presume to speak collectively for minority groups. It is precisely this collectivist mindset that is at the heart of racism.

It’s also disconcerting to hear the subtle or not-so-subtle threats against free speech. Since the FCC regulates airwaves and grants broadcast licenses, we’re told it’s proper for government to forbid certain kinds of insulting or offensive speech in the name of racial and social tolerance. Never mind the 1st Amendment, which states unequivocally that, “Congress shall make NO law.”

Let’s be perfectly clear: the federal government has no business regulating speech in any way. Furthermore, government as an institution is particularly ill-suited to combating bigotry in our society. Bigotry at its essence is a sin of the heart, and we can’t change people’s hearts by passing more laws and regulations.

In fact it is the federal government more than anything else that divides us along race, class, religion, and gender lines. Government, through its taxes, restrictive regulations, corporate subsidies, racial set-asides, and welfare programs, plays far too large a role in determining who succeeds and who fails in our society. This government "benevolence" crowds out genuine goodwill between men by institutionalizing group thinking, thus making each group suspicious that others are receiving more of the government loot. This leads to resentment and hostility between us.

The political left argues that stringent federal laws are needed to combat racism, even as they advocate incredibly divisive collectivist policies.

Racism is simply an ugly form of collectivism, the mindset that views humans strictly as members of groups rather than individuals. Racists believe that all individuals who share superficial physical characteristics are alike: as collectivists, racists think only in terms of groups. By encouraging Americans to adopt a group mentality, the advocates of so-called "diversity" actually perpetuate racism. Their obsession with racial group identity is inherently racist.

The true antidote to racism is liberty. Liberty means having a limited, constitutional government devoted to the protection of individual rights rather than group claims. Liberty means free-market capitalism, which rewards individual achievement and competence, not skin color, gender, or ethnicity.

More importantly, in a free society every citizen gains a sense of himself as an individual, rather than developing a group or victim mentality. This leads to a sense of individual responsibility and personal pride, making skin color irrelevant. Rather than looking to government to correct our sins, we should understand that racism will endure until we stop thinking in terms of groups and begin thinking in terms of individual liberty.

-----------------------------------------------------------------------------------------------
I do believe that his argument is too simplistic, namely that the "holy grail" solution to racism is "liberty." On the other hand, I don't see anything in the above indicating that Ron Paul is a racist... just that his views on the issue are different that we are used to seeing.

That being said, would it not be easy for someone to turn the above into the sensational headline RON PAUL SUPPORTS DON IMUS? Eventually, Ron Paul could even come to equal Don Imus (just like Finkel and Einhorn... name that movie for 10 points) after enough spin, even though his essay was only in defense of Imus' right to free speech, however unseemly. I support his right to free speech as well. If we don't want to hear it , which I don't(I believe Imus was way, way, way out of line), I can simply switch the station.

Unfortunately, I believe his willingness to broach topics such as those above works against him (as it did with Larry Summers' infamous "genderalization" speech, which resulted in his ouster from Harvard's presidency). The primarily liberal academic elite have worked very hard at making certain stances on topics "off limits" without any further examination required (this is curious for a group whose ideals celebrate diversity and open-mindedness). As a graduate of a very liberal academic institution, I am well aware as to how someone can become "branded" (as a nut, a sexist, basically insert something you wouldn't want to be called in here) in such a way, and how "the establishment," for lack of a better term, can discredit a person a priori, regardless of the logical coherence and intrinsic merit of her views at even the slightest hint that it conflicts with "the rules," as decreed by the liberal elite. In this way we attack the person, and not the argument. Such ad hominem methods, while intellectually dishonest and logically fallacious, seem to work marvelously with the general populace, don't they? An argument is doesn't seem to matter much in the realm of popular opinion after you successfully characterize its author as Hitler.

Examples of how this happens can be found in any discussions on differing aptitudes between ethnic groups, or between the sexes. Despite all of the evidence that some differences exist(I can think of at least one ethnic group that is disproportionately represented in elite levels of athletic competition, for instance), discussions of the sort are quickly dismissed as racist or sexist or otherwise out of line without any further examination. Doing such hinders much academic progress in the world today.

Why should we find out if the arguments have merit when we can storm out of the room in a fit of rage, or simply shut down or switch the topic? Such responses are based on emotion, and not logic. We often hear things that are inconsistent with our beliefs. When faced with such cognitive dissonance, we often choose to discredit the opposing viewpoint even in the face of overwhelming evidence. Stifling progressive debate that we simply "don't like" is an example of this. All of this is an attempt to make it easier for us to sleep at night, assured that our beliefs about the world are correct. Facts be damned.

All of this is not to say that some of us are not truly deserving of the brands that we receive. I find, however, that such brands often are put in place for self-serving reasons... to knock someone down in a furtherance of whatever cause we champion. It is easy to imagine how things that Ron Paul might or might not have said 15 years ago may have ruffled somebody's feathers, giving someone cause to brand him as a racist and allowing us to categorically dismiss his views that are outside of the box, the boundaries of which are determined by the liberal elite. Because I know all too well how this happens, I cannot pass judgment on Ron Paul based on sensationalized snippets that were amassed for political gain. Doing so would be intellectually lazy, and completely unfair to the Senator. However, I would like to hear a credible explanation from him before I resume supporting his candidacy.

-eternitus

For what it's worth, I find it hard to believe that anyone as intelligent as he is can hold any sort of truly racist view. We know that the belief that one person is superior to another based solely on the way he or she appears can not hold up when confronted with reality.

Ron Paul Issue of the Day: Get out of Iraq

2007-11-11T08:57:00.001-05:00

Getting out of Iraq... The cost of the war is approaching $1 trillion, funded almost entirely by debt (debt that the boomers won't have to worry about too much, but the under-40 crowd will have to work hard at paying off). Iraq has gotten plenty of help and it's time to let them sort it out for themselves. RON PAUL IS THE ONLY REPUBLICAN CANDIDATE SUPPORTING A COMPLETE PULL OUT FROM IRAQ.

We can't afford to increase our massive national debt further by spending ruinous amounts of money carrying out an interventionist foreign policy (anyone remember what happened to those guys from Italy about 1600 years ago? You know, I think they were based in Rome...)

Ron Paul has consistently voted against the Iraq war (Hillary, eat your heart out!!!).

2007-11-10T10:56:00.000-05:00

Feddie Krueger Cuts'em again!

2007-10-31T14:59:00.000-04:00

OKAY.... Given that it is Halloween today, I just had to work Freddy Krueger into the mix... and the Fed has made that quite easy by slicing and dicing the federal funds rate and discount rate with all due ferocity.

Why is Mr. T in there? Well, Mr. T rules... more on that later.

Today, the Fed reduced its target federal funds rate (the rate at which banks borrow from each other) to 4.5%. How do they do this? They print money and lend to banks at 4.5% as much as is necessary to "defend" their target rate (Just trying to educate, so Mr. T does not pity you.)

All in all, I have to say that I'm in favor of the recent move, despite my distaste for artificially low interest rates, and I am most impressed with the Fed's strategic maneuvering over the last few months.

Why do I applaud their maneuvering?

First, they shocked the market in August by cutting the discount rate by 0.5%, which stopped the bleeding from August's "global margin call" or as some would call it a mini "Minsky moment." They also stepped up to the plate with loads of liquidity to make sure the credit markets didn't totally explode.

Second, the Fed cut the funds rate by a more-than-expected 0.5% in September, which (i) dramatically reduced pressure in the credit markets by lowering borrowing costs for struggling banks and making existing yields more attractive, (ii) helped sure up bank income statements due to reduced interest expense and (iii) aided interbank liquidity, continuing to ensure that the credit markets didn't totally explode.

Finally, they made sure that, after today, they wouldn't be "forced" into lowering rates again by setting proper expectations from the outset. The key phrase in their statement released today:
"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth."

This is a clear signal (as clear as you can get from the Fed) that the committee believes that, while not the case for this particular cut, any further cuts will cause inflation to become of greater concern than slow growth, meaning that they don't plan on cutting rates again unless it gets uglier out there.

BRAVO! The Fed has finally BECOME AN EFFECTIVE TOOL, moving from a reactionary implement of Chinese water torture that simply drips down the economy's forehead 0.25% at a time to a proactive hammer with the capability to shape and mold (and maybe even do a mean "typewriter"). As you see, Feddy Krueger is acting more like Mr. T and our dear friend M.C.
I have far more confidence in Bernanke than our buddy "easy Al." Greenspan's fed "Can't touch this" one.

Another reason why I love the rate cuts is the devaluation of the dollar. Other countries have been devaluing their currencies to prop up their economies for quite some time (instead of, you know, improving productivity or leveraging comparative advantage or investing in capital). It's about time we get to use this easy way out of economic distress. They can buy the living daylights out of our artificially cheap stuff and send all of their jobs here for once. After all, we're looking at probably 2-4 more years of housing pain... we need the help.

Will the new Fed hammer, a sizzling global economy and a sickly dollar be enough to keep us out of a recession despite years of reckless lending and misallocation of capital? Will it be able to overcome the fact that millions of debt slaves (oops, I meant "people") are being stretched thin by their retarded mortgages because they paid too much for their slowly rotting boxes (oops, I meant "homes")? I don't think so, but Bernanke, I believe, will aid in us achieving the best outcome possible given the cards we've been dealt.

Full text of the Fed's statement:

Release Date: October 31, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Home Sales in Full-Fledged Rout: Disaster Continues

2007-10-24T10:12:00.000-04:00

Courtesy of the Wall Street Journal... I guess it turns out that people really didn't plan on paying these ridiculously high mortgage payments after all. The market dried up after buyers ran out of "greater fools" to unload houses to. Oh yeah... and people actually have to pay something up-front to buy after all the piggyback (second mortgage) lenders croaked... (Can I put that 20% down-payment on my credit card?)

If you are thinking about buying - don't try and catch a falling knife - you'll probably end up with a nasty cut. Most analysts are not expecting housing to stabilize until 2009 at the earliest. The length of the "down-cycle" has a lot to do with the length of the "up-cycle," which leads me to believe that even these estimates are too optimistic. We had a 4-year boom... we may have 3 years left in a 4-year bust.

Why? Unlike stocks, people are very slow to take losses on their houses. They'll just "rent it out" until the market "comes back." These people represent "phantom inventory" that will jump into the market at the first sign of strength... creating even more downward pressure on prices. By not getting out when the can, these people end up riding the market all the way down to the bottom. To add insult to injury, they usually can't cover more than 60% of their "carrying costs" with rent, so they are losing money every month even as their house declines in value.

Let's make this another chapter in the vanquishing of the "housing tragedy" that locks young families out of homes in order to further enrich baby-boomers, whose national debt we'll have to repay in addition to funding their retirement.

Existing-Home Sales Tumble 8%

By TOM BARKLEY
October 24, 2007 10:04 a.m.

WASHINGTON -- Demand for previously owned homes slid more than expected in September amid continued problems in the mortgage market, with single-family sales hitting their lowest sales pace in nearly 10 years.

Overall home resales declined to a 5.04 million annual rate, an 8.0% decrease from August's downwardly revised 5.48 million annual pace, the National Association of Realtors said Wednesday.

The August existing-home sales level came in well below Wall Street expectations for a 5.25 million rate.

The 5.04 million pace is the lowest since the association started accounting for combined single family and condo sales in 1999. Based on single-family sales of 4.38 million, the September figures are the weakest since January 1998.

"The credit freeze in August definitely impacted sales in September, particularly the jumbo [loan] side, so we have seen a large sales decline in the upper end of the market," NAR senior economist Lawrence Yun said.

The median home price was $211,700 in September, down 4.2% from $220,900 in September 2006. The median price in August this year was $224,400.

Mr. Yun said conditions in the jumbo loan market have improved, so he still expects 2007 to rank as the fifth-best year in terms of existing home sales. Prices are expected to ease about 1.5% from record high of last year of $221,900.

Inventories of homes rose 0.4% at the end of September to 4.40 million available for sale, which represented a 10.5-month supply at the current sales pace. There was a 9.6 month supply at the end of August, revised down from a previously estimated 10.0 months.

Existing-home sales tumbled in all regions. Sales dropped 7.0% in the Midwest, 10.0% in the Northeast, 9.9% in the West, and 6.0% in the South.

The average 30-year mortgage rate was 6.38% in September, down from 6.57% in August, according to Freddie Mac.

Write to Tom Barkley at tom.barkley@dowjones.com

NAR - Worst - Ever Showing for Pending Home Sales

2007-10-02T12:52:00.001-04:00

In another shocker, the Pending Home Sales Index released by the NAR reached its lowest point ever (even lower than September 2001).

(Click on the chart for a larger image.)
It's not too often that you see a chart (of real data) with a trend as clean as this one. According to the NAR, the problem now stems from borrowers with "good credit" who can't get loans due to the credit crunch. My only response to this is: Balderdash. As we can see, the downward trend in house sales was firmly in place before the August credit crunch.

There is a term for this: Market Failure - when transactions cease to occur because buyers and sellers cannot come together and agree on a price.

The Buyers' Issues

Now that the Ponzi scheme is up, buyers are facing a brave new world where, if they want to buy a house, they have to:

1. Make a down payment (What is that?)

2. Pay a bloated mortgage bill for a long time (You mean this initial 2% rate is not a real mortgage rate? You mean I have to pay this back? I'm so confused!)

3. Accept subpar returns or declines in the value of their housing.

When you put it that way, forking over $35,000 for the right to pay $2,500 per month, or $30,000 per year (PITI) for a $350,000 townhouse doesn't seem so great, does it? This is especially true when you are getting a lousy return on your house because (i) you bought high and (ii) houses don't go up too much in value under normal conditions anyway.

The Sellers' Issues

This is easy. "What? I can't get the bubble price that Billy Jones got up the street? No way I'm selling for less."

Or "that's not even what I paid for my house!"

Why Prices Have to Fall Further

Eventually, something has to give. In many markets, buyers can't realistically pay the prices sellers are asking for, while a large portion of sellers (at the urging of their agents desperately trying to keep prices high) are simply being stubborn.

Time to address one "myth" commonly used to combat the notion that prices will fall materially: "Nobody will sell for less than he bought his house for."

1. Some people simply have to sell if they can't afford to pay the bills or really need to move. These people will sell for a "buyer's" price and swallow the hit to their down payment or built-up equity, busting comp sets.

2. Most importantly... not everybody bought their house in the last few years. If these sellers have to go, they'll still make a good gain if they sell for 10, 20 or even 30% below the prices they could have gotten in 2005 or 2006 (however reluctantly).

Unfortunately for sellers, their stubbornness has to yield to impossibility (buyer's inability to afford asking prices) if they want to sell their home.

Oh, and by the way, I didn't even mention that the competition for buyers is about to get a lot tougher over the next year as a new wave of inventory sweeps through the markets.

- eternitus

My Beef with Greenspan: A Picture is Worth a Thousand Words

2007-09-24T13:31:00.001-04:00

Don't you get the feeling that Alan Greenspan, in his last 5 years at the helm of the Federal Reserve, was the financial equivalent of Indiana Jones at the beginning of Raiders of the Lost Ark, with the boulder barreling after him being the over-inflated, debt-riddled Economy that he created. Like Jones, he managed to escape just in time (via retirement in Greenie's case). Boy do I feel badly for Bernanke, who is left to clean up his mess.

I have yet to read his book, but I find it amazing that Easy Al continues to downplay his role in inflating the housing bubble. He credits "low worldwide long-term interest rates" for that. He fails to mention that he set in motion the mechanism that created low long-term interest rates in the first place.

It goes something like this:

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1. Fed drops Fed Funds Rate to 1% (practically paying banks to take its money after inflation is accounted for).

2. Foreign central banks drop their target rates to preserve the dollar's value vs. their currencies (so we can keep borrowing to buy their stuff, supporting their economies).

3. Ridiculously low interest rates spur massive increase in the global money supply (money is "created" via lending - e.g...
1. Fed "creates" $10 in Open Market Operations by lending to a bank to defend its 1% Fed Funds target (without the Fed constantly buying, the lending rate would go up as banks would require higher interest rates - at least high enough to cover inflation),

2. The bank lends $7 to someone (person B) who pays person C $7 for an item.

3. Person C deposits $7 in the bank.

4. The bank lends $4 to Person D... and so on and so forth.

Just in these four steps, the Fed's $10 turns into $21 (known as the multiplier effect).

4. U.S. spends a lot of this newly created money on imports (huge trade deficit), making foreign countries RICH!

5. RICH! foreign countries invest their surpluses (paid for by our huge debt splurge) in nice, safe T-Bills, Notes and Bonds, keeping interest rates nice and low so we can continue borrowing to buy foreign goods, making foreigners RICH!

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The long and short of it: create a bunch of money, and all of that money chases the same lending opportunities. If you want to lend, you have to offer a good rate (lest the coveted borrower take someone else's monopoly money). As such, massive monetary inflation will keep rates low.

Take away Greenie's step 1., above and you don't get low long-term interest rates, a housing bubble, and most importantly this mortgage mess that Uncle Ben is trying to clean up. Uncle Ben is also trying to do this housekeeping with the politicos on the Hill trying their best to foul things up with short-sighted policy measures in order to win votes for next year's elections.

Greenspan's legacy is pretty much summed up in the following chart (click for a larger image). M3 is the broadest measure of the money supply (which the Fed conveniently stopped reporting after it completely lost control of its growth).

The Fed has aided money creation at a 9% annual rate since about 1995 - massive monetary inflation as stated above - All of that money had to go somewhere, luckily it has been in assets so far (where next?)...

Can you say... slosh - TECH BUBBLE - slosh slosh - HOUSING / CREDIT BUBBLE - slosh slosh slosh - EXPLOSIVE INFLATION? Let's hope not.

Great Housing Article from Seeking Alpha's Markham Lee

2007-09-07T12:35:00.000-04:00

I have a few complaints with the methodology (he admits to them)... but his conclusions are generally sound ... a house is not, nor has it ever been, quite the investment you think it is.

-eternitus

Adjusted Case Schiller Housing Data

posted on: September 07, 2007 | about stocks: SPY / IYR / ICF

After reading an article from a fellow Seeking Alpha contributor with Case-Schiller housing appreciation data for the 1990s and for the ‘00s thru May of this year, I began to wonder how the data would look if:

It was expressed on an annualized return basis

It was adjusted for the “housing expense ratio” AKA Taxes & Mortgage Interest

I crunched some numbers and came up with the tables below, which depict the gross and real (after the expense ratio) return from housing within 17 major markets/metro areas, on a total and annualized basis for the 1990s and the for the period of January 2000 thru March 2007. The tables were created based on the following assumptions:

A $300,000.00 home was purchased at the beginning of the period.

The home was financed with a 6.5% APR fixed rate mortgage, and an 80% LTV/$60k down payment.

The home owner has a top marginal rate of 28% (Obviously, tax rates fluctuated over this time period, but this keeps things simple).

Property taxes were levied at 2% of purchased over the duration of the entire time period (not likely, but I did it this way for simplicity’s sake).

I didn’t factor in maintenance due to the many factors that impact those costs: condo vs. townhouse vs. stand alone dwelling, age of the home, etc.

It’s worth noting, that in order to be truly accurate, some sort of “baseline housing cost” would need to be factored into the calculations, since you have to pay for housing whether you rent or buy. In order to determine one’s true return from housing the “baseline housing cost” would need to be subtracted from the housing expense ratio, in order to determine the real net return. However, this is hard to do on an aggregate basis (OER is highly flawed) as rental costs are really determined by an individual’s taste and living situation more than anything else.

First, let’s look at the table for the 1990s:

Now, you can’t discuss 1990s housing prices without first acknowledging that during the early 90s, we were dealing with the tail end of the S & L crisis, there was a recession and declines in residential real estate values in many cities. At the same time, the later part of the ‘90s was a time period of tremendous economic growth, low unemployment, low inflation, etc, and for many individuals the 90s economy was superior to the recent real estate boom years.

Looking at the data itself, the first thing that jumps out is that despite the fact that homes in nearly all markets showed “some” level of gross appreciation, they were all negative for the 1990s when you factor in taxes and interest expense. You would almost think that even with the economic difficulties of the early 90s factored in, that you’d see very strong appreciation overall as the markets recovered and people had more disposable income during the boom years of the mid to late 90s.

Now, let’s look at the housing data for the ‘00s

Of course, we all know the story here, housing boom, rapid appreciation, cheap money, foreclosures and the subsequent mortgage crisis. What was immediately interesting to me is how much some high flying markets came down to the earth once the expense ratio was factored in and how the boom was really concentrated in a small number of markets with other markets merely being along for the ride. Some key things to take away from the two charts:

Cheap money, speculation and relaxed lending standards can potentially drive housing appreciation more than rising incomes and a strong economy.

Home owners are due for a major expectation reset over the coming years; I wonder if a major reset in expectations might serve to depress prices even further.

Many home owners who bought at the beginning of the 90s and sold at the end, may have felt they turned a profit (typical anecdote I bought for $300k and sold for $450k), but home owners simply can’t ignore their interest and taxation costs when determining their returns.

Home Owners should probably think of their homes more as purchased assets with “potential” investment value, as opposed to investments in general; especially as the Real Estate market continues to correct and we return to a pre-housing boom environment, both in terms of prices and appreciation.

Financing costs can be the difference between your house “performing like an investment” or “performing like pure consumption”. Subprime borrowers probably didn’t do too well net return wise, even in markets like LA and Miami.

Home owners who used zero money down, negative amortization and interest only mortgages, particularly those who purchased in the last 2-3 years, may go for well over a decade before seeing any return at all.

Your local housing market can go through a boom period and still lag the equities market, only four of the 17 markets beat the S & P 500’s 8.5% return over the time period.

Home owners often purchase homes based on expected returns which are based on price appreciation, when they should really be considering their return after taxes and interest. Price appreciation measures the cost of waiting to buy a home, not your actual return.

As we move beyond the mortgage/real estate crisis, one of the more interesting potential changes could be to homeowner psychology, as the mood shifts from “real estate as a must have, can’t lose” to one where home buying is properly viewed as (at best) a “consumption-investment hybrid”. Furthermore, due to the various factors inflating housing prices, it’s quite likely that many home owners won’t see returns on a real basis for an extended period of time. Housing may become reminiscent of tech stocks where few of tech’s former high-fliers (even if they’re quite profitable today) have seen their stock prices return to tech boom levels.

NEVER.... SELL... INTO.... A.... PANIC!!!! THAT IS SHAMEFUL!

2007-08-17T16:31:00.001-04:00

Unless you really have to (as in a margin call)....

Waiting one day for the panic to subside is worth about 5.5% in this case, or the amount of money you could earn on a 12-month CD, or $550 on every $10,000 invested.

By the way, I'm on vacation this week. Are you jealous?

See you in a week (or on the other side).

-eternitus

OMG! The stock market can go DOWN!?!?!?! - A little advice from an investment pro

2007-08-09T14:25:00.000-04:00

A good stock chart can tell a great story... as does the chart below depicting the S&P 500 over the last year.

Click on the chart for a larger image.

Apart from being a great reminder that the market is really just a bunch of scared, greedy people buying and selling... this chart is a prime example of why most small-time investors (as I presume you are) underperform the pros by a significant margin. We all want to buy after we've seen "YAY!" for a while (for fear of missing out) and sell immediately in times of trouble (usually a few days after a big drop, when we don't see a rebound).

Guess what? The guys who make the real money in the markets do the opposite. They buy when you soil your pants and give your shares away at bargain basement prices, and they sell to you when you want to jump on the bandwagon.

This is why I'm buying now, as I did in early March. Lot's of good stocks fall for no reason other than blind fear. The key is separating the wheat from the chaff.

Oh, and remember... there is a difference between price and value... every stock has one value, but many prices.

Cramer: "I've sold all of my real estate"

2007-07-31T20:54:00.001-04:00

You know it's bad when one of the smartest investors in America tells you to walk away from your house while you still can. The real shocker comes at the very end: "I've sold all of my real estate."

I've spoken about this until I was blue in the face. I'm finally getting a lot of company in my views.

-eternitus

Thought of the Day...

2007-07-11T11:41:00.000-04:00

The media did make a fuss about this May's abysmal pending home sales report (So I have to give them credit for that). However, they glossed over one key point. Read:

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The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in May, fell 3.5 percent to 97.7 from a downwardly revised level of 101.2 in April. The May index is the lowest since 89.8 in September 2001. via the International Business Times -.

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Um... didn't something really bad happen in September 2001? I can't quite put my finger on it...

Oh yeah... that 9/11 thing...

I mean, it's really, really, really bad when the only month you can find worse is the one where our country was attacked, thousands of people died and billions of dollars of damage was caused.

- eternitus

What a great fourth of July Present

2007-07-04T16:51:00.000-04:00

I was able to borrow an internet connection for this short post...

Just in case you're the one guy who thinks everything is on the up and up in the public markets... This was written before Blackstone's announcement that it was taking the Company private.

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The market looks to be positioning for volatile price action at Hilton Hotels Corp (HLT), where upwards of 32,000 lots moved today in options trading – 15 times the daily average volume for the hotel chain. While twice as many calls as puts moved today, concentrations of volume favored the July and August 35.0 straddles, and the July and August 40.0 calls.

The abrupt increase in volatility positioning indicates that the market is bracing for turbulence in Hilton shares with an uncertain, upside bias. Hilton shares gained 7 percent today to close at $36.10 in heavy trading – and with no market-moving news of note, we wonder if there' something to the chatter. Implied volatility on Hilton options soared 20 percent and currently sits at just above 38 percent – significantly above the 25 percent recorded historical volatility on Hilton shares.

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Insider trading in stocks is one thing. However, when you're knowingly trading with insider information in options, you're really ripping someone off.

That's because options involve an agreement between two parties. Let's examine...

Johnny Insider - He's the brother of an analyst at Blackstone Group. His sister - Lucy Lips, the analyst, lets the cat out of the bag that Blackstone agreed to buy Hilton at $47.50, more than $13.00 greater than the current price on the market on July 3. Johnny has $10,000 to spare, and is looking to use this information to his advantage. He has two choices - buy approximately 200 shares of Hilton, which would make him $2,600... or he could use the implied leverage of options, and make 20 times that much (you'll see how in a bit)...

Honest George - He's a market maker in options - market makers provide a valuable service... constantly offering to buy and sell shares at certain prices, giving all of us liquidity. He doesn't have any insider information, and believes that Hilton shares aren't going above $40.00 any time soon. He decides to sell the right to purchase 10,000 Hilton shares at $40.00 per share before the end of August for $1.00 per share.

He's selling a call option... As a recap, the buyer (Johnny) pays a "premium" $1.00 to the seller (George) for the right to purchase the shares at a specified price ($40.00).

Initially, Johnny pays George $10,000... which George believes to be fair compensation for the possibility that the shares will exceed $40.00, which would mean that he'd have to buy them at the higher market price and sell them to Johnny for a loss. Unfortunately, Johnny knows something George does not.

Tomorrow, Hilton's market price will skyrocket to $47.50 and Johnny will exercise his options. This means that George will have to pay $475,000 for 10,000 shares of Hilton and then sell them to Johnny for $400,000, taking a $65,000 loss (the $10,000 premium offsets some of the loss). Johnny can now sell his shares at the market price, netting a $65,000 gain(he doesn't get the premium back. As you see... the options strategy is far more profitable than simply buying shares...

Now you see how Johnny ripped George off.

George is a market maker, so it's his company's money he's losing. $65,000 doesn't seem like a big deal... but George makes tens of thousands of these transactions per day.... His trading strategy is supposed to be "market neutral"... meaning that he should make small amounts of money on each trade if the market goes either way. However, such a strategy only works when you know as much as everyone else does. George's exposure to loss may have reached into the millions before he got wise, costing the investors in his company (Average joes who invest in Goldman, Interactive Brokers Group, etc.) tons of money and putting his job in jeopardy.

I hope the SEC finds every one of the "Johnny's" out there. We all deserve a level field when we're trading in the markets.

- eternitus

Blogger Without an Internet

2007-06-25T09:26:00.000-04:00

Not only was I overwhelmed with things to do over the past few weeks... When I finally got the chance to sit down and write something, I find that I no longer have a functioning internet at home... I won't until Thursday at the earliest. I'm putting in a quick post from work now just to let the readers out there know I'm still kicking...

Be on the lookout for another horrid existing home sales number today, which may again show price declines. If not... be fairly sure that it's just a blip.

After I get the long-promised big post on housing out of the way, hopefully this weekend... we'll talk stocks, and why everyone who's going to be alive for more than 20 years longer should hold them in some form (and can withstand the occasional large drop in value because he / she doesn't need to use the money immediately).

What? Inflation?

2007-06-07T12:52:00.000-04:00

I love this guy...

Barry Ritholtz submits: Okay, so here's the "Official" explanation: the selloff over the past few days is courtesy of this new-fangled discovery called INFLATION. That's why rates have ticked higher.

You see, we have been living in a benign non-inflationary environment, and just yesterday, it seems that some traders have discovered that -- WTF?! -- prices of goods and services are rising.

Of course, many pundits, traders and investors -- and a goodly part of the Federal Reserve -- have convinced themselves that there really wasn't any inflation, so long as we wear blinders and ignore those pesky goods and services like Food and Energy. You know, those annoying items utterly necessary for survival.

That's been the f@#ktard explanation, anyway. If you believe it, though, you must be living in a cave -- which given the market for bat guano and stalagmites, probably has achieved the elusive Fed goal of price stability.

Bill King notes that:

For April 2007, the monthly food cost is $1044.80 for average family of four, per the USDA.

For April 2006, the monthly food cost is $995.40 for average family of four. Ergo y/y food inflation is 4.963% according to the USDA.

The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between U.S. Government Agencies – the USDA and BLS.

This story from May 24, 2007 went largely unnoticed: Reuters reports, “The Federal Reserve's adherence to core inflation, which strips out food and energy prices, is taxing the public's patience and risks credibility, a senior U.S. central banker said on Thursday.

‘In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal,’ said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.”

Meanwhile, the rest of the world continues to raise their interest rates to fight inflation.

~~~

The Chicago Sun-Times was kind enough to include this table of food price increases:

NATIONAL FOOD PRICE INCREASES

Here's a sampling of where food prices are heading across the nation:

National average prices	April 2007	April 2002	April 1997
White bread (pound)	$1.20	$1.00	$.86
Ground beef (pound)	$2.25	$1.78	$1.38
Bacon (pound)	$3.50	$3.26	$2.66
Whole chicken (pound)	$1.12	$1.11	$1.00
Eggs (dozen)	$1.62	$1.05	$1.08
Milk (gallon)	$3.14	$2.78	$2.61
Butter (pound)	$2.86	$3.20	$2.18
Ice cream (half gallon)	$3.79	$3.72	$2.90
Red delicious apples (pound)	$1.10	$.91	$.90
Bananas (pound)	$.52	$.50	$.52
Navel oranges (pound)	$1.24	$.75	$.60
Iceberg lettuce (pound)	$.99	$1.15	$.67
Tomatoes (pound)	$1.63	$1.32	$1.35
Frozen orange juice (12 oz.)	$2.52	$1.89	$1.73
Sugar (pound)	$.51	$.44	$.44
Peanut butter (pound)	$1.75	$1.98	$1.81
Coffee, ground roast (pound)	$3.44	$2.98	$3.89
Potato chips (16 oz.)	$3.48	$3.29	$3.18

Source: U.S. Department of Labor, Bureau of Labor Statistics

Ron Paul for President - A better America in 2008

2007-06-05T12:39:00.000-04:00

I'm going to opine on political issues for a moment, even though I normally detest all things related thereto. In fact, I have been so disgusted with the choices for president in the two elections in which I was eligible to vote that I abstained from voting altogether. For once, I've found a candidate worth backing.

It's worth mentioning that the key issues we should be concerned with are the ones that will directly affect us. For the vast majority of Americans, their only interaction with the Federal government is the payment of taxes. On that note, I'd like to throw my support behind Senator Ron Paul for president of the United States in 2008, who supports low taxes, limited government and limited foreign intervention. I believe that he is the one candidate running today who has the right mix of competence, integrity and economic knowledge to get us out of the quagmire that we're currently in.

While he is a candidate of the Republican party, Ron Paul doesn't quite fit the Republican mold as we have come to know it recently, which now includes wasteful government spending, huge federal budget deficits and a ballooning national debt. From a generational standpoint, Mr. Paul's policies, I believe, will give us non-boomers the best chance to enjoy at least a half-decent life compared to our elders.

Some of his key platform points are below:

Getting out of Iraq... The cost of the war is approaching $1 trillion, funded almost entirely by debt (debt that the boomers won't have to worry about too much, but the under-40 crowd will have to work paying off). Iraq has gotten plenty of help and it's time to let them sort it out for themselves. RON PAUL IS THE ONLY REPUBLICAN CANDIDATE SUPPORTING A COMPLETE PULL OUT FROM IRAQ.

We can't afford to increase our massive national debt further by spending ruinous amounts of money carrying out an interventionist foreign policy (anyone remember what happened to those guys from Italy about 1600 years ago? You know, I think they were based in Rome...)

Ron Paul has consistently voted against the Iraq war (Hillary, eat your heart out!!!).

Limited Government.. "I believe in limited government. The purpose of government is to protect liberty and not to run our lives or run the economy or police the world." - Ron Paul

Bloated tax codes with "incentives" that attempt to tell you how to spend your money, wasteful government spending on foreign wars and pork barrel politics, government subsidies and government sponsored entities such as Fannie and Freddie that distort markets, FHA (subprime lending financed by the government).... Ron Paul would work to end the wasteful bureaucracy that plagues Washington (remember, it's all paid for by you!).

Looking at the federal budget, it's abundantly clear that we could both generate a surplus and keep more of what we earn through lower taxes by simply reducing the size of government. We could probably cut out half of government expenditures and still have more government than we'd ever need.

Why we need a budget surplus: Young people (in their 20s and 30s) like me are going to have to pay down the national debt sometime, and it gets downright ugly when the bills come due and the creditors release the hounds (remember Mexico circa 1994?)... The greater the obligation becomes, the greater the drag on our economic growth.

Right now, 9% of our taxes go right out the door to pay just the interest on this debt. Of course, we'd have to pay this 9 percent - about 239 billion this year, before we even begin paying off our $9 trillion in debt. If we assume each family has, on average, 4 people, our national debt is $120,000 per family. Here's another interesting piece of information. Without interest on this debt, we'd have a balanced budget, notwithstanding the excesses of the Iraq war.

We need to be accumulating reserves to pay for social security and medicare, not piling on more debt. As it stands, with a savings rate of nearly zero and large budget deficits, we are spending a lot more than we make, and have been for some time. A wise person once told me "If your outgo is higher than your income, then your upkeep will be your downfall." Balancing the budget is a good first step toward making sure this doesn't happen.

Protecting the Value of Currency... Fairly simple... restrict the printing press at the Fed. Since 1913, when the Federal Reserve was established, the U.S. dollar has lost 95% of its value. From 1790 to 1913, prices were effectively flat (I'm quoting Peter Schiff from Europacific Capital on this). Inflation hurts prudent savers and rewards borrowers, who get to repay their debt with dollars that are worth less and less over time.

Easy money simply causes inflationary bubbles, as we've seen over the past 20 years. Ever notice how the price of anything that can't be imported has gone through the stratosphere? Healthcare, Education, Housing? I've just mentioned three of the most important things in life. While their costs have skyrocketed, the CPI has clocked in at relatively low rates. The reason... the CPI is a failure as an indicator of inflation... There are too many tweaks, the "basket of goods" that it measures is not representative of the spending needs of large portions of the American population, and other important factors (food and energy) are often excluded as undue focus is placed on the "core" number that excludes food and energy prices... which is a good indicator, I guess, if you don't need to consume food or energy.
------------------------------------------------------------------------------------------------

Ron Paul's economic policies are certainly the best suited for the under 40 crowd (and I believe, the nation as a whole). If we don't get the federal budget under control and (for real) control inflation, we going to watch the value of the dollars we make erode faster than we can increase our earnings (get poorer) while we pay a much higher portion of our earnings in taxes in the future. In short, we'll all be screwed... except the baby boomers, who ran up the debt in the first place and left us holding the bill as they laugh their way to their retirement homes in Boca.

Ron Paul realizes that we're setting ourselves up for ruin, and he wants to do something about it. By all accounts, he's an honorable man (according to former treasury secretary William Simon, he's "one exception to the Gang of 535" on capitol hill), and he presents a cogent, credible platform for building a better America... Something that I believe none of the other candidates offer.

Yes... Ron Paul for president, for a better America. (Come on, are you really going to vote for Hillary? Do you really want to make it 24 years straight with a Bush or a Clinton in the White House? It's time for some new blood in the Oval Office)

- eternitus

BTW - It's only extra icing on the cake (I wouldn't vote just because of this), but Ron Paul, like eternitus, is a native Pittsburgh.

Fantastic Article from the Motley Fool

2007-06-01T12:53:00.000-04:00

I know I promised to analyze stocks versus housing, and when things calm down for me, I will... The article below does an excellent job. I particularly agree with the "throwing money away" discussion points at the bottom of the article. Mortgage interest, property taxes, insurance and maintenance (which you throw away when you rent money and buy a house) right now amount to much more than the cost of renting.

Motley Fool
The Worst Investment Ever
Friday May 18, 2:05 pm ET
By Robert Aronen

My fellow Fool John Rosevear considers a house to be the best investment ever. I disagree. A house is a place to live, not a road to riches.

Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.

Positive cash flow
If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.

This is not necessarily true for real estate as an asset class. Purchase a parking lot, apartment block, or strip mall, and you very well may find that the rents are higher than the cost of ownership. Real estate that generates positive cash flow can be a great investment. This positive cash flow fuels the dividends from REITs such as Avalon Bay (NYSE: AVB - News) and American Financial Realty (NYSE: AFR - News).

Low costs
The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.

How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.

The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.

Historically proven returns
The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time. In The Future for Investors, Jeremy Siegel identifies several companies that have not only beaten inflation but also delivered returns far in excess of the market average for 50 years. It does not take a genius to actually buy companies like Pfizer (NYSE: PFE - News) or Altria (NYSE: MO - News), consistently reinvest the dividends, and build wealth over the decades. Over the 50 years of data compiled, Pfizer and Altria returned 16.0% and 19.8% respectively.

For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.

This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.

Final thoughts
I will agree with John Rosevear on one account -- a house is a great place to live. Fool Mary Dalrymple provides a good discussion of the issues associated with the rent-or-buy decision. Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.

Fool contributor Robert Aronen does not own shares of any of the companies mentioned. He lives in a van, down by the river. He would rather fund his retirement with his stock portfolio, not equity withdrawals from a house. Please feel free to share your comments with him. The Motley Fool has a disclosure policy.

S&P breaks "record," closes at 1530

2007-05-30T18:15:00.001-04:00

Thought of the day: Adjusted for inflation, the S&P 500 would need to pass 1878 to actually break a record. We still have 21% to go before we get to that level.

2007-05-30T18:15:00.000-04:00

New Home Prices Fall 11%

2007-05-24T10:25:00.000-04:00

All,
Sorry for the prolonged period of inactivity. I won't be able to get back on a good posting schedule for a couple of weeks. Lots of family issues and work have been making it too difficult to find time to post.

I'll have to be short.... I am extremely encouraged by the drop in home prices. It looks like market forces are finally starting to work... as this has (GASP!) led to MORE SALES! Gee, that complicated economics stuff actually works! Who would have thought lowering your price will get people to buy your house? I guess more people are learning that life's too short to have your house own you for 30 years.

This also means, because new homes are selling for less, existing homeowners will have to cut their prices to keep up... unless they don't want their houses to sell. I might actually be able to afford a house before I'm 45!

Even more encouraging is that incentives (like free kitchens, cars and cash back), which can total more than $20,000, have not been subtracted from the new median price... That means new homes are really going for $210 - $215k right now.

-eternitus

On a somber note, one of the sweetest women I've ever known passed away suddenly last week after falling ill on mother's day. She always treated me far better than I deserved. I thought I was special, but the enormous turnout to her funeral was testament to the fact that she treated everyone that way. I loved her dearly and she'll be sorely missed.

"The Worst is Over".... Yeah Right

2007-05-11T08:46:00.000-04:00

Economy Is Clawing Back, but Not Much

Economists See Signs of a Rebound in Growth,
But 2007 Is Still on Track as Weakest in Years

By PHIL IZZO
May 10, 2007

The worst of the economic slowdown has passed, private economists said in the latest WSJ.com forecasting survey. But they don't see any reason to expect a significant acceleration.

CHARTS AND FULL RESULTS

• Washington Wire: Economists See No AMT Overhaul

The economists don't see any new engines for growth this year. They expect continued weakness in consumer spending, for instance, which accounts for 70% of the economy.

ABOUT THE SURVEY

Among other findings of the survey:

Write to Phil Izzo at philip.izzo@wsj.com

Housing Analyst: "Our Contacts Have Officially Declared the Spring Selling Season a Bust"

2007-05-09T09:52:00.000-04:00

All, sorry for the lack of posting... My REAL job has been demanding very long hours lately... I've got something good in store for you very soon. For now, check out this article from the Wall Street Journal....

By JAMES R. HAGERTY

May 9, 2007; Page D3

The supply of houses and condominiums available for sale continues to grow quickly in much of the U.S., reflecting weak sales.

The number of homes listed for sale in 18 major metropolitan areas at the end of April was up 7% from March, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condos and town houses on local multiple-listing services.

The increase was above the seasonal norm. Over the past 22 years, home inventories nationwide have increased an average of 4.5% in April from March, according to Credit Suisse Group. Spring is the busiest time of year for home shopping, as families with children try to get settled ahead of the next school year.

Some of the biggest increases last month were in the metro areas of San Francisco, up about 19%; Washington, 17%; Orange County, Calif., 15%; and Seattle, 14%. Inventories declined nearly 1% in the Los Angeles area, according to Zip.

In a report issued yesterday, Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse, said her building-industry contacts have been surprised by the weakness of sales recently, "given the typical seasonal bounce that occurs at this time of year." She added, "Our contacts have officially declared the spring selling season a bust." Many people who had expected a recovery by year end "now believe the market rebound will be pushed out until 2008 at the earliest," Ms. Zelman wrote.

After booming in the first half of this decade, the housing market began cooling in much of the country in 2005. Since then, prices have been flat to declining in many areas. In recent months, an abrupt tightening of lending standards has further sapped the market by preventing some potential buyers from getting loans.

The National Association of Realtors yesterday again lowered its forecast, predicting that sales of previously occupied homes will total 6.29 million, down 2.9% from 2006. A month ago, the trade group projected that sales this year would slip 2.2%. Lawrence Yun, a senior economist for the Realtors, said many speculators have fled the market.

"It's good that we're getting beyond the tendency of some buyers to view housing as a temporary asset to accumulate short-term wealth, which is not to be expected in a normal market," he wrote.

Write to James R. Hagerty at bob.hagerty@wsj.com

David Lereah Announces that He is Leaving the NAR in Attempt to Save Soul from Eternal Damnation

2007-04-30T14:16:00.000-04:00

This alone is proof of God's existence.

Was he tired of losing his self-respect and credibility through shameless servitude to his evil masters at the NAR, or did they can him because nearly all of his bold "predictions" (cheerleadings) turned out to be so horribly wrong and destructive to those who harkened them?

I believe that both are true, and that being a "cheerleader" Economist (vs. a real Economist) for any special-interest group presents its challenges. However, there are many industry cheerleaders who conducted themselves far less shamefully than Mr. Lereah did.

Ah, Dear Old David, I Wish I Hardly Knew You:

David Lereah, given his widespread "tell-them-what-they-want-to-hear" media coverage, played a significant role in inflating the housing bubble, tirelessly (despite an overwhelming majority of real, independent Economists stressing otherwise) proclaiming that housing "never goes down" and that it's always a "good time to buy" in the housing market, even if that purchase is a one-way ticket to financial ruin and decades-long house poverty.

Like any clown, he used multi-decade historical norms and tried to apply them to an anomalous short-lived situation and, circularly, then tried to claim that the anomaly was the new norm. I have to believe that even a dunce like him is smart enough to have seen the folly in his arguments, which is what made his disingenuous claims so sickeningly disturbing.

He helped to put housing out of reach for countless young families and low-income Americans (unless they wanted to take some kind of toxic, subprime, neg-am option-ARM "death spiral" loan). Housing hasn't been so expensive, dollar-for-inflation-adjusted-dollar of income, since the early 1980's, during the most severe economic contraction since the great depression. When housing lost its affordability, Mr. Lereah simply changed the definition of affordable - Presto! Problem Solved! As a testament to this new measure of "affordability," foreclosure rates are now exploding as record numbers of households default under their loans, their lives, for all intents and purposes, ruined, and all this despite a healthy economy and ultra-low unemployment.

His fear-mongering books, quotes, data-manipulations and half-truths led millions of Americans to believe that they'd be "priced out forever" if they wouldn't spend 50% of their incomes on housing immediately, for fear that it would get worse (despite the fact that the very claim itself is a logical absurdity). Out of fear, many desperately jumped head-first into ruinous financial commitments simply to obtain shelter, now doomed, at best, to years or perhaps decades of indentured servitude. All during this charade, Mr. Lereah, his faithful Realtors and their Mortgage Broker buddies were laughing all the way to the bank - at the expense of everyone else.

It was only a matter of time before the mania subsided and truth boiled to the surface. Housing has gone down plenty of times when inflation is factored in, and now it looks like (uniquely) housing will fall in nominal terms this year. Thanks to you, David, for doing your part in pushing our economy to the brink of disaster. Thanks for helping us to flush trillions of dollars worth of capital down the toilet, leaving us with nothing but a massive, useless oversupply of housing. No, it's not all your fault, but we couldn't have done it without you.

I sincerely hope you left because you couldn't live with watching the pain that you helped cause, and couldn't do the bidding of your employer any longer in good conscience. If you were forced out, you now have a golden opportunity to redeem yourself. Let's just hope your replacement finds his or her way more quickly.

- eternitus

Hat-tip to Housing Panic for the wonderful graphic.

"Bad Weather" Causes Largest Sales Drop in 18 Years - Yeah, Right

2007-04-24T15:28:00.000-04:00

As could be expected, the David Lereah and his henchmen at the NAR continue to insult our intelligence. When existing home sales fell 11.3% from last year, they blamed the weather!

Yes, the weather was bad in parts of the country, but sales declined everywhere, and a lot!

Yes, bad weather can reduce sales, but I'd think it would take a biblical plague to reduce sales this much. Throughout floods, hurricanes, blizzards, earthquakes and tornadoes, sales haven't declined this much in 18 years.

"The Americans are not there. They're not in Baghdad. There are no
troops there. Never. They're not at all."

Here's last month's existing home sales report headline: "Existing-Home Sales Rebound in February, Market Stabilizing." If stabilizing means consistently falling, well, then yes, the market is stabilizing.

No, Mr. Lereah, nobody with half of a brain believes your garbage. Though, I guess if you call the bottom enough times, you'll eventually be right.

For all of the newer house bubble readers out there, check out David Lereah's entry in Wikipedia to see how comical the timing of his books is. Probably the best is his book on how to get rich in tech stocks, which was published in June 2005... right about the time when you would have sustained maximum damage in the market.

- eternitus

Existing Home Sales Report: Due Out Today

2007-04-24T08:39:00.000-04:00

Today is D-Day for the NAR. I'm anxious to see how they spin numbers that I believe will be horrendous based on their pending home sales index during the last two months. Let's see if the trend of revising last month's figures downward (so this month doesn't look so poor by comparison) continues. Will they admit that housing is crashing, or will they manipulate the figures and call bottom one more time?

I'm also enjoying the fact that an egregious bout of price inflation, supported by the government at the expense of 30% of its citizens (actually more if you count all of those young house-poor couples who bought at the peak), has been over for quite some time now. Most of those who were left out earn lower wages those who owned their house already, who were insulated from the damage. (They could just trade their overvalued house for another... didn't need to pay $4000 a month like a first-time buyer in California.) Don't forget that the whole reason that families needed to take out those toxic subprime loans was because they couldn't afford to buy a house any other way.

The consensus is a seasonally-adjusted rate of 6.6 million homes, down 2.9% from last month's figure of 6.8 million homes. I'm also expecting another significant YOY decline in median house prices.

Fingers Crossed...

- eternitus

PIMCO's Bill Gross: Houses 15%-20% Overvalued

2007-04-20T16:09:00.000-04:00

All,

Sorry from the absence of posts! Jury duty ("ugh") has thrown a monkey wrench in my whole routine.

As promised, I'll be delivering a "real" buy vs. rent (or anything vs. anything calculation) shortly. Please understand that putting together a good piece of original work (not simply pasting someone else's work) takes a good bit of time... especially when data-gathering is required. In the meantime, I'd like you to check out a great site:

Bubble News Network

If you have some free time at work or at home, this is a great way to get news on the housing bubble without sitting through those annoying pieces on Angeline Jolie's ninth adoption from the planet Skylon.

The link above will take you to an entertaining interview of PIMCO's Bill Gross. PIMCO's (bond fund company) estimates are right in line with mine below. They actually looked at the NUMBERS! What a novel concept.

Always remember: while all analysts / economists see the same things that I do, whether or not they decide to show you those things usually depends on how rich or poor it might make them. If you ever have heard the Latin term "cui bono? (who benefits?)", this is its essence. When examining anyone's "advice," always remember to examine that person's motives... more often than not, you'll find a trail leading to that person's wallet.

PIMCO's angle: While Gross talks about a gracious rescue for housing by the Fed, what he fails to mention is that the Fed has much less control over long-term rates than you might think. Did you notice that the Fed increased its target by more than 4% and long-term rates barely budged? Instead, Mr. Gross is salivating at the hefty returns rate cuts would generate for his short-term bond funds (when rates fall, your existing bonds have interest rates that are now "above market" - people will pay more for them).

For those of you who think that a Fed rate cut might actually work... check out the Bank of Japan's response to their real estate implosion in the early 90's. They dropped rates to virtually 0% - that's right - from 1990 to 2003. What effect did that have? Nada. Leverage, even at 0% interest, has little appeal when prices are declining.

- eternitus

House Price Fundamentals: By the Numbers

2007-04-13T16:32:00.000-04:00

I've been getting a lot questions in emails from readers about the relationship between fundamentals and prices, and what exactly it means when their real estate agent or stockbroker tells them "the fundamentals are strong" and that they should buy.

A Word on Fundamentals

In the medium and long-run, fundamentals always drive asset price valuation (the value of your stock or real estate). In real estate prices, the main fundamental drivers are incomes and interest rates. When your broker says the fundamentals are strong, she is indeed correct: interest rates are low and incomes are increasing (though not excessively so). However, there is not some line at which fundamentals become "officially strong" and put a lead foot on the infinite asset price accelerator. While this is the way its generally presented in the media or by your brokers, it's ridiculous if you sit for a moment and think about it. If interest rates decline by 1%, what happens? Will the "magic" of 5% mortgage interest cause prices to rise 5 times faster than incomes rise for all time?

The obvious answer is no. The buyer still has the same amount of money in hand to dedicate to housing. The price he is willing to pay will adjust upward in the long-run until the monthly payment approximates what it did at the higher interest rate. After that happens, even though the "fundamentals are strong," it's ridiculous to assume that prices will continue to increase indefinitely unless "Average Joe's" income rises proportionately.

If that's true, then what happened to housing? Answer: Speculation

Notice that I use the term "long-run" above. In the short run, speculative greed and fear of missing out (i.e. you'll miss out if you don't buy now... you'll be priced out forever) can cause significant distortion in markets. Speculators are the "technical" traders in the stock market or the flippers in the real estate market who live by the mantra "the trend is your friend." They don't buy based on an asset's underlying value, but instead they speculate on price swings in search of a short-term "easy money" profit.

To an extent, speculation is a self-fulfilling prophecy. As the rise in prices cause more and more speculators to pile on, with each participant searching to cash-out off of a "greater fool," the rate of price increase accelerates. In the end, the "smart money" takes its profits off of the table before the inevitable fall in prices, and they sell to the "greatest fools" who are left holding the bag as profit-taking feeds on itself, increasing the rate of price decline. Eventually, the market falls out of favor with speculators, fundamentals dominate and the market regulates for a time. The effects of speculation are well documented in history, from "Tulipomania" in 1600's Holland to the dot.com bubble of the late 1990's and the housing mania of 2004-2006, with plenty of stops in between.

What Should House Prices Be Today Given the Fundamentals?

I'll start with the good old days of April, 2000. When the boys were boys, the economy was strong and the "beer flowed like wine." Based on the U.S. Census data taken at the time, the median household income was $42,000 and the median house price in the U.S. was around $125,000. At a rate of 8.2%, a 100% mortgage payment on the "median" house was around $935. Through April 2006 (data is not yet available for April 2007, but I'll provide estimates later), incomes rose 19% according to the U.S. Bureau of Labor Statistics, meaning we can expect, based on incomes, that the median mortgage payment would also rise 19% to $1113 per month.

Given the lower interest rates in April 2006 (6.43%), that $1113 per month can buy a lot more house than it used to(which is why interest rates are a second major "fundamental.") Adjusting for both wages and interest rates, the "fundamental" value of a median U.S. house would be $177,343 in April,2006, up from $125,000 in April, 2000 - a perfectly valid 42% appreciation in house prices (before speculators stepped in and screwed the darn thing up). The manic fever that swept the country (we're always looking for the easy ticket to fortune) drove median prices all the way up to $211,578, based on changes in the OFHEO Home Price Index from our base value of $125,000, creating a 19.3% ($34,000) gap between the 2000-based fundamental value and the actual price of a house. So, when your real estate broker or David Lereah tries (or tried) to use the "fundamentals" to support current house prices, the numbers simply don't add up, and haven't for two years. (Unless you believe that some new housing technology has made houses 20% better at providing shelter... or all houses jumped 20% in size over the last 7 years - most of the houses out there today were around back then.)

Click on the picture for a larger image.

As you can see in the graph above, from 2001 to 2004, buyers were able to get a better "deal" than in 2000, and buying could have been considered a fantastic value in historic terms (especially in 2003). However, as prices began to rise, at first due to better fundamentals, speculation took hold, driving the prices way above their 2000-associated "fair value." Based on estimates for April 2007, we can already start to see house prices converge with the fundamentals.

Assuming (generously) flat house prices from this time last year, and a 3.0% increase in wages (most recent BLS estimate), and given the current drop in mortgage rates to 6.20%, we can already see the house prices begin to converge with the historic fundamentals.

Click on the picture for a larger image.

If we assume mortgage rates stay the same (given the mess in mortgages and inflationary pressures, I believe they're more likely to rise, but just for argument's sake), and incomes rise by 3%, it will be 4 more years until the median family budget buys as much house as it did back in 2000... if house prices don't fall appreciably.

Click on the picture for a larger image.

Divergences from fundamentals don't often last that long... it's more likely that prices will decline slightly to aid the correction. A 3% annual decline in house values and a 3% annual increase in incomes will erase the market distortion by April 2009. At any rate, it looks like a particularly ugly time to buy a house right now.

Click on the picture for a larger image.

For my next post... I'm going to give you the real goods on "Buy vs. Rent," and explain why you can "throw your money away" just as easily by paying too much for a house as you can by renting. In fact, it's not a matter of throwing your money away at all... we do so in both instances. It's a matter of whether you're throwing more money away buying or renting.

- eternitus

--------------------------------------------------------------------------------------------
At the request of John M., you can find the numbers for the charts below.

A note on the 2000 adjustment (for the UberNerds out there)... the Census data actually says that the median house price was $119,600 in 2000. However, since the Census doesn't have a yearly home price index, there is no way to get the Census yearly % change. So, I used OFHEO's % changes from this figure. Because of the differences in methodology between the Census and OFHEO, doing that only yielded a value of $202,000 in April 2006, below the $210 - $225 k range reported. Obviously, OFHEO and the Census don't precisely agree (statistical samples rarely do). So, I used a figure close to $119,600 ($125,000) that will get us to a reasonable result when using OFHEO's price adjustments.

At any rate, changing the starting point to $119,600 or to $130,000 would not change the % valuation gap, and only reduces / increases the estimated dollar amount of the gap by $1,000, so it's not material to the analysis... mostly cosmetic.

An interesting fact to note is that prices jumped by 69% as measured by changes in the OFHEO Home Price Index from 2000 to 2006. To put that in perspective, median house values took 40 years to double before this period.

Click on the picture for a larger image.

Fair is Foul and Foul is Fair: An Epic Irony

2007-04-10T08:38:00.000-04:00

All,
I'm still working on my next big post on house price fundamentals, but it's not quite finished. In the meantime, you've got to check out this link:

Irony of the Day: David Bach's Advice on How to Avoid Foreclosure - Yahoo! Finance

This is the guy who just last year released Automatic Millionaire Homeowner. It looks like his definition of "millionaire" means $1,000,000 in debt. I'm amazed that this guy could live with himself writing something like this. How many of these foreclosed (or soon-to-be foreclosed) house debtors acted on his advice?

Unbelievable.

- eternitus

Housing Inventory Surges in March

2007-04-05T10:40:00.000-04:00

Since I don't have time to write (I'm still going to put out some original material, hopefully this weekend)... I'll let a delightful article from the Wall Street Journal do my talking... Enjoy

- eternitus

Housing Inventory Surges in March

By JAMES R. HAGERTY
April 5, 2007; Page D2

A sharp increase in homes offered for sale last month suggests that home shoppers will find plenty of choices this spring.

Click the chart or here for an interactive version.

The number of homes listed for sale in 18 major U.S. metropolitan areas at the end of March increased 6.5% from a month earlier, according to data compiled by ZipRealty Inc., a national real-estate brokerage firm in Emeryville, Calif. The data cover listings of single-family homes, condominiums and town houses on local multiple-listing services.

Over the past 22 years, home inventories nationwide have increased an average of 1.7% in March from February, according to Credit Suisse Group. Supplies typically rise modestly in March as sellers pursue the many families with children who seek new homes in the spring, so they can move during summer vacations.

The big rise in the latest month may reflect sellers' expectations that it will take much longer to find buyers than it did during the housing boom of the first half of this decade, said Patrick Lashinsky, president of ZipRealty. Rather than waiting for April or May, he said, many people planning to move this summer put their homes up for sale in March. He added that many sellers are being cautious, waiting to sell their old homes before committing to buy new ones.

ZipRealty recorded the biggest increases in the metro areas of Los Angeles (12.8%), San Francisco (12.2%) and Washington, D.C. (9.4%). Miami, where a glut of unsold condos has been weighing on the market, showed a modest rise of 1.8% in the supply of all types of homes in March from a month before. But the Miami inventory was up 61% from a year earlier. For all 18 metro areas, the inventory at the end of March was up 35% from a year earlier.

Large inventories have caused prices to level off or fall modestly in much of the country over the past year or so. The recent surge in defaults on subprime mortgages -- loans to people with blemished credit records -- has prompted lenders to tighten credit standards. That tightening is expected to put downward pressure on home prices by removing many potential buyers from the market.

Write to James R. Hagerty at bob.hagerty@wsj.com

Mainstream Media Misses the Boat on Yesterday's Data

2007-04-04T07:38:00.000-04:00

All,
I'm currently swamped at my real, pay-the bills job (the reason for my lack of posting). I'll have to keep this very brief. The story goes like this:

Yesterday, the Dow was up 128 points. Incredibly, the Associated Press attributed this run-up to a 0.7% (seasonally adjusted) ANNUAL increase in the NAR's pending sales index. (YAWN!) This makes absolutely no sense, especially given that the index is 8.5% below its year-ago level and the Northeast and West, the two most important regions, posted month-over-month declines. Oil's retreat and a potential breakthrough in the Iran hostage crisis (Didn't this happen before somewhere?), drove the rally. The reason: worries of a severe exogenous price shock due to a spike in oil (similar to the 1970's oil spike) combined with tons of liquidity and a slowing economy, a recipe for the U.S. economic train to pull into the stagflation station, abated. In short: looks like the outlook for inflation did not get worse (although it really hasn't improved).

For all you history buffs out there, I can't wait until Tony "Neville Chamberlain" Blair proclaims to his people, after appeasing Iran, that "WE NOW HAVE PEACE IN OUR TIME."

For my next post, I'm going to teach all you non financial types about fundamentals (a lot of talk about them, but no one in the media seems to explain what they are(or have a clue, at all) and how to do a real, honest-to-goodness buy versus rent calculation (for a house), so you can make an informed financial decision in line with your long-term interests. You'll see why I rent in Philadelphia, would perhaps buy in Midwest, and would contemplate suicide in California.

- eternitus

The Decline and Fall of the American Dream

2007-03-28T14:19:00.000-04:00

I suppose you'll have to forgive me for waxing philosophical (which isn't necessarily under my purview as a Financier and Economist - though I also have a degree (well, a minor) in Philosophy), but there's something that I've just now come to realize that's almost beyond disturbing to me. Unlike my normal, data-centric posts, this one is an opinion piece, but one that I beg you to read.

------------------------------------------------------------------------------------------------
Home Ownership's Recent, Twisted Introduction to the Concept of the American Dream

The idea of the American Dream can be traced back to an autobiography written by a fellow Philadelphian, Ben Franklin, who documented his rise from "poverty and obscurity into which [he] was born and bred to a state of affluence." The story tells of how Mr. Franklin effected his meteoric rise to fame and fortune through hard work, stubborn perseverance, inventiveness and God-given talent (which you and I may or may not have). Horatio Alger wrote countless books on the topic, and the ideal still rings true in the ranks of a good portion of the 3,000,000 millionaires alive in America today.

The American Dream, by the very two words which make up the phrase, is above all an ideal that should sit at the very core of what it means to be American. It is supposed to represent all of our hopes and dreams rolled up into one - the sparkling flagship of noble ideas in a land of limitless opportunity. Instead, the mighty American Dream, the powerful force that roused my grandmother and millions of others to leave their homes behind in search of better lives, is now synonymous in the mainstream psyche with the purchase of a single material good.

In a sign of the times, this once-sacred ideal has been twisted by the titans of industry into a mere slogan, its beautiful melody perverted into a siren song, relentlessly luring unsuspecting passersby into its grasp. The promise of prosperity and a better life has been cruelly twisted by the forces of unfettered consumerism and the dire certainty of debt.

The ultimate concept has been displaced by the ultimate asset. The permanent and sublime has been replaced by the transient and tangible. What's more, I didn't even realize that it had happened until today. To those in the real estate industry who managed to pull off this masterfully insidious feat, I can only tip my hat to one of the greatest marketing movements in recorded history. The very idea of the American Dream has been turned against us.

This, folks, is the American Dream: No matter where you c0me from, or who your parents are, if you got the goods, you can make it. No, folks, "making it" does not mean entering into a ruinous financial commitment to purchase a large, pretty box that slowly rots away over a period of 100 years (I put it in such terms to highlight the absurdity of the notion). In fact, under the loose lending standards up to this point, you needed hardly any "goods" at all to achieve that dream. The American Dream is certainly not confined to ownership of a house, as its new common usage implies. This narrow definition so tragically shortchanges the phrase's meaning that it's nearly comical and wholly demeaning. In fact, it's true that the American Dream includes owing a house only coincidentally, a choice (not a requirement) that's part of a much larger success. Millions of overextended families flailing at water's edge on a financial waterfall, or simply crushed under a mountain of debt, hardly fits anyone's definition of success - except for the lenders, agents and brokers who reap the obscene profits from this darkening field.

The actual country that we live in may not be all that its cracked up to be. We all certainly don't have an equal shot at fame and fortune, and we all may not be treated equally under the eyes of the law, yet, but a dream is supposed to be something truly great, a paradigm toward which we strive and will one day perhaps transcend. What's always made America great is certainly not its reality, but the unique set of ideals, including democracy, liberty, opportunity and equality, toward which that reality has slowly marched over the past 230 years. If those ideals now include the newly redefined American Dream, then we're marching the wrong way.

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- eternitus

Home-Sales Surge May Not Reflect Subprime Woes

2007-03-24T13:46:00.000-04:00

In examining the NAR's existing home sales report from Friday, March 23, the real big news, in my opinion (and how the headlines should read), is the 7.6% slide in median home prices since July 2006, when the median price was $230,000. That's $18,000 in "equity" that has gone up in smoke. (Just assuming, for simplicity, that the "mix" of homes sold in the data is little changed - we're talking about a set of large numbers, so this tends to be so).

If you bought then, with no money down, and assuming closing costs of $3,000, you could be $21,000 in the hole right now. If you factor in real estate placement fees of 6% (another $12,700), you are looking at a median loss of $33,720 on the sale of your "median" home right now! OUCH! That's a tragedy on a massive scale. For the 605,000 who bought then, that translates to an approximate loss of $12 billion in "equity" (without consideration for real estate fees). For all who bought in 2006, the number could be as high as $75 billion... OUCH (again)!

Courtesy of the Wall Street Journal (After a Few Rants)...

I plan on keeping this blog weekly, but people have to see this article... It's important that we have full knowledge of the actual data on housing, especially given the provider (NAR - National Association of REALTORS) ) ... and especially when seasonal adjustments and other manipulations come into effect, such as the NAR's phantom downward revisions of year-ago data (curious, because usually these revisions occur within one or two months... seems convenient that, when they wanted to keep the train rolling, prices were "higher" and now, at damage control time, "oops, they weren't really that high after all!").

I'm not anti-home ownership... I think it's a great thing when you can get even a moderately reasonable price. However, prices aren't reasonable at the present (by any sane measure), and as such, I'm against making a first-time home purchase in the Northeast and the West at this time. (I will provide a post on the detailed calculations behind it in the future, but suffice it to say that, given the differences between prices and rents, if they persist, then renters are better off renting for the rest of their lives). As I've said on this blog before, NO INVESTMENT IS GOOD WITHOUT FIRST CONSIDERING THE PRICE. That's just common sense. There are plenty of great assets out there, but paying too much can turn a great asset into an atrocious investment (see: stock market bubble).

What I am against is the NAR... One should always be somewhat suspicious of any information received from a group whose motives are driven not by public service, but by PROFIT OFF OF YOU! No, they don't lie, but they do want to paint as rosy a picture as possible (it all depends on what data you throw out, and what you keep - learned that in Investment Banking, where EVERY client we visited was undervalued compared to their comps - how do you think we did that?). A REALTOR has a vested interest in keeping the overpriced party going. They would much rather get 6% of $300,000 than 6% of $150,000 (Remember that's YOUR MONEY they are taking, and, in a $300,000 house, that's an extra $18,000 in appreciation and pay-down of debt principal, on top of your closing costs, that you have to make up to break even).

As a primer, the true rate of home sales was 4.6 million annually in February... The extra two million is a seasonal adjustment that is determined by a statistician... a very subjective number... we'll learn more in the coming months, when the "seasonal" factors go away.

And now, the article as promised...

Home-Sales Surge May Not Reflect Subprime Woes

By MICHAEL CORKERY
March 24, 2007

Sales of previously occupied homes rose unexpectedly last month, but economists said the increase was partly driven by unseasonably warm weather and didn't fully reflect the current turmoil in the subprime mortgage market.

The recent surge in defaults on subprime mortgages, those for people with weaker credit records, has forced lenders to tighten their standards. That is expected to eliminate many potential home buyers, damping sales in the months ahead.

The National Association of Realtors said sales of existing homes increased 3.9% in February from a month earlier to a seasonally adjusted annual rate of 6.69 million units. That sales rate was 3.6% below the year-earlier level.

The latest data reflect completions of home sales in February that resulted from purchase agreements that were mostly signed in December and early January, when unusually warm weather in the Northeast may have enticed more people to shop for homes. The Northeast led the nation with a 14.2% surge in sales in February from a month earlier, while sales increased 1.6% in the South and 3.9% in the Midwest. They were unchanged in the West. Economists also cautioned the unusually warm weather may have confounded seasonal adjustments meant to compensate for lower activity in winter.

"This was purely a fluke number," said Joshua Shapiro, chief U.S. economist at consultancy MFR Inc. "You can bet dollars to doughnuts that next month this number is going to come right back down."

The national median home price dropped to $212,800, a 1.3% decline from a year earlier. Without a downward revision in the year-earlier median, the decline would have been 2.1%, said Thomas Lawler, a housing economist in Vienna, Va. Mr. Lawler said it was the second month in a row that the NAR has revised the year-earlier median price downward. NAR chief economist David Lereah said such revisions are automated and "happen all the time."

Some analysts say price cuts and low interest rates are bringing buyers back into the market, which helped boost sales in February and in the previous month. But the outlook for the housing recovery is clouded by the meltdown in the subprime mortgage market that is beginning to stymie many borrowers with poor credit from obtaining financing.

Mr. Lereah predicted Friday that credit tightening will reduce home sales by 100,000 to 250,000 annually over the next two years. Most economists say this winnowing of home buyers is only now emerging and could drive down home sales in the coming months.

"Our view had been that sales were going to turn around in middle of '07," said Patrick Newport, economist at consultancy Global Insight. "But I don't think that is going to happen because a segment of the home-buying market is not going to be able to borrow money."

The inventory of homes for sale rose 5.9% to 3.75 million at the end of February, which represents a 6.7-month supply at the current sales pace. That's down from a 7.4-month supply in October.

Economists say the number of homes on the market typically increases in February as the peak spring selling season kicks off. In some markets, rising foreclosures threaten to worsen the glut of homes offered for sale. Credit Suisse analyst Ivy Zelman estimates that foreclosures could add as much as 20% to the current inventory of existing homes.

Deductive Reasoning - Tax Time

2007-03-20T09:56:00.000-04:00

I had to change my layout to get this to fit! Don't be alarmed!

We'll employ a little reasoning on this post to understand how tax deductions benefit some more than others, and why, aside from business expenses, I believe we should switch to credits.

Our tax system is insanely complex for ordinary people to understand. Large corporations and wealthy individuals may have armies of lawyers and accountants whose sole purpose in life is to find the single combination of deductions and credits out of tens, hundreds or maybe thousands of combinations that results in the lowest tax liability. One estimate claims Americans spend as much as $350 billion each year filing personal and business income taxes. H&R Block alone collected $2.5 billion in tax preparation revenue in its last fiscal year.

The most widely misused and misunderstood creation of the tax code has to be the deduction. An overabundance of deductions is one reason why the code is so complex in the first place.

To be sure, tax deductions are a good thing for taxpayers. They get better and better the more money you make, as a matter of fact. What that means, however, is that the highest earners among us (who usually aren't the demographic that the deduction targets in the first place) benefit the most.

Further, because of the complexities of the tax code, many don't fully understand a deduction's effects, and stop at "it must be a good thing." What's more, slime balls who do understand the implications, and know that you don't, will take advantage the fact and will lead you to believe you're benefits are greater than they are. First, some basic math: a deduction of $1000 yields only $250 in tax benefits to someone in the 25% bracket. To get to the answer, simply multiply the deduction by the tax rate.

Now, we examine America's favorite deduction: Mortgage Interest - We're assuming that these five happy families pay exactly the same amount of mortgage interest each year (For simplicity's sake, I'm leaving out the AMT, but, with only the deductions mentioned, its effect isn't material to the discussion).


	Average	Yuppy	Corporate	Big	Corporate
	Joes	Puppies	Climbers	Timers	Executives
Family Income (Married):	$55,000.00	$110,000.00	$165,000.00	$220,000.00	$5,000,000.00
Tax Bracket	15.00%	25.00%	28.00%	33.00%	35.00%

Mortgage Interest	$12,000.00	$12,000.00	$12,000.00	$12,000.00	$12,000.00

Tax Savings:	$1,800.00	$3,000.00	$3,360.00	$3,960.00	$4,200.00

Why do the Corporate Execs get more than twice what the Average Joes get on the same amount of itnerest? Answer: Deductions benefit higher earners disproportionately.

Let's take this analysis one step further. In 2007, to be able to deduct mortgage interest, you have to give up the $10,700 standard deduction and itemize.

	Average	Yuppy	Corporate	Big	Corporate
	Joes	Puppies	Climbers	Timers	Executives
Family Income (Married):	$55,000.00	$110,000.00	$165,000.00	$220,000.00	$5,000,000.00
Tax Bracket	15.00%	25.00%	28.00%	33.00%	35.00%

Standard Deduction Given Up	$10,700.00	$10,700.00	$10,700.00	$10,700.00	$10,700.00

Taxes Savings You Give Up	$1,605.00	$2,675.00	$2,996.00	$3,531.00	$3,745.00

Actual Tax Benefit of Home Ownership	$195.00	$325.00	$364.00	$429.00	$455.00

Fortunately, the homeownership deduction is not as bleak as it looks - By itemizing, you get to deduct state & local taxes and property taxes that you wouldn't otherwise (and maybe a few other things, but those are the biggies for most of us.). Let's assume 5% state & local taxes and $2500 for Property Taxes. (Remember, Benefit = Deduction * Tax Rate).

	Average	Yuppy	Corporate	Big	Corporate
	Joes	Puppies	Climbers	Timers	Executives
Family Income (Married):	$55,000.00	$110,000.00	$165,000.00	$220,000.00	$5,000,000.00
Tax Bracket	15.00%	25.00%	28.00%	33.00%	35.00%

Actual Tax Benefit of Home Ownership	$195.00	$325.00	$364.00	$429.00	$455.00

Add: State & Local Tax Benefit	$412.50	$1,375.00	$2,310.00	$3,630.00	$87,500.00

Add: Property Tax Benefit	$375.00	$625.00	$700.00	$825.00	$875.00

Total Benefits From Itemization	$982.50	$2,325.00	$3,374.00	$4,884.00	$88,830.00

When it's all said & done, the Average Joes make out with just $1000 in tax savings (or about $80 per month), while the Corporate Execs save almost $90,000, almost twice what Average Joe makes in a year, before tax!. If we switched to CREDITS, which are based on what you spend, eliminated all deductions, which are based on what you make, and eliminated itemization altogether, you get a situation that's much more "on the level." Also, you get one that's much, much simpler, and less open to deception by those who stand to gain from our collective ignorance.

	Average	Yuppy	Corporate	Big	Corporate
	Joes	Puppies	Climbers	Timers	Executives
Family Income (Married):	$55,000.00	$110,000.00	$165,000.00	$220,000.00	$5,000,000.00

Mortgage Interest	$12,000.00	$12,000.00	$12,000.00	$12,000.00	$12,000.00
Tax Credit	15.00%	15.00%	15.00%	15.00%	15.00%

Total Tax Savings:	$1,800.00	$1,800.00	$1,800.00	$1,800.00	$1,800.00

This way, the Average Joe saves just as much as Bernnie Ebbers and the Enron Execs, we don't have to worry about "giving up" the standard deduction, and we probably spend less preparing our taxes.

Great Idea! Why don't we change it now! One thought to leave you with:

Where do you think the incomes of the folks who write the tax laws fall in our "spectrum" above? Do they have more in common with the Average Joes, or the Corporate Execs? Further, who funds their campaigns?

Hint Below....

To be fair, I can't blame them (the status quo would be just fine for me, too). They won't reform until we demand it, and, besides, what would the tax preparers do?

-eternitus

Is New Century the New Sock Puppet?

2007-03-17T09:04:00.000-04:00

This is directly from the Wall Street Journal, but I think everyone should see it... Seem's eerily similar to the dot-com crash... (dot com's are only a small part of the market... subprimes are only a small part of the market)... etc. Enjoy.

Is New Century this decade’s Pets.com, with their pitch of home loans for all? Stephen Roach at Morgan Stanley thinks so.

“Sub-prime is today’s dot-com — the pin that pricks a much larger bubble,” he wrote in a recent report. Roll back the clock to 2000, and Mr. Roach reminds us that “the optimists argued that equities as a broad asset class were in reasonably good shape,” with any excesses confined to about 350 of the “so-called Internet pure-plays,” which he says accounted for about 6% of the total capitalization of the stock market at the time.

“That view turned out to be dead wrong,” he says. “The dot-com bubble burst,” and the S&P 500 — a broad measure of the market — fell nearly 50% over the next two and a half years and the U.S. economy slipped into a “mild recession, pulling the rest of the world down with it.”

Could it be déjà vu all over again? “Fast-forward seven years, and the actors have changed but the plot is strikingly similar,” says Mr. Roach. Of course, this time, it’s the subprimes instead of the dot-coms. The housing bubble burst, borrowers with poor credit failed to make payments and the mortgage lenders got squeezed as the big banks they count on for financial backing turned their backs.

“How far will the ripples spread?” Mr. Roach think he has the answer, and like last time, it isn’t pretty: “As was the case seven years ago, I suspect that a powerful dynamic has now been set in motion by a small mispriced portion of a major asset class that will have surprisingly broad macro consequences for the U.S. economy as a whole.”
–Worth Civils

Issues Surrounding a Massive Subprime Bailout....

2007-03-15T13:40:00.000-04:00

I think it is very important that such a program is not undertaken hastily (see “Katrina Cards”).... Below are some issues that need to be resolved (I don't think they can be resolved, but we'll see) regarding any sort of massive mortgage bailout...

1. How would Congress vet such a program to avoid abuse (see “Katrina Cards”)? What are the costs associated with vetting these loans, and how many dollars will be allocated to bail out consumers? Further, how can we stop any bailout money from going to people who fraudulently misrepresented themselves in order to get loans that they couldn’t afford (thinking they could cash-out at any time for a profit)?

There is at least $40 trillion in Mortgage Debt Outstanding (as of 9 months ago). An overall delinquency rate of 5% puts $2 trillion worth of mortgage debt at risk.

For the $2 trillion in endangered loans, that translates to approximately $170 billion in mortgage payments due just this year… a potential worst-case scenario balloons the Federal budget deficit from $250 billion over the next twelve months to $420 billion.

2. Further, do we segregate “subprime” borrowers from “prime” borrowers, and only help those in the subprime category, even though prime borrowers are in trouble nonetheless?

3. While a bailout can work as a stopgap measure, how do we solve the problem of the basic fact that these people still can’t afford a mortgage on their own? If we subsidize, “until they sell,” then what incentive do they have to sell in the first place? Are we going to subsidize these borrowers permanently? What will that cost? $1 trillion, $2 trillion? If we put a time limit on the subsidy, then we are just delaying the inevitable. This might be the worst case, where billions in tax dollars go to no good end.

4. Finally, the question of fairness… I don’t own a home, and refuse to buy irresponsibly (i.e. borrow more than I can afford to repay if things go south). Now my tax dollars will go to subsidize someone else’s poor decisions to keep them in a house, while folks like me are still renting? One could argue quite successfully that those facing foreclosure should not be, and have no right to be, in the homes they’re in.

Keep in mind, that the market will correct on its own… the glut of subprime loans will be wiped out through foreclosure, and the lenders will probably suffer the most (the borrower will be freed of the obligation, in the end).

No Bailout for Irresponsible Borrowers

2007-03-14T09:58:00.000-04:00

First, I'd like to introduce myself as this is my initial blog.

My name is Ryan, and I am a 25-year old financial analyst living in Philadelphia. My professional background includes Investment Banking (formerly) and Private Equity (currently). Prior, I graduated from Swarthmore College in 2004 with a Degree in Economics. Many of my posts will be directed, for now, toward what I believe to be an enormous and growing problem in the U.S. - Housing and it's lack of affordability.

I'm writing in staunch opposition to any legislation that offers a bailout to irresponsible borrowers who over-levered themselves in order to purchase a home. All borrowers have a choice before signing on the dotted line. If a bailout occurs, it seems that once again congress will penalize the financially prudent with higher taxes (or a greater budget deficit) in order to reward the profligate few.

If money isn't involved in a bailout, legislation that makes foreclosure more difficult will penalize the lenders, who followed through on their contractual agreement in the first place and provide a valuable service to the economy. Much like onerous European labor laws that discourage hiring, I believe that such an action will discourage lending to a greater extent than any of us would like.

I believe we all have a right to the American Dream, but we have a duty to follow through on our obligations as well.

"Predatory Lending" is merely a symptom of a larger problem, that being a lack of affordable housing. The median income, in many areas of the country, cannot begin to afford a median house. Does anyone not see a problem here? This is what drives borrowers to take on more debt than they can afford. Housing must be allowed to correct in an orderly manner so home ownership is a reasonable proposition for all Americans.

Please keep in mind that there is a large and growing class of losers from the housing bubble that has nothing to do with mortgages and delinquency. It is the youth of this nation, ages 27 and younger, who never had the chance to buy a house during more affordable times (A "starter" house in many parts of this nation costs $1500 per month (more in others) , or more than half of the average person's take home pay. Keep in mind that much of this demographic is already saddled with debt from ever higher education costs. Just to add insult to injury, these are the lucky few who will bear the brunt of our burgeoning social security "time bomb." It is truly a great time to be alive.

It's not quite the Grapes of Wrath at this point, but frustration and discontent is growing among this group, myself included.

Fireside Finance

From Yahoo Finance: Couldn't have said it better myself

Laura Rowley Money & Happiness

Has the American Dream Become a Fairy Tale?

Angry Renters Oppose the Mortgage Bailout

Video of the Day: Renter's Take on Housing Bailout

OPPOSE THE HOUSING BAILOUT

This just in: Bullshit is Most Important Issue for 2008 Voters

Hillary Says to Copy Japan?

Hillary's Bad HistoryMarch 31, 2008; Page A18

Waiting for that one, dumb home buyer

Waiting for that one, dumb home buyer

Blecch! NAR's Yun Named Top 10 Forecaster by USA Today

Japan, Here We Come!!!

Bernanke Says HomeownersNeed More Help on Loans

Eternitus 1, Economists 0: Looking Back 9 Months

At the time, I was more of a "chicken little" as the stock market was surging toward new highs each day, though it's a fact that there were savvy money managers who knew what I knew... and probably timed their trades better.

Friday, May 11, 2007

"The Worst is Over".... Yeah Right

Economy Is Clawing Back, but Not Much

This week's sign of the apocalypse

Messed Up Situation

We need more videos like this one

Happy Holidays!

The Clinton Housing Bubble

The Clinton Housing Bubble

Greenspan: Captain Insano

Humorous Video on the Financial Crisis

Mortgage Madness: What is Wrong with America?

Happy Thanksgiving! (One Day Late)

A discussion of Ron Paul

Ron Paul Issue of the Day: Get out of Iraq

Feddie Krueger Cuts'em again!

For immediate release

Home Sales in Full-Fledged Rout: Disaster Continues

Existing-Home Sales Tumble 8%

NAR - Worst - Ever Showing for Pending Home Sales

My Beef with Greenspan: A Picture is Worth a Thousand Words

Great Housing Article from Seeking Alpha's Markham Lee

Adjusted Case Schiller Housing Data

NEVER.... SELL... INTO.... A.... PANIC!!!! THAT IS SHAMEFUL!

OMG! The stock market can go DOWN!?!?!?! - A little advice from an investment pro

Cramer: "I've sold all of my real estate"

Thought of the Day...

What a great fourth of July Present

Blogger Without an Internet

What? Inflation?

Ron Paul for President - A better America in 2008

Fantastic Article from the Motley Fool

S&P breaks "record," closes at 1530

New Home Prices Fall 11%

"The Worst is Over".... Yeah Right

Economy Is Clawing Back, but Not Much

Housing Analyst: "Our Contacts Have Officially Declared the Spring Selling Season a Bust"

David Lereah Announces that He is Leaving the NAR in Attempt to Save Soul from Eternal Damnation

"Bad Weather" Causes Largest Sales Drop in 18 Years - Yeah, Right

Existing Home Sales Report: Due Out Today

PIMCO's Bill Gross: Houses 15%-20% Overvalued

House Price Fundamentals: By the Numbers

Fair is Foul and Foul is Fair: An Epic Irony

Housing Inventory Surges in March

Housing Inventory Surges in March

Mainstream Media Misses the Boat on Yesterday's Data

The Decline and Fall of the American Dream

Home-Sales Surge May Not Reflect Subprime Woes

Home-Sales Surge May Not Reflect Subprime Woes

Deductive Reasoning - Tax Time

Is New Century the New Sock Puppet?

Issues Surrounding a Massive Subprime Bailout....

No Bailout for Irresponsible Borrowers

Hillary's Bad History
March 31, 2008; Page A18

Bernanke Says Homeowners
Need More Help on Loans