Helpful notes on Real Estate

Those of you who know me also know that I remain extremely bearish on real estate. There are a number of reasons for this pessimism. Briefly, the primary reasons are:

• By most price measurement standards, we are not currently back to the pre-bubble price level in most cities, and we are still not there in Portland, Oregon, where I live. 
• If we are not back to pre-crisis levels, but the economic situation is also dramatically worse off, and there is significantly more inventory of housing on the market relative to the population, then we should expect price declines ceteris paribus to below pre-crisis levels. 
• The economic situation now is far worse than pre-crisis levels, meaning we should expect a further drop still. 

Some counter this by arguing that interest rates now are lower than in the past. Of course, the important point when you're buying a home is not what the interest rate is, it's the real interest rate. Right now, we are in a period of substantial uncertainty with respect to interest rates and inflation. Many believe now that we are in for a massive inflationary spiral, perhaps even hyperinflation, due to the actions undertaken by the Federal Reserve. However, economic history and much of economic theory indicates that we are in greater danger of low inflation, or perhaps even deflation now. Given where inflation is presently, it's quite possible that real interest rates are, and will remain higher than they have been over the past decade. It remains to be seen, therefore, as to whether today's rates are a good idea for people making a purchase of their first home (it's likely still a good idea to refinance if you have an existing mortgage).

So, having laid out my view, I wanted to share some interesting and helpful web resources on the real estate market.

The NY Times Buy vs. Rent Calculator

If you want to decide whether it's a good idea to purchase a home or not, this is a great tool. You can evaluate whether it is cheaper to actually rent a home at the rates prevailing, or to purchase a home, given your financial situation, and relative home values in your area. Give it a shot! The advanced settings are particularly interesting.

Google Maps

There is more than meets the eye here now. Google has used public records to incorporate listings of homes for sale on their maps, and homes in foreclosure, or that have been foreclosed upon. If you want to be a buyer today, opportunistic buying can be done using this tool. Knowing Google, there is a good chance that the features only get better over time.

To use the maps, go to a location, and then click on "more" on the map, to the right. You'll see a list come up, and you select "real estate". Then, in the new menu, select "foreclosure", and you're on your way. Happy shopping!

The Case-Shiller Index

This is one of the better indexes of national home prices. Importantly, it tracks the variation by city market, so many of you can see how far your own city moved, and whether it has moved back, and how far.

I hope those few of you who read this find this helpful. Feel free to share with friends, and suggest other sites that might be helpful.

One of the reasons I love Anthony Wiener

Sorry for taking some time between posts. I have several in process right now, but they are rather lengthy. More will be up soon, likely after today or tomorrow.

In the meantime, please enjoy this great rant by Anthony Wiener, excoriating the Republican Party in Congress for failing to provide health care for 9-11 heroes. Let me say this: please remember this when that party wraps itself in the flag and calls people of my political beliefs "socialists".

Also, I am in the process of creating a website, which hopefully will provide basic financial advice and services for people seeking simple, reliable solutions. I don't know if it'll make any money, or break even, but I am hopeful it could at the very least provide a tiny voice shouting against the tide of the active money management and financial advisory firms, preaching idiocy to you in order to get a chance to churn your accounts.

Celebration of nerdiness

This is a bit more personal a post than most will be, but I was tickled to see that Amazon has decided to recommend Immanuel Kant's Critique of Pure Reason to me as a book I would like to read. With that, I believe I may have maxed out Amazon's algorithm for nerdy, prestige driven intellectuals. Equally entertaining is the fact that I actually took a course at Oxford entirely focused on that one book for an entire term, so had it not been for that, I might have wanted a copy myself.

More coming soon. I think I'll denounce the tax-cut compromise yet again soon, and also float a note on the behavioral research related to optimal bonus sizes. Spoiler alert: research shows that incentives work to enhance performance in a non-linear fashion, and can at times be destructive as well.

An update to my post on economic stimulus

I mentioned in a prior post that the poor are far more likely to spend their tax cuts, and, in fact, to spend MORE than their tax cuts.

Well, the CBO, Megan McArdle, and the Economist all agree with me, and the Economist was kind enough to blog the data from some recent studies. You can find the information here. It's rather short.

The plight of my generation.

Take a look at the relationship between living with your parents and home ownership

It is a really interesting commentary on what has happened to my generation when it comes to housing.

If you follow the blue line in the chart, you can see that home ownership rate ramped up dramatically in the middle part of the most recent decade, before beginning a precipitous dropoff thereafter. At the same time, you can also see that there is an inverse relationship with the percentage of 25-34 year olds living with their parents. I'm not sure how that statistic is counted, but it seems awfully high to me, rather shockingly, depressingly high.

I've felt for some time that for my generation, about the only option left for those who want the American Dream is to become hopelessly over-leveraged very early on in life. First, you graduate from high school, buy a car on credit (because it's so hard to commute or work in so many places without a car). Then you move on to borrowing nearly a quarter of a million dollars for a private college education. Then you borrow some sort of enormous sum, which in 2007 would have been about 160% of the normalized value of a home, and try to start work.

Unfortunately, this would then be followed by a dramatic recession, and the decline of 35% or more in value of both your education, and your home, leaving you with perhaps a half a million dollars or more in debt, an aging car, and a house you can't leave in an underwater mortgage, restricting your ability to chase jobs. If you're fortunate, you still have a job.

If, however, you chose to avoid these pitfalls (as I largely have), you may well have become locked out of higher earning potential careers in the future, and home ownership, and perhaps even a home of your own as you seek to maintain some semblance of fiscal responsibility during an irrational decade.

How to stimulate the economy: Why jobless benefits are better than tax cuts for the rich

So, there's been a lot of debate recently about the deal Obama took, which extends the tax cuts from the first Bush administration. There are a lot of details associated with Obama's proposed deal, but the big tradeoff is as follows:

Obama agrees to extend the tax cuts to the top income bracket: families that earn in excess of $250,000 annually. In exchange, he gets a 13 month extension to expiring unemployment benefits.

There are a lot of "pop" arguments about this, and the mainstream economics blogging community has covered this relatively well, I think. My intention here is to sort out some of the arguments, and explain how lots of the standard arguments don't hold a lot of water.

The basic argument grows from the argument about how much economic stimulus "bang" we get for the many, many bucks we are spending in debt in order to finance this tax cut, and the relative value of other alternatives.

If you listen to the standard dialogue that comes from the Republican right, they tell you that:

1. Deficits are really, really bad, and gosh darn it, we need to not be so damned irresponsible, and balance the budget. 
2. Tax cuts for the wealthy are good, because gosh darn it, they use their money to CREATE JOBS. 

So, the first claim is rather nakedly disingenuous. The second claim is where the meat of the issue lies. 

Generally speaking, when you cut taxes, or when you spend money, your aim is not to increase savings, your goal is to increase aggregate demand. Increased demand means that you are generating additional economic activity. In order to generate additional demand, you want the recipients of the government's largesse (remember not taxing you, OR spending money on something you sell is largesse from a government in deficit) to spend the money you give them. Once they have spent the money, then you hope the people they bought goods and services from to spend the money on something as well. It's this echoing effect of increased economic activity that makes the idea of stimulus better than a pure transfer. 

Let's focus on this for a second. If $1 is transferred from the government to an individual, and they save it, there is no increase in economic activity, just a redistribution of wealth. If, however, that individual spends the money, then there is going to be some additional economic activity. If they spend it and it gets spent again, then there is yet more economic activity. This process generates what is called a "multiplier". 

The dirty little secret of the tax cut for the nation's wealthiest is that the multipliers for giving aid to those without jobs, or otherwise those who are very poor are the highest available, while the multipliers from reducing taxes on the wealthy are the lowest available. Why? 

There are a number of reasons why this is the case, but the biggest is the marginal propensity to consume for the poor, and the rich. The poor often spend 100% or MORE (using credit) of their incomes. Giving them more money means that money gets spent, and those who receive it often spend it again, rather than saving the money. In contrast, if you give the money to a rich person in a tax cut (meaning, in the process, you may give away enough money in a tax cut to ONE rich person to be able to give unemployment benefits to several, if not DOZENS of poor folks without jobs), they are far, far more likely to save the money. 

Well, doesn't saving money help produce economic activity, you ask? Well, yes. But a cast also heals SOME illnesses. What if I have the flu? The question is not whether it can help, but whether it is the right treatment for where we are NOW. 

Increased savings helps a great deal, in a number of complex effects. However, right now, our economy is not in danger because we lack savings. What's more, cheap access to capital is being taken care of ably by Bernanke and the Fed, as he keeps interest rates low. So, access to capital is not the problem. Stimulating economic activity through consumption is the problem, as are long-term structural deficits. For that you need to put money in the hands of those who will USE it.

And, while the government is deciding on who that is, we might as well ask ourselves what kind of nation it is we want to live in, and make some value judgments about how we think it best, and most moral and right to distribute the incidence of taxation. 

All that brings me back to my fundamental points to take away: 

1. The multiplier effect from jobless benefits, and other assistance to the poor such as food stamps and job training programs is as good as you get in increasing demand. 
2. Increased savings by the rich do NOT create jobs as well as creating demand for the existing businesses. 
3. If access to capital is needed, the Federal Reserve is already doing that more cheaply and effectively than the tax code can. 
4. The cost of providing benefits through a tax break to one person in the top 2% by income on average is similar to the cost of providing the same stimulus to the economy through improving the lives of several dozen poor people. It's the logical thing to do, and the ethical thing to do. 

A comment on confusion about EU debt

Recently, many, many journalists and commentators have been commenting ad naseum about the deep debt that the so-called PIGS (Portugal, Ireland, Greece, Spain) are in, and the trouble they are having servicing their debt.

The conversation frequently then turns to how various EU member states - most notably Germany - will be forced to bail out their more spendthrift fellow member states. The implied, and sometimes stated premise for this logic is that it is necessary in order to defend monetary union. I'd like, therefore, to explain how this is baseless, and shows a fundamental misunderstanding of European Monetary Union.

The central issue here is that people are missing the point that while these bonds are denominated in euro, they are not obligations of the European Union. It is still sovereign debt, and it is still backstopped by the governments themselves.

What difference does this make? It's akin to the fifty states issuing their own bonds. Sure, it would be bad if California defaulted, or caused other ill to befall their creditors, and it would have deleterious effects on the credit markets for the other states. But, critically, it would NOT constitute a default by the United States, and it would not inherently harm the Dollar as a currency.

The argument about the impact on the Euro area is far more complex, but also less worrisome. The broad point is that when nations cede control of monetary policy through the adoption of a single currency across many economies that are not perfectly integrated (and that do not have very high de facto labor mobility), the constituent economies lose access to monetary policy as a level with which to address their own economic situation.

That means that when a nation such as Greece is not as competitive, they lose the ability to protect their own industry through raising trade barriers, and they lose the ability to devalue their currency to become more competitive. The result is that wages and employment are hurt, and the economy is forced to adjust. Labor mobility would help, but unlike in the US, language and culture are big barriers in Europe.

As a result of these pressures, states engage in deficit spending, which raises the cost of borrowing. This is what got Greece and the other PIGS in trouble, along with the fact that sovereign debt is still subject to the dynamics of contagion, which can worsen the situation rapidly, and take something from being an overly rosey scenario (judged in terms of borrowing costs) to a dramatic overshooting of the market reaction to financial turmoil.

Does this mean it's necessary for Germany and other, stronger states to bail out the PIGS? Not at all. Is it advisable? Perhaps. But the important thing to remember is that it is NOT necessary to defend some perceived creditworthiness of the Eurozone. And don't think for a minute that the PIGS think they would be better off by repudiating their debts and issuing their own currencies again. That is far from being on the table.

Reintroduction to blogging

Hello internet. I'm writing this blog again because I find myself wanting to explain a number of issues in various realms in greater depth than a tweet, a short email, or a facebook post might offer me. Also, I know some of those who know me, professionally or personally, would be interested in seeing what I have to say on some of those issues about which I am expert, or at least about which I have some knowledge and informed, or entertaining opinions. So, here's a shot at putting some content out there for you to consume, while also relieving my mind of frustrating thoughts with nowhere to go. Let's hope this becomes something at least mildly rewarding!