Housing Delusion: It’s Not 2004 Anymore

April 9th, 2009

A recent article in the soon to be defunct Boston Globe caught my eye today.  “Low mortgage rates, falling prices, and a tax credit are luring first-time buyers into homes they can afford” reads the headline.  I made it through the first page without laughing as it was pretty reasonable.

“I wanted to snap something up,” said Rehman, a psychiatry resident at Brigham and Women’s Hospital in Boston. “It might get lower, but I still feel good about my decision.”

This guy seems to have reasonable expectations.  He admits prices could go lower but he wants to buy now due to a pending marriage.  Completely reasonable.

Then I clicked over to page 2 and read about this guy:

“The $8,000 credit is definitely huge,” said Jamerson, who sells plumbing supplies. “We are looking to buy cheap and in four to five years make a nice profit.

Seriously dude, 2004 called, they want their irrational exuberance back.  Even those optimistic on real estate prices are predicting an L shaped recovery or the proverbial “dead cat bounce.”  When prices finally do stop falling, they are likely to flatline for 5 or more years.  If this guy is expecting any “profit” let alone “nice profit” in 5 years he is going to be severely disappointed.  For what it’s worth I think it’s extremely telling that the particular development in which he is buying, 5 of the 6 buyers are “first time.”  This means the builder has convinced 5 households with no experience in actual homeownership to buy into his development.  Why was he not able to convince more previous homeowners on the value of this particular piece of real estate?  I’m guessing a combination of taxes and  association fees make this a less than stellar proposition but without the benefits of experience these people don’t know any better.

Surprisingly this kind of article is common.  Stories about people convinced it’s a good time to buy and doing so.  Quotes from realtor’s stating how the combination of low prices, low rates, and incentives make it a great time to buy.  But what’s missing?  Articles about experienced landlords and investors buying.  Where are those stories?  Stories about people with a track record of making wise real estate decisions?  I won’t be convinced we have hit bottom until we start seeing stories about those people.  If it’s a such a great time to buy, where are the investor’s?

Jon Economy

The Danger of Shopping With My Wife

April 8th, 2009

This week one of the local grocery stores is having another Catalina deal, buy $20 of Proctor & Gamble products get a $10 off your next order coupon.  Pretty good deal especially since you only need to spend $20 at “regular” prices and many of the items are on sale.  Normally I can just do the shopping myself but since I have no idea what kind of Olay and Covergirl products my wife is going to want, I took her with me.

First we end up parking and using the door furthest from the health and beauty section, this leads to us coming in and walking past the overpriced flowers section.  “I want a tulip” she says.  “That’s not what we came here for” I respond.  Needless to say a tulip ends up being the first thing in the basket.  I try to walk quickly to the health and beauty section but notice that she’s stopped and looking at some chocolate bunny’s on the display.  Fortunately we have plenty of chocolate at home, so none of them end up in the basket.  We finally make it to the Olay section and she looks straight to one of the most expensive items on the shelf:  a $25.99 moisturizer.  “Is this what you normally get?” I ask.  “No last time I got that $11.99 green bottle over there” she responds.  After the 20% off sale price and the $10 Catalina, it ends up being $10.79.  It’s less than the green bottle so I agree.

We then check out the Covergirl section to see what she likes there.  Here the sale is 30% off plus the Catalina so some great deals are possible.  I tell her to pick out a combination of things she likes that add up to $20.  Eventually she settles on some things she likes.  Then it’s off to the checkout, again I try to walk quickly.  Again I look back and find her looking at some fancy decorated cupcakes strategically placed on a low table (right at eye level for the kids).  These $1.99 each cupcakes intended to catch the eyes of 4 year olds had ensnared my 31 year old wife.  I think the look on my face was enough to get her to move on.

So we end up spending $36 on the cosmetics, some cat food, and a tulip, nearly half the monthly grocery bill and have a $10 catalina to save for next time.  Was it a good deal?  We’ll see if she actually uses all of the cosmetics…

Jon Budget, Deals

The Homeownership Sacred Cow

April 1st, 2009

For a long time, the very mention of renting as a wise financial manuever would get you snickers at best and passionate opposition at worst.  Homeownership is the American dream of course, so any mention to the contrary borders on unpatriotic.  Recently it has become clear that the homeownership issue is not as cut and dry as it once seemed.  You know mentality has changed when a newspaper actually publishes an article criticizing homeownership as I found recently in the Boston globe.  A large part of a newspaper’s revenue comes from real estate listings, so publishing such an article is akin to biting the hand that feeds you.  Nonetheless it’s good to see some validation in print of what I have believed for a while.  From the article:

Owning a home is not right for everyone, they say: In some ways it’s overrated, and it can even have harmful effects for individuals and society. It is now glaringly clear that buying a home is a financial risk, not the surefire investment it is often perceived to be. Widespread homeownership may also have a negative impact on the economy, because, among other reasons, displaced workers can’t easily relocate to new jobs. And some of the alleged rewards of homeownership, such as greater self-esteem, health, and civic engagement, have been called into question by research.

I’ve made the personal decision to rent my home until prices fall sufficiently to make purchasing a logical financial decision.  Even my own mother questions what I am doing.  “Homeownership is the American dream”, she tells me.  “That doesn’t make it right”, I respond.  I can understand where she is coming from.  In metro Pittsburgh, I estimate that it costs $1500 a month to rent $150,000 of house.  The same $1500 a month rents $300,000 of house here in metro Boston.  In the end, when I explain how messed up the math is here, she understands my logic.  Even with recent price reductions, it’s still not a good time to be buying property in metro Boston.

Some analysts propose abolishing or limiting the mortgage interest tax deduction, which provides substantial tax breaks for homeowners. Others favor greater security for renters - such as laws making eviction more difficult - or tax deductions for renters, which a few states, such as Massachusetts, already offer.

The government has worked hard to push homeownership to these currently unreasonable levels.  Between the mortgage interest deduction and the capital gains exemption, the government is giving up billions in revenue.  Most of the revenue the government is giving up is going straight to the wealthy.  Yes both the mortgage interest deduction and capital gains exemption primarily benefit the wealthy, both are regressive taxes.  The wealthy can afford more house and therefore will stand to have larger gains when they sell.  The wealthy are also much more likely to itemize deductions to actually benefit from the mortgage interest deduction, while the mortgage interest on a modest home might not even be enough for a middle income person to exceed the standard deduction.

I really like the part of this article where the author disputes the psychological and societal benefits of homeownership:

A recent study, which aimed to avoid the problems of previous research, suggests that homeownership confers no real benefits. The study examined self-respect, perceived notions of control, time spent with friends and family, volunteer activities, and enjoyment of the neighborhood, among other things. On all of these measures, after controlling for income, health status, and home value, the study found no significant advantage for homeowners. In fact, homeowners were on average 12 pounds heavier, and they spent less time with friends.

The evidence is mixed on whether homeowners are more civically engaged than renters. But to the extent that they are, their influence in some cases has undesirable societal repercussions. Since houses are the major asset for so many families, homeowners naturally want to protect their property values. This often leads to zoning laws that make it difficult to construct commercial or additional residential buildings. Such laws erect barriers to entrepreneurs and reduce overall housing affordability.

A homeowners self interest may actually cause them to support laws that go against free market economics.  Here in Massachusetts, we don’t need to look very far to find examples of this extreme anti-development.  A prime example is Carlisle, MA (within 25 miles of Boston) which has a population density of 317 per sq. mile.  Such a low density would classify Carlisle as an “exurb” but being 25 miles from the center of Boston it is geographically a suburb.

So what would happen if we leveled the playing field between renting and owning?  My guess is that home prices would drop to levels where it makes economic sense to own.   So areas like most of the midwest, where renting is more expensive would see little change, while both coasts would see sales prices drop and rents rise.  It would be more expensive to rent, for good reason.  Renting is a convenience that you are paying your landlord to provide.  If we keep the playing field level, people will gravitate to the decision that makes most sense for them.

Jon Economy

Better To Be Lucky Than Frugal?

March 30th, 2009

My wife and I made a quick trip to Connecticut this past weekend.  I had a “Free Category 1-5 night” Marriott certificate that I received for my $65 annual fee for holding the Marriott Rewards credit card.  Turned out to be a pretty good deal this year, as the Mystic Marriott and Spa was going for $249 a night this particular weekend.  It was kind of a last minute plan as the certificate expired March 29.  We had various ideas for using the free night but the expected rain late Saturday into Sunday had us looking for something that could keep us occupied in the rain on Sunday.  We explored the idea of a quick trip to Vegas, where the weather was bound to be good, but would have needed to return on Monday instead of Sunday to get the good airfares.

So we settled on Connecticut.  Saturday was beautiful here in New England, so we wanted to do something outdoors.  We discovered the Mystic Seaport Outdoor Museum was perfect for this.  I wasn’t sure what to expect before we went in.  I left very pleased.  They have recreated a 19th century whaling village on the museum property with actual buildings that were brought in on barges.  The various buildings are intriguing to see.  They also have traditional indoor museum type exhibits (the eskimo and figurehead exhibits were particularly good).  But the highlight of the museum is actually boarding the ships they have on display.  The friendly guides posted on the ships have some great information to pass on about the ships and are so passionate about it that even the details don’t seem boring.  It was a great way to spend a Saturday afternoon.

After checking into our hotel and having Mexican food at a particularly crappy local Mexican place we headed up to the Mohegan Sun casino.  My wife wanted to get her nails done at the spa for reasons I assume only a woman can understand.  I settled into a nice $5 craps table.  The table was cold for a good 20 minutes, then the dice were passed to an eccentric drunk woman who had a hard time keeping the dice on the table.  She made about 6 points and hit lots of other numbers in between.  I managed to be up about $125 by the time my wife returned from the nails.  She hung out with me and had a free drink, but I could tell she was getting bored so we left.

The next day I saw a sign on the way in advertising “New $5 Blackjack.”  I asked a casino employee where to find it and eventually worked my way over.  My wife wanted to go shopping so I had some time.   By the time my wife returned I was just about even.  Then I got on a huge run and was up another $100.  My wife knows nothing of Blackjack.  I tried to explain some simple strategy so she could keep the winning going while I went to the bathroom.  So I told her, “the other players will help you, I’ll be back.”  She managed to win 2 hands without me.  When the spot next to me opened up, I convinced her to sit down and play from my stack.  I think she was just enjoying the drink service and talking with people in the peanut gallery, so sitting down involved actually paying some attention to the game.  Sure enough we continued to win, running up yet another $100 and tons more drinks.  5:30 rolled around and I said it was definitely time to get going.

Gambling is seldom a frugal endeavor but with $5 tables and free drinks you aren’t going to lose much.  Worst case it’s a great way to spend a rainy Sunday.

Jon Off topic, Travel

$4 Gas Will Return, Probably Sooner Than You Think

March 26th, 2009

Oil prices are back on the upswing again, having hit $54 a barrel today.  I expect to see a rush to push through an increase in the gas tax while prices are still low.  The National Commission on Surface Transportation Infrastructure Financing has recommended a 10 cent increase in the federal fuel tax to help pay for repairs to deteriorating roads.  $1.89 vs. $1.99 is alot easier to stomach than $3.99 vs. $4.09, so I think we’ll see this happen before prices hit those high levels again.  Here in Massachusetts, the governor has been pushing for a 19 cent increase in the state gas tax and again is trying to push it through while prices are low.  Again $3.99 vs. $4.28 is difficult to stomach.

So we’ve got some new taxes conspiring to push up prices at the pump.  What else is happening?  US commodies markets are predicting a huge jump in inflation of the US dollar.  The fed has been pumping alot of money into the system to replace the money supply lost through decreased lending.  This helps to stabilize the economy and is probably a good thing to do.  The problem however, is when lending picks up again, it’s unlikely they’ll be able to pull that money back out very quickly or easily.  More money in the system = more inflation.

Then we’ve got the stimulus, uh spending, package. While named a stimulus, it’s been widely reported that by the time the money from this bill actually gets spent the recession is likely to be over.  So we’ve got the government spending huge amounts of money in an already growing economy.  It doesn’t take a rocket scientist to figure out this will be inflationary.

Next, we’ve got the post recessionary economy.  When we do pull out of this recession, people will naturally start jumping in their cars, flying on airplanes, and powering around on boats just like 2 years ago.  The world didn’t have enough supply then, it’s unlikely to have enough supply a year from now either.

So we’ve got higher taxes, inflation, and supply constraints, every element of the perfect storm to send fuel prices back through the roof.  Even the cheap gas while it lasts…

Jon Economy

I’m Outraged At The Outrage

March 25th, 2009

Outrage is the new word of the moment.  Chances are you, right now, you are probably outraged at somebody.  Perhaps you’re outraged that Denise Richards was voted off “Dancing with the Stars” last night.  Perhaps you are outraged that American Idol was preempted for the Presidential primetime press conference last night.  Perhaps you are also outraged about “bailed out” companies paying their employees bonuses.  If that’s the case, perhaps you need to think through this issue a bit more.

We in the US have what is, mostly anyway, a capitalist economy.  Control of business rests with the private sector.  Businesses are supposed to make decisions that are in the best interests of shareholders or investors.  When a company decides to pay a bonus to its employees based on some sort of performance metric, that’s their decision to make.  It is also in the best interest of employee retention to keep the promises made.

So AIG got a large bailout from the government (whether it should get one in the first place is another topic).  It then proceeded to make good on its promises to employees.  In large part due to media attention, the public became outraged that government bailout money was being used to pay bonuses to “employees who ran the company into the ground.”  While I’m sure at least a few employees contributed to AIG’s poor decisions, I’m sure there were many others that were not involved at all.  These employees hit their performance targets for the bonus and were paid accordingly.  What is wrong with that?  The New York Times has published a resignation letter from an AIG employee who received such a bonus.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

If this guy were an auto worker, plumber, or some other union job and had his company promised bonus stolen from him by politicians, he’d be turned into a hero.  Unfortunately for him he is a highly productive and highly compensated executive.  Because his bonus number is in the 6 to 7 figure range, the average American expresses what is actually jealousy, as outrage.  So while those responsible for the mess at AIG have (wisely) disappeared, those that are left and are actually trying salvage something for the American taxpayer are thrown under the bus.  For the average American, knowing the whole story is not necessary, making a stink about it is.

This unwillingness of Americans to actually seek out the whole story before passing judgement outrages me.  Even if you don’t like it, you still have to play by the rules.  These employees were promised bonuses for hitting performance targets.  If they hit their targets, they get paid.  There really isn’t much to understand.  Be jealous if you want, but outraged?  If you really want to be outraged let’s think of some real abuses of the American taxpayer.  At McDonald’s, the person who takes your money and puts it in the register gets paid ~$6.15 an hour.  At the highway tollbooth, the person who takes your money and puts it in the register gets paid ~$30 an hour.  Why is there such a large discrepancy?  In private business, pensions have largely been replaced with 401k’s.  Fulfilling pension obligations is something that’s seen as far too expensive.  Yet for government employees, pensions still reign supreme.  Shouldn’t there be some concern for the American taxpayer that the pension obligations are too expensive?  Yet we never hear about these outrages.

Next time you’re feeling outraged I encourage you to get the whole story first.  You might be surprised what you learn.

Jon Economy

Why The Obsession With Credit?

March 24th, 2009

One thing that, I think, makes me unique among Americans is that I’ve never paid a dime of interest charges in my life.  I’ve always rented my housing.  I paid cash for the one car I’ve purchased, the previous junker having been given to me by my parents after I graduated college.  I’ve borrowed 0% money from credit cards, to engage in interest rate arbitrage.  But in all I’ve never paid for the privalege of using somebody else’s money.

I realize I’m the oddball when I hear friends talk about their car payments, virtually everyone either: has one or has recently paid it off and is well on their way to financing yet again.  Why would you use credit to purchase a depreciating asset, that will be worth considerably less than you paid for it by the time you pay it off?  I hear things like “I can’t wait to pay this car off so that I can get a new one” or “hopefully we can get a few more years out of our first car so that we can finish paying off the second first.”  This kind of thinking traps you into financially dangerous situations.  The decision to replace a car should be made when the car is no longer practical.  Situations such as, when it’s no longer able to get you to work reliably or when a significant expensive component fails and it’s no longer economical to repair.

I can understand a salesman’s obsession with credit.  It’s much easier to sell a “$30 a month” Bose sound system than a “$2000″ Bose sound system as optional equipment on a car.  Talking monthly payments also helps him to obscure calculations and do some math trickery to maximize your spending.  The $20 extra per month for you could turn into hundreds for him.

Credit certainly does have a place.  For a person fresh out of college with a job but no car and no money yet, credit allows that person to get the car that enables them to get to work.  For them, they get return on their investment.  The interest payment allows them to go to work to make even more money.  Compare this situation with a person who already has a car coming out of college.  It may not look great but there’s a good chance Dad probably did his research and got you a nice reliable car to take to college.  In this situation you can already get to work and make the big bucks.  What investment return does paying those interest charges get you?  Not a damn thing.

It’s unfortunate that the US has become so reliant on credit. Just look what’s happened to the economy in the past 2 years.  The banks reduce their lending and the proverbial “stuff” hits the fan.  It’s not like they even reduced their lending much.  If you’re the type that pays your bills ontime and aren’t already fully leveraged there’s a good chance banks will lend to you.  Just turn on the TV virtually any time and see the advertisements for cars, along with financing offers.  The money is there to be lent, only now it’s only to the right borrowers.  This small reduction in lending is enough to plunge the stock market thousands of points.

Maybe I’m the crazy unusual one again, but I think when the market hits bottom and starts heading up again I hope it’s based on normal lending patterns, the kind where the good borrowers get credit and others pay cash.  If we start the economy again with constrained credit, we’ll find a way to make it work.  The money will still be there to be lent to people making investments:  in careers, in businesses, and other credit strategies that provide returns.  At the same time, credit will be limited for consumerism.  In other words, provide the credit for production, not consumption.  Sorry “$30 a month” Bose sound system…

Jon Finance

House passes bill taxing AIG and other bonuses

March 19th, 2009

Wow.  Who would have thought it would come to this?  The House has passed a bill to recapture the bonuses paid to AIG employees through taxes.  One small step for taxpayers, one giant leap for socialism.  I’m pretty sure this kind of law is unconstitutional but I don’t sit on the Supreme Court so what do I know?

Don’t get me wrong.  I think it sucks that the people that ran these companies into the ground get paid a bonus.  Unfortunately, though, the bonuses written into the employees’ contract.  I might not like that contract but there are lots of contracts I don’t like.  Remember the Detroit “jobs bank?”  The “jobs bank” was where laid off autoworkers could go to get paid for doing nothing.  So as part of restructuring GM to get get it’s government bailout the “jobs bank” was eliminated.  Did we try to collect back pay for those laid off workers who had utilized the “jobs bank?”  Of course not.  I’m sure it would be equally popular and equally easy to pass a tax on “jobs bank” pay.  But it didn’t happen because it’s unconstitutional.

The tax bill sets a dangerous precedent for “taxing groups we don’t like.”   This idea is nothing new.  We’ve been doing it for years with extra taxes on smokers, drinkers, trans-fat eaters, and other “dirty” classes.  But this time however we are targeting individuals with our taxes.  Can you imagine a “people who got away with murder tax” or “baseball players with fat heads tax” targetting OJ Simpson and Barry Bonds?  Both of these people cost taxpayers alot of money in legal fees, should we not try to recapture that with some taxes?  Perhaps that really loud guy who has those TV commercials: “Billy Mays.”  I and others view him through our government bailout funded DTV converter boxes.  So he made tons of money and annoyed millions of viewers at a huge cost to the American taxpayer.  How about a tax on him too?

It’s a slippery slope.  At the bottom is socialism, I hope we don’t go that far…

Jon Economy

Back Into Catalina Grocery Deals

March 18th, 2009

One of our local grocery stores, Shaw’s, has recently started frequently running Catalina promotions again.  Last month it was Conagra products, now this month it’s Kraft products.  I thought I’d mention it because it points out just how much these promotions can save.

Normally Shaw’s is the most expensive grocery store around.  If you go there and buy stuff that is not on sale, you pay top dollar.  These super high prices are what make them work so well for Catalina promotions.  Despite the wording of the deals, they are nearly always based on the pre-sale price of the item.  So the Oscar Meyer Deli Creations that are on sale for $2.50 count as $4.99 (regular price) towards the promo.  So buy 5, plus a filler like Plantar’s Trail Mix for $1.25 and you reach the $25 threshold.  Total spend $13.75, but then the Catalina machine starts printing… drum roll… your $10 catalina.  So for $3.75 net, you have $27 worth of food (not that I would every pay $27 for this stuff).  There are scenarios using coupons to get your net even lower.

Also there is currently a promotion for Heinz products.  Check out Slickdeals.net or hotcouponworld.com to get the full info.  Obviously this is a somewhat advanced form of couponing, since you must do math and buy from a specific list of products.  Get the wrong size or something not on the list and you might not get your $10 back.  But with practice most people can learn it.

Jon Deals

Banks: We Don’t Want Your Stinking Bailout

March 13th, 2009

According to an article in the New York Times, many banks have decided they don’t want a bailout any more.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyondprotecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money.

Surprised?  Not me.  I think alot of banks accepted the bailout “just because everybody else was doing it” and they felt they needed a bailout as well to remain competitive.  Then they found out about all the crap they would have to put up with as a condition of accepting the bailout.  Suddenly it didn’t seem like such a good idea any more…

The banks are still private businesses.  They have to answer to shareholders.  If the right business decision to make is to send bailout money back, that’s what they need to do.  Now if only we could make the bailout uncomfortable enough to get bailed out homeowners to send money back…

Jon Economy