The Liberal Order

Triangle home sales are up, but is that enough?

Things are improving in the Triangle area real estate market. Sales are up 19% in June. This follows increases of 9% in April and 28% in May, and inventory is down from its peak in June, 2010, shortly after I wrote this.

Sales might be up, but housing prices continue to fall. The graph below shows the change in inventory (black line and right axis) and asking prices for homes in the Triangle (left axis). Notice the recent upward trend in inventory (not unusual as people who waited to put their homes on the market due to poor market conditions of the past begin putting them on now), and the downward trend in asking prices. Prices still have a way to fall.

[H]igh unemployment in North Carolina is hampering any sort of real economic recovery, including a sustained recovery in the housing market. As foreclosures are sold off and banks cooperate with homeowners in short sales the pressure will affect the market, sending home values lower. Home prices are forecast to decline 3.8% on average in 2012 in Raleigh. 

This is old news, but there are still questions unanswered.

The U.S. House of Representatives just released (obviously without alacrity) its findings on Countrywide's bribing of its members and staff.

"Documents and testimony obtained by the committee show the VIP loan program was a tool used by Countrywide to build goodwill with lawmakers and other individuals positioned to benefit the company," the report said. "In the years that led up to the 2007 housing market decline, Countrywide VIPs were positioned to affect dozens of pieces of legislation that would have reformed Fannie" and its rival Freddie Mac, the committee said.

Some of the discounts were ordered personally by former Countrywide chief executive AngeloMozilo. Those recipients were known as "Friends of Angelo."

Well, yes, but there are still many other culprits in this mess. It's not just Countrywide that brought down the global financial system. Even still, it's good to see some effort to hold people accountable for their transgressions.

The Securities and Exchange Commission in October 2010 slapped Mozilo with a $22.5 million penalty to settle charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis began. Mozilo also was banned from ever again serving as an officer or director of a publicly traded company.

He also agreed to pay another $45 million to settle other violations for a total settlement of $67.5 million that was to be returned to investors who were harmed.

Not a bad investment. He made billions with his fraud and rent-seeking activity and had to repay only millions. It's punishment less severe than what these guys got. But no one has yet been punished for the bribing of lawmakers, including and especially the lawmakers. 

But here's the puzzling part for me.

The standard discount was .5 waived points. Countrywide also waived junk fees that usually ranged from $350 to $400. 

Fifty basis point discount!?! Waived fees totaling around $350 to $400?!? That's it? Wow, this just demonstrates that our members of Congress and their staff aren't high end call girls, they're just low rent prostitutes. 

And people complain that there's too much money in politics. No, this proves that there's not enough money in politics, there's too much politics in money (i.e., our markets). 

Should there be an inheritance tax?

I've never been a proponent of an inheritance tax, especially one of 100%, but this pushes me towards that.

 

These two did nothing to deserve anything, and their ostentatious spending is nothing short of vulgar. In the end I reject the tax only because a) that money was the rightfully obtained property of someone who has the right to transfer freely to someone else if he or she wishes, and b) the inheritance tax would shift more savings from investment to consumption, adversely affecting long-run economic growth.

Oh, and more importantly, I believe in keeping scarce resources out of the hands of those who will waste it. Believe it or not, I do think the government will waste it more than these two are/would.  

The Solution to Too-Big-To-Fail Is Not Bailing Out Big Banks

I have two opportunities to invest $100.

1. A safe investment that pays me $110 with certainty in one year.
2. A risky investment with a 50% chance of paying me $200 in one year and a 50% chance of leaving me with nothing.

For the first option, $110 with certainty means that after one year: ($110/$100) - 1 = .10, or an expected ten percent return.

For the second option, a 50% chance of $200 and a 50% chance of 0 means that after one year: [(100+0)/100] - 1 = 0, or an expected zero return.

It's the first opportunity that I will take since it a) has a higher expected return (10% v. 0%), and b) is less risky. 

Now, suppose instead that I take my own $100, borrow another $900 with a promise to repay investors $945 one year from now (a 5% rate of interest), and use the $1,000 to undertake one of the two investment opportunities laid out above.

$1,000 (1+.1) = $1,100, I repay investors $945, leaving me with $155. ($155/100) - 1 = .55 or a 55% return. 

By investing in the other alternative, I have a 50% chance of ending up with $2,000 - $945 = $1,055, giving me an expected gain of $527.50, and a 50% chance of ending up with 0 (i.e., my investors and I lose our investment). [($527.50 + 0)/100] - 1 = 4.275, or a 427.5% expected return on my $100 investment.

Now which investment will I pursue?  Governments can try to increase their oversight of banks and the investments they make, but Alan Meltzer makes a good case for increasing capital requirements instead.

Experience shows that regulation is an inadequate substitute for bank capital. Scrutiny failures by the Securities and Exchange Commission left investors in the Madoff and Stanford funds with huge losses. Regulation failed to protect the public. Federal Reserve examiners monitored all the transactions in major banks before the 2008 crisis. These regulators also failed to protect the public and the banks.

Government housing-policy overseers mandated lower down payments and reduced the quality of mortgages, resulting in more than $100 billion in losses at government mortgage lenders. The taxpaying public will pay for the mistakes.

Mr. Vitter had it right; Dodd-Frank has it wrong. Congress should repeal Dodd-Frank and mandate higher capital requirements. Making bankers bear the risks they undertake is the best way to limit those risks.

 

Should you short the stock of Costco and Target?

I was in Barnes and Noble two weeks ago and noticed that though there were quite a few people mulling around in the store, I didn't see anyone purchase anything other than coffee or some other refreshment from the café. In fact, about half the people in the store were in the café using the wi-fi. I ended up purchasing a remainder book for $6. 

These big-box retailers are struggling and the end of big box retailing is near. Internet retailing is reducing the revenue per square foot for bricks-and-mortar retailers. Stores like Barnes and Noble, much like Borders before them, also struggle with space dedicated to near-obsolete media - DVDs and music CDs.

Megan McArdle has more about how survival of big-box retailers will depend on niche products. Still a long shot.

Now, short BKS stock?

 

HOAs and State Legislation

What differentiates a local, state, or national government from a homeowner's association (HOA)? Given the limited scope of the HOA, as well as the incentives of developers to provide an efficient mix of public goods (i.e., landscaping, garbage and lawn debris removal, pools, etc.), as Don Boudreaux and Randall Holcombe point out, HOAs tend to be less controversial. The HOA agreement is an ex-ante contract that you agree to prior to buying your home. 

So HOAs ought to be viewed more favorably than typical forms of government, thought they still are governments. Consequently, there has to be some means of residents petitioning and challenging their HOAs without having to run for office.

North Carolina's state legislature is considering limits on HOAs that intrude on homeowners' rights. 

Another hot-button issue was the ability of HOAs to foreclose on homeowners that don't pay their dues and assessments.

Tammy Neal, a real estate broker and former appraiser who lives in Union County, said she ran across an HOA board that foreclosed on a homeowner who owed $50. She called it "a travesty."

I agree, that sounds heavy-handed, but is it any less egregious than current asset seizure forfeiture laws? 

HOAs need to find more resident-friendly means of addressing delinquent residents and those who refuse to comply with guidelines. Yes, some residents are simply malcontents, who then need prodding by formal public institutions to hold them accountable. But such action should be a last resort. 

From my experience, I've seen too many people who sit on HOA boards who are control freaks that relish in exercising their authority and pushing people around. But it's also the case that HOAs cannot selectively enforce regulations, leaving them little room when it comes to enforcing what appear to be minor infractions.

For example, if the HOA agreement stipulates no commercial vehicles are permitted in a homeowner's driveway for more than ten consecutive days (this provides leeway for a homeowner having commercial work done on their home), then by allowing a resident to park a car in her driveway emblazoned with logos on the side of the college where she works, it makes the HOA susceptible to a lawsuit if it then denies the right of the homeowner who owns a moving business to park his moving truck in his driveway.  

What Does It Mean To Say That Median Household Incomes Are Decreasing

Russ Roberts asks a good question.

I always say, just observe what's around you. That may not always prove accurate, but that depends on where and what you are observing. For example, you can't look at living standards or behaviors in the DC area and conclude that things must be pretty good around the country - DC is not average America. But I teach at a college where the students come predominantly from typical middle class families, many from even lower-middle class families. Most have cell phones, laptops, a car on campus (with the insurance needed to operate that car in NC), a large flat-screen tv in their dorm room (nobody that I knew of had a television in their dorm room when I was in college), microwaves, air conditioning, etc. 

Given that about 70% of high school graduates in the U.S. now go on to college, and that colleges seem to be catering to the median student in ways never seen before, can we safely conclude that living standards in the U.S. are rising, not stagnating?

A lot of the campus residence halls in the U.S. were built in the mid-20th century when it was common for kids to share bedrooms and bathrooms at home. Today, students arrive at college not used to sharing a room or the communal experience of the older dorms, Newman said. Students are also bringing more gadgets, including refrigerators, microwaves, flat-screen TVs and computers.

"Just the stuff that people bring with them, the type of housing has to change ... we are changing the types of amenities we're offering to remain current and relevant to the student of today and of the future," she said.

The challenge is making sure the buildings last the next 100 years since universities can't afford to renovate them year after year, she added.

On the other side of the University of Michigan campus, a privately owned 10-story apartment complex called Zaragon Place has a wait list full of students hoping to live in the building that opened in 2009. The fully furnished apartments -- complete with black leather couches, 42-inch flat-screen TVs, granite kitchen countertops, washing machines and dryers -- cost about $1,189 a month. (North Quad costs about $1,412 a month for a two-room suite with a private bathroom). Students have access to a 24/7 gym, underground parking and a convenience store next to the building.

- - - -

"Kids today want more privacy, they want better amenities, and in a lot of cases, they don't want to have three or four roommates," he added.

He says North Quad is an "exception" in terms of quality, but even then, the dorm isn't on the same level as Zaragon housing.

"We're offering an entirely different product based on the quality, closeness, the adult nature of it and its sophistication," he said. "We believe that's what kids want, and that's how they want to live."

Is it a wonder why students today have such an entitlement attitude about their grades and classes?

 

 

Coase, Regulating Ideas, and the News & Observer

In 1974, Nobel laureate economist Ronald Coase published in The American Economic Review "The Market for Goods and the Market for Ideas." In it, Coase maintains that arguments for regulating goods and services can be more readily applied to regulating ideas, notwithstanding the much stronger opposition to the latter. As he reasons, you can generally tell when you get a bad haircut or a bad can of peaches, but you can rarely ever tell when you're fed a bad idea. More importantly, given the incentives that exist, markets tend to weed out defective goods and services fairly well, while on the other hand those same incentives don't work as effectively when it comes to things like political speech, media reporting and the like. The negative externalities in markets for ideas make them ripe for regulating.

As absurd as Coase's argument may seem to some - and I'm certain newspaper reporters and editors fit this category of opponents - there is some credibility to it. For example, consider what the Raleigh News & Observer has published just in one week without critical review or validating the accuracy of the included statements and data.

First, on Sunday Saturday, June 11th, it reported in its "Notable Numbers" column that the average teacher salary in North Carolina is so low that the state ranks #45 in the United States in teacher pay. Not true. According to the National Education Association, the average teacher salary in North Carolina for the 2008-2009 school year was $48,648, placing it at 25 out of 51 in terms of average teacher salaries in the U.S. (See chart C11 on page 19.)

I submitted a letter to the editor to correct this mistake and to also explain why it is misleading to compare the average teachers' salaries across states without comparing costs of living too. (The average teacher in North Carolina earns 89.6% of what the average teacher in the U.S. earns. This is exactly equal to the ratio of per capita income in NC relative to the U.S. (90%), and five percentage points greater than the ratio of the median household income in NC relative to the median household income in the U.S. (84.2%).)

The next day I received an email from someone at the N&O requesting the source for my data, which I provided. I have yet to see a correction for their statement.

Second, the paper's columnists, reporters and editors have repeatedly argued in favor of making permanent the "temporary" one-percent increase in the state's sales tax rate, referring to it as a "one cent" increase in the tax and therefore dismissing its imposition as insignificant. This obviously influenced at least some readers (and see here), including this person who fails to understand how markets spontaneously coordinate social behavior and how markets have empirically improved the human condition multiples more than has government. Using its own projections, I explained to two different N&O writers that this "one cent" increase in taxes actually cost the average family of four in North Carolina about $420 per year, not one cent.

Third, on June 14^th, the paper published as an op-ed what can only be regarded as a sales pitch for its real estate and homebuilding advertisers. Along with other things, Tim Minton, an executive vice-president of the Home Builders Association of Raleigh-Wake County, relays the erroneous assertion that since here in Raleigh we didn't experience as large an increase in home prices during the housing boom we can expect to NOT see as large a decrease now that the bubble has popped.. (David Bracken, a staff writer for the N&O, has also written as credible news story what can only be deemed a sales pitch for the housing and real estate industries in NC). 

Minton's arguments are wrong on two fronts. The first is that housing prices in Raleigh are actually high relative to median household income and rents in this area. Look at this chart here. (You can sort by clicking on the headers for each column.) Raleigh ranks sixteenth highest of 144 cities in terms of the median home price to the median household income in the area. The price-to-income ratio in Raleigh currently exceeds that of Washington, DC, the only city to have experienced home price appreciation last quarter of the twenty cities tracked by the Case-Shiller index. Look also at the adjusted price-to-rent and the adjusted rent-to-mortgage ratios, in both Raleigh ranks ninth of the 144 cities. Both reveal that, ceteris paribus, it's currently better to rent than to buy in the Raleigh area.

On the second front, as I argued here, Raleigh did not experience as large an increase in housing prices as did other larger metropolitan areas, but that's because the vast open spaces here relative to those other cities give Raleigh a more elastic supply curve for housing. In other words, as demand for housing increased in Washington, New York and Los Angeles, you couldn't build more homes so housing prices skyrocketed. On the other hand, as demand for housing in Raleigh increased, builders responded by building more homes. Worse still, they overbuilt larger, more expensive homes. There is still a glut of homes priced in excess of $400,000 here and we have yet to see a bottom.

The purpose of a newspaper is to inform its readers, objectively using facts and information that have been critically scrutinized, as well as expressing opinions that are clearly noted as such and are based on factual information and reasoned analysis. It's not supposed to act as cheerleader for any specific cause or political party, or to surreptitiously promote the interests of its largest advertisers. I'm all for a turn around in the economy and housing market here - I benefit from it. But if I'm a potential home buyer, I rely on information from others, including the media, on whether I should or should not buy a  home. Given the News & Observer's actions, why shouldn't it be regulated just like the rogue industries the writers and editors themselves vilify for dishonest and self-serving behavior?

I don't believe that the people of the N&O are bad people. In fact, those I have dealt with in the past have been very good and exceptional people to work with. And I certainly don't believe they are ignorant. But I'm always surprised to read what I consider either shoddy journalism or veiled attempts to sway public opinion, not to inform. (I am also surprised at how regularly it editorializes in favor of group interests at the expense of individual rights, notwithstanding publishing stories such as this, which is the epitome of promoting group interests over individual rights.)

The fine people of this paper need to be more objective in their analyses of events and stop publishing one-sided interpretations. A good newspaper allows for reasoned debate. 

Arnold Kling Speaks Some Sense

Arnold Kling reasons:

But ultimately, the financial sector (including government) is not some separate entity. We as investors and taxpayers ultimately have the financial sector on our balance sheets. By creating the illusion that there are more safe assets in the economy than actually exist, we end up fooling ourselves.

This is exactly right. Diversifying risk and allocating it to least cost avoiders is an important purpose for the existence of investment and commercial banks, as well as insurance companies and the like. But the risk hasn't been eliminated. And as Nassim Taleb argued in criticizing the Black-Scholes Options Pricing Model, it is often obfuscated, hidden, and therefore mispriced.

The result is that risk is allocated inefficiently and way too much is taken on. Recent investment tools and products of Wall Street, including collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), special purpose vehicles (SPVs), structured investment vehicles (SIVs) and credit default swaps (CDSs) did not eliminate or even reduce risk in the housing market. Instead, it buried the risk under layers upon layers of derivative assets, leading lenders to take on far more risk than they thought they were when purchasin mortgage assets, especially subprime mortgages.   

"One-half of 1,000 people polled admitted they are not responsible with their finances."

All right, that's not quite what the article claims, but it's close.

Half of the more than 1,000 borrowers surveyed by the National Foundation for Credit Counseling said they would never be able to afford the 20% down payment required under the qualified residential mortgage structure.

Isn't this a signal that for people who are extended loans, too many will subsequently find themselves having trouble repaying due to their irresponsible budgeting practices?

The nonsense comes later in a quote from the National Foundation for Credit Counseling.

"Although renting has many advantages, it may not stimulate the economy as much as an uptick in the housing market world, as renters do not typically spend as much on home improvements, lawn equipment, appliances, or other areas, which would lead to job growth," according to the NFCC.

No, they probably won't, but spending is not exogenous. If I currently rent I may indeed spend my money on fast cars and entertainment rather than on home improvements and lawn equipment. But once I purchase a home and become a homeowner, I may indeed shift my purchases from fast cars and entertainment (i.e., spending in those sectors declines) to home improvements and lawn equipment (i.e., spending in those sectors increases). But there is no net increase in economic activity as my spending on home improvements and lawn equipment is paid for by my decrease in spending on fast cars and entertainment.