Monday, August 30, 2010

On Building Mosques and other Religious Intolerance

Here is a simple test to determine whether or not objections to building a mosque are based on religious intolerance. Would the objections be exactly the same if a Baptist church, Catholic Cathedral, Jewish Synagogue, Mormon Temple or Quaker Meeting House were planned for the exact same spot?

If everyone agrees that (for whatever reason) no religious establishment is appropriate for a particular location, forbidding the building of a mosque in that spot is not Islamophobia – although it maybe antireligious—but that is a different issue.

Those who oppose building the proposed mosque within two blocks of the former World Trade Center do not pass the test. Nor do those in the towns and cities across the country where they criticize building mosques in areas zoned for religious institutions.

To liken the protests, as recently did to those by the National Parks Conservation Association (“NPCA”) against building a Wal-Mart on parts of the Wilderness Civil War battlefield not incorporated into the National Park is specious. They claim both protests are based on the same principle: “It is simply the wrong building in the wrong place regardless of developers’ legal rights.” The difference is NPCA opposed building any big box store on the civil war battlefield directly opposite the visitor’s center. Wal-Mart happens to be their current target.

Opponents of the mosque, however, do not oppose any building for the site. Their claim is that a mosque, in particular, is inappropriate. Why? Because the World Trade Center terrorists were Muslims and building a mosque would be “insensitive” to the victims of that tragedy. So go further and note that Saudi Arabia doesn’t allow Christian churches, so “fair is fair.”

Malarkey. One of the things that has made the United States great is the First Amendment of the Constitution. We are not Saudi Arabia with a state religion. For those who love the constitution, but forget to actually read the document, here is the First Amendment in its entirety:

Amendment 1
Freedom of religion, speech, and the press; rights of assembly and petition

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

One of the best ways to show terrorists that their 2001 attack on the United States failed miserably is to adhere to our principles. Let the mosque be built so terrorists from around the world can see that, unlike in their countries, we will NOT prohibit the free exercise of religion—even when it is of a small minority of residents. That we value the right for all peoples to peaceably assemble—regardless of their secular or religious message.

We win by remembering who and what we in these Unites States stand for. We lose if we become as intolerant as our enemies.

~ Jim

Monday, August 23, 2010

Another Damper on Housing Prices

In case there weren’t enough reasons for housing prices to stay low for many years, I recently read about one more. On August 2, 2010, I discussed the law of supply and demand concerning housing. One area of supply I did not include is this:

In many areas of the country, the percentage of home sales to absentee buyers has increased dramatically. For example, the LA Times reports that in the Inland Empire area of California the rate has increased from 19% at the end of 2008 to 30%.

In that area, almost one-third of all home sales are to investors who are planning to flip the houses. The good news regarding the influx of professional investors into buying property at auction is that they are bidding prices higher, building a bit of a floor under current prices. The bad news is that these houses will be back on the market in the next year and a half or so. Thus July’s reported 10+ month inventory (which will go higher this month for sure) is understated in the sense that all of these flipping houses (if you’ll pardon the term) are deferred inventory.

As we look out over the next several years, flippers will continue to add inventory as they finish rehabbing foreclosed properties they acquired. More supply means lower prices—all things equal.

~ Jim

Monday, August 16, 2010

Prediction: No Social Security CPI increase for 2011

Unless something unexpected happens, we will have positive inflation for 2010, but I do not expect Social Security benefits to increase for 2011. That seems unfair—until we look at the larger picture.

Social Security benefit increases for a calendar year are based on the ratio of the average CPI-W (CPI for Urban Wage Earners and Clerical Earners published by the Bureau of Labor Statistics) factors for the previous July, August and September as compared to the highest average CPI-W for any previous July, August, September period. If inflation monotonically increases (that is there are no decreases) the comparison is from one year’s third quarter average to the previous year’s third quarter average. That’s what happened with the CPI-W index for all years through and including 2008, resulting in annual Social Security benefit increases.

In 2008 the average was 215.495, a whopping 5.8% higher than 2007’s 203.598—and for 2009 Social Security beneficiaries received this 5.8% increase. [You may recall oil prices were skyrocketing during that period, driving up the CPI.]

Oil prices declined, the world went into recession and prices declined. In 2009 the CPI-W third quarter average was only 211.001, a 2.2% decrease from the previous year. Fortunately for Social Security recipients, benefits may not be decreased because of decreases in CPI-W, and so for 2010 they remained unchanged. While it didn’t feel like it to retirees, from a math geek’s perspective, they were getting a bonus during 2010 because their benefits did not decline—relative to the index they were getting a raise.

July 2010’s CPI-W was 213.898—higher than last year, but still not as high as 2008. Unless inflation increases significantly in August and September (it would need to increase at an annual rate of roughly 9%), the average for 2010 will be less than 2008’s average. Consequently, no increase in benefit levels for 2011.

The outlook for a 2012 increase is reasonable. The CPI-W is only about 1.1% below its all-time high in July 2008 and for the last twelve months the CPI-W increased about 1.6%, although the rate of increase has declined recently.

For those not receiving Social Security benefits, the lack of a cost-of-living adjustment will also mean the contribution and benefit base for 2011 will remain unchanged from 2010 (and 2009) even though average wages have continued to increase. Once the average third quarter CPI-W does exceed 2008’s level, the wage base will increase based on the National Average Wage Index.

~ Jim

Thursday, August 12, 2010

Alternative to Gun Control

For reasons I don’t understand or agree with, the courts appear to be interpreting the second amendment to the U. S. constitution to give individuals (rather than state militias) the right to own guns with limited restrictions. Everyone agrees it is bad for criminals to have guns; however, those who despise all gun control consider it the lesser of two evils. For now they have won.

Here are my suggestions on controlling gun use, recognizing that forbidding people from owning them is not going to work.

1. Require background checks for all gun purchases, including those at gun shows (currently a huge loophole.)

2. Register the guns with their owners. This includes new purchases and all guns already owned. There should be no cost to gun owners for this registration. Anyone possessing an unregistered gun is committing a felony.

3. Each owned gun must have a ballistics test performed. The FBI will maintain a nationwide database as they do with fingerprints. This does not preclude states and local governments from keeping similar data bases if they choose. Because this will take time, require all gun sales (new or used) to include a ballistics test. Older guns can be included over time—starting with those types of weapons police deem most likely to be involved in crimes.

4. The owner has the responsibility for proper storage and use of the gun. If an unauthorized person gets hold of a gun and causes no harm, the owner has committed a misdemeanor. If a crime is committed with their gun (other than carrying a firearm not belonging to the person), the owner is guilty of a felony. If the gun is stolen and it was impossible for the owner to know, then they are off the hook—but the burden of proof is on the owner. I forgot to lock my gun cabinet doesn’t cut it.

5. Run periodic nationwide “turn-in-your-gun” events that allow people to turn in guns to the local police, who, after verifying ownership, will destroy the guns. I suspect anti-gun proponents can raise sufficient funds from their supporters to pay for this program.

With these simple law changes, the gun owner clearly bears the consequences of a gun’s misuse. This changes the battle lines from gun-owning rights to gun-owning obligations, which given where we currently are in this over-armed United States—might be a good change.

~ Jim

Monday, August 9, 2010

The Need for Parallel Universes

The political primary season is upon us with much hue and cry from politicians on the far right that the Federal Government response under Bush and Obama to the financial crises was wrongheaded. Government should not have interfered with “necessary market adjustments.” If firms (investment banks, commercial banks, auto firms) went bankrupt, them’s the breaks. Our biggest problem, they claim, is the ballooning Federal deficit.

Here’s where a parallel universe would be useful. In this alternate universe, we could see the effects of the advocated nonaction during the financial crises. Alan Blinder (Professor of Economics at Princeton) and Mark Zani (Chief Economist at Moody’s) published a paper on July 27, 2010 in which they estimate without the massive government intervention, GDP would be 11.5% lower and 8.5 million MORE jobs would have been lost.

I do not claim that each and every dollar was well spent. I’ve already discussed in a previous post how worthless the $8,000 home purchase credit for new buyers was. However, when I look at my own spending, in retrospect I wasted quite a bit of money on goods or services that didn’t meet my expectations. If I can’t get it perfect on a micro-level of one person, why would I expect the Federal Government not to waste some money here and there? The main thing is they provided liquidity and stability when the global economy needed it.

Without parallel universes to provide the “true” answer to what if questions, those not in power point to the current problems and wail how bad it is—and no one can prove them wrong.

I want to express now my personal thanks for those who took risks during those dark days and saved us from worse. Thank you.

~ Jim

Friday, August 6, 2010

The Mythical Man-Month

Recently, I watched the third episode of The Pillars of the Earth. The book is by Ken Follett and is one of my all-time favorites. His love of cathedrals shines. What caught my eye in the made-for-TV series shown on Starz was a scene in which all of the nearby townspeople come out (in the nick of time) to work one day on the cathedral (for which they are paid and given a free dispensation from the church). The progress is so vast that the project moves from almost dead to sufficiently amazing as to impress King Stephen.

What’s wrong with this picture? It suffers the same problem as outlined by Fred Brooks in his 1975 book The Mythical Man-Month even though Brooks was writing about software design and Tom Builder is designing a cathedral.

When a project is running unacceptably late, a first reaction (okay, probably a second reaction; the first is to lay blame) is to add more people. Brooks postulates that adding more personnel tends to further delay the project because (1) all the new people have to get up to speed, and (2) communication issues increase exponentially. These same issues must have applied to 12th century England, even in the made-up town of Knightsbridge.

Yes, the skills the villagers applied were menial—but still, would one master builder be able to keep all the carts hauling earth, carved stone and the like straight? Might not someone have bumped a support pole here or there? Well, it was in a movie, so I’ll cut them some slack.

Back in the real world, however, we keep applying the same mistake. We see a surge works in Iraq and add more men in Afghanistan—ignoring the communication and infrastructure needed to support the surge. We pour massive resources of people and money at improving our security networks, tell everyone to “play nice” in the sandbox and are amazed when terrorists slip through the cracks.

You can add your examples in the comments below. One point to remember is if the proposed solution is to add staff to catch up, it’s probably going to make it worse.


Wednesday, August 4, 2010

And the Band Played On…

In the last post, I talked about the future of the housing market. Today I want to look at the banking industry. To date the Federal Deposit Insurance Corporation (FDIC) has closed more than 100 banks. When the FDIC closes a bank, it finds another bank in strong(er) financial condition to take over the assets and liabilities. Since the closed bank was undercapitalized, usually the FDIC guarantees any losses over a certain threshold as part of the deal.

This process makes the entire banking system stronger and, in theory, should help promote future loans as more assets are available to strong(er) institutions.

Unfortunately, we’ve only seen the tip of the bank closing iceberg. The FDIC keeps an official list of distressed banks. Banks are included on the list based on a variety of characteristics including underperforming business loans, commercial mortgages and home mortgages. The official FDIC list of “problem” banks has increased from 416 in Q2 2009 to 775 in Q1 2010. (Note closed banks are removed from the list, so the number of banks in trouble has more than doubled when we consider the hundred plus already closed this year.)

There will be more. Banks must reflect the underwater nature of mortgages they hold; but if housing prices drop even a few percent more, it will drive an even larger percentage of mortgages under water. An estimated 14 million home mortgages are already underwater (roughly 30% of mortgages). Four million of those are underwater by over 50%. Surely these must either be restructured or foreclosed.

The total face value of all mortgages underwater exceeds $2 trillion. If the average of these mortgages is 25% underwater, that’s a half a trillion bucks. Every 1% decrease in prices leads to at least $20 billion of additional losses (and that doesn’t consider mortgages currently above water that will slip below the surface at various price declines).

In order for the economy to grow, we need investment. In order to have investment, banks must make loans. In order to make loans, banks must minimally feel a teeny bit confident in order to stop hoarding cash.

It’s clear to me this confidence is not going to come from looking at their mortgage portfolios.


Monday, August 2, 2010

The Housing Bubble Continues

I suspect many areas of the country have not seen the lows in housing prices. As with other goods and services, in the long term housing prices are subject to the laws of supply and demand. Right now there is lots of supply and not much demand, which implies a future decrease in prices.

Available housing is still overabundant, with a 10+ month supply, and it will continue to worsen. In a few cities, like Detroit, there is an oversupply that will not be matched by demand because of migration from the area. In most places, the oversupply can eventually clear, either through price declines or increases in demand.

Let’s look at both sides of the supply/demand curve starting with the demand for housing:

Interest rates are at generational lows, which means mortgage costs are relatively low. That’s already priced into the current market, so unless interest rates decline further, this will not increase demand.

The US population continues to grow and form additional family units. Eventually this will require additional housing. However, many families have substantial elasticity on when a new household is formed. Children return to parental homes after college; roommates rent together for longer periods before taking separate residences. Parents go and live with their children. Over the long term, this will boost demand for housing, but the long term can, and I think will be, several years out.

The ill-conceived $8,000 tax credit for new homebuyers frontloaded demand. Any first-time home buyer who was close to being ready to buy a house had an $8,000 incentive to close the deal before the end of June. People who might have bought houses later in the year, or even in the first few months of next year, accelerated their plans to make an earlier purchase. The credit was ill-conceived because it did not change demand a whit; it only moved it forward and rewarded one lucky class of home buyers at the expense of future taxpayers (not at the expense of current taxpayers since no taxes were raised to pay for the largess).

Job growth is paltry, and wage growth for those employed is also low.

Turning now to the supply for housing:

Foreclosures continue and are starting to include those who negotiated revised terms with their banks.

The percentage of homeownership for the 75+ age cohort has increased since the housing bust. This suggests deferred listings. This group may be unwilling (at least for now) to sell their homes at prices they perceive as “too low.” Eventually, death, morbidity or decreased financial circumstances will force these sales. When that happens, more inventory will dump onto the market.

Not all current inventory is being counted in the supply figures, particularly in the condo market. This takes two forms. Rentals are replacing sales as developers hope to generate sufficient cash flow to hold off creditors until the market turns around, when they can again sell at a profit. I recently read reports indicating entire developments in some cities stand empty and unlisted. Furthermore, houses in the midst of repossession may be abandoned but have not yet reached formal listing.

While Congress recently extended unemployment benefits, that extension did not increase the time jobless benefits are paid. With the dismal job creation, more families are running out of those benefits as their unemployment has extended past the limit for payments. Many of these families will be forced to move.

Lastly, builders continue to construct new units. They are sitting on expensive land with mortgages that must be paid or they too will be foreclosed. Many of these builders are in survival mode and will build smaller houses with less expensive accoutrements in order to meet lower price points (and appear to be decreasing prices.) While they may hope to earn modest returns on these houses, their real economic drive is to reduce debt burdens by selling parcels. I suspect those with deep pockets can find some very attractive deals on raw land currently—which undercuts the market price much the same way distressed sales depress the prices for all completed homes.

As housing prices continue to tumble, Congress may consider a second round of support. I don’t think anything will pass, but the possibility will keep first-time buyers on the sidelines. Why buy now when prices continue to decline and it’s possible the government may throw money at you later?

A grim picture, indeed. This too shall pass. Eventually the continued weakness in the housing market will flush the remaining weak owners and builders from the system. Once that is done, housing prices will stabilize and start to rise. Just don’t hold your breath.