Investors are swarming to buy up foreclosed houses in Phoenix to rent out to tenants (Amid Housing Bust, Phoenix Begins a New Frenzy)
I wonder what will happen to monthly rental rates in Phoenix when all those surplus houses are converted to rentals.
I wonder what will happen to housing prices when rental rates start to fall and all the would-be landlords run for the exit?
I wonder what will happen to all the lenders to the would-be landlords?
2009-05-24
2009-05-20
The NY Times fixes their faux pas in another article
Yesterday I mentioned that the NY Times ran a silly front page story saying that the new credit card legislation would cause the credit card companies to get rid of reward programs and other perks for customers who pay their balance every month. Today, Ron Lieber mocks that notion in a Your Money piece, but doesn't mention that it was his own paper that bought this industry propaganda hook line and sinker the day before.
Your Money: Consumers Are Dealt a New Hand in Credit Cards
Your Money: Consumers Are Dealt a New Hand in Credit Cards
2009-05-19
Why is the NY Times running credit card industry propaganda on the front page?
This front page story in the New York Times today struck me as really weird:
Credit Card Industry Aims to Profit From Sterling Payers
The thrust of the story seems to be that if Congress passes legislation to more tightly regulate credit cards then all the people who pay their balance in full each month are going to get charged higher rates, have to pay annual fees, and lose all perks like cash back plans, etc. To me it seemed like the piece was slanted to generate opposition to the pending legislation by people who would otherwise be neutral about it (the people who pay their balances each month promptly). While I know that seems paranoid, the article completely failed to mention an obvious flaw in the thesis that credit card companies would raise rates and fees on good customers: People who pay their balances every month don't need credit cards at all, and the only reason they have them is because they can get cash back and pay no annual fee. If the credit card industry tries to raise rates on people who don't really need consumer credit they are going to lose those customers in droves. Not to mention that each credit card company is going to have a strong incentive to poach "sterling payers" from its competitors by continuing to offer perks like no annual fees and cash back.
There is a reason that all these perks evolved in the first place: it was the only way to attract and retain these "sterling payers," and new legislation that makes it harder to squeeze the less-than-sterling payers is not going to change that reality. It reminds me of the delusion currently popular with the media that just because they are losing advertising revenue their readers are going to have to pay more for content. There are reasons that free content evolved in the marketplace, and the loss of advertising revenue doesn't change any of the market forces that created free content.
Credit Card Industry Aims to Profit From Sterling Payers
The thrust of the story seems to be that if Congress passes legislation to more tightly regulate credit cards then all the people who pay their balance in full each month are going to get charged higher rates, have to pay annual fees, and lose all perks like cash back plans, etc. To me it seemed like the piece was slanted to generate opposition to the pending legislation by people who would otherwise be neutral about it (the people who pay their balances each month promptly). While I know that seems paranoid, the article completely failed to mention an obvious flaw in the thesis that credit card companies would raise rates and fees on good customers: People who pay their balances every month don't need credit cards at all, and the only reason they have them is because they can get cash back and pay no annual fee. If the credit card industry tries to raise rates on people who don't really need consumer credit they are going to lose those customers in droves. Not to mention that each credit card company is going to have a strong incentive to poach "sterling payers" from its competitors by continuing to offer perks like no annual fees and cash back.
There is a reason that all these perks evolved in the first place: it was the only way to attract and retain these "sterling payers," and new legislation that makes it harder to squeeze the less-than-sterling payers is not going to change that reality. It reminds me of the delusion currently popular with the media that just because they are losing advertising revenue their readers are going to have to pay more for content. There are reasons that free content evolved in the marketplace, and the loss of advertising revenue doesn't change any of the market forces that created free content.
2009-04-24
Restricting credit card rates and fees is not a good idea during a financial crisis
In today's New York Times it was reported that the Obama administration is supporting legislation to limit the fees and rates credit card companies can charge people (Obama Pressures Credit Card Issuers on Rates, NY Times 2009-04-24). This seems to me to be a really dumb move.
What are banks going to do if they can't raise rates and fees on their higher risk credit customers enough to cover their default risk? That's right: The banks are going to get out of the business of offering credit cards to higher risk borrowers. Which is probably for the best for the people who get cut off (borrowing on credit cards to finance consumption is always and everywhere a poor financial strategy). And it would be a great idea if we weren't in a recession. But isn't reducing the availability of consumer credit during a recession attributed to a credit crunch kind of a dumb move?
On a related front, what is going to happen if banks are not allowed to raise rates and fees on existing credit card balances as the risk of default on those existing loan balances increases? That's right: The banks are going to lose even more money and they are going to need an even bigger bailout from the government to survive. In effect, the costs will be shifted from the higher risk borrowers to the taxpayer. Which makes me feel like a chump for being a taxpayer but not a borrower.
What are banks going to do if they can't raise rates and fees on their higher risk credit customers enough to cover their default risk? That's right: The banks are going to get out of the business of offering credit cards to higher risk borrowers. Which is probably for the best for the people who get cut off (borrowing on credit cards to finance consumption is always and everywhere a poor financial strategy). And it would be a great idea if we weren't in a recession. But isn't reducing the availability of consumer credit during a recession attributed to a credit crunch kind of a dumb move?
On a related front, what is going to happen if banks are not allowed to raise rates and fees on existing credit card balances as the risk of default on those existing loan balances increases? That's right: The banks are going to lose even more money and they are going to need an even bigger bailout from the government to survive. In effect, the costs will be shifted from the higher risk borrowers to the taxpayer. Which makes me feel like a chump for being a taxpayer but not a borrower.
2009-04-23
The price of oil and the recession
An article today in the New York times talks about the fact that the price of oil has been holding up remarkably well despite weakening demand and swelling inventories. Oil Prices Resist the World’s Recession Trend (NY Times 2009-04-22). The author credits the resiliance of the price of oil to OPEC supply cuts and people investing in oil futures as a hedge against the USD and inflation.
To me this dynamic risks worsening the global recession. As one economist once said, a recession is a deflation trying to happen, i.e. when demand drops, but prices don't drop enough to keep pace, then a recession happens as people buy less. As long as the price of oil is artificially propped up by hot money and OPEC the world will continue to consume less and less energy. That doesn't sound so bad on it face. Isn't saving energy good? But the energy will be saved because people are consuming fewer goods and services and because whole businesses will go under because high energy prices cause them to lose money.
The way I see this playing out is that either:
To me this dynamic risks worsening the global recession. As one economist once said, a recession is a deflation trying to happen, i.e. when demand drops, but prices don't drop enough to keep pace, then a recession happens as people buy less. As long as the price of oil is artificially propped up by hot money and OPEC the world will continue to consume less and less energy. That doesn't sound so bad on it face. Isn't saving energy good? But the energy will be saved because people are consuming fewer goods and services and because whole businesses will go under because high energy prices cause them to lose money.
The way I see this playing out is that either:
- The price of oil will collapse in the near term, which will provide a stimulus to the economy which will help shorten the recession, or
- The price of oil will continue to be propped up by speculators and OPEC, which will prolong and deepen the recession, which will in turn cause an even deeper collapse in the price of oil later.
2009-04-16
Maybe genes don't determine many diseases after all
This article in today's New York Times:
Genes show limited value in predicting diseases
Supports my longstanding suspicion of claims that certain diseases (depression, autism, schizophrenia, etc) were caused by genetic defects. It always seemed to me that if a disease truly was caused by a genetic variation then the expression of the disease would follow simple Mendelian rules, like is the case with Huntington's Disease or Tay Sachs disease. And my skepticism increased when the years and decades went by without indentifying the specific culprit genes for various diseases that were attributed to genetics.
Genes show limited value in predicting diseases
Supports my longstanding suspicion of claims that certain diseases (depression, autism, schizophrenia, etc) were caused by genetic defects. It always seemed to me that if a disease truly was caused by a genetic variation then the expression of the disease would follow simple Mendelian rules, like is the case with Huntington's Disease or Tay Sachs disease. And my skepticism increased when the years and decades went by without indentifying the specific culprit genes for various diseases that were attributed to genetics.
2009-03-03
How many excess houses are there?
"Sometimes, indeed, the reduction of stocks [of capital goods] may have to be virtually completed before any measurable degree of recovery can be detected. "
- John Maynard Keynes, The General Theory of Employment, Interest, and Money, Chapter 22.
One of John Maynard Keynes theories was that recessions occur when producers cut back on the production of durable goods because there is a real or perceived oversupply of durable goods. See Chapter 22 "Notes on the Trade Cycle" of the General Theory of Employment, Interest, and Money. I see this effect at work in the current downturn in the US housing market. Housing starts have plummeted as the inventory of houses for sale swelled and prices declined (a sure sign of oversupply), and the resulting decline in construction spending has contributed to the recession. Not to mention that declining home values related to the oversupply of housing have helped trigger a financial and credit crises.
What I think is fascinating about Keynes's theory is that he postulates that before a recovery can begin the excess stocks of durable goods must be eliminated one way or the other. That got me wondering: just how many excess houses are there in the US right now and how long will it take for population growth to soak up this oversupply?
To explore this I put together some rough calculations on this Google Documents spreadsheet. All these numbers were pulled from Census bureau data at the links cited below.
The calculations on the spreadsheet seem to indicate that there were more housing units built in the period 2004 to 2008 than could be absorbed by population growth. From 2000 to 2004 the ratio between population growth and housing stock growth was 4.19 (4.19 new people for every new house). In the period 2004 to 2008 that ratio was 1.29. Given the average people per house over the years (see spreadsheet) it looks like more housing got build in 2004-2008 than could be justified by population growth.
But how to measure how much excess supply there is in the housing stock? The absolute number of vacant houses is not very useful because it doesn't take into account changes in population. So the first thing I did was calculate what population increase it would take to return to the year 2000 ratio of people per housing units, and that number turned out to be 4.5 million more people to get us back down to the people per housing unit ratio of the year 2000. Since our average annual population growth rate is 2.7 million it would take about a year and a half for population growth to consume the excess housing stock assuming that all new housing construction stops immediately.
I also calculated the number of excess housing units assuming the year 2000 ratio for people per housing unit and got 1.9 million extra housing units.
Of course these are really rough calculations. I haven't gone back to look at how stable the ratio of people per housing unit is over time, and presumably preferences change over time for how many people live together in one house. However, even if there was a trend towards smaller households on average earlier this decade, it seems unlikely that that trend would continue during the recession. There are a lot of reasons for people to move in together when the economy is shrinking. About the only thing that would make smaller households attractive at this point would be truly spectacularly low prices on housing.
To me these calculations indicate that:
Sources:
Census Bureau: Rental and Homeowner Vacancy Rates for the United States: 1960 and 1965 to 2008
Estimates of the Total Housing Inventory for the United States: Fourth Quarter 2007 and 2008
Housing Vacancies and Homeownership historical tables.
No one home: 1 in 9 housing units vacant - USA Today 2009-02-12
Housing bubble peaked in early 2005.
- John Maynard Keynes, The General Theory of Employment, Interest, and Money, Chapter 22.
One of John Maynard Keynes theories was that recessions occur when producers cut back on the production of durable goods because there is a real or perceived oversupply of durable goods. See Chapter 22 "Notes on the Trade Cycle" of the General Theory of Employment, Interest, and Money. I see this effect at work in the current downturn in the US housing market. Housing starts have plummeted as the inventory of houses for sale swelled and prices declined (a sure sign of oversupply), and the resulting decline in construction spending has contributed to the recession. Not to mention that declining home values related to the oversupply of housing have helped trigger a financial and credit crises.
What I think is fascinating about Keynes's theory is that he postulates that before a recovery can begin the excess stocks of durable goods must be eliminated one way or the other. That got me wondering: just how many excess houses are there in the US right now and how long will it take for population growth to soak up this oversupply?
To explore this I put together some rough calculations on this Google Documents spreadsheet. All these numbers were pulled from Census bureau data at the links cited below.
The calculations on the spreadsheet seem to indicate that there were more housing units built in the period 2004 to 2008 than could be absorbed by population growth. From 2000 to 2004 the ratio between population growth and housing stock growth was 4.19 (4.19 new people for every new house). In the period 2004 to 2008 that ratio was 1.29. Given the average people per house over the years (see spreadsheet) it looks like more housing got build in 2004-2008 than could be justified by population growth.
But how to measure how much excess supply there is in the housing stock? The absolute number of vacant houses is not very useful because it doesn't take into account changes in population. So the first thing I did was calculate what population increase it would take to return to the year 2000 ratio of people per housing units, and that number turned out to be 4.5 million more people to get us back down to the people per housing unit ratio of the year 2000. Since our average annual population growth rate is 2.7 million it would take about a year and a half for population growth to consume the excess housing stock assuming that all new housing construction stops immediately.
I also calculated the number of excess housing units assuming the year 2000 ratio for people per housing unit and got 1.9 million extra housing units.
Of course these are really rough calculations. I haven't gone back to look at how stable the ratio of people per housing unit is over time, and presumably preferences change over time for how many people live together in one house. However, even if there was a trend towards smaller households on average earlier this decade, it seems unlikely that that trend would continue during the recession. There are a lot of reasons for people to move in together when the economy is shrinking. About the only thing that would make smaller households attractive at this point would be truly spectacularly low prices on housing.
To me these calculations indicate that:
- Housing prices will probably continue to fall until either:
- (1) population growth has absorbed the excess housing stock (another 1.5 years at least?) or,
- (2) housing gets so cheap that people prefer even less crowded living arrangements than they preferred in the year 2000. Intuitively, it would seem that that price point would have to be significantly lower than the housing prices in 2000, especially since the future was looking bright in 2000 and its looking dark right now. The Case-Shiller home price index was at 107 in June 2000, and it was at 154 in Dec 2008. 107/154 = 1.47, i.e. maybe another 50%+ drop in prices to absorb the excess supply without waiting for population growth?
- Any new home building this year and next year will prolong the period of falling house prices.
- To instantly stop the housing market decline we need to either bulldoze about 2,000,000 housing units, or get an extra 4,500,000 people to immigrate to the US.
Sources:
Census Bureau: Rental and Homeowner Vacancy Rates for the United States: 1960 and 1965 to 2008
Estimates of the Total Housing Inventory for the United States: Fourth Quarter 2007 and 2008
Housing Vacancies and Homeownership historical tables.
No one home: 1 in 9 housing units vacant - USA Today 2009-02-12
Housing bubble peaked in early 2005.
Subscribe to:
Posts (Atom)