When Are You Moving?

WARNING: this is a LONG, dry, economics rant post. Beware!

"When are you moving?"

I get asked this question every time I mention that we live in Ogden, but I work in Provo. The people asking the question have a point. A 156 mile round-trip commute isn't the most pleasant part of my day, and on snow days I often can't get either down or back.

The short answer is . . . who knows!

Here follows the long answer:

I do know why we haven't moved yet. Besides the wonderful generosity of family, for which we are very grateful, housing prices are not . . . shall we say . . . stable. MSNBC has an article today about the housing market. Apparently none of the measures being taken by the Federal Reserve have done anything to stem the tide of foreclosures or to increase the number of homeowners or the median price of a house. They have a spiffy graphic showing what housing prices have done since 1999:

Now, this raises two questions in my mind.

1. Why are homes worth more in the middle of every year and less at the beginning and end?
2. How does this track with median income changes over the same period?

I have no comment on the first question, and I only asked the second because I already knew the answer. That's why I'm writing this post.

So, as to question 2 - the amount a family can afford to pay for a house is related to their income. "Well. . . duh!" you say. Bear with me. It's more obvious when you think about housing prices in terms of years of income. In the UK, for example, the size of a mortgage you can qualify for equals 3 times your annual income (ignoring all other factors). Thus if you earn $50,000, then you can get a $150,000 mortgage. The ratio in the US is a bit more generous, but, same idea. With that in mind, let's look at another chart (thank you Wikipedia):

If you'll notice, median income peaked in 1999. Since then it has declined.

Everyone assumes the housing market was healthy in 1999. So, we'll start there. In 1999 median income was about $46,000, and the average home cost about $138,000 (just eyeballing the chart for the end of the year). That works out to . . . let's see . . . carry the 2 . . . oh, yeah, 3 times the median income. Those mortgage people were on to something. I'll call this 3:1 ratio a "healthy ratio."

Now let's look at 2005. Housing prices that year were $230,000 for most of the year, while median income had declined to $45,326. That comes out to over 5 times the median income. Not a healthy ratio.

When I look at the numbers that way, it's perfectly obvious why houses aren't selling. The latest income figures available are for 2007. They show that median income has risen slightly since 2005. It was about $50,000 in 2007. the housing slump was in full swing in 2007, so for that year the ratio declined from 4.6 times median income to 4 times median income.

What really gives me pause is this:

Looking at the income chart, median income starts to slide before every recession, and continues to decline till well after the recovery is underway. As every news outlet in the country recent told us, we are in a recession. Chances are good, therefore, that median income is falling, and has been for a while. (we don't get income figures till after the fact).

If this is one of the sharpest recessions ever, as we are reminded daily, chances are median income will fall steeply, and housing prices will continue to follow until well after the recovery is underway.

With that in mind, I'm going to make some predictions. Since they will be memorialized on the internet, we'll all see what my predictions are worth in a few years. (it's really win-win: if, as is most likely, I'm wrong, you'll all know to stop wasting your time reading my blog, and I'll know to keep my mouth shut on topics of which I am ignorant). These are also the reasons, in my mind, we aren't moving yet:

• I think housing prices will return to something much closer to the "healthy" 3:1 ratio they were at in 1999.
• Prices won't even begin to recover until unemployment starts to fall, and median income starts to increase at the earliest. (probably more like 6 months later).
• All the fancy things lenders did to make up for the increasing gap between income and housing prices are gone for good.
• I think the national median home price will easily fall below $150,000

I think the low prices will stay around a while because 1) All the speculators fueling shows like "Flip this House" lost their shirts (and good riddance), and 2) Lenders will be gun shy for a while, given the number of banks that went under from bad mortgages.

We'll see what happens, but I'm not optimistic for the next few years.


PS - Sorry for the abrupt ending, I tried to think of a good closing with a smooth transition and a hard-hitting conclusion, but I couldn't. The thoughts have stopped, hence so does the post.

...

Apparently I Don't Understand Economics

We all know inflation is bad. Rising prices devalue our money and make it harder to buy things. Apparently the opposite is also bad. Deflation - falling prices - is also bad for the economy, at least according to economists quoted by MSNBC.

“A benign decline in prices amidst a sluggish but recovering economy would be unwelcome but tolerable,” Merrill Lynch economist David Rosenberg wrote in a note to clients this week.

Unwelcome to whom, Mr. Rosenberg? I know plenty of people who like to pay less for goods of all types. I've heard of weirdos who like to pay more, but they're much more rare.

“But the price slashing now under way as the consumer beats a hasty retreat could allow that corrosive deflationary spiral to take hold — something the Fed wants to avoid at all costs.”

The Fed wants to avoid falling prices "at all costs?" boy, with friends like that, who needs enemies?

As I said, I'm not an economist, but perhaps someone who is could answer this question for me:

If inflation is bad and deflation is bad, then what, precisely, do you expect prices to do?

Should a pound of cheese always have the same price? If so, then the USSR had this economics thing all figured out. They just printed the price right on the label. Year after year a jar of tomato sauce was 40 kopeks. Your parents paid 40 kopeks and, by darn, your children would pay 40 kopeks. Is that the answer?

The problem I have with this idea is that (as I have learned both in life, and in school), in a market, there needs to be a mechanism to balance supply and demand. That mechanism is price. If I want 40 dollars for a widget, and you don't think it is worth 40 dollars, guess what? No sale. Deflation has to occur to meet your demand.

At this point any "real economist" is probably either rolling on the floor laughing, pulling out his hair in frustration, or muttering incoherently about Econ 110 having no relationship to "real economics."

Well, maybe not - but the economists in the MSNBC story seem to have nothing but contempt for consumers. They give the distinct impression that they believe the average of consumers' judgments about the worth of goods (otherwise known as the 'market price') is wrong, and that they, the "elite" know what things are worth.

Pardon my skepticism, but are these the same "elite" who have guided our economy to it's current prosperous state? The ones who never saw the housing bubble coming? Who watched house prices rise 10% per year as wages rose 2% and saw nothing to worry about? Who thought sub-prime mortgages were a terrific idea? Or, a little farther back, thought stratospheric stock prices for unprofitable .com businesses were just the "new economy?" Or thought that Pres. Bush's tax cuts would unacceptably reduce govt. revenue? or that Reagan's tax cuts would do nothing the stimulate the economy? Or thought that Sweden was a model of a well-run economy?

Now who should be laughing?

I'll say it again. Economics is not a science. It is a pseudoscience. Any claims to truth or predictive ability that it makes are a fraud.

Economics is a descriptive art - like psychology. Also like psychology, it has no power to predict future behavior because every person in the system is an agent unto herself, and not an automaton. This is why no one saw this crisis coming. Economists admit that this is unprecedented and was almost completely unforeseen - and they are right - they just don't see it as a failure of their 'science.'

Economics is (at best) a social science, a descriptive study of human behavior. It is individual psychology mis-applied to huge groups of people, and it goes through fads just like any other field of study. It also has its quacks like any other field. Keep this in mind next time an economist claims to know something.

The Real Danger of Communism . . .

. . . is that everyone would only be able to buy the items in this old Soviet mail-order catalog from 1983 called: "Goods for Personal Use."

Keep in mind this catalog wasn't just from one company, it was from the only company - the state. There were no other vendors for many of these items. Different factories would produce variants in some cases, but not all.

I ate off those flower dishes myself, and the big brown cabinets near the bottom were in literally every single apartment I ever saw. There were slight variations in color and layout but it was depressingly uniform.

No wonder Feng Shui wasn't practiced in the USSR, any interior designer with an once of artistic ability would be driven to suicide after one look at these items.

Electoral Food for Thought

This article may be a little harsh on Obama, but not much in my opinion. Unlike much political opinion, the author does in fact link to supporting evidence.

None of this would go unreported if McCain had said or done it. Anyway read it and weigh it yourself. I find some of it persuasive, some not. But an Obama presidency would not be a good thing.

"Time to use the C word."

The Motto of the European Union

I just found out that the EU has a motto. Who knew?

We all know the motto of the United States "In God We Trust." It's solid, reassuring and says something concrete about the country. As mottos go, it's a good one (as are most things the Founding Fathers put out).

The EU motto also, unintentionally I presume, says something concrete about that "country." The motto is:

"United in Diversity"

That's it!? . . . what the heck is that supposed to mean? That's right out of the Oxymoron Dept.

I can hear the dialog in the committee meeting that came up with that . . .

France: "I'm glad we can come together to celebrate our differences."
Germany: "Yes indeed, we are united in our diversity . . ."
Italy: "Eureka! that's it! the new motto - 'united in diversity'"
France: "Sacre bleu! you are right. It's perfect, concretely vague . . ."
Germany: "Disturbingly reassuring . . ."
Italy: "Universally unique . . ."
France: "It absorbingly reflects all of the foreign policy, economic and social positions on which we've agreed to disagree."
Italy: "not to mention our shared individual non-binding commitment to Democratic Socialism.
Germany: "Plus it has a nice ring to it - like 'French Victory!'"

(stiffled laughter)

France: "That's not funny . . ."
Britain: "But it is seriously ironic!"

Anyway, it is the perfect motto for the EU.

Arctic National Wildlife Refuge (ANWR)

(I've been itching to write this post for a while now, and since I'm stuck at work waiting for a massive file copy to finish, here you go).
One of the environmental/no oil crowd's biggest success has been halting oil drilling in ANWR. to justify it they show pictures of the refuge such as this:

Beautiful, who'd want to put a stinky old oil rig there?
And this:

awwww, look at the cute little squirrel, the poor thing must be afraid of the noisy oil well, poor little guy!
What they don't tell you is neither of these pictures is from the area where drilling is proposed. They are from the permanent wilderness area far to the south. No one is suggesting drilling there.
This is where the oil is:

Oh, wait, that's the winter picture, of course it's just a bunch of ice, it's Alaska for crying out loud! I wouldn't want to be accused of falsifying it's true beauty by showing it out of season. Here's the summer view:

Much prettier, no? I hear it often hits 40 degrees in July. Parts of it even grow grass as you'll see. But that's beside the point; it's the wildlife that will really suffer!
The best indication of the horrors that await the caribou and the other wildlife of ANWR can be found by looking at the sad plight of their brethren right down the coast in Prudhoe Bay who are already suffering the effects of the unfettered greed and environmental indifference of Big Oil! BEHOLD THE CARNAGE!!!!

Note the oil drilling operation and pipeline behind all the rotting carcases. . . what? . . . wait a second . . . those caribou aren't dead, they're eating and resting with their young!. . . huh? . . . well I'm sure they're scared of all the development! you'd never see them get any closer than that to an oil rig!

. . . like right on the access road . . . D'oh! Well, caribou aren't the brightest . . .  savvy predators, like bears, surely understand the danger posed by the human intruders!


well, OK. . . those are just dumb brown bears. Polar bears would never. . .

. . . ah, but small animals, like birds, would be driven away by the . . .

. . . they may hunt, but they'd never nest near an oil rig . . .

Um . . . Ok. Maybe we should learn from the other Alaska coastal drilling sites and not hyperventilate over ANWR.

Current Oil and Gas Prices are Self-inflicted Wounds

For several reasons, I always enjoy finding articles that summarize everything I've been thinking on a current issue. First, it confirms what I've always thought - "I'm a smart guy." Second, it saves me the trouble of composing long blog posts - I can just cut, paste and link. Much easier.
so I'm glad I found this post on the real political and historical reasons for the current "energy crisis."
Short version: Congressional dismay about high gas prices is like me blindfolding myself and then complaining when I bump into things a lot.
Long Version:

Americans feeling the pinch at the pump should recognize that the wealthiest nation on the planet has nothing but itself to blame for the third in a series of energy crises that began when Richard Nixon was still in office.
Having largely ignored the previous two shots across the bow — the first coming in 1973 when OPEC decided to ban sales of oil to nations that supported Israel in the Yom Kippur War, and the second in 1979 after the Islamic Revolution in Iran — the U.S. seems determined to repeat the mistakes of the past.

What should make Americans on both sides of the aisle even more ashamed is that before the first energy crisis, the United States produced 11.428 million barrels of oil per day. This represented 66 percent of the 17.308 million barrels we consumed that year.
Compare that to 2007, when America produced 8.481 million barrels per day, or only 41 percent of the 20.7 million barrels consumed. Such is the result of the so-called energy policies of seven White Houses and 17 Congresses controlled by both Democrats and Republicans.

Yet, today’s politicians — mostly on the left side of the aisle, of course — have the gall to place all the blame for rising energy prices on increased demand from expanding economies like China and India.
At least those countries are participating in exploration efforts to expand their own supplies. China’s oil production has almost doubled since 1980, while India’s has grown by an astounding 375 percent. At the same time, U.S. production has declined by 22 percent. . .
Closer to home, our neighbors also ramped up oil production. To the south, Mexico has seen its crude output jump 64 percent since 1980, while Canada’s increased 85 percent.
Did I mention that our production declined by 22 percent in the same period?
Putting this in its proper perspective, if America had responded to the second energy crisis by increasing oil production only at the average rate of our North American neighbors, we’d currently be supplying ourselves with 18.86 million barrels of crude per day, or 91 percent of our usage.

It's not as if we don't have the oil available. According to an April 2006 study done for the Library of Congress:

Oil shale is prevalent in the western states of Colorado, Utah, and Wyoming. The resource potential of these shales is estimated to be the equivalent of 1.8 trillion barrels of oil in place. . . . In comparison, Saudi Arabia reportedly holds proved reserves of 267 billion barrels.

That doesn't include ANWR, and it doesn't include offshore drilling.
The real problem, I believe, is that liberals, and environmentalists in particular, want oil to be expensive. Read the words of Sen. Obama when ask his opinion of high oil prices:

I think that I would have preferred a gradual adjustment. The fact that this is such a shock to American pocketbooks is not a good thing. But if we take some steps right now to help people make the adjustment, first of all by putting more money in their pockets, but also by encouraging the market to adapt to these new circumstances more rapidly, particularly U.S. automakers.

I think most people fail to see the need for an adjustment at all. the article points out that Democrats don't have this attitude about other scarce "resources."

Why has one political party for nearly four decades viewed energy crises through the narrow prism of learning to adjust to higher prices and declining resources, as opposed to aggressively finding and producing more of what the country and the economy needs?

Such questions seem particularly relevant given how this same party views hunger in our nation and throughout the world. The answer isn’t for those that have less to make an adjustment and adapt to their impoverished condition. 'Adjust to having less' is certainly not the Left’s prescription for Americans lacking health insurance.

Democrats want government to increase the supply of food and medical care to those deemed financially incapable of providing for themselves.
Why doesn’t the same hold true for energy?