Warning

Everything on this blog is the truth, which is pretty fucking scary. Well, some of it is wild conjecture, but that is pretty scary too.

Tuesday, August 24, 2010

Why You Should Live in a Van Down By the River: You Can Move It.

I read a lot of economics blogs and columns, in part because I am a masochist but I also really like to see what economists are saying or not saying about housing.  At Marginal Revolution today there is a discussion about theories behind the involvement of Fannie and Freddie in the mortgage market.  The post states that the old consensus was that the GSE's were in place to make housing more affordable.  EPIC FAIL ALERT.  The notion that Fannie Mae, Freddie Mac, and the Federal Reserve have ever made housing more affordable is ludicrous and comical.  If you define affordable as low interest rates then you can definitely argue that they succeeded but you are ignoring the most important factor in whether housing is affordable:  your income.

We used to consider housing affordable if you spent roughly 25 percent of your gross monthly income on housing.  During the peak of the housing boom, Fannie Mae was routinely backing loans at 65 percent of  people's gross monthly incomes.  If you expand your definition of affordable to mean, "at the cusp of bankrupting you" then well done, Fannie.  You made housing more dangerously affordable than ever.

What we have in many parts of this country is a mismatch in the supply of housing with what consumers can actually afford, you know, given their crappy job prospects.  The government inflated housing bubble changed what we view as affordable and made a 3 bedroom house in the suburbs with granite countertops seem like a public good.  It's not.  We have a vast amount of homes that are affordable to a small amount of people.  This cannot be fixed by government intervention, it will require rising incomes and economic growth which will increase demand for what is currently, unaffordable housing.

HUD projections show that in my region, housing demand will be for homes in the $125,000 to $200,000 price range.  This is affordable given our median income levels and these are the homes that are actually selling right now.  What we have is a plethora of homes priced from $250,000 to $350,000 that even if you have 20 percent to put down (a modern miracle), once you factor in taxes and insurance you would need income in excess of $72,000 a year to afford.  This is assuming that you don't have any other debt.  If you have a car payment, student loan, and an average credit card balance this ups your income requirement to $100,000 a year to afford the payment.  Better get on the The Ladders website.

On the other end of affordability we have many families that are working class, what is quickly becoming a class of the working poor.  They may have combined incomes of $45,000 per year and they have consumer debt and spend virtually all of their incomes monthly.  For this family, an affordable house carries a mortgage payment of  $1125 including taxes and insurance.  For this family, a home that costs $150,000 is affordable.  Unfortunately, many of these families are living in $250,000 houses because they qualified for twice what they could actually afford with the help of Fannie, Freddie, and the Federal Reserve.

We have a number of housing problems which are exacerbated by our poor economy.  People underwater on their mortgages are trapped unless they say screw it and walk away and why wouldn't they; what incentive do they have to stay?  Do you really think people struggling to stay afloat are going to put the virtue of their word over a rational economic decision?  Didn't think so.

A bigger problem exists for unemployed homeowners.  Because economies tend to have local and regional agglomeration characteristics in particular industries, you end up with a lot of unemployed people in one area with similar skill sets.  If these unemployed people were mobile, as in able to sell their house and not take a complete financial schlacking, they could move to where their skills might be employable.  Unfortunately, we have a labor force that is very immobile right now which makes unemployment even worse.  Being a renter right now has tremendous advantages, particularly if you can move to take advantage of opportunity.

Perhaps, the Banks should become landlords and turn short sales and foreclosures into rentals.  This would slow down the decline in housing values because the properties wouldn't go to market and then drag down appraisals for the next two years for other homes in the area.  Bankers would make great Slumlords, they wouldn't even require training.

Housing Will Save Us!!! Oh Wait, Nevermind.

The Geniuses of the Federal Reserve (wouldn't that make a totally un-sexy calendar) have declared that a double dip recession is becoming more likely following a weak housing report and high unemployment. Can you remember the last time that economic news didn't include the phrases "weak housing" and "high unemployment"?  Why is it then that every news release about the economy seems to be written with an underlying tone of surprise like economists and media types are really saying, "I can't believe that housing is still weak and people are still unemployed, the economy seems so robust."

The coverage of Charles Evans, Chicago Federal Reserve Bank President, can be found here.  Here is a quote from the article:

 "Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover." 

I have to call Bullshit on this statement.  Housing as measured by fixed residential investment has contributed on average 4.1 percent to GDP since 1929.  It is actually a very small part of our economy when compared to consumer spending, government spending, and private investment.  It is not an engine of economic growth, it is a symptom of economic growth.  Economists should know better.  When consumers feel good about their job security and have rising wages, they invest in housing.  Therefore, housing sector growth lags economic growth not the other way around.  When did we quit recognizing this and start treating housing as a bigger component of our economy than it actually is?


If you don't want to take my word for it because I blog under the name Turdy and swear like a sailor, take a look at this graph I created tracking the private sectors housing investment over time as a percentage of GDP.   

Data from Bureau of Economic Analysis, Graph and Data Analysis by Turdy, Design based on Calculated Risk Blog
What should jump out at you from this graph is that housing rebounds after the trough of the recession historically.  The fact that intelligent economists at the Federal Reserve and serving as Obama's Economic Advisors are arguing that housing can and should lead us out of the recession are bullshitting you.  It is distracting you from what is really wrong with our economy; businesses have so little faith in our economy and face so much uncertainty about government policy that they are paralyzed.  As long as this is the case, there will not be economic growth.

It must make you wonder how a sector that directly contributes such a small share of GDP could facilitate the destruction of the larger economy.  The answer is that the housing bubble fueled indirect contributions to GDP through lax lending standards and consumers use of their homes as ATMs.    Housing didn't gain that much in share of GDP during the bubble, it reached a peak of 6.1 percent in 2005 which was a 50 year high but still only 2 percent over its long term average.  During this same period however, consumer spending on goods and services grew because people felt wealthier which led to increases in goods manufacturing and spilled over to other sectors of the economy.  When the bust occurred, the reversal of the positive spillovers was catastrophic for manufacturing, retail, and other major sectors of the economy.

Economic recovery will rely on the consumer in this recession as it has in EVERY RECESSION IN OUR HISTORY.  Before people buy houses, they need to be able to pay for necessities like transportation, food, and child care.  When they feel secure in their jobs and have wage growth, they will start investing in more long term investments like housing but we are nowhere near that point.  It is a colossal waste of time for everyone to worry about propping up the housing market and suggesting that it will grow our economy.  We have already paid the price for the fallacy of this argument, why must we continue on the same path?

Tuesday, August 17, 2010

Just when you thought it couldn't get worse....

This article in the WSJ is today's reason that I am fast tracking my plans to become a pirate.  Here is the opening sentence:

"The U.S. government will likely continue to play a role in guaranteeing mortgages, but policy makers must figure out how to design a system that doesn't lead to a rerun of the collapse of mortgage-finance giants Fannie Mae and Freddie Mac, Treasury Secretary Timothy Geithner told attendees at a housing summit convened on Tuesday."

Arggh.  My immediate irritation is with the word "design".  The government couldn't design an exit strategy from a wet paper sack yet they can design a system to prevent financial ruin?  No, they cant and the fallacy that you can design a system to control a spontaneous order like our market economy is mortifying and dangerous.  I was even more disturbed to find out that two economists I greatly respect  seem to be throwing support to Geithner on their blog.

The argument pervasive at the moment is that without government backing there will be no private capital in the mortgage markets and this will lead to a further decline in housing prices, more underwater homeowners, and more stress to the economy.  Currently, the government is involved in backing 90 percent of mortgages whether implicitly or explicitly.  As far as I can tell the idea is to wean the government out of its involvement in the business of housing by temporarily increasing its role, an idea that is so profoundly crazy I cannot believe it is being taken seriously by smart people.

I agree with the ultimate goal that the government (read taxpayers) will not be intimately involved in every loan made for housing.  The problem lies in the fact that once the government is involved, it changes the expectations of the private players and becomes the new rule of the game.  The incentives will not be there for the private sector to take a role because the expectation will be that the government will continue to prop up the market.  Private capital will flow into areas other than mortgages and the taxpayer will end up with the flaming crap bag on their steps.  Temporary government intervention typically turns into permanent government intervention because it distorts market signals and diverts investment to alternative sectors.


I don't know about you but if I hear the phrase, "Mortgage Rates are at historic lows," one more time I am going to exercise my second amendment rights and blow up my television.  Mortgage rates have been too low for too long, another part of the problem.  The Treasury officials are arguing that without a government guarantee on mortgages, mortgage rates will soar.  Fantastic!  Let them soar, they have been distorting the real cost of lending and altering borrowers decision making calculus for too long.  Interest rates are prices and as such, they should reflect the risk associated with lending and the cost of doing business.  Let interest rates rise and more private investors will enter the mortgage markets.  Keep interest rates below the actual market rate and the government will be the only entity dumb enough to jump in.

I am so tired of government stimulus that I think I need a Valium to cope with my over-stimulation.  

Tuesday, August 10, 2010

Welcome to the Scam

It has taken me a few days to process the op-ed written by Treasury Secretary, Timothy Geithner.  The title of his piece, "Welcome to the Recovery", is so ironic it took me two days to quit laughing.  If you haven't read this epic work of bullshit, you can find it here. 

This is economic recovery?  Surely, you jest. If you aren't disappointed by this "recovery" than you have incredibly low standards and should immediately stop reading this blog.  You would be just as happy reading Brittany Spears blogging about the housing crisis. 

The disappointment that this is what smart people call economic recovery is akin to finding out that heaven is just a really huge Department of Transportation office and that you will spend eternity waiting in line to renew your heaven license, only to find out you didn't fill out the paperwork correctly and must take a new number. When did we decide to accept such low standards for economic recovery?

I no longer want to be an economist because it is mortifying that myriad intelligent economists are spewing the propaganda and bullshit to convince the American public that things are getting better.  The worst part is that these economists know better and if they don't, they should.  Every piece of economic data that is released is discarded if it is negative and explained away.  If there is the slightest bit of implied positiveness in a number, it is heralded as a sure sign of recovery.  The problem with this is that most of the data is suspect, and the analysis of the data is even worse. 

I recommend that you immediately take everything Bernanke and Geithner say and infer the opposite for at least the next 18 months or so.  If they say the auto industry is booming, I want you to hear, "The auto industry isn't declining at the frightening speed it was thanks to the infusion of your future into this dinosaur industry."  If they tell you the private sector is investing, you should hear, "The private sector is investing in things that don't really create jobs and the increase looks great because it is a positive number, but investment plummeted so much that it had nowhere to go but up."  When Geithner says businesses have repaired their balance sheets, you should hear, "Businesses have made use of many loosey goosey accounting standards and in addition, by laying off a huge part of their labor force they can direct the money they were paying in wages to paying off debt that has been called due by struggling banks."  This is just a brief sampling of how to take bullshit and turn it into truth, I am working on a patent for a portable economic bullshit translator that resembles a Kindle.  Stay tuned for that.

The hard core truth is that the financial crisis is both a symptom of a false economy created with government incentives and the cause of our new economy.  Without the government infused housing bubble, perhaps we might have recognized back in 2003 that the strength of our economy was an illusion.  Instead, we rode the false economic growth like a reckless drunk on a mechanical bull. 

A gentleman asked me the other day if the current economy was Keynesian.  I was baffled but wrote his comment off to someone trying to impress me with their vast economic knowledge earned by listening to Rush Limbaugh.  Maybe I wrote him off to soon, perhaps, he was implying that the cause of the crisis was Keynesian economics and that is highly likely.  Regardless, modern economics cannot describe what our economy is and therefore it cannot purport to know how to fix it.  Keynesian policies will only make the economy worse because the underlying assumptions are not valid.  We have undergone structural changes in our economy that have altered the framework of neo-classical economics, so much so that if I were teaching economics right now I would have my students tear up their textbooks.  The government intervention in the economy and the perverse policies of the Federal Reserve have irrevocably altered our economy and now our economy has new DNA.  The basic tenets of economics are the only economic principles that are applicable now and my mantra, "Incentives Matter", is the key to understanding the crisis and eventually recovering.

I have blogged before that I think there are only two possibilities about economics right now:
  1. Our models were always wrong and we just got lucky because the spontaneous order of the economy was strong enough to counteract our stupidity.  In this theory, the economy used to have a very strong immunity to the falsehoods of economists.
  2. Our models were once applicable, but we have so screwed up the natural economic order that we have to start over or at least go back to Adam Smith. 
Economic recovery is a long way off and we are paying for the false growth that led to the housing and financial crisis, and it is even more painful than if the government had let us recover from the 2001 recession without "pumping up the jam" by propagating and encouraging the American Dream.  While all this has gone on, the "brightest economic minds" of our time are systematically lowering our standards for what economic recovery is and what we should expect economic growth to look like.  Maybe it is necessary but it is depressing all the same. 

I would bet that if Geithner and Bernanke went to happy hour and were drunk enough to be very honest about the economy they would say, "We are royally fucked."