Saturday, December 25, 2010

This crisis that looks like that crisis

I was spending my morning reading when I came across the following passage. See if you can guess what countries it is referring to and then scroll down to the bottom (after the jump) to see the answer.
The [debtors] argued that the collapse was proof enough ... that for them to pay the amount owed was impossible. The [creditors], by contrast,  saw the collapse as the evidence of capital flight ... How could it claim to be bankrupt when so many rich [debtors] seemed to be wandering around Europe? ...

Y took the approach that the simple and direct approach would not work. The total figure owed, $xyz billion, was too politically charged a number, particularly in [creditor A]. Tampering with it would inevitably lead to confrontation To challenge [creditor A] at this stage of the negotiations would bog them down in the sort of wrangling that has produced no results ... Instead, Y proposed that the committee focus on the very limited but achievable goal of reducing the amount [debtor] would have to pay in the immediate future to a more manageable level.

The committee would jettison the whole concept of "capacity to pay," he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering mass protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest? No one could agree on the answers to such cosmic questions. ...

In it's place, Y proposed an alternative criterion: the [debtor] public should be required to shoulder the same tax burden as [creditor] taxpayers. [Creditors] had to tap their tax revenues to pay interest on their own debts. [Debtors] had [devalued] away its internal public debt--the [debtor], therefore, had a natural surplus from which they could afford to pay their debt.

Friday, December 24, 2010

5 Unlikely and unexpected events that you should consider in 2011

I saw a few lists making the rounds of low-probability events that are generally unexpected as predictions of potential 2011 surprises. Here is my list of potential 2011 surprises:
  1. Increasing reserve requirements in China, in conjunction with excess lending in the last year and lower balances amongst household depositors as a result of negative real rates and increasing inflation expectations result in a sharp rise in interest rates as demand for credit increases and cheap deposits are scarce. Credit becomes difficult to obtain, causing the expansion to slow significantly.
  2. Credit crisis in Brazil. Attempts at controlling inflation by Dima Rousseff's new government lead to tightening and in the process expose massive overallocation of credit by the banking sector. Increasing rates make certain parties unable to refinance without sacrificing profitability or at all and a trigger wave of defaults as a result, particularly in consumer credit. Uncertainty spreads to other LatAm countries leading to significant losses in dollar and local currency-denominated debt.
  3. Q4 2010 Retail sales disappoint as increasing volumes are more than offset by margin compression as a result of online competition leading to very low net-income. Poor retail earnings releases kill sentiment and start a snowball that leads to a 20% sell-off in the S&P. Aggregate S&P earnings still increase, but PE compression stays and the S&P ends 2011 at 1150. 
  4. Lackluster global growth lead to Aussie property market weakness. EU banks dump Aussie MBS at steep losses to limit exposure, leading to continued weakness in the European banking sector and a new wave of Gov guarantees, further stressing sovereigns.
  5. An EU member state defaults after receiving aid from the EFSF. Resulting haircut severly impairs EFSF capital base. Member states, under obligation to make EFSF bondholders whole, suffer rating downgrades as a result of the liability (France, Italy, Spain, Netherlands, Belgium) excluding Germany. The EFSF becomes uneconomical and is abandoned as the German public protests about the risk risking becoming a guarantor to an increasing number of EU member states.
Please understand this is all wild, wild speculation of technically possible yet very unlikely events. In particular #4 and #5. These things might happen, but they could take multiple years to play out.

Tuesday, December 21, 2010

Someone at the BoJ doesn't quite grasp supply and demand

From Bloomberg:

Bank of Japan Pledges to Steadily Buy More Assets"...The BOJ’s purchases of real-estate investment trusts and exchange traded funds have bolstered stock prices, a sign the stimulus has supported sentiment even as global growth slows."
Uhm. I guess it's nice they are at least buying some hard-assets instead of government paper as far as the Yen is concerned, but someone ought to tell the peeps at the BoJ that if you have a stable, aging (and soon to be declining) population while you forbid foreigners from buying real-estate, chances are you are not going to have much luck supporting real-estate prices. Especially not when interest rates are already at record lows. It's that supply and demand thing you can learn from Mankiw's book.

My suggestion? Start letting immigrants in. Seriously.

Sunday, December 19, 2010

Just for fun: 2011 Predictions

Well, Bespoke got a cute little round-table thing going on and they forgot to consult me. It's OK, I'm used to it.

We'll review these again next year, along with a review of other people's too and see if the "wisdom of crowds" is for real. I suspect most of us will do no better than a dart-board.
  • Fed funds: Flat. Benny Bernanny wouldn't dare and he'll err in the inflation side, just like the  King of Knifecrime Island did. I truly believe he cares more about achieving full-employment than price stability and he his hell-bent on weakening the dollar, supporting asset prices and holding short-term real rates negative at all costs.
  • Dollar: Mixed, but generally flat. General downtrend with high spikes up if Portugal is forced to go to the EFSF or if haircuts for Euro debt happen, although I doubt that will happen. I haven't had a chance to update the maturity schedule for the PIIGS because, being unemployed, I can't afford decent health insurance, much less Bloomberg, but I'll try to sneak in somewhere when I get back home--currently on vacation
  • Long bond: Up. Right now I think it's oversold, but I could see it oscillating in this space, although I think the downtrend in interest rates is going to keep going (thank Europe!). The 2-30 curve is already at historical wides and I really don't see it getting much wider, especially because I think recovery hopes are a dash too high. In August I bet a trader at my old job that by next August we'd see the 2-30 spread around 200bp. In retrospect, that was too aggressive.
  • Munis: Definitely up. Conviction buy. In fact, if you follow me on twitter, you would have seen me ranting all last week about buying Munis and selling Tsys if you wanted to hedge the curve. Default fears are way overdone and I think that they are definitely undervalued on a relative basis. My preferred play here is lightly levered CEFs selling at a discount.
  • S&P: Up. I got my money on a range bound market with an upwards trend. Slower earnings growth. The story here is going to be multiples. I wouldn't be surprised to see PEG compression. So I think companies will be in better shape, but I think valuation won't keep up. Overall I like corp bonds, convertibles and HY (although I think upside here is limited). I think "Wall of Maturity" fears are way over-done. Best places to play are are CEFs with 20-40% of leverage and selling at decent discounts (> 7%). Good opportunities to trade in and out.
  • Light Vehicle Sales: 13.5M total, but steady and steep uptrend in SAAR. (Previously)
  • Euro crisis: Mostly unch. I expect upward creep on spreads. I think that the catalyst for Portugal to go to the EFSF is going to be really high rates on a refinance, not high rates on current-year deficit financing. 2012 is when I see that happening, the fund-raising necessary in 2011 is limited enough that Portugal could probably stomach the pain, so if they go to the EFSF it will be because of political pressure from peers to stop contagion fears and volatility, not market pressure. I think Italy is going to see the biggest widening (in % terms), followed by Spain. If Portugal front-loads and can pull-off a successful auction in Q1, I doubt anything drastic will happen.
  • UK: There is so much sad face to be had there. I expect continued weakness in the Sterling vs Euro combined with high inflation and a limited recovery. The VAT rise is fucking asinine. The only thing Brits are getting for Christmas is lowered standards of living. Banking exposure to Ireland is big and they still have their own housing issue to deal with. I see little probability of a recovery in UK housing and in fact expect significant further weakening. I wouldn't be surprised by additional write-downs, buuuut there is an upside. Banks that have deposits (liabilities) in Sterling and hold assets with Euro exposure will benefit from said weakness as losses in Euro denominated assets are partially offset by movement in the Sterling. I suspect this is deliberate.
  • Spain: Increase in spreads, banking problems no EFSF assistance necessary, but expect the FORB to get plenty of use.
  • Latin America: Continued boom. Inflation leading to central bank tightening will be a theme, at least in Brazil. Argentina up (PEOPLE ARE RETARDED!!!!). Increasing interest rates risk attracting more hot money and further aggravating the situation. Brazil's bond-tax was a great idea, in my opinion, I hope to see it elsewhere. I think the Automotive recovery will be a nice tailwind for Mexico. (I'll update with production graphs when I'm back home)
  • International Economics: I expect capital controls to be a continuing theme, particularly in the form of taxes similar to Brazil's. It makes perfect sense to me, curbing funding local assets with foreign liabilities and vice-versa will increase currency stability by creating "speed-humps" for capital and limiting the volatility caused by hot money flows.
  • China: Pettis already did it, so I'm not going to bother. My only prediction is continued inflation. Just look at the money supply growth. You can also look at all those Chinese IPOs happening recently. If that's not hot money, I don't know what is. Expect price inflation to lead to wage inflation which will lead to some exporters and manufacturing moving inland, South and possibly abroad. This is a good thing. Expansion outside of the currently-urbanized centers could maintain investment expenditure high, which would be good for nat. resource producers. The whole issue of Yuan appreciation might go away as a consequence of price inflation.
  • Housing: Mixed. Suburban McMansions down, multi-family up. Expect people to avoid big suburban houses in gated communities with expensive fees. Foreclosures will keep putting downward pressure on prices and there will be a lack of demand as people look for smaller, cheaper housing. Community Association fees got to outrageous levels and the upkeep on big houses is likely to be a deterrent to people in debt, or getting out of debt. Apartment rents up. I think a solid investment would be non-luxury condos to rent out. In South Florida, you could can definitely find properties that have positive carry. (rent > taxes + mortgage + fees).
We'll see how I fare next year!

Friday, December 17, 2010

Shut-up, TNR: Lady Liberty is a perky-titted, skinny chick with hairless labia

Outraged over their privacy being violated, The New Republic publishes a cover of an x-rayed Lady Liberty to show how our precious freedoms are being taken away. Normally, I'd be OK with their sensationalist outrage, buuuuut I was put on this earth to rain on your collective parades.

Not to get all Steinem/Levy on you, but I'm just kind of wondering, was it really necessary to use a skinny perky-titted model for this shoot? Also, I guess you can't blame TNR editors for not knowing much about physics, but I'd like to bring up the issue of hair. Normally, you can't see hair in x-ray images, but this image clearly shows Lady Liberty's nice 'do. Curiously, though, that's the only place where the Lady has hair. So, I'm left wondering whether seeing Lady Liberty go bald was so heinous that it had to be stopped, or whether outlined labia were acceptable for a magazine cover but pubic hair wasn't. Seriously guys, fuck you.

Thursday, December 16, 2010

In response to the Athens riots

Unrestrained idealism, explosive temperament and no much to lose will get you that way. I don’t know if its better but its definitely sexier than polite complaints uttered quietly about the state of things. - Srta. Batsouli

Tuesday, December 7, 2010

China Money Supply: October 2010

To see the latest data please see the label Chinese Money Supply
I was going to stop publishing these, but after looking at the blogger statistics, I noticed they were the most popular recurring item in terms of pageviews, so I decided to update them again. As always, the data is released in an unpredictable schedule--often late--so I can't predict when the next update will be.

You might notice that I changed the scale of the nominal graph to a log scale. It made sense. The only reason I hadn't done it before was because the formatting was poor, but I finally gave in and decided function was more important than form in this case.

Light-Vehicle Sales: Population-Adjusted November 2010 Sales

Monthly sales per thousand people at the SAAR rate. This is done by people and not number of drivers because statistics on licensed drivers are only released every two years. A fair estimation, for the present year, is about 68% of the total population (~88% of 16+ people are drivers and ~78% of the population is aged 16+). This figure has held fairly steady since 1990, before then drivers as a percentage of the population were as low as 50%. It is my opinion that the downtrend in the number of sales per thousand people ist he result of lengthening replacement cycles and a slowdown in the growth-rate of new drivers.

For more on driver demographics and trends in sales please see the Auto Sales Special Report posted in  late October.

Saturday, December 4, 2010

Don't dump your moral problems on the legal system!

I came across this blog post about Four Loko today on Modeling Behavior, where Adam succinctly summed it up:
This is because while the regulation is ostensibly about caffeinated beer, as Robin Hanson argues, it’s actually about regulating a “particular vaguely-imagined classes of people”. Politicians want to regulate Four Loko drinkers, not caffeinated beer.
So yeah, kids are drinking Four Loko and getting pretty drunk and caffeinated. When I was 22 we used to do these things called Jagger bombs where we gulped down a shot of Jaggermesiter and a half red bull in like 2 seconds. Other times we simply drank a 20oz Rockstar and then took a couple of shots of cheap vodka before going out. Really, it's no different. 

People like getting fucked up, they really do. The problem of substance use is a purely moral one, and it's mind-numbing that this country still insists on trying to use the legislative system to tackle moral issues. I mean, people are free to try to legislate things they find unsightly away. People are also free to make the retirement age 40 and provide free housing for everyone. Neither is going to work.

This is one of the reasons I would support legalization of all drugs. I don't want kids hooked on heroin any more than the next person, but I think using legal prohibition to control that is largely an exercise in futility. Some drug being legal will not automatically mean that people are going to run into the pharmacies in droves to buy it. Alcohol is legal and you don't see people--other than college students--stumbling around drunk all day and night. Your coworkers probably don't show-up to the office after downing half a pint of vodka, either. And seriously, I doubt the productivity lost to new cases of intoxication will even compare to the productivity lost to gossip websites and online shopping.

Yes,  drugs can be addictive and all that, but that's what education and medical treatment is for. To be honest, I don't really think that legislators are really so concerned about the people's safety, I think they are really just afraid that someone, somewhere, is getting fucked-up and enjoying it. Especially if that someone is young, poor or brown.

Sunday, November 14, 2010

Treasuries as volatile as stocks!

The NYT has a story about how long-term treasurys are sensitive to changes in yield. Socking, I know.
“There could be near-equity-like volatility” coming for these bonds, warned Joseph H. Davis, chief economist and head of the investment strategy group at the Vanguard Group.
The Vanguard Long-Term Treasury fund, for example, has lost around 8 percent of its value in just the last two and a half months
In the first six months of 2009, the average long-term government bond fund lost 23 percent of its value, only to climb around 14 percent in the subsequent four months, slump 8 percent in the next six months, and soar 26 percent between April and August of this year.
I applaud Mr. Lim for his mention of duration in the article, it's nice to see a journalist not treating his/her readers like idiots, but I wish he would have gone the extra mile and mentioned convexity. By bringing down long-term yields, the Fed was the one that increased volatility in bond prices by increasing duration. Just like the decline in long-term yields has created great gains for bond holders, it is putting them at great risk. To see why, look at the graph below.

Image borrowed from

As you can see, the line turns nearly vertical as yields approach zero. This is the same effect that you see in the graphs displayed in the housing affordability posts. The slope of that line is the sensitivity of interest rates, in fact, the slope of the tangent is the duration that Mr Lim mentions. What I wish he had mentioned, however, was that that volatility is natural at rates this low. Changes in yield have not really been violent, but these instruments are very sensitive to yield levels. in the future, it will not be ticks up in yield that are at fault for making bond investors lose money, it will be the Fed for bringing down far rates to such low levels, and investors for not doing their homework.

Of course, investors need not lose money even if yields move up. Mr. Lim accurately explained how coupon payments may make-up for loss in bond price, but he forgot one more thing, the yield curve. With a positively-sloped yield curve, the value of a bond naturally increases as time passes because the rate on near-term securities is lower than those on longer-term securities. In other words, if the 30-yr rate is 6% and the 20-yr rate is 5%, then an investor could absorb a 1% rise in the 20-yr rate over 10 years without having to absorb a loss on the price of his/her bonds. This may do little for investors in the 30-yr bond, but when you consider the gap between the 3 and 7 is 126bp, you see how that positive slope can provide a little cushion to bond holders. In the mean time, though, investors looking for low volatility are cordially invited to invest in one of the safest assets out there, cash and cash equivalents.

Thursday, November 11, 2010

Light-Vehicle Sales: Population-Adjusted Sales and Auto Finance Rates

In order to bring some additional clarity to the light-vehicle sales numbers posted by the BEA every month, I decided to adjust the numbers to present the number of units sold for every thousand people. Additionally, new auto finance rates are presented below, with data coming from the FRB's G19 report. I believe this presentation does a better job of presenting how depressed auto sales became during the latest recession. I've previously said that I expect a strong medium-term bounce-back in auto sales as demand builds up.

SAAR of sales per 1000 people

Auto finance rates
I consider tailwinds for sales to include:
  • Reduced sales over the last two years - I expect people to eventually replace vehicles they kept for longer because of economic conditions. Sales are still very low, even assuming a twelve year replacement period.
  • Historically low finance rates - Lower rates mean more purchasing capacity for the same monthly payment or a lower payment for the same principal. I add that a friend that works in a Toyota dealership has commented to me more than once that demand is not an issue for them as much as access to financing is. If that is true, a pickup in willingness to finance would fuel an increasei n sales
Headwinds include:
  • High rate of unemployment - No Job, no loan
  • Increasing quality means vehicles last longer - 10yr 100,000 mile warranties ring a bell?
An additional scenario that could put downward pressure on sales is if reduced access to credit and a reduced willingness to consume translate to a lower standard of living where the number of automobiles per capita significantly decreases. I think that scenario is overly pessimistic and I would sooner expect a pick-up in sales of cheaper models as consumers trade down from luxury to economy vehicles before forgoing automobile ownership altogether.

Friday, October 29, 2010

Vehicle Sales 1976-2010: A look at the future

This post is part of the special series Vehicle Sales 1976-2010.

To tie this all together, I think that we can expect a strong medium-term recovery in domestic automotive demand. I define demand as the demand for replacement vehicles plus the new demand from additional drivers. Using the Census projections we can expect about 268,722,000 individuals aged 16 and over in 2020. Using the previously observed 88% rate of licensed drivers, this would mean 236,475,360 drivers, or an increase of 24,404,194 drivers over the next 10 years. Keeping the number of vehicles per driver constant at ~1.2 this would mean an additional 29,285,033 vehicles in the national fleet. Additional to that would be the demand for new vehicles from retired vehicles. Like I mentioned before, It's hard to precisely estimate the lifespan of a vehicle, but using a hypothetical ten year lifespan and approximately 240 million vehicles (excluding buses and motorcycles) in 2009, that would translate to roughly a full turn around in the fleet, giving us a total domestic demand for automobiles of ~270 million cars and trucks over the next decade. Considering yearly sales averaged ~17.3M vehicles for the six years prior to the recession, this would be quite a strong recovery.

Thursday, October 28, 2010

Vehicle Sales 1976-2010: Sales and Demand

This post is part of the special series Vehicle Sales 1976-2010.

The previous post in the series looked at the market size for vehicles and the size of the country's vehicle fleet. This post will concentrate on how growth in the market combined with other factors affect sales. The number of sales on any given year is driven by two factors, the growth in the total fleet and the number of units purchased as replacements for retired or obsolete units.

As you can see, new-additions to the fleet, while significant, are more volatile as a percentage of sales than replacements for retired units. You can see in the graph that after large dips, retired units seem to bounce back quickly. This suggests that the growth of the fleet is the most sensitive to economic conditions and that a large component of sales is purported replacements for retired units. This makes sense because while touch economic conditions can make one keep a vehicle a little longer, there is limits to how long the life of a vehicle can be extended before a replacement becomes a viable alternative.

Wednesday, October 27, 2010

China Money Supply: September 2010

To see the latest data please see the label Chinese Money Supply
So here's a collection of updated charts with the latest money supply numbers from the People's Bank of China and the National Bureau of Statistics of China. Velocity of Money, YoY growth after the jump.

Please note that, purportedly because of demand for physical currency, there is a significant distortion around the Chinese New Year.
Nominal money supply numbers as reported by the People's Bank of China

Vehicle Sales 1976-2010: Market Size and Demographics

This post is part of the special series Vehicle Sales 1976-2010.

The main factor affecting domestic vehicle sales is the market size. The market for automobiles consists of the personal market and the corporate and public-sector markets. I decided that the best way to measure the market size was to look at the number of licensed drivers and the number of potential drivers. As previously mentioned in the introduction to the series, potential drivers are people age 16 and older. The number of licensed drivers was taken from numbers published by the FHWA. In order for the domestic vehicle fleet to increase we must have an increase in the number of drivers, an increase in automobile ownership, or a combination of the two.

Number of residents over age 16 and % of residents age 15 or under
The chart clearly shows a relatively smooth increase in the number of residents age sixteen or over, which are candidates to be drivers in blue. In red is the percentage of residents age 15 and under. As can be seen, this number has been on a decline since 1962. From this data we can reasonably deduce that we can expect no major demographic reason for an abnormal increase in the potential drivers in the near future. In fact, the number of potential drivers as a percent of the population may be close to reaching it's upper limit.

Drivers as a % of population and vehicles per driver
In this chart we can see that for the last 40 years the number of drivers as percentage of the potential drivers (residents age 16+) has essentially plateaued. This means that the growth in drivers (potential purchasers of motor vehicles) should now generally follow the growth in population. Not every person sixteen or older will be a driver and it looks like the stable number of licensed drivers is 87-88% of the 16+ population. We've also seen the number of registered vehicles rise from .85 vehicles per licensed individual to 1.2 vehicles per licensed individual. Driver-less vehicles may be a possibility in the future but, in the present, a vehicle requires a driver. This means that at any point in time no more than one vehicle per licensed driver should be in use. Taking this into consideration, it seems reasonable to expect a natural ceiling in the number of vehicles per licensed driver. Once that range is reached, the growth in the total number of registered vehicles should be similar to the growth in the number of drivers.

Vehicle Sales 1976-2010: Introduction

This post is part of the special series Vehicle Sales 1976-2010.

Every month Calculated Risk posts the graph of monthly light-vehicle sales. The sales are usually presented as the seasonally adjusted annual rate (SAAR) reported by the BEA. The reason for the adjustment is a strong seasonality in sales which make it difficult to see underlying trends in the short-term. These numbers are suitable for comparison from month to month or even year-over-year, but I found them unsuitable for looking at longer-term trends. To remedy this, I decided to find some different ways of looking at the data to try to get a better look at long term trends in light vehicle sales and hopefully gain some insight as to plausible future outcomes.

To begin, let's consider some of the factors that affect light-vehicle sales:
  • The number of drivers and potential drivers
  • The level of vehicle-ownership
  • The lifespan of a a vehicle
The first factor is not dependent on the current economic cycle, although it is affected by larger demographic trends which may or may not be the result of past economic cycles. Because sixteen is the age at which most teenagers can drive in this country, potential drivers will be defined as residents aged sixteen or older for the purposes of this post. To find the estimated number of residents aged 16 and older, I used the estimates published by the Census Bureau. The number of drivers is the number of licensed drivers reported by the FHWA.

Vehicle-ownership is harder to define. The Federal Highway Administration publishes a series of statistics every two years that includes the number of registered vehicles and the number of licensed drivers. The series is slightly out of date right now, but I believe it should be updated in 2011. The series is limited in various ways; for example, numbers are rounded to the millions and vehicles registered are not broken down into separate categories by use (a motorcycle, a garbage truck, a school bus and my mom's Matrix are all counted as a motor vehicle). Additionally, a vehicle does not necessarily belong to a licensed owner, or even an individual, and not every licensed individual drives. Despite this, I believe that the numbers will be useful in identifying long-term trends, even if they lack precision.

It is hard to determine the current lifespan of an automobile. We can find an approximation by looking at the mean age of automobiles, which gives us an idea of the lifespan of past models, but this isn't very reliable. New models may have longer or shorter life than past models, and things like wage levels affect the potential lifespan of vehicles--if labor is expensive, fixing and maintaining older automobiles becomes less economically attractive. Additionally, economic conditions affect how often people look for new cars.

I will hopefully have time in the future to extract more precise figures from archived reports, but the task is time-consuming and I am skeptical about it's added value (e.g. buses and motorcycles only accounted for 0.41% of the total fleet in 2008). Many the series were split-up recently and many of the numbers are only available from PDF reports from which the data must be re-entered into a spreadsheet to be usable.

Sunday, October 10, 2010

Shut-up, NYT: Mankiw Will Work Less if Taxed More (see also: Laffer curve)

The bright and extremely personable professor of economics at Harvard University, Greg Mankiw, writes in the NYT about how higher taxes mean he'll end up working less.
HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?
I'd like to personally thank Greg for this eloquent explanation of the Laffer curve. I'm sure it's included in once of his excellent textbooks, although this article was certainly more memorable. My issue is with his last thought, though:
Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply.
Yes, maybe. But Greg is making the assumption that if he doesn't provide his services, someone else wouldn't step-in to fill in the gaps. I'd see this argument being valid when we are close to full employment levels, but the unemployment rate amongst individuals, even if lower than the less educated, is still elevated.
Image source: Calculated Risk
I'm sure that there is plenty of unemployed or underemployed economists who would be happy to take that work Greg doesn't really want, many of which are probably adequately qualified, even if they lack his reputation.  To Greg's possible substitutes that fall under a lesser marginal tax-rate, this same work would yield more savings, meaning they'd be more willing to take on that extra work even if their supply curves are identical. Those who are less financially comfortable and are more willing to sell their labor may be willing to provide the same services for the lesser compensation they might be offered as a result of lacking Greg's name-recognition. So my final comment to Greg is that it may be worth considering that maybe this is not so much about "how much the government should redistribute income" but about how much government should redistribute the opportunity to work. And right now, Greg, there is plenty of us that would be perfectly willing to provide our services for both income, and the opportunity to create a name for ourselves so that one day we too can turn down jobs because, after taxes, they don't pay that much.

As a final nitpick, that 90% estimate is kind-of a worst-case scenario. If Greg's concern is really how much taxes are going to reduce what he finally leaves his children and grandchildren, he should look into estate-planning and all of the opportunities there is to distribute accumulated wealth to heirs over time to reduce the tax-impact, whether it is tax-exempt gift allowances, 529 Plans, or other of the products that are available for these purposes. If you are interested in any of those services, Greg, please feel free to leave a comment and I will make sure to put you in touch with some financial professionals that are both highly-qualified and very much willing to work.

Wednesday, October 6, 2010

China Money Supply: August 2010

To see the latest data please see the label Chinese Money Supply
So here's a collection of updated charts with the latest money supply numbers from the People's Bank of China and the National Bureau of Statistics of China. Velocity of Money, YoY growth and some new GDP ones after the jump.

Please note that, purportedly because of demand for physical currency, there is a significant distortion around the Chinese New Year.
Nominal money supply numbers as reported by the People's Bank of China.
Indexed growth of the money supply compared to growth in GDP (2005=100)

Tuesday, September 28, 2010

Housing Affordability 1971-2009: Chart Roundup (UPDATED)

This post is part of the series Housing Affordability 1971-2009

I have updated some of the charts from the previous posts and put them in one post for easier access. For explanations on the data and commentary, please follow the links to the source posts. Click "read more" to see all updates.

From Interest Rates and Borrowing Capacity:

Sunday, September 26, 2010

A Look at Real Household Income 1967-2009

Ruh-roh! Once adjusted for inflation (CPI-U, All Items),  it looks like real gains in household income have been concentrated amongst few over the last four decades. This seems timely considering the debate over the extension of the Bush tax-cuts. Click on the image for a larger version.

Please remember that real incomes trend toward stability, because if everyone's income increased, then prices would also increase, both because labor is an input of goods and services and because rising incomes would shift the demand curve to the right.

Sunday, September 12, 2010

Wikipedia, Khan Academy and The Price of Knowledge in the Digital Age

Being twenty-six years old and having been heavily-involved in technology since my early teen, I've had a chance to witness a lot of big things from the beginning. I remember when Audioscrobbler (the thing that drives was still a grad-school project.  I remember when OpenID was just a post on Brad Fitz' LiveJournal. I remember when Wikipedia got it's 1000th article. My first contribution as a registered user dates to September 2002. Back then Wikipedia was a sort of wild-west and I didn't even know what "peer-review" meant. I've been programming for the better part of the last 12 years and and remember making contributions to the software that runs Wikipedia before it even had a name. I remember the site being down for hours and hours--sometimes even days--when the servers were overloaded or a hard drive failed.

Anyway, one of my favorite memories is showing my father Wikipedia and him laughing. He attempted to explain the concepts of authorship and authority, why he was skeptical about the quality of the site, and how the concept of it all was a radically different from the status-quo--naturally, I had no interest. As time went on, he increasingly became a believer too. We were seeing this massive revolution happen before our eyes, in the shadows of the .com crash, when nobody gave a flying fuck about tech anymore. I didn't realize what it all meant then, but I remember my father talking to his friends about it and heated debate happening; they were all genuinely interested and excited about what it meant. In the true, original spirit of the internet, Wikipedia was democratizing access to knowledge, leveled the playing field like few things before, and it was all capital "F" Free. The price to access it was $0.00 and the value of it was increasing exponentially as the network of information nodes became increasingly interconnected and of increasingly better quality. The most relevant comparison in my mind is probably the Gutenberg press.

Recently, I had a feeling of deja-vu as I signed-on to the Khan Academy. I first learned about the Khan Academy a little over a year ago. I was having a little bit of trouble remembering some mathematics concept and someone suggested I look for it on Youtube, as there was this "Sal dude" posting instructional videos. I searched, found, learned, and didn't really give it much thought again. Since then, Sal Khan was gotten a ton of press, and so recently, idle from my lack of employment, I logged on to the Khan Academy. I was totally shocked by what I found. Not only is the library of lessons huge but I finally used the problem-generating component, and I was totally floored by what I found. Sal created a "Knowledge map" (accessible once you sign-in with a Google account) wherein as you complete certain lessons and the set of problems satisfactorily, new areas are suggested.

The system is basically a tree of nodes that correspond to a specific lesson, each of which has an instructional video. Each node has zero or more parents, with the root node being "Addition 1". As nodes are completed, new ones are recommended, organically building upon the previous ones. Completing "Addition 1," recommends "Addition 2" and "Subtraction 1". As nodes are completed,  the student can continue to explore each branch of the tree independently. Likewise, someone who is interested in learning, for example, linear algebra, could look at the map and follow it back until he or she found the first familiar subject and then beginning with the next lesson.

The videos--mostly math-related at present time--are both focused and engaging. Khan is a gifted teacher, able to distill lessons to their core and present everything you need to know about one thing in a few minutes.  With 20-30 minutes a day, one could easily follow the knowledge map and become proficient in most any mathematics subject in a couple of weeks or months. Any motivated learner has the ability to learn whatever they want, at whatever speed they want, at no cost at all. For parents who lack the knowledge to coach their children or are unable to afford tutors; adults that need additional education but lack the economic means or time to do it at a traditional venue; and students wishing to place higher in college math-placement exams in order to save themselves an unnecessary and expensive introductory or remedial course, the implications are huge. Khan has singlehandedly, in a remarkably short time, changed the landscape for mathematics education.

To test it all out, I decided to "attend" the Khan Academy. I started with lesson 1, "Addition 1." and worked myself up to calculus over a couple of days. I didn't watch the videos for the simpler subjects like addition and subtraction, but I did start skimming through once I got to Algebra II and started really watching in the later parts of Trigonometry. I was amazed of how fast time went, and how rewarding it was to complete the subject examinations--you must get 10 consecutive questions right in order to advance. Both the videos and problem-sets were generally completed before my attention span was exhausted, which means 10-15 min. As I completed problem sets and worked my way up the map, I started feeling like I was opening new levels on a video game or something, it was really strange.

The process is not limited to individuals working on their own. Pupils are able to enter a "coach ID" and be linked to a "class". The interactive problem sets generate data that the coach can use to identify students that are stuck on a certain type of problem or are working at below/above average speeds. Because the students can work independently of one another, no one student is held-back or left-behind. Someone having trouble with, for example, variable substitution can simply re-watch the short lecture, rewinding or fast-forwarding as needed to focus on the points he or she doesn't grasp.

I understand that this is not the first experiment of it's kind, I'm familiar with Open Course Ware and I've used iTunes U, but this is definitely different. The casual approach, accessible language, narrow focus, instant availability, lack of requirements and flexible structure all combine to create something orders of magnitude more accessible to the casual user. Not everybody knows how to use a podcast, but everyone knows how to work Youtube. Just click "play," and look at your screen, it's that simple. Have a question? Under each video is a list of previously-asked questions and responses, and if yours is not on there, you can add it instantly and someone is likely to respond promptly. I'm not saying this approach will work for every subject, but I have no doubts it could work for at least undergrad-level physics, chemistry and finance. As someone who barely passed high-school chemistry, something like this would have saved me a lot of angst as I tried to cover a month's worth of skipped classes the Thursday night before the test.

With the recent press the Khan Academy has been receiving, including public accolades from Bill Gates and sizable donations, the project has been able to pay Sal a salary and will be able to fund it's continuing existence. As momentum builds, it is not unreasonable to expect the number of contributing teachers to increase--some volunteers are already helping translate and close-caption the videos. Because the subjects covered don't change, there is no reason why these videos couldn't be used for generations to come--although, admittedly, some of the earlier ones could use a quality upgrade. The value produced by the Khan Academy is accumulative and increases with each additional topic and translation--I can't even imagine what a textbook company would be willing to pay for it--yet the price to access it, like Wikipedia, is zero. Of course, the free ability of content online is not enough, you have to give people access to the internet first, but with the ubiquity of mobile-phone service, rapidly-falling prices of computers and initiatives like OLPC, it isn't hard to imagine a world ten years from now where 80% of school-age children have access to the internet, even if it is from a shared device. When I first understood what Wikipedia was about, nine years ago, all I could think about was "Wow, this is going to change everything." Mark my words, this will change everything, too.

Wednesday, August 25, 2010

Stopping Deflation with Government Stimulus

Credit NY Fed
This post was inspired by a comment over at The Big Picture. Barry Ritholtz posted some interesting chart pr0n from the NY Fed's report on Household Debt & Credit and a commentator by the name of "HelicopterBen" brought up Richard Koo, whom I've written about before, and whose book I reviewed.

I feel like a broken record, but I'll say it again: Koo's GIGANTIC assumption is that the government will spend the money in projects with a NPV greater than zero. I quote myself below:
I'm just not comfortable leaving that decision up to the guys that decided to try to reflate the bubble by pulling-forward demand, subsidizing toy arrows and foreign liquor and build useless airports. Just sayin.
As I said in my response in TBP (I comment there as "X on the MTA"), trying to return to the good times by maintaining the money supply inflated is like trying to--ignore the negative connotation of disease for a second--infect a patient by inducing the symptoms. Or, if you prefer, curing the symptoms instead of the disease, either analogy works for me. I'm not going to rant about malinvestment, because I've already done so--although Pettis said it better  and then what Steve Waldman said it best. instead, I'm going to make a quick point about the money supply.

One of the Fed's goals is to maintain relative price stability. When Paul Volcker was first appointed Chairman of the FRB, he changed how things work and decided to try to control inflation by targeting the size of the money supply. Little '84 hiccups aside, it is in my opinion he did a good job navigating this new, uncharted territory. At the time this "monetarist" thing was fairly new, but it makes sense to control inflation by controlling the growth of the money supply. This works well because the Fed can act in the markets via the FOMC, and they can release accommodate expansion when it's needed and tighten when things are heating up too fast.

Koo--correctly, in my opinion--argues that during a large-scale deleveraging, when rates are already pushing zero, monetary policy becomes impotent. He argues that no matter how much money a central bank puts out, it won't create inflation if businesses and households are all focused on paying down debt. I think he is totally correct. Where I disagree with him is where he argues that the government should become the borrower of last resort to keep the money supply from shrinking. Yeah, the government can soak-up funds when there's an excess, but can we trust them to release them when the private sector needs them? More so, can the government allocate capital in anything but a wasteful manner? Which brings me to my main point: why do we need to keep the money supply inflated, and businesses and households leveraged? I am not saying we should allow a violent deflationary crisis to take place, or the government shouldn't stimulate when it makes sense, I'm just saying there is nothing wrong with having excess reserves when there's nothing to invest them in. Americans are simply not going to halt spending because of small price declines are expected. I'll put money on that.

Borrowing is contracting and there is excess reserves because people want to save and pay-down debts. Some may need to save the money for future expenses, others may want to pay down the underwater component of a mortgage so they can refinance at a lower rate or sell and move. CC debtors may need to lower their debt-service so they can start spend that money elsewhere. Some may want to lower DTI ratios so they can borrow in the future. Slack in the system is a good thing, just like cash in an investment account. There is nothing wrong with not being fully leveraged or fully invested. Businesses and households are preparing and keeping their powder dry so that once a suitable investment comes, they can act on it. That is healthy and rational.

Businesses and households may be paying down debt because they have ugly balance-sheets as a result of the decline in asset values. Fixing balance sheets is not a bad thing, it leads to strong businesses that can grow once their internal problems are fixed. Trying to keep businesses and households in their current, insolvent and over-leveraged state to prevent a few bankruptcies is like locking up junkies and keeping them high so that they don't have to go through withdrawals: ultimately counterproductive.

I would favor going through a painful deflationary cycle and dealing with the bankruptcies of weak businesses and households, but if the Koo sympathizers really want to transfer debt from businesses and households to the government aka "the borrower of last resort", maybe we could do it by having the government borrow large amounts at record-low rates and sending checks to tax-payers instead of poorly investing it. Tax payers could then use that money to pay-down debts, get out of homes they can't afford, or consume and invest if they are so inclined. If nothing else, it would speed-up the process of getting consumers back to a healthy place where they can start spending again so businesses have an incentive to start investing again. Of course we'd have to deal with higher taxes to serve that debt, but something tells me Uncle Sam has a better rate than Joe the Plumber's Capital One card.

Monday, August 23, 2010

Gambling: The Wrong Way to Close Fiscal Gaps

image by jasonswell
I have nothing against gambling; I love, love, love a good horse race and I've stayed up my share of nights at a craps table. I've played dice 'till sunrise, I buy Mega Millions tickets if the pot gets big and I've been known to wager a dinner tab with co-workers. However, gambling is not the way to cure fiscal woes. If states want to legalize gambling because the residents of the state in question want the liberty to choose whether they want to gamble or not, I am strongly for it, but not as a way to close fiscal gaps.
Gambling is a consumption activity. The only value that is being generated after everything nets out is whatever enjoyment gamblers got out of spending their money. There is no other net value being produced. Going back to Econ 101 (hi Greg!) we can't just all do each others' laundry. I have nothing against consumption, it is the reward we get for hard work, but you can't base an economy solely around it. As states turn to gambling to close budget gaps, it is increasingly important to remember how this all works:

Wednesday, August 18, 2010

Shut-up, WSJ: "Bond Bubble" edition

There has been a lot of noise in the blogosphere about the "bond bubble" (1) (2) lately. For what it's worth, I don't think there is so much a bond bubble as there is a system awash in liquidity that has to go somewhere. Some money is chasing momentum, some is chasing income, some is chasing yield that has more stability than equities can provide. I do think rates are absurdly low, but that's what happens in deflationary environments. The JGB bubble has been a "no-brainer" short for 15 years, but that trade has been a consistent loser for just as long. In general, I think bonds have limited potential to enter "bubble" territory right now because their value has a natural cap (that they trend to as maturity approaches) and because bubbles--in my mind at least--require massive amounts of credit to finance the purchases of the asset in a bubble, and that demand for loans would, you know, be reflected in higher interest rates that would halt the appreciation of bonds.

Tuesday, August 10, 2010

How Hogs Get Slaughtered: Structured Notes

In case you don't know, I work for an Independent Broker-Dealer. Near me is one of our bond guys, he specializes mostly in brokering bonds and other fixed-income instruments and some flow trading. Throughout the workday we'll chat about this or that and every once in a while he sends me some issue to look at if he finds them interesting or attractive.

A couple of weeks ago, he told me about a new-issue, a 20-year Bank of America CD. It was a tax, free, FDIC insured, floating-rate structured note with a 9% coupon and call protection for a year. I jumped out of my desk and came to his Bloomberg to check the deal out. We are a pretty small firm, around $5B in assets, so I don't know why we were getting an allocation. After all, most of our brokers would be buying no more than a couple of hundred thousand, maybe $1MM at most, to split between their customers. Something had to be wrong, otherwise someone higher-up would have picked it up first. With 20Y Treasuries yielding less than 4%, I was genuinely puzzled. Then, I noticed the terms of the deal:

  • Callable after 1 year
  • Floating yield (30YCMS - 2YCMS - 0.875%) * 4
  • Cap: 9%, Floor 0%
Yiiiikes! Let's go over each one of these features and see what they mean

Saturday, August 7, 2010

More on refinancing negative-equity loans

 Josh Rosner over at The Big Picture has a response to a plan similar to the one I proposed last week. I argued that breaking-off the underwater part of a mortgage and turning it into a full-recourse uncollateralized loan was likely to have little effect, since the collateral wasn't going to magically be worth more just because the banks needed it to. I wrote:
The government could create a facility that lends money to underwater homeowners that need to free themselves from a home.

This is not a giveaway, it is a loan. This is not a below-market-rate loan, and therefore carries no implicit subsidy. The loans should be made at a rate similar to or slightly higher than the original mortgage rate. Home-owners who are underwater and are being held-back from taking a job in a different area should be offered the loans, which would be contingent on a job offer. The loans would be used to pay-off negative equity at the time of a home sale. The borrower could then free him or herself from the home anchoring him or her down and return to employment
If the lender vowed to reduce the rate on the loans by a set amount if the borrower transformed the loan into a second lien on any new property bought, it could furthermore enhance the quality of these loans. These loans could then either be kept until maturity or sold to banks for securitization
The original idea behind this was that, especially for a distressed, undercollateralized loan, if you increase the quality of the borrower, you increase the value of the loan. I argued that because the Fed owns $2Tin MBS and Fannie and Freddie guarantee so much of the rest, it would actually be in the financial interest of the taxpayer to do this.

Josh, however, is responding to a slightly different plan. a mass, streamlined refinancing of underwater-mortgages. I tend to agree with some of the logic behind the idea, but, operationally, it would be a total nightmare.  I still think the best way to deal with it would be for banks to allow homeowners with no second lien to convert the underwater portion of their mortgages into a separate, uncollateralized recourse loan and refinance the house at an appropriate LTV. This help people sell their homes and downsize or move, without being forced to default on their debt.  Josh didn't respond to my plan. Josh doesn't know that I exist. In fact, judging by the traffic stats, only about 1.7 people have ever read this blog, but I like to chime in on everything.  Here is Josh's objections (along with my response):
- As a result of another prepayment-shock and the inability to model future prepayment shocks, investors would become even more unwilling to invest in MBS gong forward, or would begin to demand higher yields going forward; unwilling to invest in MBS going forward, or would begin to demand higher yields going forward;
 Oh, no! The government would stop subsidizing people earning abnormally high yields with unusually low prepayment rates! Shut up, Josh. Anyone who bought MBS in size knows that there is an embedded call option in the loans and how negative convexity works against you when interest rates drop. I agree that the streamlined refi process would be a mess, but that doesn't matter for a plan like mine.
- The interest rate risk that this would cause, as banks and the GSEs themselves all had to re-hedge their books at the same time, could precipitate a systemic risk issue;
Yes. They are all going to have to do that at the same time. By this same logic, why didn't the unusually low prepayment rates wreak havoc on their prepayment models and therefore their hedges?
- The prepayments would cost investors more than half a trillion in lost interest income;
I was under the impression that the government was trying to get out of the business of subsidizing bond holders at the expense of everyone else. I'm sure investors will find new ways to reach for yield or invest that money in, oh, I don't know, a value-creating process?
- Such a “streamlined” refi program would cost state and municipalities billions of dollars in transfer fees that they would normally be able to charge on a refinancing;
Well, if it wasn't for the program, the states and municipalities wouldn't get any fees, because underwater homes can't be refinances anyway. So they aren't really losing anything at all. They are just a road-block that's being worked around. Since the states just got $26B from Uncle Sam last week, they should just keep their mouths shut. Not to mention the benefits they'll reap from would-be defaulters and foreclosures staying current.
- Keeping borrowers in their homes with rate reductions could be argued to be consistent with maximizing value under conservatorship. A streamlined and across the board refi program that treats all borrower LTVs and other features the same would appear to violate the conservatorship;
I agree with the first part. The second part I'll leave to the lawyers. I do think that a mass-rate-decrease might be the cheapest way to minimize costs for the guarantors, though.
- The GSEs, according to their trust agreements, are prohibited from soliciting prepayments. If they were in receivership these agreements could be abrogated but they would still have to pay value on the contracts; and
- Servicer’s could solicit borrowers to prepay on the program but it would be a nightmare to operationalize and oversee such a massive program. 

Friday, July 30, 2010

Mobility and Underwater Homes: A humble suggestion

Today, the Washing Post reported:
Labor mobility has nearly ground to a halt in the past two years, and policymakers are increasingly worried that the slowdown is not just a symptom of the nation's economic struggles but also a barrier to overcoming them.
The biggest factor seems to be the large number of unemployed homeowners who have little or no home equity. Between 2006 and 2009, the number of renters who moved out of state decreased by 13.6 percent, according to census statistics, while interstate migration among homeowners has plummeted by 25.5 percent.
It must be a slow news day because this is no news. The WaPo covered it in June 2008. Bill over at Calculated Risk added:
approximately 1 in 8 households (the same proportion as with negative equity) will probably not accept a job transfer now because of depressed home values - and that is about 200,000 fewer households per year that will probably not move for better job opportunities.
This was all later confirmed by the Census Bureau in December 2008 and even more supporting evidence showed up in Paul Krugman's blog yesterday (source: Atlanta Fed). But I'm not here to berate the WaPo on repeating themselves, we all do it, I'm here to put a couple of things together and make a suggestion.

The problem
People with low or negative equity are not moving to the areas where they could find a job because they are trapped by unrealized losses or don't want to realize these losses. I would be willing to venture the guess than in the past households used proceeds from capital gains or built-up equity to fund relocation expenses; with low/negative equity, that just isn't possible.

Credit to MacroBlog
Additional obstacles
Cutting people's principal is a non-starter in many cases. Banks don't want to get a reputation for cutting loan principals and non-delinquent homeowners see it as reckless buyers getting rewarded at their expense.

A proposed solution
Seeing as how the government is already throwing massive amounts of money away trying to either reflate, or turn people into permanent renters, I suggest something slightly different. The government could maybe create a facility that lends money to underwater homeowners that need to free themselves from a home.

This is not a giveaway, it is a loan. This is not a below-market-rate loan, and therefore carries no implicit subsidy. The loans should probably made at a rate similar to or slightly higher than the original mortgage rate. Home-owners who are underwater and are being held-back from taking a job in a different area should be offered the loans, which would be contingent on a job offer. The loans would be used to pay-off negative equity at the time of a home sale. The borrower could then free him or herself from the home anchoring him or her down and return to employment.

I don't know if this next part is possible, but if the lending facility vowed to reduce the rate on the loans by a set amount if the borrower transformed the loan into a second lien on any new property bought, it could furthermore enhance the quality of these loans. These loans could then either be kept until maturity or sold to banks for securitization for a profit. Why a profit? Well, if the transaction was correctly orchestrated, the borrower rid him or herself of the anchor home, allowing them to enter a new job. If the borrower decided to buy a new home, the drop in rates would almost ensure they will be able to buy a similar home for a smaller monthly payment, improving the debt-to-income ratio. Because of the same lower rates, the new monthly mortgage payment plus the loan payment should be lower than the original mortgage payment, putting the borrower in a better position to meet their obligations. Additionally, banks holding undercollateralized loans would get to rid themselves of those loans and the possible losses associated with future defaults or short-sales. Finally, freeing people from their underwater properties would increase liquidity in the real-estate market, encouraging price discovery, getting assets to the people that want them and getting people to the employers that want them. Here's the list of pros in my mind:
  • Worker mobility is augmented
  • Worker / employer mismatched is reduced, increasing employment and PCEs and income taxes collected
  • Putting people to work reduces unemployment benefits being paid out
  • People decrease their debt service expense, leaving more money for PCEs
  • Real-estate liquidity improves
  • A couple of commissions are generated for brokers
  • Price discovery is sped up
  • Undercollateralized loans are reduced
There may be no debt permanently retired, but increasing mobility and employment prospects should put the underwater borrowers in a better position to pay-off their loans. If they still default, well, they probably would have done so anyways, and seeing as how the Fannie & Freddie black-holes probably guaranteed that paper, the Treasury would have probably taken the same loss on the assets--more if you include the added expense of the foreclosure process. Before you argue that it's basically a subsidy for the MBS holders, think about who owns $2T in MBS and who guarantees a whole lot of the rest.

Housing Affordability 1971-2009: Chart Roundup

This post is part of the series Housing Affordability 1971-2009

I have collected all of the charts from the previous posts in the series and put them in one post for easier access. For explanations on the data and commentary, please follow the links to the source posts.

Thursday, July 29, 2010

Housing Affordability 1971-2009: Data Sources and Collection Methods

This post is part of the series Housing Affordability 1971-2009

This is the last post of the series on housing affordability. At the bottom you will find a link to the spreadsheet so you can download it and play with the data if you want. Before that, I'll just add a couple of comments about the data and where it came from.

Owner's equivalent rent, rent of primary residence and CPI less shelter
These came from The BLS CPI website, and you can find the unique ID of the series used at the top of the "CPI-U data" worksheet. The two re-based versions just adjust the numbers to make 1971 and 1984 equal 100. This is done by taking the original value and dividing it by the 1971 or 1984 value respectively.

Monthly and yearly new home prices
These prices come from the Census. (monthly, yearly)

Monthly and yearly mortgage rates
These are posted on the Freddie Mac website. No adjustment was made for points.

Median household income
I cheated a little with this one. The series I found for median household income was limited, so instead I used the third quintile of the entire data set provided by the census.. I compared the overlapping years and the differences were so small that I decided it was OK to do this. There is no reason for the third quintile to be any less accurate than the absolute median.

Median fair-market rents
This is the rent data I decided not to use, it came from a HUD survey. Apart from being noisy and the data collection methods (phone survey with random dialing) being of poor quality, the series only started at 1979. I don't know anyone that participates in phone surveys, and didn't trust the sample to be representative.

I am making the spreadsheet available to save others the pain of having to copy values from PDF files into a spreadsheet. I do not mind if you create derivative works with any of the charts, but I do ask that you give me a mention. A simple "Credit to Morally Bankrupt for data in spreadsheet format" with a link to this post so others can download the source spreadsheet would be sufficient.

Download the spreadsheet in Microsoft Excel format.

Tuesday, July 27, 2010

Housing Affordability 1971-2009: Payments, Prices and Capacity

This post is part of the series Housing Affordability 1971-2009

In the last post I talked about the growth in prices in percentage terms. Today's post includes the same data, but using a nominal scale. While I think the percent change charts are great for looking at long-term, the nominal charts do a better job of communicating the differences in dollars and cents.

Here we can see the relationship between the median-price for new homes and the purchasing power of a payment equal to 30% of the median-household income. Judging by the gap, my estimate of 30% is close, but not perfect. I discussed my reasons for using this figure in Two Ways of Looking at It Once I post the source spreadsheet you will be able to fill-in any values you want to see plotted for the %-of-income and down-payment variables. Please note these are not in log-scale because the actual figures became a harder to read. You can find the log-scale versions at the bottom of this post.

Monday, July 26, 2010

Housing Affordability 1971-2009: Long-Term Trends

This post is part of the series Housing Affordability 1971-2009

In the last post I discussed the comparison I used for this analysis and why I chose certain data series over others. In this post we will look at long-term trends in income and prices and how lower interest rates have allowed prices to rise faster than income. Rents and the CPI less shelter figure are also included to illustrate the divergence of the trend home prices from the trend in consumer goods.

I am excluding shelter from the CPI figure because I want to display how the trend in housing differed from everything else and comparing housing prices to an unadjusted CPI would understate the growth in prices.

For rents, I decided to use the "rent of primary residence" series in the CPI. The BLS does not publish rents in their average price survey, and the only nominal figure I found came from the HUD, and after looking at collection methods, I was not impressed with the quality or coverage of the survey. Since the Census Bureau does not offer a national figure, I am still looking for better rents data1.

Sunday, July 25, 2010

Housing Affordability 1971-2009: Two Ways of Looking at It

This post is part of the series Housing Affordability 1971-2009

In the previous post, I discussed how borrowing capacity changes with respect to interest rates, finishing up with an example of the buying power of a $500 monthly mortgage payment from 1971-2009.  The example is obviously a gross oversimplification; income and price levels can and have changed since then.  To try to make some sense of this all, I decided to look at the data from two sides:
  • The change over time in the cost of a median-price new home and the monthly mortgage payment necessary to buy it, a function of the price level and interest rate. 
  • The change over time in the median-household income and the borrowing capacity based on it, a function of the income level and interest rate.
I chose to define borrowing capacity by calculating the amortized loan principal that would require a payment equal to 30% of a median-income household's earnings.