Tag: Economics

With the slow-down in the housing market comes a slow-down in the housing industry. This is why economists fear that a drastic correction in housing prices will have the kind of ripple effect that could send the US Economy into a recession. If the appetite for housing slows, fewer construction workers (and Realtors, mortgage brokers, appraisers, title/escrow… etc) can find employment. We are seeing pretty big drops in some of the housing construction data now – fewer homes being built, fewer permits applied for – and expectations have been that we would see a rise in unemployment related to this. The housing industry is assuredly large enough to influence that number.

But the unemployment rate has remained stubbornly low, keeping pressure on the Federal Reserve to watch out for ‘wage-based’ inflation, aka too many workers making too much money. So where are all the laid-off construction people now, if not unemployed?

A few months ago I read a fascinating piece forwarded by a favorite economist and author, John Mauldin, which explored not only the concept that much of the construction labor is undocumented workers, and therefore not showing up in official unemployment records, but also the impact this might have on the global economy. Much of the money earned by undocumented workers is sent back across borders to Latin American family back home. The central banks of these countries literally count on this cash in their economy, and it affects their own policy decisions and economic steering. The essay’s question: do these countries know as much about this housing slow-down as we do? If not, there is risk of a ripple-effect well beyond our borders. And in today’s global economy, those ripples bounce back and forth across borders. Interesting stuff.

Last month at the Pacific Coast Builders Conference in San Francisco, there was a panel titled Immigration, Labor and the Future of the American Workforce which focused on the importance of immigrant laborers to the home-building industry. And Jerry Nickelsburg with the Anderson Forecast group at UCLA recently published a report about a study on these “Hidden Workers”.

With the immigration debate and legislation proposals, keep an eye on this topic in the coming months…

With the current sell-off in the bond market, we have finally returned to an upward sloping yield curve in the 2yr – 10yr chart. It’s still pretty flat, and bonds have started to retrace some of the steps they took during that little three-week selling frenzy, but we have not had an upward slope for a long time. Check out this site for a great illustration of the yield curve over the last 9 years or so (make sure to hit the ‘animate’ button). If it didn’t make a lot of sense before, this will help. Pay close attention to the last few years where we see the Federal Reserve’s steady 0.250% rate hikes (on the left) and the corresponding long term rates (on the right). This stubborn long-term rate has stayed relatively calm in the face of all those Fed tightening moves.

Its no breaking news that you can learn a lot about investment and prosperity from a guy like Warren Bufett. I saw a blurb recently about the Berkshire Hathaway annual shareholder’s meeting, and clicked my way into this 5 page document he wrote in 1996 titled “An Owner’s Manual”, where he outlines his basic economic principles of business operation. There is some great insight here, particularly on the last page where he describes the difference between intrinsic value vs. book value.

This passage uses a well-constructed example of the opportunity costs of college education to illustrate the difference between “Book Value” and “Intrinsic Value”, two important business valuation metrics. This same exact principle applies to debt and wealth management when we talk about the use of the marginal dollar.

Most people can clearly evaluate the cost of not paying off a dollar’s worth of mortgage principle – we call it interest. But we see most people mistakenly value the actual cost of paying the mortgage principle back, measured in foregone return on investment and foregone liquidity, as well as increased risk and tax exposure.

Its tough to set your financial priorities in order when you don’t know what they all cost. With the mortgage being the largest ‘bank account’ most people have, it is critical that the mortgage plan is congruent with these priorities – adequately valued. Take a look at this for evidence of how ‘most people’ are missing opportunities to build a better bottom line. Good mortgage planning can take this concept even farther in the right direction.

There was an interesting article today in Realty Times discussing the currently escalating energy costs, and the implications for home sizes and housing decisions. One might think that with gas prices rising so quickly, the average consumer might alter their behavior reflecting sensitivity to these costs.

The author makes the case that it would take a true energy crisis to change the current course of larger average home sizes (20% are 4 or more bedrooms, nationwide!). One interesting detail is the fact that garage doors are being built with larger dimensions to accommodate the larger, gas-guzzling SUV cars that so many Americans love to drive.

I don’t think the average home builder can respond to the weekly changes in gas prices, and expect to see some of the energy-conscious construction trends become more wide-spread. There has been a lot of buzz for months about “green construction” in my area (San Francisco Bay Area), but the building industry has to deliver based on some amount of lag time.

A little over a year ago, the Brookings Institute issued an insightful report about “The Housing Affordability Index, A New Tool for Measuring the True Affordability of a Housing Choice”. One of the key issues that hit home for me was the discussion on a consumers tendency to mis-appropriate values of things like commuting, environment, time, road-rage, etc.

We have seen a huge growth of housing in the areas to the East of the Bay Area over the last several years. As a result, tons of homes have been built in towns like Tracy, Stockton and Modesto. There have also been entire up-start communities built at former cattle ranches like Mountain House. Most of this growth has been by people who work in the Bay Area, but cannot afford – or do not want to pay for – the houses. If you doubt this, try driving east on Interstate 580 during afternoon commute hours.

Reading the Brookings paper, you might gain a sense of how to evaluate things like:

• -gas costs, auto wear and tear costs
• -time spent commuting measured against time spent with spouse, kids, etc.
• -psychological costs of road-rage
• -physical health costs of traffic stress, sitting in smog and exhaust fumes
• -health care costs related to the above
• -living away from urban cultural centers, food choices, arts, etc.

Everyone will have a different set of priorities of course. But you need to know how to measure the cost of missed opportunity, and other things that cannot be easily defined in dollar amounts.

If you need help figuring out how your mortgage plan can be molded to accommodate your life’s priorities rather than restrict you from them, its time to talk.

Non-Farm Payroll and Unemployment data were released today, and the US Economy is still chugging along… For those who feel Federal Reserve Chairman Ben Bernanke will lower rates in the near future, this news serves as a little cold water splash in the face. Unemployment is too low. Plain and simple.

There were 180k new jobs last month, versus the expectation of 135k. Unemployment dipped to 4.4%, versus the expected 4.6%. This is going to keep wage-side inflation persistent, since employers will need to compete for skilled workers by raising pay. And Bernanke has made it clear that no rate cuts will come until the inflation cinders have ceased to smolder. He may even need to hike rates one more time to cap things off.

The Fed Funds Rate remains a moving target, and the timing for adjustment of this rate back down has extended beyond what analysts expected a year ago. Evidence of inflation beyond the Fed’s comfort zone has persisted in these types of news reports, and we won’t see a change in Bernanke’s tone until inflation gets back under 2%.

The meltdown in subprime lending is not going to directly lead to a Fed cut as many have speculated. Even if the housing market languishes due to an increase in supply and decrease in buyers, this needs to trickle through to the data in reports like those given today before the Fed will respond. Perhaps with all the mortgage companies shutting down, we will see a counter-weight to this tight job market…

… I’ll be careful what I wish for.

Back in May of last year, I ran a post about the state of the housing market as indicated by the caliber of Investor I was coming across in my practice. So many of these speculative buyers were lacking the basic understanding about how to invest in real estate, and were exhibiting ideas and strategies evangelized by the late-night infomercial type of real estate guru. I predicted that this was a sign of a topping market, but only that it was a sign. I did not call for a crash in housing. I spent the following posts explaining how dynamic our economy was, and why it was so difficult to predict these things…

But back to my point. The market has been pretty flat in the last year, and this type of amateur investor has all but vanished from the marketplace. But any investment professional can tell you that opportunities exist when you think against the grain. It can be tough to do, but it often pays.

With the tightening credit availability in housing, a lot of would-be buyers are going to need to turn back to renting homes. This puts a squeeze on rental supply, and causes a trickle-up in rental costs. Keep this in mind as you look for return and cash-flow on your investment properties. The opportunities will be out there…

RealEstateJournal has another interesting article today about a particular niche in Real Estate Investing – the college campus play…