August 29, 2008 12:44

If all Americans read financial magazines, we never would have had a real estate bubble

It's just a throwaway line in a comment by Curmudgeon on my Merced real estate saga, but it nonetheless got my hackles up:

This continued because the realtors and builders (and to be fair, the media - yes, Justin - and the economists and a lot of others) said that people were still working and making money, and real estate always goes up, so this is simply a natural outcome of an expanding economy.

Now I certainly wasn't telling anybody that "real estate always goes up." Here's something I wrote for Fortune in 2005:

To bring the argument back to houses: In many U.S. markets today, the monthly cost of buying a house is significantly higher than the monthly rent on an equivalent house. So by the "imputed rent" test, it makes no sense to buy. People buy anyway because they assume that house prices will keep rising, meaning they can sell out later for a profit. That of course requires that another buyer will come along who also assumes that prices will keep rising, which will require yet another such optimistic buyer down the road, and so on, and so on. This happens to be the definition of a Ponzi scheme.

I'm not claiming to be any kind of forecasting guru (that 2005 article concluded: "[T]his real estate market craziness cannot continue. But to make a bet about when it's going to end--now that would be really crazy.") And there were lots of similar warnings to be found in the business/financial media in the years leading up to the current bust. The problem--and I of course think it is the greatest problem facing our nation today--is that not enough Americans read the business/financial media.

Economist Bob Shiller, whose warnings about an impending real estate bust were quoted pretty danged widely in the financial press, writes in his new book The Subprime Solution (available as a Kindle download right now; supposed to be in bookstores next week, although it may be there already) that lower-income homebuyers generally weren't aware of the risks inherent in subprime mortgages, because nobody had any economic incentive to alert them to those risks.

Financial advice magazine did indeed report on these risks. So, while the higher-income subscribers to those publications got the story and stuck overwhelmingly to conventional fixed-rate mortgages, many lower-income people were left with personal tragedies.

One of Shiller's proposed solutions for this is government-subsidized financial advice for the nation's nonmillionaires. How 'bout government-subsidized subscriptions to Fortune and Money then?

August 28, 2008 9:10

My visit to Merced, epicenter of the real estate bust

I went to Merced and all my son got was this lousy T-shirt.

I took a day of vacation from vacation (a.k.a. a day of work) when I was out in California to drive down to the Central Valley metropolis of Merced, which is by several measures (foreclosures, average price decline) the worst real estate market in America. I figured I might find good fodder for a column. Then I saw the long article about Merced's real estate bust in Sunday's NYT, and decided I probably shouldn't do that column just now.

But I might still write it eventually, because the NYT didn't focus at all on what I found most interesting about Merced--which was how unevenly distributed, and generally undisastrous-feeling, the area's housing disaster seemed to be. (More after the break.)

August 27, 2008 12:41

Take my airport... Please!

This morning's New York Times has a story about the "$250 billion war chest" amassed to finance a "tidal wave of infrastructure projects in the United States and overseas." Big banks and funds want to buy your roads, bridges and airports, America—and since Congress won't put on its big-boy pants and pay for infrastructure improvements, states are really excited to take that money. (I have a vague recollection of having read something along those lines before.)

Anyway, I found the timing of this article a tad odd, considering that over in Australia, where the idea of investor-owned infrastructure first took off, things aren't going so well right now. Here's an overview, from a recent article in the FT:

The pioneer of the specialist fund model was Macquarie Group, although several local rivals including Babcock & Brown and Allco Finance joined in with gusto. The model involved buying infrastructure assets in sectors such as energy, ports, utilities and property, and bundling them into listed satellites and taking fees.

It worked a treat in the days of cheap credit, as buyers could borrow heavily and pay top dollar for assets that were themselves always rising in value.

The global credit crunch has changed the game for the infrastructure funds, with funds scrambling to reduce their average weighted cost of capital.

Some have divested to slash net debt or are pre-emptively selling assets well ahead of renewal of debt contracts. Several others have decided to change policy and only pay distributions from operating cash flows, thereby cutting debt but also dividend yields to investors.

Here in the U.S., Macquarie recently had to go out of its way to say it's still interested in doing a consortium deal to lease Chicago's Midway Airport, even though its airports-only unit is no longer interested in going it alone.

When those people from the Port of Long Beach were here last week, I asked if they ever got calls from investor types looking to lease assets. Sure, they said. They used to. These days, not so much.

Which is not to say a little private-public partnering isn't a good idea. Just that it's maybe not the one-stop solution we once hoped for.

Barbara!

August 27, 2008 11:08

Don't know what sort of mortgage you have? Well, it's probably not that important anyway

Journalists who write about the housing meltdown occasionally get taken to task for not laying enough blame at the feet of the individual homeowners who were signing up for mortgages they should have known they couldn't afford. I, myself, have been accused of this. So in the interest of blaming homeowners their fair share, let me present a poll out today from Bankrate.com that shows more than a quarter of Americans don't even know what type of mortgage they have:

At least we're doing better than last year?

Barbara!

August 26, 2008 11:41

Are happy economic days here again? Not quite

So far today we've learned that:

1) The decline in housing prices slowed in June, according to the latest S&P/Case-Shiller data.

2) Average income in 2006, as reported by the IRS, finally topped the 2000 level (in 2001-2005 it hadn't).

3) The number of Americans without health insurance declined in 2007, the first such drop since 2000.

4) The Conference Board's Consumer Confidence Index rose for the second month in a row.

Hooray, hooray! Right?

Well, house prices are still falling, and fast. Income growth in the 2000s has been excruciatingly slow (median household income, as reported by the Census Bureau, was still below its 1999 and 2000 levels in 2007). There are 45.7 million uninsured Americans. And the Consumer Confidence Index, while rising, is still only about half what it was a year ago.

As economic news goes, all the developments reported today would have to be described as positive. But the big picture hasn't changed much.