Political Interest

A Question of Fundamental Values

The Real Estate bubble articles seem to be coming fast and furious in the last two weeks; today it's the New York Times with the economic question, "Why buy when you can rent?"

The Times article, with the help of the consulting firm Economy.com, does an analysis of the gross income multiplier between rents and home prices in 50 metro areas across the country. What it shows is a growing disconnect in some metro areas, such as California, South Florida, and New York, between the home's ability to generate income and its selling price, strikingly similar to the price to earning ratios in the tech stock market bubble.   

Read the article here.

Click here for the comparison chart by metro area.

Note to Buyers: Interest Only Loans are Risky

I wouldn't have thought one had to be an economist to figure this out, but apparently you do.  The newly popular interest only, which allows buyers to only pay on interest, and not even all of that, for the first few years of the loan are all the rage. 

According to the Washington Post a third of loans in DC metro area issued this year are interest only, including over half of the loans issued in the District.

Just five years ago, only about 2 percent of home-purchase loans in the Washington area involved interest-only terms.

Mark Zandi, chief economist of Economy.com, said buyers are turning to interest-only loans because real estate has become so expensive -- but that real estate is becoming so expensive partially because of the use of these new products.

"It largely reflects the inability of families to afford a home with a plain-vanilla mortgage," Zandi said. "This is a way for people to get into what are extremely expensive homes."

He said it also reflects "increasing speculation" that is occurring in the real estate market, as investors pursue interest-only loans "because they need to devote less resources to servicing this debt."

Like I said, He'd Win Utah

Political Wire has a plethora of 2008 election stories this week, including this political shocker the Governor of Utah has endorsed Mitt Romney for the Republican nomination for President in '08. 

What the hell is going to run on? His record in Massachusetts, which is so fantastic he's trailing in the polls for reelection. 

Also on Political Wire a USA Today Poll outlining Senator Clinton's prospects in 2008, which are looking up.  Any opponent who thinks they're going to get past Hillary simply by shouting "electability!" had better think again

Completely Insane

A new MSNBC article shows just how far over the edge the California market may have gone already using this example:

Maya Vestal, 25, who works for a biotech company, took the plunge this month with her boyfriend, plunking down $585,000 for a 1,200-square-foot home near San Jose in a neighborhood she describes as “not great.”

Frankly, the three-bedroom, one-bath house doesn’t sound all that great either. Built in 1940, it needs about $50,000 worth of work including new plumbing, new wiring and a new kitchen, she figures. “The only thing we’re keeping are the floors, which are beautiful, original hardwood.”

And it's not just that people aren't getting much for their money, it's that they can't afford what they're getting:

Together, Vestal and her boyfriend, a 25-year-old city worker, earn more than $100,000 a year, but the new $3,800 monthly mortgage payments will eat up nearly 70 percent of the couple’s take-home pay.

(Emphasis Mine)

In addition, other recent articles have also noted the extremely high rate of no principle payment loans and adjustable rate mortgages that are being used in California these days.  These risk factors combined mean that the slightest hiccup in the economy could produce a very hard landing in California.

In fact, while high real estate asset values have contributed to growth nationally in the last four years, as noted in my last post, locally in a place like California or Massachusetts they can become a drag on the economy by discouraging businesses from relocating there because of the added expenses for workers.  And that makes the hiccups that can lead to a hard landing all the more likely to happen.

Krugman weighs in...

Paul Krugman of the New York Times weighs in on the real estate bubble today. 

Krugman takes the idea that there is a real estate bubble as a given, then goes on to blame Fed Chairman Alan Greenspan for it and outlines the consequences of the eventual burst. According to Krugman a decline in housing prices could be devastating to the economy if other engines of growth haven't picked up enough to spur the resulting fall in demand.

I think Krugman's absolutely right about the danger of the situation, especially for certain local economies, such as California's, which would have a ripple effect on the national economy.  His blame on Greenspan seems to be a little off track, however.  Greenspan might have initiated the boom by lowering interest rates, but the failure of interest rates to respond to his last eight interest rate hikes suggest it might already be out of his control.

Victory in Iraq: Is the Fifth Time the Charm?

Via Maxspeak, things still aren't so great in Iraq or many of the other "Arab Spring" countries. Given their complete lack of a plan for victory in Iraq, maybe the Bush administration could follow the famous Vietnam era quote and, "Declare victory and go home."  By my count the next victory declaration will be our fifth in Iraq:

1. Toppling of the statue (celebrated with the aircraft carrier landing).
2. Saddam's capture (celebrated with a rare Bush news conference and the implosion of the Dean campaign).
3. The handover of power to the Interim Government (celebrated with a wee hour document signing, a hearty handshake and a red-eye flight for Jerry Bremer back to the US).
4. The elections in January (celebrated with Congressional GOP finger paint day).

Some how these victories seem to getting less convincing each time.

Romney Shows Exactly What He Stand For: Nothing.

Conversion on the Road to Damascus White House. Could Mitt Romney be any more transparent in his waffling on abortion?  In a USA Today interview Romney claims, via the Boston Globe, his "perspective" has changed on abortion.

When Romney was wooing Massachusetts voters in 2002, he said he supported Roe v. Wade, the 1973 Supreme Court decision legalizing abortion, and promised not to change the state's abortion policies. He espoused the same position during his 1994 US Senate campaign against Kennedy.

''I believe that abortion should be safe and legal in this country," Romney said in an October 1994 debate against Kennedy. ''I have since the time that my mom took that position when she ran in 1970 as a US Senate candidate. I believe that since Roe v. Wade has been the law for 20 years we should sustain and support it."

In recent months, however, Romney has played up his personal opposition to abortion in out-of-state speeches; removed a reference to Roe before signing an annual proclamation celebrating access to birth control; tried to promote the teaching of abstinence to students; and declined to publicly back a measure expanding access to emergency contraception, even though he said he supported that goal during the 2002 campaign. He has said he will examine the proposal if it reaches his desk.

So far the pro-lifers aren't buying it, if they do, they're bigger suckers than I thought.

Let's Make a Deal

So a day later is the Judge Deal a good pr a Bad one for Democrats?  On the whole I'd say good, one because it has further heightened the divides in the GOP as this Post article shows:

The fallout from the Senate compromise that averted a showdown over judicial filibusters fell most heavily on the Republican Party yesterday, signaling intraparty warfare that is likely to shape the battle for the party's 2008 presidential nomination and further strain the unity the GOP has enjoyed under President Bush.

Monday's surprise deal left two of the party's most prominent potential 2008 candidates, Senate Majority Leader Bill Frist (Tenn.) and Sen. John McCain (Ariz.), on opposite sides of an ideological and strategic divide that is likely to widen as the party begins in earnest to hunt for a successor to Bush. Perhaps mindful of the power of social and religious conservatives, other GOP senators with presidential aspirations, including George Allen (Va.) and Chuck Hagel (Neb.), condemned the deal.

Two, the spin coming out of this looks horrible for the GOP leadership, since it tightens their public alliance with the extreme religious right, the last thing they needed after Schiavo.  And third, since it kicks any showdown down the road, closer to 2006, it makes any actual destruction of the filibuster much less likely.

Tiny Bubbles

Housing prices are still rising at an unstustainable clip. From the AP:

The strength in sales, which was attributed to further declines in mortgage rates, put new upward pressure on prices. The median cost rose to a record $206,000, up 15.1 percent over a year ago.

That represented the biggest 12-month gain in prices since November 1980 and added to concerns that the housing industry could be experiencing a speculative bubble similar to the stock market bubble that popped in the spring of 2000. The median is the midpoint where half the homes sold for more and half for less.

The jump in home prices raised worries in financial markets that the Federal Reserve might be compelled to boost interest rates at a more aggressive clip, given that the eight quarter-point rate hikes since last June have done nothing to cool off demand for housing.

Wordsmith and Fed Chairman has refered to all of the local bubbles that make up the national real estate market as "froth."  Clever.

Low Inflation, but Lower Wage Growth

The NY Times editorial page made an excellent point yesterday, despite our relatively low rate of inflation wages aren't keeping up with price hikes.  That means workers need to tap their home equity or turn to consumer credit to keep their living standard the same, a big long term problem for the economy if wages don't start to rise.

Click here for the editorial.