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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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Is the government trying to keep house prices inflated, or are they simply trying to prevent overcorrection.
House prices doubled on speculation.
We built too many houses and too many jobs were based on houseing. Once the bubble popped, there was an inevitable over supply and low demand that would tend to cause a massive overcorrection to the down side.
20-city Case-Shiller went from 100 in 1999, peaked just above 200 in early 2006, and is back to 137.
Well, 137 is still inflated?
$100K house at 7% for 30 years is $665 a month PI.
$137K house at 4% for 30 years is $655 a month PI.
Historic low interest rates adjust the price/rent break even point.
We can naturally expect house prices to drift down if/when rates return to historic norm, but that will not lower most peoples’ monthly payments as the lower principal payments are offset by higher interest since most people buy with a mortgage.
Sure, the cash price will go down, but in a normal market, cash buyers are generally rare.
So, ignoring over supply and insufficient demand for a moment, given interest rates near 4%, are we at fundamental rent/price support level, on average?
In some markets, like Phoenix, we are below this level. In other markets like NYC we are still above this level. Looking at the difference between the two I see a pattern. Over corrected are areas with no lack of housing, plenty of room to resume building, no real driver of demand, and unlikely to see steeply increasing rents even if the eonomy were to recover(Phoenix, Vegas, Detroit, Atlanta, Cleveland). The non-overcorrected market are those with limited housing, limited empty land and real demand, that are likely to see rents increase if the economy were to improve (L.A., BosWash, NYC, San Diego).
Yes, the government continues efforts to keep house prices from falling. Yes, some of those efforts are keeping the “still overpriced areas” inflated. If 37% above historic norm is justified by 4% interest rates, are those efforts really intended to keep prices inflated. Or are we at the point that the government is no longer trying to keep prices inflated and they are simply trying to keep the prices from overcorrecting to the down side?
I think there are a lot of people hoping for an overcorrection, so they can buy, then enjoy the later upside. I am not even going to try to argue that an overcorrection is bad.
I am simply asking:
1) Do 4% interest rates justify 37% higher prices based on rent-equivilant cost?
2) If the answer to #1 is yes, then, is the government working to keep prices inflated or are they just looking to prevent over correction based on the (maybe) short-term oversupply and sub-normal demand?
If this is good or bad depends on whether you are a current owner looking to eventually get back even so you can move, or if you are sitting on a pile of cash looking to scoop up bargains at the bottom for huge profits. This makes any argument on good/bad-ness of an overcorrection purely subjective. I am far more interested in the objective, measurable.
Related question: Is price fixing legal, so long as it only concerns housing?
Commentary
Price-Fixing Begins At Home
Nicole Gelinas, 01.15.09, 12:01 AM EST
The government can’t determine mortgage rates forever.
The U.S. Federal Reserve and the Treasury Department have been mulling over a plan that would obliterate all market signals from the mortgage industry. The plan demonstrates once again Washington’s perverse belief that the cure for decades’ worth of government distortion of the housing market is … more government distortion.
Normally, Washington doesn’t directly control mortgage rates. Yes, the Fed helps control general interest rates for all kinds of borrowing through its interest rate policies. And the government’s long-assumed guarantee of mortgage behemoths Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), until it quasi-nationalized the two companies last summer, also kept mortgage rates lower than they would otherwise have been for decades.
But now, the government may take a giant step further. The Fed and the Treasury may set home-borrowing rates in the next few months by purchasing mortgages directly from Fannie Mae, Freddie Mac and other mortgage lenders at a fixed price that would dictate an interest rate of 4.5% for new home buyers, as well as, possibly, for owners of existing homes who want to refinance their more expensive loans. After news of the tentative plan got out in December, mortgage rates plummeted to just above 5%, the lowest level in four decades. (Since then, the Fed has begun purchasing mortgages, but the government hasn’t yet formalized the target mortgage rate.)
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I agree it is going to fail.
Keeping prices from overcorrecting “could” work if we were really working off excess supply and waiting for demand to return.
Demographics of boomer retirement and slowing immigration mean there is no demand coming to eat up the supply.
We’re at the dead end of the debt based economy, but the PTB fail to admit/understand the real underlying cause of the last 30 years of economic gains. The PTB do not understand why we’re not about to shrug off the recession and return to boom. It isn’t a recession, it is a structural dead end.
The question was not whether it would be successful.
The question is, are house prices currently inflated given we’re back to price/rent equality given current low interest rates.
Are they trying to keep prices inflated, of just attempting to prevent overcorrection?
“Demographics of boomer retirement…”
means demand for family-sized McMansions will be increasingly replaced by supply of empty-nest McMansions as those who are too sick, old or tired to clean and maintain a large living space downsize to retirement-sized housing.
“Demographics of boomer retirement…”
means demand for family-sized McMansions will be increasingly replaced by supply of empty-nest McMansions as those who are too sick, old or tired to clean and maintain a large living space downsize to retirement-sized housing.
You’ve just described my parents’ living sitch to a tee. They don’t live in a McMansion, but it’s a house that’s gotten way too big for them.
And it’s no longer very clean. To the point where I went on the cleaning attack when I was back there over the holidays. My mother seemed a bit surprised by all of my fervor, but I don’t care to live in a dirty space. Even if I’m just visiting.
Next time I go back, I’m going to plan ahead and find out who has a good cleaning service around there. Then I’ll hire them — my treat — and we’re going to get that house scrubbed down.
Are they trying to keep prices inflated, of just attempting to prevent overcorrection?”
prevent over correction by keeping prices inflated
“You’ve just described my parents’ living sitch to a tee.”
My inlaws are also empty-nesters who live in a largish (family-sized) McMansion. Unfortunately my MIL, a compulsive cleaner approaching age 70, just developed a medical condition which will curtail her cleaning activities for the near future. What happens to cleaning duties I don’t know, as it is not in her constitution to let others assume her household duties.
“prevent over correction by keeping prices inflated”
Sounds great until you take the perspective of a prospective buyer, who gets to look forward to no reward going forward for taking the risk of buying at a point when shadow inventory numbers in the millions and nobody knows where the bottom lies because everyone knows prices are propped up.
At best, current buyers should expect a lower future return on their housing investment than if they purchased another asset class not subject to government-sponsored price support.
Economics 101: Artificial Government Price Fixing Kills Housing Market Recovery
New York States historic Hudson Valley region housing numbers continue to be a shell game not unlike the guys with the fold up tables outside Port Authority’s 42nd Street bus terminal in NYC.
The only ‘real’ movement has been with the now expired income tax credit which is now cause for concern as it only prolonged the inevitable further erosion of housing prices, noted as correction by some industry, financial and government analysts.
Homeowners reluctant to take the loss on their investments are refusing to move their prices to sell. For example we viewed a single family residence in Cornwall-on-Hudson, New York with a list price of $600,000.00 with an assessment of $300,000, what does this mean for the buyer? DON’T BUY!
You are hedging a bet of $300,000 that the housing market devaluation has bottomed out and will attain your purchase level…not so quick cowboy.
The assessment levied on your property will become the $600,000 and with the crushing local, county, state and school taxes in New York State you will never be able to recover your investment.
The market had been artificially buoyed with federal bailouts, for the financial institutions not the victims of predatory lending, and the force of the $8000 tax credit. Now the program has run its course with trillions spent and the housing market is right back where it started when it crashed.
…
Welcome the HV housing game, my current back yard. My uncle lives in Cornwall (officer at West Point).
Property taxes in NY state will crush you yet the system of labor and wealth extraction is sustained irrespective of the cost to individuals, families, etc.
I wonder how it feels to have a paid off house in NY, and to still have to pay those crushing taxes? No thanks.
I wonder how it feels to have a paid off house in NY, and to still have to pay those crushing taxes? No thanks.
Many states offer “deferred” taxes for those over sixty in retirement. When they eventually tip their dull children are often surprised to see the prime cut from the remaining assets go to bye bye.
Define recovery?
Housing real problems now are the economy. Is the economy about to recover?
Or is the economy on a knife’s edge waiting for the govt to be forced to stop the $1.3t a year deficits?
Would housing crashing to a level supported by real supply and demand, help economic recovery, or would it simply speed the time when we plunge into depression.
Again, I’m not arguing chance of success.
If the government (wrongly) believes this was just a recession and the economy will recover, bringing back demand and immigration to eventaully absorb the excess supply…. are they attempting to keep house prices inflated, or are they seeking to just prevent overcorrection to the downside?
Price fixing for the good of the few, do the detriment of the many, is illegal.
Government attempting to engineer price stability for the sake of the greator good is the primary goal of modern economic theory.
The Fed to pool reserves, to allow those reserves to be loaned out, the fed as buyer of last resort, all to control the growth of the money supply and create economic stability and price stability.
FDIC to insure bank deposits and prevent runs on banks when people suddenly realize money is just other peoples’ debts.
Unemployment to be counter cyclical.
Minimum wage, food stamps, housing assistance, EITC, per child tax credit, all intended to ensure the poor can consume to create demand and establish a floor under labor costs.
Social Security and Medicare to give people a reason to save less than 25% of their incomes, keep them consuming, and prevent them from draining thier children’s ability to spend.
Is the government attempting to create price stability for the greater good, illegal? Certainly not.
Should their attempts to inflate a bubble for the good of the few be illegal? Surely. But, is that where we are at now?
“Government attempting to engineer price stability for the sake of the greator good is the primary goal of modern economic theory.”
I must have slept through most of my economics classes, or perhaps I went to the wrong schools, as over the course of many economics courses, I can’t remember ever hearing a single professor mentioning your ‘theory.’
But since you mentioned it, could you please provide a few references so we can all get caught up?
Perhaps there is a currently-available course that professes what you called the ‘primary goal of modern economic theory.’
And in fairness to the point you tried to make, the monetary policy goal of stable inflation could be construed as a form of government-engineered price stability, at least as regards the value of fiat currency.
But if you extend that argument to specific classes of goods, such as housing, I’m not buying it. If you show me where it says in the Fed’s mandate that they are authorized to prop up housing prices, and I will shut up.
U.S. NEWS
JANUARY 26, 2012, 6:07 P.M. ET
Bernanke to Revisit Teaching With Class on Fed
By LUCA DI LEO
Federal Reserve Chairman Ben Bernanke is heading back to the classroom.
Mr. Bernanke, a former economics professor, will deliver four lectures in March to undergraduate students at the George Washington University School for Business, talking about the central bank and “its role in today’s economy,” the Fed said.
The move—a first for a Fed chairman—will provide an opportunity to explain the Fed at a time when it is coming under heavy political fire, and will offer Mr. Bernanke a chance to revisit the joys of teaching, something he might like to do when he retires.
“It’s like candy for him,” said Donald Kohn, the deputy chief at the Fed until 2010 and Bernanke’s right-hand man during the financial crisis of 2008 and 2009. “It’s probably good as recreational therapy.”
The lectures—to be held March 20, 22, 27 and 29—will offer Mr. Bernanke the opportunity to talk about central banking from an academic perspective, something he relishes. It could provide a welcome break from the high-pressured testimonies he must deliver to Congress and from his fast-paced, quarterly news conferences following the Fed’s policy meetings.
The sessions could also give Mr. Bernanke an indirect way to respond to the growing chorus of political critics. Republican presidential candidates continue to attack the Fed fiercely in debates. Newt Gingrich and Ron Paul accuse him of sowing the seeds of inflation and weakening the dollar. Mitt Romney has joined the others in saying he wouldn’t reappoint him.
Mr. Bernanke prefers not to respond directly. When asked about the criticism during a news conference Wednesday, he declined to comment, saying “I have a job to do.” But he has noted that during his six years as Fed chief, inflation has averaged 2.3%. That’s lower than what his predecessors Alan Greenspan and Paul Volcker achieved.
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But he has noted that during his six years as Fed chief, inflation has averaged 2.3%. That’s lower than what his predecessors Alan Greenspan and Paul Volcker achieved……
one problem. The “basket of goods” had been rigged, and they EXCLUDE FOOD AND ENERGY, the 2 items everyone MUST buy.
So, Necessities are way up and widgets, not so much.
More government lying.
Money Printing I 4 credits
Money Printing II 4 credits
Money Printing III 4 credits
But if you wait four years until your senior year to take each class, you’ll get 6 credits each.
Unfortunately, you’ll also need 50% more credits as a whole to graduate.
Excellent. You get ‘extra credit’ if you postulate, at every turn that the Money Printing and ‘injections’ were not aggressive enough. Amounts in each case should have been LARGER.
No amount is too large, and no bank too insolvent to save.
IMO, I think the interest rate policy has much more to do with propping up wall street then it does the housing market…
Which flavor of ‘interest rate policy’? And is there any reason rewarding Wall Street and propping up housing have to be mutually exclusive policy objectives?
CREDIT MARKETS
FEBRUARY 3, 2012
Investors Place Their Money on Fed
By MATT PHILLIPS
Investors have piled into mortgage bonds guaranteed by U.S. housing agencies, in a bet that the Federal Reserve will launch a third round of stimulus aimed at the housing market.
That buying has sent yields for securities backed by newly originated 30-year mortgages to record lows this week. Yields move in the opposite direction of prices. On Thursday, the rate for 30-year Fannie Mae mortgage securities hovered at about 2.66% late in New York, according to data from Credit Suisse Locus, a research platform. On Jan. 3, the yield stood at 2.96%.
Rates have declined in recent months, driven first by the Fed’s surprise announcement in September that it would start buying mortgage debt again with the proceeds of maturing mortgage bonds. More recently, investors took cues from some Fed officials publicly highlighting the importance of housing to the economic recovery. Speaking to a bankers’ group in Iselin, N.J., on Jan. 6, Federal Reserve Bank of New York President Bill Dudley, considered a close ally of Fed Chairman Ben Bernanke, said “with additional housing policy interventions, we could achieve a better set of economic outcomes.” Other Fed officials recently have raised the call for more action on housing.
Many bond-market strategists expect the third round of quantitative easing, in which the Fed buys bonds to increase the money supply in an effort to increase lending and liquidity, to be announced sometime in the first half of 2012. Rough estimates of the size of the program vary. BNP Paribas said the Fed could purchase $400 billion, while Morgan Stanley analysts offer a range, with $750 billion of purchases of Treasurys and mortgages at the high end.
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“Is the government trying to keep house prices inflated”
The answer is yes.
I’ve observed strategic reaction and well orchestrated pushback by outside forces when discrediting and shaming the Housing Crime Syndicate on blogs, forums and news outlets. The most sophisticated operators are on HP. Frankly, most of you have no idea how deeply entrenched and powerful the HCS is and I only see a fraction of it. It’s a war fought through the media and there are paid PR firms operating on the net EVERYDAY at the behest of the HCS.
My speculation? The Fed reserve funds it all to keep every one spending and borrowing. Their proxies are the entrenched power structures we’ve come to hate. NAR, MBA, other banks, 401k industry, revolving credit operators.
If you think we “just kinda drifted to this point” then you deserve to be ridden hard by the thugs.
NAR, MBA, other banks, 401k industry, revolving credit operators = REIC (Real Estate Industrial Complex), a great source to politicians for campaign contributions and political sound bites
You’ll see alot of what appears to be boo-hooing for home debtors by what appears to be Joe/Jane Sixpack on the website I mentioned. Alot pandering for principal reduction, “keep people in their homes”, hang the ‘banksters’ etc. And everything is peaceful until “walking away” is mentioned, then all hell breaks loose. The same nutjobs wanting to string up bank exec all of sudden shift gears and attack the idea of strategic default as if it were Satan himself. And then a simple question is posed and I’ll ask it here;
“Why do you want to keep homeowners enslaved to massive debt from which they’ll never recover from financially?”
This question goes unanswered by the Boo-Hoo’ers.
The charade is professional, paid for and insidious.
There’s a University of Arizona professor by the name of Brent White. A while back, he wrote a book called Underwater home : what should you do if you owe more on your home than it’s worth?
When it first came out, the UA PR machine was crowing like a rooster. Then, radio silence.
From what I could gather, Prof. White’s book, which gives ample coverage to the notion of swimming away from an underwater home, offended the REIC.
But you can read it at the UA law library. Just understand that this subversive book is not allowed to leave said library.
what site - “HP”? what is that?
“If you think we “just kinda drifted to this point” then you deserve to be ridden hard by the thugs.”
No, no. I get it.
Faced with the choice of 1) ending free trade and reversing the war on labor to create a sustainable balanced economy or 2) deregulatign banking to get the debt/money flowing to pander to the few at the expense of the many, they chose option 2.
I get it.
But, at this point.
With the 20-city index sitting right at the same monthly paymnet at 4% interest as would be at 100 baseline with 7% interest, are we still inflated, or just on the verge of collapse into overcorrection territory?
Your argument kind of reminds me of one I had with step-mother’s, mother about 30 years ago:
Her, “Oh, he did it?”
Me, “How do you know. Sexual harassers tend to leave a history of multiple incidents with multiple women. Here we have one woman, making unsubstaintaied claims, and she folowed him to 2 more jobs over the next 20 years.”
Her, “I know he did it because he wants to make abortion illegal”.
Classic non-sequiter (It doens’t follow).
You hate Realtors, bankers, Wall Street, politicians in the pocket of the above, etc, etc. therefore, house prices, even at payment/rent equivilance, are still inflated.
It doesn’t follow.
“You hate Realtors, bankers, Wall Street, politicians in the pocket of the above, etc, etc. therefore, house prices, even at payment/rent equivilance, are still inflated.”
You’re asserting that prices have normalized and it’s a false assertion as is an interpolation from CS baseline. Secondly you extrapolate using a variable(interest rate).
We’re going to find out over the next decades just how grossly inflated housing prices are.
Enjoy the ride.
The most sophisticated operators are on HP. Frankly, most of you have no idea how deeply entrenched and powerful the HCS is and I only see a fraction of it.
Excuse me for being so slow this morning, but what is HP and HCS? I just got my coffee..
Mornin’, Rancher!
The HP is the Huffington Post. HCS is our “we love to hate it” Housing Crime Syndicate. Y’know, real estate agents, mortgage vermin, CDO street gangs, banksters, etc.
I’ve observed strategic reaction and well orchestrated pushback by outside forces when discrediting and shaming the Housing Crime Syndicate on blogs, forums and news outlets. The most sophisticated operators are on HP. Frankly, most of you have no idea how deeply entrenched and powerful the HCS is and I only see a fraction of it. It’s a war fought through the media and there are paid PR firms operating on the net EVERYDAY at the behest of the HCS.
Hmmm, I’ve noticed the same thing on the HuffyPo. And I thought that I was the only one.
Paid PR firms, huh? If their work is the same stuff I’ve been reading, I think they need better writers. This copy/paste of the same old HCS talking points is getting old.
1) Do 4% interest rates justify 37% higher prices based on rent-equivilant cost?
Yes if the pool of buyers have about the same income as when the home prices were 37% lower. What also needs to be considered are the tax/insurance costs compared to the past and the quality of the housing stock today compared to what it was during the “historically normal” valuations at 37% lower. Bigger? Better? Maintained? “Are these houses better off than they were 10 years ago?”
2) If the answer to #1 is yes, then, is the government working to keep prices inflated or are they just looking to prevent over correction based on the (maybe) short-term oversupply and sub-normal demand?
Both, because a way to prevent an over correction would be to work to inflate. We’re in uncharted territory on this governmental housing intervention thing.
You are attributing too much intention to the policy. They are trying to stabalize prices. In some places this is stopping an overcorrection. In some places this is keeping overpriced housing from coming down to a sustainable level. In some places, the two results can happen within 10 miles of each other.
What they are actually trying to do is keep housing prices from falling anymore no matter where prices currently are. This is because they see falling prices as an issue in the health of the banking and financial sector. The Fed doesn’t own all the bad assets. They are still out there in bank portfolios, insurance company reserves, pension funds “safe” assets, etc. As a side issue only, they think that keeping house prices from falling further will keep more people from voluntarily defaulting with puts an administrative burden on the legal system that it *cannot* handle without gobs more money that it can’t get.
It is really as simple as that.
What they are actually trying to do is keep housing prices from falling anymore no matter where prices currently are.”
The big question is will they be successful?
And *that* is a question way above my pay grade.
That is a question those way above your pay grade seem unable to answer successfully. Prediction is hard, especially when market forces are thwarted by distortionary intervention.
What they are actually trying to do is keep housing prices from falling anymore no matter where prices currently are. This is because they see falling prices as an issue in the health of the banking and financial sector.
And there ya have it. Nothing to do with keeping people in their homes. It’s about keeping payments flowing to the banking and financial sector.
No wonder the PTB thinks that strategic default is such a scary thing.
Nothing to do with keeping people in their homes.
+1 It’s all about the quality of the debt.
What they are actually trying to do is keep housing prices from falling anymore no matter where prices currently are.
What they are actually trying to do is keep asset prices from falling anymore no matter where prices currently are.
The quality of the debt slips as prices drop.
I would like to hear about the buy vs. rent equation in different localities. In Orange County, CA seems house prices are still dropping, yet rents remain firm.
Steady demand for rental by newly-foreclosed former homeowners?
Please tell us where you are located.
Also interesting to hear how lower unemployment will affect the housing market and construction.
…house prices are still dropping, yet rents remain firm.
Used to be a time when mortgage PITI was cheaper than rent because credit was tight and few could come up with the 20% down payment. Social meddling in the marketplace usually has consequences beyond the intended purpose as section 8 style programs tend to keep rents inflated above market value.
In a reasonable economy, a 137K mortgage equals a $1370/month PITA.
When our country gets back to this level of equivalency, housing will once again be “affordable.”
I’m seeing lots of articles purporting that the economy is getting stronger. Has the economy turned around or is this a head-fake? An upward correction soon to be followed by another downturn? Fake numbers?
Thanks in advance!
Has the economy turned around or is this a head-fake?
Bob and weave…
Dead cat bounce?? -
$1.3T a year deficits. The new money is flowing in faster than it is leaking out. That does not mean the leak is going away.
Will we be able to continue to increase total debt at 3x the rate supported by population and wage growth?
We have increased each household’s share of total debt from 2.8x median income in 1980 to 6.5x today. Can we continue to grow that debt to income ratio?
If we can’t keep pumping in debt/money at this rate, forever, and the leaks are not about to go away, then it is not a sustainable recovery.
If you listen to the Marketwatch shills, the economy could hardly be better.
heh….. MW.
Meant to type CNBC. Eh, it’s all the same.
I believe that residential real estate is going to start adding to the economy despite falling prices. Simply put, construction has hit bottom, will not fall further, and might increase in some places, particularly multi-family and rehab.
At this point lower prices mean more economic growth. More people buying houses at prices they can afford, and fixing them up. Higher prices mean more stagnation.
Sfrenter, better get approved for that mortgage now.
California Teachers Fund Trims Investment Forecast to 7.5% Amid Declines
The California State Teachers’ Retirement System, the second-largest U.S. public pension, cut its assumed annual rate of return to 7.5 percent from 7.75 percent, the second reduction since 2010.
The board of the $144.8 billion fund voted yesterday to adopt an actuary’s recommendation to lower its investment forecast because of what a staff report called “dramatic market declines” beginning in 2008.
The change means the plan will need larger contributions from taxpayers, teachers, school districts, or a combination of all three, to cover pension costs
http://www.bloomberg.com/news/2012-02-02/california-teachers-pension-fund-reduces-assumed-return-rate-to-7-5-.html
“… its assumed annual rate of return to 7.5 percent from 7.75 percent…”
Lol. Stand up material.
Yeah. Ignore the real rate of return of about 4%, largely based on population growth, which is about to go away with Boomer’s aging.
When my wife and I do our retirement planning it is more like this….
We’re adding 14k a year to 401(k)s. If we manage to avoid unemployment and keep putting in that money for 20 more years we’ll have… $280K + the current $150K.
If we manage to keep up with inflation on the RoI, we’ll be happy and more than a little surprised.
You are going about this the wrong way. If you are still young enough to have 20 more years of work ahead of you, then here is a much better option:
Quit your jobs and get a government job. Roll over your current 401k into an IRA and “grow” the current amount over the next 20 years.
Now, you get GUARANTEED retirement after 20 years, whether you save anything or not. You get a FIXED payout (with cost of living increases), whether the economy or the markets do well or not, usually higher than most private companies, and, you still have the IRA.
You will live very well at the expense of others who get to keep your pension plans solvent, no matter the economic stresses of the rest of the country.
I see people my age (56) currently collecting their government pensions (including family members) who spend their days shopping and dining out, traveling to new places and basically enjoying the “fruits of 30 years” of government “service”.
They think it’s great. If I were they, I would agree. They expect to collect until they die. The funds never dry up, so they can just spend it all on luxuries and consumables. It’s like being a “trust fund baby”, only it’s Uncle Sugar that pays for it.
“Quit your jobs and get a government job.”
Is this what you personally plan to do?
I assume when you say govt job, you mean federal unless you’ve missed all the stories about state and municipal pensions.
And for federal, maybe not such a good idea either (see federal debt and deficit). Counting on that retirement plan and not saving could be a disaster for many retirees in the not so distant future.
I’m afraid it’s too late for me. I don’t have 20 years of available service to donate, as that would make me 76, way past the “normal” of 65. It won’t work for me. I missed the government gravy train. While I did try to get a few County/State jobs during my years of work, I did not get one.
I realize it’s ridiculous to think everyone can quit their jobs and get a government job, but then the “fully funded” retirement claims of the various unions are just as ridiculous.
They are only fully funded if the taxpayers get the bill. So, while they are being ridiculous, I figure I will give financial advice that takes the same line of reasoning.
If it works for them, well, then, it should work for everyone else too.
Al,
For new government employees, the pension will be 1% per year of service multiplied by the average of the high 3 years which includes only base pay and locality adjustment. Overtime (yeah, like anyone ever authorizes overtime), bonuses ($500 wow!) and anything else cannot be included.
So 20 years of government service with the average of the last three years at $70,000 will get you a pension of $14K a year or $1167 a month. Better than a kick in the pants, but not enough to live the life of luxury that Dio whines about.
And even if you work more than 40 years, you can’t get more than 40% of the average of your high three. You stop getting additional years of service after 40.
Oh, that’s great. It sounds like a reasonable “benefit”. It means you might even need to save some money on your own like the rest of us. I don’t have any problem with it.
But you say that’s for NEW employees. So, I guess they figured out all the promised benefits of 90% of last 3 years pay, based on 20 hours of overtime and an added “cost of living”, when inflation is supposedly ZERO, haven’t worked out too well financially? Is that about it?
I just posted another article about ridiculous government pensions from the Capitol of Rhode Island. Look it over.
They (the former mayor) promised 5 to6% COL adjustments in perpetuity, as a needed benefit in 1991.
They’ve never done anything about it, so the benefits are astronomical. The beneficiaries feel they are “entitled” to it, since they got it in a contract. It’s guaranteed.
That’s what I am complaining about.
A reasonable “pension” that gives you a support level of income is not a problem with me.
However, I know too many people already, collecting in excess of $3500 a month or more for their 25 or 30 years, in their mid-fifties. And I’ve seen many more instances like the example in the story where the former employees are paid in 6 figure annual benefits. It’s criminal, not a ‘benefit’. Stealing by government mandate.
However, if it’s “legal” to write yourselves benefits by mandate, then it should be “legal” to rescind them. Unfortunately, the Judges seem to think anything promised is sacrosanct, even if the benefits bankrupt the Grantor of the benefits. I favor all municipalities and County governments that cannot meet budgets for payments to employee benefit plans to do the right thing. BANKRUPT the city/county and start over. Let those who shafted their citizens pick up their own retirements, as they have already bled the citizenry dry.
Actually that is the system that has been in place since 1984. It is still in place. The pre-84 people get 2% per year of service times average of the top 3, but all the money that would have gone to Social Security goes to the pension plan and they don’t get any credit toward SS for their years of government service. The 2% also max out at 40 years so you can’t get more than 80% no matter what, no overtime or bonuses included.
we’ll have… $280K
1) only if the market doesn’t tank in those 20 years
3) you don’t get fee’d to death
2) Don’t forget you still owe income tax on that when you pull it out.
I used to believe in the 401(k) until both crashes in the 2000’s. Now I only put in enough to get the company match.
I don’t even bother with an IRA anymore either. I figure that will be something the government decides to target and raid in the near future and ‘manage’ for me. No thank you.
Polly,
Those numbers pretty much dismiss my idea that Fed employees won’t be saving for retirement because of their ‘rich’ pensions. Although, 40% of your best three if you’re debt free and live a modest lifestyle would work out nicely.
And given that the median starting age for federal employees is somewhere in your mid 30s, most aren’t going to get anywhere near 40%. Those of us in the new system do have a 401(k) plan available and we use it. Plus we are part of Social Security.
My father spent 25 years of his career at one company (others before and after). The CEO of that company said that retirement should rest on a 3 legged stool - social security, pension and personal savings. Except for being pretty darned sure that I won’t be able to take my pension as a lump sum (the way my dad did when the company got bought out), I have what my father had. Except he got stock options and had 20 years of solid stock market returns and got to buy a house for three times his salary before inflation (including wage inflation) hit in the 70’s. So maybe not so much like my dad after all.
“Quit your jobs and get a government job.”
It’s just not that easy.
I have mentioned before that a friend’s brother is a retired cop who gets paid more than $70k per year. He is absolutely tickled pink.
“…bonuses ($500 wow!)…”
Government bonuses are a sick joke compared to what Wall Street offers.
The change means the plan will need larger contributions from taxpayers, teachers, school districts, or a combination of all three, to cover pension costs………………
Notice, of course, the ridiculous choices of “revenue enhancement”
1) Taxpayers
2) School districts?, which means Taxpayers.
3) Teachers. Really? Didn’t they just start riots in Wisconsin over the idea they should actually pay a little more for their retirements?
So, we can count out 3, except perhaps for a 0.5% contribution increase. Maybe.
What’s missing here is the realization that the entire “planning” of 8% “growth” was always a joke. You can’t have 8% growth in a 2% growth economy. Can’t happen. You can rig the system, as Greenspan did and start speculative bubbles that give the ILLUSION of ‘growth’, until reality sets in. I’d LOVE to find some 8% growth, or 7.5, or 6 or even 5. Net returns on stock/bond plans for the past 10 years haven’t made near this.
So, what are we really talking about? An UNSUSTAINABLE Pension growth bubble that needs to be supported, again, by taxpayers, or, here’s a thought.>>>>>a REDUCTION in Pension benefits. And absolutely NO payments before age 65. How about that?
Do you think we could get government “benefits” in line with all us 401k, self-saved, no-return slouches that litter America? They are taxing our retirements to pay for theirs. Only in a 3rd world fascist dictatorship would I expect the government “servants” to be fleecing the working classes, but then, I guess this is what America means anymore. You are either on the government dole, or you pay for it.
Here’s another story from RHODE ISLAND:
Mayor: Providence is facing bankruptcy
Demands sacrifices from retirees, tax-exempts
Updated: Friday, 03 Feb 2012, 10:05 AM EST
Published : Thursday, 02 Feb 2012, 9:34 AM EST
By Ted Nesi, WPRI.com Reporter
By Nancy Krause
PROVIDENCE, R.I. (WPRI) - Rhode Island’s capital city will be in bankruptcy by June if it doesn’t get help resolving its financial crisis.
Taveras said the city’s retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city’s pension liability “into the stratosphere” by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.
“These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year,” Taveras said, calling the increases “raises,” not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions.
Taveras’s office released a list showing that the city’s highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin’s pension will total roughly $796,871 if he lives to the age of 100.
http://www.wpri.com/dpp/news/local_news/providence/wpri-wpri-providence-mayor-angel-taveras-budget-crisis-nek
You see, only in Government, can you make projections about how the future will be, and promise “public servants” an endless stream of wealth from the taxpayers. ANY FOOL can see it’s completely unreasonable and unfair for taxpayer to be paying a retiree 3 times his salary, years after leaving. Police and Fire departments seem to be the biggest crooks, while being hailed as “heroes”. It makes me ill.
The California State Teachers’ Retirement System, the second-largest U.S. public pension, cut its assumed annual rate of return to 7.5 percent from 7.75 percent, the second reduction since 2010.
Sounds like the strawberry picker in the $700k McMansion couldn’t keep up with his end of the deal. Nobody could have seen this happening. Shocking!
Is there any chance some U.S. presidential candidate will take the bold step to suggest that household finance decisions are private, and hence not appropriate to address by massive federal government intervention, especially the kind that involves deliberate price fixing!?
Why should falling (or rising, for that matter) housing prices be a concern for presidential politics?
ANALYSIS
AIR DATE: Jan. 31, 2012
How the Housing Market Could Shape the 2012 Election
A new Standard & Poor’s Case-Shiller Home Price Index showed U.S. home prices fell for a third straight month in two Florida cities, Miami and Tampa. Jeffrey Brown discusses the housing market’s role this election season with The Wall Street Journal’s Arian Campo-Flores and Jed Kolko of the real estate website Trulia.
How does the housing situation play into the relative strengths of the various U.S. presidential candidates?
Romney gains from U.S. housing crisis
By L. Ian MacDonald
Posted 6 hours ago
There are many reasons why Mitt Romney won the Florida primary by 15 points over Newt Gingrich, but the state of Florida’s housing industry is a good place to start.
Since the housing bubble burst in 2006, home prices have fallen by 30% across the U.S. But in Florida, home values have plummeted by 40%. Millions of Floridians owe more on their homes than they’re now worth.
The housing vacancy rate is more than 11% across America. But in Florida, nearly 20% of its housing stock stands empty.
For Canadians, it’s a great time to buy a condo in Florida.
Now consider that Gingrich accepted $1.6 million in consulting fees from Freddie Mac, the mortgage lender that, with its sister institution Fannie Mae, owns half the mortgages in America, and you have the makings of a devastating attack ad that helped take Gingrich down in Florida.
If the American dream is that everyone is entitled to own a home, even when they can’t afford one, then the two mortgage lenders were enablers.
There is a story, told in Michael Lewis’s brilliant The Big Short, of a migrant worker in California who got a mortgage for $700,000 with no down payment.
That’s the kind of stuff that was going on before the bubble burst. When the financial crisis struck in 2008, Washington was forced to bail out Freddie and Fannie to the tune of $450 billion.
The very thought of Gingrich taking all that money from Freddie would have been enough to take him down. But there are plenty of other reasons, including Florida being a diverse and cosmopolitan state with three times as many voters as the first three caucus and primary states — Iowa, New Hampshire and South Carolina — combined.
…
All I’ve ever heard Mr. 1% say about housing is that foreclosures should happen to clear the market. It’s about the only thing I can agree with the plastic man on. However, I cannot see it being a popular stance with the general population given the sheer number of foreclosures, and the collective hatred for the big banks and 1%’ers. Mr. 1% has issues ahead of him.
the collective hatred for the big banks and 1%’ers????
What collective hatred??
If the general population had the slightest clue about all the financial shenanigans that have gone on to make the BIG 10 banks, BIGGER and richer, though they should ALL have been Liquidated, then they would have NO customers.
I see Wells Fargo Banks going up everywhere and lines of people streaming in and out. Same for the rest.
Goldman_Sachs, which never was a Bank, except when needed to be to get FREE FED money, is nothing but a skimming operation.
They have been doing stock buy-backs for 3 years to prop up the price of their stocks, while their execs SELL their shares, whenever they pass the 3 year revised requirement for converting BONUS shares to CASH, thereby screwing their shareholders of the money the should have received in dividends, but instead was used to “buy back” shares on the market. The prices have still declined.
Not a word in the press. People in America are angry because they see they have been swindled by the Banksters, but they focus on Football, Basketball, and sports in general. They go about their daily lives, focused on useless things like that, and go to the same Banks that screwed them out of their money. You see, they are too stupid to realize that they have been screwed out of their money by the banks, even when they get a $35 overdraft charge, or an 18 to 23% interest rate charge in a ZERO return rate environment. People are Stupid.
“I see Wells Fargo Banks going up everywhere and lines of people streaming in and out. Same for the rest.”
They’re opening up everywhere in the northeast in the last 18 months.
When I started this blog in 2004, it was an exercise in ‘thinking out loud’ about the housing bubble. I remember thinking in the spring of 2005, that if what I was seeing was correct, what might the fall out look like? I pondered that it might include corporations like the GSEs going away. Or even to the extreme of the end of the US dollars role as a reserve currency.
Look how far events have taken us. The European Union might dissolve. There are open calls for ending the central bank. The resulting global economic weakness could even be playing a role in revolutions around the world. This article by William Pfaff got me to thinking:
‘The framework in which most Americans, including the foreign policy specialists, see the world has totally changed in a decade…Americans in 2002 believed themselves on top of the world, capable of anything. They took progress for granted. A leading neo-conservative of the time said, ‘we have something called the Agency for International Development, in the hope that someday Somalia might look like Norway.’
‘The American public, and again, many of its foreign policy experts and political leaders, have decided that the United States is in decline, its social coherence, its sense of unity and purpose lost, divided as never before by economic class. The American and Western economies are badly weakened by a global recession and potential depression, wrought by Wall Street.’
‘This is no illusion, nor is the widespread conviction that the American government and its electoral system suffer a crisis of function, accountability, competence and venomous political conflict.’
I don’t buy everything written here. But this idea of bubbles marking large shifts interests me. Japan experienced a twin stock and real estate bubble, then went from an economic superpower into decline. Does the current global mania represent the last spasm of the global financial system as we know it? If so, consider the magnitude of the changes ahead.
“But this idea of bubbles marking large shifts interests me.”
Similarly interesting is the history of natural disasters that change the course of history. It is too early to say to what extent last year’s Japanese tsunami or NOLA’s Hurricane Katrina of a few years back will have that effect, but the Lisbon, Portugal earthquake and tsunami of 1755 is believed to have done so.
“When I started this blog in 2004, it was an exercise in ‘thinking out loud’ about the housing bubble.”
Can’t tanks you enough Mr. Ben. $eriously, many, many tanks to you and alls your time & effort$!
Now, that there are 7+ Billions of consumer$
economic$ is going through puberty
(That’s the message eye gots at the pay phone booth in the middle-of-nowhere Mojave & I’m $tickin’ with it!)
“consider the magnitude of the changes ahead.”
Indeed.
The 20th century began with a major power shift from Europe to North America.
One would have to be blind to not see the potential for a similar shift to move that power to Southeast Asia.
There are large bubbles all over Asia. In India, Australia, Russia, eastern Europe, Central America, even in Arab states.
The conventional thought has been that power shifts. But what if the decline is as widespread as the real estate mania? China is a good example; the underclass is massive. No political representation. Dependent on unsustainable trade imbalances and a real estate bubble as large as any on the globe. I don’t see power, but weakness.
The future will remain cloudy until China works through the aftermath of its property bubble. This may take decades, far longer than I am likely pay close attention.
China is a good example; the underclass is massive. No political representation. Dependent on unsustainable trade imbalances and a real estate bubble as large as any on the globe. I don’t see power, but weakness.
There’s been massive social unrest in China that we just don’t hear much about in the Western media. And it will continue.
But an even bigger question remains about the reaction of governments, or their people, worldwide to cope with the economic stresses that are the result of the Greenspan Mania.
Whenever economies collapse from debt destruction, there are usually riots, revolution, and most often WAR.
We’ve been busy making war on various supposed radical groups, while alienating foreign peoples for some time now. Will economic stress over oil, water, food, metals, or other commodities lead to a REAL shift in ‘power’ as we go fight over the resources? We are saber-rattling in the Persian Gulf, and the Mediterranean.
Germany suffered from WW1 and got a bad deal. The depression led to the growth of the Nazi party and then WW2. WW1 brought the end of the Czar and the start of Communism in Russia. There were world-wide economic stresses from the 1907 collapse, prior to WW1. We are only 3 years into this latest fiasco. I fear a world-wide game of drawing sides for conflict, escalating into a real shooting war. What will that do to all the ‘power centers’ of the world. Who knows?
“…Greenspan Mania…”
Ministry of Truth position: The Greenspan Mania is a figment of your very active imagination.
The geography of wealth and power worldwide could change drastically during the next decade, including across the U.S. and its neighbors.
For the past 100+ years, much of the wealth and power in the United States has been concentrated on the coasts.
Who says it will stay that way? I find it interesting that those promoting class warfare generally are from geographic locations that stand to lose the most if “economic fairness” becomes a dictated affair.
I sure as hell wouldn’t want to be in NYC, Boston, Washington DC or California if economic parity becomes a mandate.
Does the current global mania represent the last spasm of the global financial system as we know it? If so, consider the magnitude of the changes ahead.
”
I like the way the book ” the fourth turning ” explains this
I think the election of Obama was the start of the crisis which should go for 20 years. Before that it was unraveling.
yes its bad and yes it will get better after dramatic changes
I think the election of Obama was the start of the crisis which should go for 20 years. Before that it was unraveling.
Poor Obama. Guy just can’t win for losing.
Bad thing about 20-year crises: They may outlive you.
“Does the current global mania represent the last spasm of the global financial system as we know it?”
I think the pre-2008 mania represented the last spasm of the debt-driven consumer economy in the U.S., and early retirement in demographically challeged Europe. Things will be a little tougher, but not too bad.
Americans in 2002 believed themselves on top of the world, capable of anything.
Really? How soon we forget…9/11/01?… In 2002, America had just majorly gotten our wings clipped. I think that is when our sense of total infallibility started to crumble. I remember the days after on Cape Cod. Besides all the other repurcussions of that event, the real estate market was at a complete standstill. It was our central bank that allowed Americans a temporary headfake but as you know from all the people who joined you here on this blog, we didn’t all buy it.
“consider the magnitude of the changes ahead.”
I thought that was why we were all here. The swirling arguments of who’s right and who’s wrong don’t interest me much. Well I should rephrase: I enjoy the presentation of someone’s arguments but not so much the personal attacks that so often are part of the package. I enjoy the heads up on what’s going on in world gov and banking entities and the following analysis. Whether each of us accept any of it is our own choice, and those choices will decide how each of us survive the changes you refer to. I’m never sure why anyone else’s opinion about what we believe should matter more than the repurcussions we’ll personally face because of how we act on those opinions.
“I thought that was why we were all here.”
As much as things seem to change….things are still the same.
I had prime rib for dinner. $9.95, special, every Friday, potatoes and gravy and a how do you do with a first name. I have to say it is as good as any $100 city dinner, better with the first name.
Yes, choices. Our choices will matter much more than the slogans.
“When I started this blog in 2004, it was an exercise in ‘thinking out loud’ about the housing bubble. I remember thinking in the spring of 2005, that if what I was seeing was correct, what might the fall out look like?”
Then: Those of us who conjectured that there was a bubble with a looming crash were labelled tinfoil-hat wearing conspiracy theorists.
Now: Everyone saw it coming, except for those whose jobs depend on their not having seen it coming.
“The American and Western economies are badly weakened by a global recession and potential depression, wrought by Wall Street.”
Dr. Ben Bernanke’s Think Method:
If we collectively think there won’t be a global depression, there won’t be a global depression.
P.S. I did my bit to stimulate the economy over the past two months, by diversifying some of our household portfolio into durable assets that provide me with personal satisfaction. And I don’t mean buying a house.
Own Vs. Rent Riles Government Housing Policy
http://www.cnbc.com/id/46238350?__source=RSS*blog*&par=RSS
I love the part about REO Bulk Rental Investors are sworn to secrecy. America is a Banana Republic.
So much for glasnost.
That’s the FED working on it’s OPEN MARKETS concepts. Transparency.
Yea, that’s what the American market system is all about Transparency and the ability for ALL to have current price discovery.
Remember who went to jail for “insider trading” because her broker told her he had heard some rumors about her stock and that she should sell it. That’s right, Martha Stewart. A real criminal, who said to her broker, “if you think I should, then go ahead and sell my shares”.
Crook. Criminal. Con-woman.
Selling on a rumor gained from “inside information”. A bigger offense can be found nowhere in the financial history of America.
It’s all a big farce.
and (c) agreement to keep certain information about the REO [Real Estate Owned, i.e. bank owned] and related matters confidential.” That last part is to keep the prices competitive as the market starts to improve. ”
will this work ?
Maybe.
If all these houses were actually offered for rent there would be massive downward pressure on rental rates. Low rental rates would entice many to stay out of the market for buying, pushing prices down on those houses that are for sale. As long as there is more housing available for occupancy than occupants, either as rentals or for sale, it should put downward pressure on prices. Especially now that attitudes are changing towards renting.
If the houses are just held and not rented, who knows.
As long as there is more housing available for occupancy than occupants, either as rentals or for sale, it should put downward pressure on prices. Especially now that attitudes are changing towards renting.
I think Al just nailed it.
Criteria for the program:
(a) the financial wherewithal to acquire the assets;
= you must be rich
(b) sufficient experience and knowledge in financial and business matters to analyze and bear the risks of the investment opportunity;
= well connected
(c) agreement to keep certain information about the REO [Real Estate Owned, i.e. bank owned] and related matters confidential
= willing to lie
(b) sufficient experience and knowledge in financial and business matters to analyze and bear the risks of the investment opportunity;
= well connected
Al, I beg to differ with the above.
Why? Because of what I see and hear here in Tucson.
You wouldn’t believe the number of well-connected people who thought they knew what they were doing in the real estate business. Both residential and commercial. Many of them have lost their shirts.
Will the Republican presidential candidates continuously hammer Obama on the economy, even though a recovery is underway?
Can’t Obama put the shoe on the other foot, and point out that the economy was already in the toilet when he took office, and that his efforts to improve it have finally born fruit?
This news will also make it harder for the Fed to politically justify a decision to implement QE3. If a recovery is clearly taking hold, how would the Fed sell the idea?
Unemployment rate falls to 8.3%; fifth straight monthly decline
The Labor Department reported Monday that the U.S. jobless rate declined to 8.3% in January, the lowest in three years. Daniela Silvero, left, an admissions officer at ASA College, discusses job opportunities with Patrick Rosarie during a job fair in New York. (Associated Press)
By Don Lee
February 3, 2012, 6:20 a.m.
Reporting from Washington—
The U.S. job market strengthened at the start of the year as employers added an unexpectedly large number of new jobs and the unemployment rate in January dropped for the fifth straight month to 8.3%–the lowest in nearly three years.
The Labor Department said Friday that employers nationwide added 243,000 net new jobs in January – about 100,000 more than what analysts were forecasting. Job gains were broad-based, powered by increases in manufacturing, professional and business services such as accounting and engineering, and in leisure and healthcare industries.
Government, however, continued to trim its payrolls, and the information sector also reported job losses, notably at motion pictures and sound recording firms. With the step-up in private-sector jobs, the nation’s unemployment rate dropped to 8.3% last month from 8.5% in December. The last time it was that low was February 2009.
The jobless rate has fallen every month since August, when the rate was 9.1%. Most economists were expecting the January unemployment rate to tick higher or at best stay the same. The Labor Department also said there was a little more hiring momentum at the end of last year than previously thought.
…
I don’t really have a dog in this fight, but I find the NPR attack on the GSE regulator’s investment strategy to be quite the spectacle. Would like to hear what other HBB posters think of this chapter of the housing bust. For instance, is it Freddie Mac’s duty to save FB’s by forcing losses on investors or taxpayers, as the Democrats seem to prefer?
Methinks the NPR reporter believes the ability to refinance into cheaper mortgages comes as manna from heaven, not at the cost of investor losses.
Freddie Mac’s Regulator ‘Completely Puzzled’ By Allegations Of Conflict
Categories: Business, National News, Economy
07:55 am
February 3, 2012
by Mark Memmott
Federal Housing Finance Agency Acting Director Edward DeMarco during testimony before Congress in December.
Enlarge Chip Somodevilla/Getty Images
Steve Inskeep speaks with Edward DeMarco
Saying he is “completely puzzled by the notion that there was something immoral that went on here,” the man at the top of the agency that regulates Freddie Mac has explained why he believes the taxpayer-owned mortgage company did nothing wrong when one of its arms, as NPR and ProPublica have reported, “placed multibillion-dollar bets against American homeowners being able to refinance to cheaper mortgages.”
Edward DeMarco told Morning Edition co-host Steve Inskeep in an interview broadcast on today’s show that Freddie Mac’s actions were “in the class of ordinary business transactions.” The “reverse floaters” in Freddie Mac’s investment portfolio, which as NPR has reported “brought in more money for Freddie Mac when homeowners in higher interest-rate loans were unable to qualify for a refinancing,” did not affect the agency’s efforts to stabilize the mortgage market, DeMarco said.
Instead, DeMarco characterized the investments as part of Freddie Mac’s effort to make sure it doesn’t lose money. And he said one of his major responsibilities, is to “make sure Fannie Mae and Freddie Mac undertake activities that don’t cause further losses to the American taxpayer.”
…
One the one hand, they were going to engage in a policy that would lead to default, and on the other, they were going to take out an insurance policy against that default.
“Well, I knew I was going to shoot the tenant. But I didn’t want to lose the rent. So I took out a life insurance policy on him. Was that wrong? Should I not have done that? I mean, it seemed win-win to me.”
“So I took out a life insurance policy on him.”
I questioned the perverse incentives created by this COLI concept back in the early-1990s when I first caught wind of it. The sales guy at the company where I worked at the time looked at me as though I was from Mars.
It could be very, very bad for employees to work at companies which perceive themselves to be underwater on this kind of insurance policy.
Managing Your Money
Why Your Company May Want You Dead
By Joe Mont 01/10/12 - 08:30 AM EST
BOSTON (MainStreet) — You may be worth more to your employer dead than alive.
Since gaining popularity in the 1980s, companies have been taking out Corporate Owned Life Insurance policies on employees and listing themselves as the beneficiary. Many workers go about their workday with no clue that such policies exist and that their company has placed a bet on their timely (at least from an actuarial standpoint) death.
…
Is Trump’s endorsement, and sychophantic statements about how you are honored by it, a political asset or a liability?
Jon Stewart Skewers Trump’s Romney Endorsement on ‘The Daily Show’ (Video)
The Comedy Central says he never pictured the real-estate mogul and NBC reality star as a supporter of the GOP frontrunner.
6:46 AM PST 2/3/2012 by Erin Carlson
I suspect Obama can beat the Republicans on the economy, unless I underestimate the stupidity of the American voter.
Feb. 3, 2012, 11:35 a.m. EST · CORRECTED
Employment up nearly 2 million since summer
Commentary: Household survey shows steady improvement
unless I underestimate the stupidity of the American voter.
You know you’re on thin ice with that one.
Totally. For instance, the whole Republican platform is an effort to blame the bad economic situation on Obama. Voters who fall for this may be completely oblivious to the roaring recovery already underway. (In their defense, I suspect many economists are as well…)
I’d like to talk about Palm Beach County.
I think SFrenter’s saga highlights what many of us are facing: when do you pull the trigger?
I have no doubt this will likely play out for another 10 years, Japan-style. So how does one decide?
For me, it would be entirely based on my children and schools. This doesn’t necessarily mean buying, but if I can find a place in a good district, I might pull the trigger. But, if my kids get into a fundamental school (Florida schools that have strict rules), I might stay renting nearby that school. It’s all FUBAR.
And then there’s the whole plan B… if Gov. Scott unleashes more unregulated industries on Florida, we’ll be off to Delaware, and if that happens I am going to buy and be done with it.
It seems harder today to predict the future than it did in 2006.
“So how does one decide?”
Buy when you
1) can sustainably afford the monthly payments;
2) when your permanent income (roughly the sum of your accumulated savings plus your secure future income) far exceeds the value of the home you intend to buy;
3) everyone you know thinks you are crazy to buy (happened to us back in 1996!).
I think SFrenter’s saga highlights what many of us are facing: when do you pull the trigger?
You don’t pull the trigger when asset prices are falling. If moving away is not an option then you rent and develop a savings plan.
How long from now until people universally agree that “real estate is the worst investment”?
February 1, 2012 10:39 AM
History says home real estate is a bad investment
By Larry Swedroe
The historical data show that investing in residential real estate hasn’t been great for investors.
While the housing bust showed many people the dangers of investing in residential real estate, investors could have realized this long before, simply by paying attention to history.
Prior to the bust, recent history made many investors feel comfortable that buying up houses would prove profitable. The recent Journal of Wealth Management paper “Measuring Residential Real Estate Risk and Return” noted that while there were a few individual quarters when the S&P Case-Shiller home price index fell, the overall trend for the 19-year period 1987-2005 was upward. The run-up in home prices was so great that for the 10-year period 1997-2006, the nominal and real returns were 9.7 percent and 7.1 percent, respectively. And from 2000 through 2006, the figures were 11 percent 8.2 percent, respectively.
However, making decisions based on such evidence means falling prey to the mistake of recency bias, which is the tendency to give too much weight to recent experience while ignoring long-term evidence. (For more on recency bias, see my new book, Investment Mistakes Even Smart Investors Make.)
Knowledge of the historical evidence would have led to the conclusion that prices don’t go straight up. In fact, in just the period 1972-1984, the U.S. had experienced three boom-bust cycles in housing prices: 1972, 1978 and 1984.
Looking at the longer-term data, we also see quite a different picture. For the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. One can only imagine how many fewer investors would have piled into the residential home market if they were aware of the historical evidence. As Spanish philosopher George Santayana famously remarked: “Those who cannot remember the past are condemned to repeat it.”
Yale professor Robert Shiller, in his book “Irrational Exuberance,” argued that home buyers may also be influenced by comparing simple returns on infrequent real estate transactions. Assume that a home in 2005 sold for 10 times the price it sold for in 1945. While that produces a simple return of 900 percent, the real (inflation-adjusted) annualized return was less than 1 percent.
Another likely error made by homebuyers was that the simple rate of return ignores all of the costs of residential real estate — including significant transactions costs, closing costs, property taxes, maintenance, and improvement costs. An assumption of 1 percent for maintenance costs would yield a real return of below zero.
The return on investment for a homeowner should also consider the imputed rental income (meaning the money you save by owning instead of renting), net of all costs. A study covering the period 1952-2005 found that when costs and imputed rental income were included, the real return to homeowners was 6.9 percent, comparable to the 7.3 percent real return for the S&P 500.
Unfortunately, that analysis ends right about the time the bubble burst. At the end of 2005, the Case-Shiller Composite 20 home price index was 202.16. By October 2011, it had fallen all the way to 138.56, a drop of more than 31 percent. And since the consumer price index rose more than 15 percent over that period, the real loss on home prices was more than 46 percent. While the home price index was falling 31 percent, the S&P 500 provided a total return of over 13 percent over the same period. And the S&P 500 has since risen to 1,308 from 1,253 (as of Jan. 18), an increase of more than 4 percent (not including the return from dividends).
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