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Saturday, May 1, 2010
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31 comments:
There's an interesting Elizabeth Warren interview that expands on some of the school pyramid commentary discussed on this board in the past. For those of you who may not have heard, she is considered to be on the short list for the next upcoming Supreme Court opening. Here are some extracts from the interview:
“The median family is spending 80 percent more on mortgage payments, adjusted for inflation, than they spent a generation ago.....
I want my kids to have a shot of making it in the middle class.” This is what it’s about for parents. And so, what does that mean in America today, because of our peculiar way of financing education? It means you’ve got to get to the right zip code, because the right zip code will determine the school assignment for your child. But the prices have shifted upward for those zip codes.
Families with children have seen a 100 per cent increase in housing costs since 1983. Why? Not because families with children have a bigger need for granite countertops or spa bath-rooms, but because housing is the substitute way to buy into a decent school system. This is white families, African American families, Hispanic families, Asian families, it’s across every spectrum. Families with children are tightening the belt one more notch, are working extra hours, are sending both people into the workforce, to try to get into the best possible school district for their children. Families are in financial trouble not because they’re irresponsible but because they’re too responsible. They’re trying to do it for the kids."
c-
I would be really interested in where shot is getting her statistics. The average house is currently only ~30% more expensive adjusted for inflation than it was in the early 80s. Interest rates are much lower, so I can not possibly see how the average family is spending 80% more on housing than in the 80s. Unless in the 80s most people paid off their mortgage rather than now most people take HELOC loans when ever they have equity. If this is the case I don't feel bad for the middle class families because it was their own choice
HB - Beats the heck out of me.
Like my Daddy always told me:
"Figures don't lie but liars can figure."
Cara,
Warren implies that housing in better school districts has outperformed relatively. I wonder if that is true inh NOVA.
I know everyone is aware, but the article reinforces the point that a house is not granite countertops, but you are buying schools, a commute, and a safe neighborhood too.
you see it in Arlington.
North of 50 it's one high school, south of 50 it's another and south of columbia pike it's another
(In Rough terms)
this translates into some amazing price differences.
certtainly people capitalize taxes, we can see real price shifts across a tax demarc line, and we see that in schools.
2 Cents
Pricing power depends upon
market conditions.
most people have a very poor understanding of that, when they scream "X can't control a commodity".
Now consider some commodity with
a fixed demand, like gasoline.
most people are stuck to a commute, and then they are stuck to driving to the store, and dropping kids off.
so how much discretion do they have on demand?
now if supply is limited, then price can go wild.
when demand is running very close to supply, a small restriction will cause a massive price runup.
the assumption of "No Pricing Power" assumes substitution.
That coffee can be substituted for Tea, the Taxis can be substituted for Limousines. When there is no
substitute, practically available.
you can't convert your car overnight to run on methane.
then the producers do have tremendous pricing power.
HB - To follow up to your question of where Ms. Warren got her figures: I was curious myself so I did a bit of research.
From what I can find, lots of sources agree that 25% of net income before taxes was the historic norm paid for housing costs. How much is it today? Here's an article I found with a quick google search. how much does the average American make"
The author calculates that the median household income in the United States is $46,326. A median home price purchased during the peak was $200,000 with an average 6.5% mortgage. Those assumptions result in the theoretical average family paying 47% of their pretax income on housing. That is an 88% increase over the assumed historic norm.
Now I realize that this makes a lot of assumptions and that personal circumstances vary widely. I'm no statistician but even my casual check indicates that Ms. Warren's figures showing an 80% increase in housing costs probably aren't that wildly off.
Robert,
I don't accept that. If it were true I should be able to find a neighborhood with crap schools, moderate to higher crime, and the prices would be affordable Since they're still not, really, clearly the overriding one is commute. Schools are the third item of importance on that list because not everyone who wants to live in a zone has kids. Everyone has some concern about crime, and almost everyone has a pretty significant concern about a commute.
oh dear lord what is this?
Xpovos,
There are some fairly convenient areas with higher crime, lousy schools, and low house prices. (They are, admittedly, in DC...)
C-
I don't really agree with several of your assumptions between housing now vs. 1983. First as a minor nitpick I think you are under reporting income by ~$4K median income = $50,233 . This is the 2007 number, I am pretty sure preliminary reports said it rose a little in 08 and shrunk a little in 09. Incomes are also rising in 2010 do far
More importantly though you are making the assumption that the average family bought their house at the peak and had no down payment. Sure maybe 20% of people did this, but most families either did not buy during peak or sold a different house and used the profit to put a large down payment. Most of the country is also above water on their mortgages so they likely would have refinanced either in the early 2000s or recently into a mortgage at ~5%. If you change your numbers to account for this I would be the difference between housing then and now is only 20-30%.
I agree if you were a first time buyer in 2006 you likely are paying 80% more than the average home owner in the 1980s, but if you look at all families I just can't see how this is possibly the case. Ohh yeah as a minor last point tax rates were worse in the 80s and the analysis should really use post tax dollars.
Dave, not precisely true, but I'll grant you're more on the money than I'd like.
Take these townhomes, e.g.
OK, so they're very attractive, new construction, all the ameneties and insanely close to a major worker location: Navy Yard, so they should command a reasonable premium.
But they're townhomes, so that's gotta detract somewhat--even if you account for the fact that you're in the city itself. Medium walk to metro, that's nice even if you're not working on the Yard.
But are they comparable with Arlington? No. For all the other reasons (the secondary and tertiary reason). And the price?
Starting from the $600K. That's pretty comparable with some nice parts of Arlington.
So, again, people pay for commute, house size, house quality, and new construction. Not so much for crime avoidance or schools.
XPovos says:
"I should be able to find a neighborhood with crap schools, moderate to higher crime, and the prices would be affordable"
It's called PG County.
http://franklymls.com/PG7214733
is typical.
Too true Pat.
I would have bought in Fort Washington if only I weren't afraid to live there. One can purchase a lovely home in Fort Washington for the price of a smaller Rambler in eastern Fairfax County. Bargains abound.
PG Colonial
From my limited experience the commute into DC and NoVA seems no worse than typical. Not sure about the schools though. The ratings on Greatschools.com don't look very favorable.
Imagine what the list price would be if it were located less than one and a half miles due west!
Ah.... location.
So, yes, Xpovos, crime and schools do matter.
Contrarian-
You are correct that you did say you had sold well before the plunge. Although TBW has a point that you were still recommending that people should sell at the bottom, saying the market was going to fall as much as it did in the great depression. So your own choices, were good, but your recommendations were not very good.
Now that we have had are third positive quarterly GDP number, do you believe we are starting to recover or do you think starting in 2Q or 3Q 2010 we are going to start falling of a cliff. I personally think a double dip is possible, but very unlikely for at least a year.
HB - Being a practitioner of the Elliot Wave, its unlikely Contrarian had much left to sell.
He said he has been following high priest Robert Prechter's advice for years. Prechter's calls have been nothing short of complete failure.
Suppose you invested $100,000 in 1985. If you followed Prechter's advice, that 100K would be worth ONLY $1,700 today!!!
http://www.erictyson.com/articles/20090616
Its kinda amazing to think you could lose over 98% of your money over the last 25 years, but I guess its possible following the high priest of the Elliot Wave!
Anon-
Luckily margin calls probably would have limited the losses to a mere 90% :-p
Since there is a lot of financial discussion on this site, I'd like to throw out a question.
I am looking for a financial advisor to handle my investments. Although I have been hands-on for some time (with indifferent results), I have to travel a lot and may be on travel and without internet for long periods, sometimes months at a time. This means that I can't react quickly to changing market conditions.
I have read the advice available on the web concerning the selection of financial planners/advisors but aside from self-promotion efforts, it is very general. Is there a site where I can get information about specific track records - enough to do rating comparisons?
c-
I don't know any site that does this well. In general what I have seen is the same as what you are seeing ( a lot of self promotion). To be perfectly honest though I am not sure using past performance is really that important. I have seen several studies (including one I did in school) showing that past and future (above/below) market returns for different advisers have virtually no correlation. So I would either try and find someone that seems competent, honest, and trustworthy or just invest the money in a fairly safe portfolio that should be able to do reasonably well in any sort of market environment (a mix of bond funds with fairly safe stocks e.g. JNJ, PG, MCD, MSFT...). This obviously is not a perfect portfolio for any market, but it will likely be good enough that it will outperform once you take into account the cost of a financial adviser.
c, that would be a very useful site; I'll be interested if anyone can find one.
I will pass along what a friend of mine who teaches portfolio management at a top 5 business school told me:
"I have all my money in index funds. It's tough to beat them in the long run."
Ace-
I fully agree with what your friend said. Most active portfolio managers lose to index funds, due to transaction costs related to trading. So when you add on the fact that index funds usually only cost ~0.1% rather than the ~1% an adviser charges it just further pushes you down that path.
pat,
I'd explain that PG is less desirable than the other locations because of racial tensions and higher taxes in Maryland in general. Things like taxes and other localizations do make it harder to compare states against each other in multi-state metropolises like ours.
I had a chance to live in PG. The two deciding factors where that the house was too small for the price and our needs; and that we couldn't handle living in Maryland. The crime/schools weren't an issue.
Ace,
I agree bonuses would boost salaries but why wouldn't Gov McDonnell incorporate that when discussing average salary? He's trying to impress upon people how much tax revenue these 300 people are going to bring.
There's something hilarious (or is it sad?) that many of you on this blog are so unimpressed by the $200k figure. I can almost guarantee you that Gov McDonnell and his staff felt that was a very impressive figure that should wow Virginia voters and make them okay with spending millions to woo NG here.
---
As for the oil thing, I was referencing 2005 when Hurricane Katrina occurred and gas zoomed up to $4 and stayed there well beyond any supply shocks should have occurred.
contrarian,
I amend my prior statement to "Did anyone follow contrarian's advice to sell in late 2008?"
TBW-
The problem with Katrina was not that it impacted oil prices (for more than a couple of months), but instead it was that it destroyed a lot of refinement capacity. utilization drops in late 05 for Katrina Currently a lot of the country's refinement capacity is near the gulf, so there really wans't enough plants to turn the oil into more usable products like gasoline. You are correct though that Katrina made profits incredible for oil companies. The "crack spread", which is the amount of money companies get for turning oil into gasoline went up a lot.
Xpovos
I lived in Bethesda about 12 years,
and Greenbelt for about 2.
I preferrred bethesda to Greenbelt, but there was a lot of good in Greenbelt.
PG is changing too.
it's much more upscale and the community is getting nice. the greenline has anchored the
inner part of the county.
TBW, I don't know whether the guv included the bonuses. I thought the wording was ambiguous. I agree with you that he might have wanted to impress but he may not know enough about private industry comp. to think about bonuses. Yes, you're right in assuming I didn't vote for him. To be fair, he may have just repeated the #s the company gave him, and THEY might have a reason for offering the lowest legitimate # they could.
I don't think it's exactly that people here are unimpressed with the $200K figure--speaking for myself, it's more that the # seems low compared with other figures I've seen, if the 300 are mostly top managers of such a large company. If, however, 250 of them are support people for 50 top managers, for example, then the $200K figure seems more as if it could represent salary plus bonus.
unimportant fyi:
c and Cara/cara are not the same person
tbw/Ace,
Related to what Ace is saying, I just don't know that you should take an offhand statement in a political speech as gospel truth. They fact-check people's speeches for a reason. High levels of accuracy are not to be expected.
That said, I amend my prior statements to only apply to the high level executives, not the bulk of the 300 employees if the $200k average turns out to be accurate. It's what I meant all along anyway, "where are the top executives going to live?", given that 300 people or 100 or 15 people are all drops in the bucket anyway.
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