“Housing, Inflation both getting worse,” says a headline at MarketWatch.
The price of oil held steady yesterday – in the face of Saudi plans to pump another 200,000 barrels a day. The dollar held steady too. And the yield on the 10-year note rose to 4.24%. Gold jumped $13.
Unless you own an oil well or a goldmine, it has been a bad year. Out of the world’s 52 leading stock markets, 49 are down for the year. Ireland, for example, has lost 15% of its equity market value. Vietnam has been crushed…everyday is a down day in Hanoi.
In the United States, the fall in stocks has cost investors almost a trillion this year. Losses from housing are said to be about a third of that. But that is just the beginning. From 2006, the value of U.S. housing stock is said to be down about 16%. Case/Shiller, the experts on housing trends, think another 15% will be lost before the housing market bottoms out in 2010. That will mean a further $3 trillion haircut for U.S. households.
You’ll remember – how could you forget? – that the U.S. government’s ‘financing gap’ is about $57 trillion….and that the federal government’s official ‘national debt’ alone is increasing at the rate of $1.5 billion per day. Well, in today’s news comes word that the “combined net worth” of all U.S. households is $56 trillion. Already, you see, the country is technically broke – with more in liabilities than in assets. But the asset side of the ledger doesn’t include the value of government property – such as the White House or the Pentagon – which could be sold off to an Arab sovereign wealth funds in an emergency.
An emergency is probably coming, so the feds might want to get some appraisals.
But it is housing we are writing about today, not the approaching bankruptcy of the United States of America. As to the roof over their heads, Americans probably have no illusions. But as to the other roof – or the extra roof – they bought in order to benefit from the greatest boom in housing prices in 100 years, we feel a revelation is coming. A profound insight is approaching them, like a tiger through the bushes…ready to rip them to pieces.
That insight hit us hard over the weekend. We pass it along today, in the language of an enlightened economist, so that our dear readers won’t be caught off guard. In two words: houses suck.
What makes houses such a terrible thing to own is what investors refer to as “negative carry.” When housing prices are rising, you scarcely notice the ‘carry.’ Your capital gains offset them. But when housing prices go down, you take not only the capital loss…but you begin to notice the carrying costs too. You can own a stock without having to pay property taxes on it. In fact, you should have “positive carry” on it – assuming the stock is the sort that pays dividends. There are banking stocks, for example, paying 5%, 6%…8% dividends. In other words, they pay you to own the stock. Same thing with bonds – positive carry. You collect your coupons…and hope yields go down so you’ll make a capital gain on the bond itself. Businesses, partnerships, commercial property – all produce (or should produce) positive carry. Even a dog can produce a kind of positive carry…you have to feed him, but at least he licks your hand. And a wife…well, never mind….
But a house? Even it could produce positive carry if you bought it cheaply enough and it is rented out to good tenants. Otherwise, your carry will go negative…and negative in a major way. We’ll tell you about one of the most negative carries in the history of housing…below.
Before we get there…let us notice that, predictably, homeowners are eager to push some of the cost of negative carry on to someone else. In England, one of the largest mortgage lenders has been nationalized. In America, private mortgage lenders are laying low…government backed mortgage lenders are taking their place. Government sponsored companies originated 81% of mortgage loans in the last quarter of ’07 – more than double what they had done at the height of the housing boom. And Federal Home Loan Banks own nearly $1 trillion of mortgage loans.
The socialization of the mortgage business may be a vote-getting idea in any housing downturn; in an election year it is unstoppable. In effect, while China raises it banking reserve requirements to fight inflation…and stocks its central bank coffers with dollars, pounds and euros…America lards its own reserves with mortgages, and encourages its member banks to lend more freely.
And so, in the Land of the Free, people look to the government not only for drugs and retirement benefits, but also for food (a record number of Americans are now getting food stamps) and for housing. Without the government behind the mortgage industry – without the Fed, Fannie, Freddie, the FHA and the FHLB, and the mortgage tax credit – they would have to pay full price for the roofs over their heads…
No one wants to do that…and no candidate proposes that they should have to…
*** It seems like everyone we know now has a house for sale – in Florida, in Virginia, in New York and in Latin America – with no buyers in sight.
In a bull market in housing, a roof is an asset. People buy roofs not only for shelter, but for profit. Typically, if buying a roof is a good investment, they will buy more than one…or more roof than they need.
But when the bull market comes to an end, a roof is a liability. It has to be kept up – or the whole house will be damaged. Worse, when the sun shines on the housing market, a roof is as liquid as a bond or a stock. But when it begins to rain, the liquidity drips through the roof…all of a sudden, you can’t get rid of it.
And this weekend, we found ourselves in possession of acres of expensive roofs – every one of which has a hole in it.
“How’s everything going?” Elizabeth wanted to know. “Aren’t you lonely…all by yourself in that big place?”
“Oh…it’s going very well. Just 130 more to do.”
“One hundred and thirty what?”
“Windows…Yes, I’m painting the windows. Well, I’m painting the ones that aren’t broken. At this rate, I’ll be home sometime next year.”
A house is not an investment; it’s a consumer item. Just as with any other consumer item, the less of it you buy…the less you regret it later. And here we offer a groveling confession…a painful mia culpa…a humbling admission: going against all our own rules, and against common sense too, we now find ourselves in possession of the Chateau de Problemes sans Fin. Yes, a grand place it is. Sumptuous. Majestic. Magnificent. It is a pile, in other words. A heap of trouble. A monument of merde.
It is a long story. It is a bubble story, of sorts… one that began, like all bubbles, in self-deception…and then progressed into dull farce and now approaches the tragic, loathsome end – to be followed, we hope, by redemption.
The goal was to create a genteel conference center. We spend so much time learning and teaching, (often we don’t know which) we decided tit would make sense to have a place where we could do so regularly…grandly…where we could gather our writers and analysts from all over the world…and spend time in a dignified setting learning our metier – without disturbing the other guests. That is the advantage of having your own place – you can make your own rules. But the disadvantage is obvious too – you have to take out your own trash…and take care of the roof…and figure out what to do with the cows.
We spent the week at a conference there last week. How could we not notice that half the electrical outlets didn’t work? Or, that bits of the floor popped up when we walked over it? Or that the walls were cracked…and paint was peeling off the woodwork? Or that a piece of the roof was missing?
Come the weekend, we were ready to put on our overalls and get to work.
But first, we will give you an insight: after lettuce, houses are probably the worst investment you can make. It is not like an ETF – which costs almost nothing to maintain and never gets you up in the middle of the night. Even the charges from hedge funds seem light by comparison. Just get a quote or two on replacing a slate roof the size of a football field. Or, maybe you’d like to replace a few windows – remember, the historical society requires that they be just like the old ones!
The whole conference center project fell in tatters – shredded by the combined efforts of historical preservationists and modern world improvers. The improvers insisted on ameliorations that would make the world a better, safer place – an elevator for the handicapped, special rails to keep people from falling out of window, exit lamps and fire extinguishers under every seat cushion. The preservationists on the other hand, wanted everything to stay exactly as it was. Elevator? You’ve got to be kidding. Guardrails? Over our dead bodies!
If only we could have gotten away with it!
So the project fell back on its instigator. We tried delegating the problems to others. We tried ignoring them. We tried waiting the problems out. Nothing worked. So, as a last resort, we are going to try actually taking care of them.
That was how we came to be dressed in rags and painting a window, when a Mercedes drove up.
“Is the owner around?” asked its well-dressed driver.
“I’m the owner.”
“Are you sure…you, the owner?”
At first, he thought that maybe we didn’t understand French. Then, realizing that we had understood each other. He gave a malicious chuckle.
Markets and Money