Economics

The last few years have seen a lot of creative financing to purchase homes as prices rose out of control, with a huge increase in the percentage of adjustable rate mortgages (ARMs) used by first-time home buyers in order to stretch the limits of what they could afford to buy. About 25% of all current mortgages in the U.S. are ARMs. Unfortunately, many of those who got them did not understand what they were signing up for, and one in five subprime ARM homeowners in West Virginia, Alabama, Michigan, Missouri, and Tennessee was more than 30 days late with a payment at the end of last year. The peak of ARM interest-rate resets will occur in 2007-2008, which leads one researcher to predict that up to 1 million of 7.7 million homeowners who took out ARMs in the last two years will end up losing their homes to foreclosure in the next five years, with banking losses of up to $100 billion–painful, but less than the S&L crisis. The last time interest-only ARMs were popular was in the 1920’s, when the fall of home prices caused many of those who had them to lose their homes. In the last few years, they’ve been pushed hard by sleazy mortgage lenders with things like illegal telemarketing calls and deceptive direct mail pieces that look like they’re something important from your current lender, a refund check, or something else highly desirable or urgent in order to get you to open it. More at Ben Jones’ Housing Bubble Blog.

The number of homes for sale has gone over 40,000 (at last check it was 37,217 on March 6). Home builders are offering incentives like a free car or free upgrades (like granite counters, flooring, and cabinets) in order to avoid reducing prices, but price reductions are inevitable. And when price reductions occur, those who’ve already signed contracts at higher prices will be more likely to walk away… the rational response when an asset class you want to buy is deflating in price is to wait as long as possible, because the deals will only get better. (That’s why I’m content to live with year-or-more-old computer technology; my last upgrade for a home system was to buy somebody else’s used system.) More at Ben Jones’ Housing Bubble Blog.

Not only are there 33,270 homes for sale in Phoenix, 14,601 of them are currently vacant. Many speculators purchased homes and never lived in them so that they could be resold in “new” condition. The average price of homes listed for sale is $484,594. The number of pending sales is 8,125. The average price of the pending sale homes is $378,573. (From Ben Jones’ Housing Bubble Blog.) Lippard (2006-12-09): Forgot to link to previous #'s:/2006/01/phoenix-housing-inventories-for-sale.htmlAnd the ziprealty numbers for Phoenix listings are higher (continuing from where the previous left off):1/31/2006 32,5632/1/2006 32,6842/2/2006 33,0872/3/2006 33,1452/4/2006 32,9532/5/2006 33,3682/6/2006 33,5762/7/2006 33,5502/8/2006 33,6842/9/2006 33,8442/10/2006 34,2342/11/2006 34,5882/12/2006 34,7532/13/2006 34,8152/14/2006 34,8152/15/2006 34,8162/16/2006 34,8162/17/2006 35,1442/18/2006 35,4272/19/2006 36,2602/20/2006 35,4432/21/2006 35,6422/22/2006 35,5032/23/2006 35,3242/24/2006 35,1782/25/2006 36,3882/26/2006 36,5242/27/2006 36,6392/28/2006 36,1743/1/2006 36,3893/2/2006 36,2833/3/2006 36,8113/4/2006 36,9003/5/2006 37,0643/6/2006 37,217 ...

This Wall Street Journal article describes the UAW Jobs Bank program, under which American auto manufacturers pay some 15,000 unneeded employees wages and benefits which can exceed $100,000 a year, with a total cost of over $1.4 billion per year. GM has the most workers in the program–between this and the pensions, it’s no wonder GM is not competitive. While many of the workers in the program do community service or participate in educational programs, some of the latter seem rather dubious (studying crossword puzzles?). Other employees spend their time in the “rubber room” engaging in creative loafing. (Via The Agitator.)

What an amazing city. The Ixtapaluca low-income housing projects (one photo at left) look like a suburban nightmare out of a video game, but these purport to be actual photos taken from a helicopter. (Thanks to BLDGBLOG.) Historical Comments Einzige (2006-12-09): Santa Vaca! That looks literally unreal. Martin (2006-12-09): Those aren't houses! More like storage units for surplus humans. Brrrr. ...

To continue from just before where we left off last time… there were 10,748 homes for sale on July 20, 2005, and it had increased by 79% to 19,254 by October 2. Yesterday, it was up a further 69% to 32,512–a 202% increase over the July 20 number. I’ve seen estimates that about a third are being sold by “investors." 10/1/2005 19333 10/2/2005 19316 10/3/2005 19362 10/4/2005 19463 10/5/2005 19562 10/6/2005 19670 10/7/2005 20052 10/8/2005 20219 10/9/2005 20153 10/10/2005 20324 10/11/2005 20470 10/12/2005 20668 10/13/2005 20850 10/14/2005 21238 10/15/2005 21446 10/16/2005 21463 10/17/2005 21527 10/18/2005 21588 10/19/2005 21795 10/20/2005 21806 10/21/2005 22302 10/22/2005 22719 10/23/2005 22769 10/24/2005 22806 10/25/2005 22976 10/26/2005 23132 10/27/2005 23293 10/28/2005 23681 10/29/2005 23805 10/30/2005 23816 10/31/2005 23790 11/1/2005 23601 11/2/2005 23665 11/3/2005 24193 11/4/2005 24579 11/5/2005 24786 11/6/2005 24717 11/7/2005 24937 11/8/2005 25244 11/9/2005 25333 11/10/2005 25387 11/11/2005 25700 11/12/2005 25685 11/13/2005 25773 11/14/2005 25945 11/15/2005 25913 11/16/2005 25884 11/17/2005 26261 11/18/2005 26098 11/19/2005 26662 11/20/2005 26688 11/21/2005 26684 11/22/2005 26488 11/23/2005 26776 11/24/2005 26819 11/25/2005 26855 11/26/2005 26871 11/27/2005 26890 11/28/2005 26979 11/29/2005 26811 11/30/2005 26797 12/1/2005 26792 12/2/2005 26915 12/3/2005 27238 12/4/2005 27295 12/5/2005 27356 12/6/2005 27387 12/7/2005 27403 12/8/2005 27367 12/9/2005 27649 12/10/2005 27706 12/11/2005 27664 12/12/2005 27512 12/13/2005 27411 12/14/2005 27566 12/15/2005 27517 12/16/2005 27603 12/17/2005 27791 12/18/2005 27776 12/19/2005 27722 12/20/2005 27604 12/21/2005 27554 12/22/2005 27516 12/23/2005 27486 12/24/2005 27311 12/25/2005 27014 12/26/2005 26810 12/27/2005 26822 12/28/2005 26687 12/29/2005 26649 12/30/2005 26547 12/31/2005 26497 1/1/2006 26462 1/2/2006 26401 1/3/2006 26751 1/4/2006 27403 1/5/2006 27564 1/6/2006 28224 1/7/2006 28337 1/8/2006 28542 1/9/2006 28595 1/10/2006 28786 1/11/2006 29222 1/12/2006 29507 1/13/2006 29689 1/14/2006 29899 1/15/2006 30415 1/16/2006 30391 1/17/2006 30707 1/18/2006 30817 1/19/2006 31085 1/20/2006 31457 1/21/2006 31463 1/22/2006 31497 1/23/2006 31607 1/24/2006 31766 1/25/2006 31830 1/26/2006 32142 1/27/2006 32002 1/28/2006 32477 1/29/2006 32458 1/30/2006 32512 ...

In 2003, the Bush administration said that the $200 billion estimate of the cost of the war in Iraq from Larry Lindsey, Bush’s economic advisor, was too high. Paul Wolfowitz suggested that the cost of reconstruction would be financed entirely by Iraq. Congress has so far appropriated $251 billion for military operations, and the Congressional Budget Office has indicated that we should expect another $230 billion in costs over the next ten years. Now a paper by Nobel prizewinning economist Joseph Stiglitz and Harvard budget expert Linda Bilmes argues that the CBO’s estimate leaves out some significant costs, like healthcare for injured soldiers–lifetime care for brain injuries alone may cost $35 billion. Their paper argues that $1 trillion is a conservative estimate of the total costs. (Story at The Guardian.) ...

Over the next two years, $2.5 trillion in U.S. mortgages that are based on adjustable rate mortgages will reset to higher interest rates. There is little question that many people who have been using creative financing to speculate in the real estate market are going to have some serious financial difficulties as a result. More at Ben Jones’ Housing Bubble blog.

The current (December 24, 2005) issue of The Economist features a story, “Wealth from worship," summarizing a paper by MIT economist Jonathan Gruber, “Religious Market Structure, Religious Participation and Outcomes: Is Religion Good for You?” Gruber claims that regular religious participation leads to better education, higher income and a lower chance of divorce. His results (based on data covering non-Hispanic white Americans of several Christian denominations, other faiths and none) imply that doubling church attendance raises someone’s income by almost 10%.The summary points out that ethnic density can make a group worse off (“ghettoization”), which Gruber controls for by looking at “the density of ‘co-religionists’” not of the same race. He says that “a 10% increase in the density of co-religionists leads to an 8.5% rise in churchgoing” and that a 10% increase in the density of co-religionists leads to a 0.9% rise in income. In other words, because there are lots of non-Polish Catholics in Boston and a few in Minnesota, Poles in Boston both go to church more often and are materially better off relative to, say, Swedes in Boston than Poles in Minnesota relative to Swedes in Minnesota.If this is accurate, what’s actually going on here? Suggestions offered in the Economist summary: Churchgoing increases one’s network of connections, making business dealings smoother; churchgoing provides a form of insurance against social or economic setbacks; churchgoing promotes an increase in education; churchgoing reduces the stress of life. The first two of these, and perhaps the last, strike me as plausible; whether or not churchgoing promotes education likely depends a great deal on the particular sect or denomination. ...

The December 17th issue of The Economist has an article (“The next wave”) about projected growth in India’s “Business Process Offshoring” (BPO) industry. While today two-thirds of the $250 billion of annual spending on legal services goes to the United States, 28% of the available global workforce with the requisite language and technical skills is in India. Since India’s law is based on English common law, it is in a good position to take a large portion of that business from lawyers in the United States, with a 75% reduction in cost for the buyer. The Economist notes that this is “not just a question of ‘paralegal’ hack work such as document preparation’ but includes ‘drafting contracts and patent applications, research and negotiation.’" Let’s all weep a few tears for U.S. lawyers being put out of work.