Fed softens commitment to holding interest rates low

The Fed held rates steady but stocks tumbled when the fed softened its commitment to holding them low.

Economists had widely expected the Fed to keep interest rates unchanged at 1% but pundits had not anticipated a change in the policy statement. “We think this is simply a rewording, rather than a change in Fed’s accommodation policy as it conveyed that it ‘can be patient in removing its policy accommodation,’” said Ashraf Laidi, chief currency analyst at MG Financial Group.

Presumably low rates increase the risk of inflation since low interest rates increase the money supply. Apparently the risk of deflation is still present in the Fed models and the risk of run away inflation looks relatively small. As long as this is the case, the Fed can leave interest rates low to encourage investment over savings.

San Mateo County Times: California is costly to live in

This morning, the San Mateo County Times ran this article on the decreasing affordability of living in California.

The California Budget Project, a Sacramento-based public policy think tank, said in a report to be released today that an increasing number of moderate- and low-income Californians are “locked out” of the housing market.

“This is affecting so many middle class people now,” said report author Erin Riches. “It’s no longer just a low-income problem.”

The report also said that young people in California are finding it increasingly difficult to buy their own homes here. According to the California Association of Realtors, 19 percent of Bay Area households could afford to buy a median-priced home in November, down from 22 percent last year.

Among California’s low-income renters, inflation-adjusted household income fell more than 10 percent from 1989 to 2002, from $16,250 to $14,580, making it more difficult to afford housing, the report said. As a result, many people are living farther away from their jobs, resulting in long commute times.

The article also pointed out the downward trends in rents and incomes:

Though average rents in the Bay Area have been declining since the first quarter of 2001, incomes have also been on a downward trend, said Matt Schwartz, executive director of California Housing Partnership, a San Francisco-based nonprofit.

Due Dilligence: State of Machine Translation

Over at Due Dilligence, they’ve posted a nice an overview of the current state of machine translation. Not surprisingly, it doesn’t seem to have improved much since my cognitive science days in the early 90s. As with other problems in AI, our effortless use of language makes it seem like an easy problem; whereas the truth is that we’re dealing with a problem that our brain is highly specialized to solve. In fact, that problem our brain is specialized for isn’t the obvious problem (ie communicating information) but something more subtle (e.g. reading the goals and intentions of others from their actions, being able to predict how our actions will affect the thoughts and actions of others, etc).

In chess, they’ve been able to match and even beat the best human players — not by solving the problem the way people would solve it, but by using brute force combined with specialized optimizations in various domains to trim the scope of the brute force problem down. It sounds like MT is headed in a similar direction. I have less hope this approach will succeed for MT as it has for chess. The domain of language is much more subtle and complex than chess.

WSJ: Housing Prices Continue to Rise

The Wall Street Journal had an article on the housing market today (subscription required). The synopsis is that generally the national media house price goes continuously up, roughly in line with incomes; but the picture is sometimes different for local markets:

In a paper to be published soon in the Brookings Papers on Economic Activity, house-price gurus Karl E. Case of Wellesley College and Robert J. Shiller of Yale University find that the national measures of market trends can be very misleading. In most of the country, house prices tend to rise gradually, in line with personal income, they find. But California, New Jersey, New York, New England and Hawaii — all of them short on land for building new homes — are prone to lurch from booms to busts or periods of stagnation.

The upshot: Buying a house in a popular, land-starved place doesn’t necessarily mean you will gain more in percentage terms over the long term. In the 21 years ended in the first quarter of last year, Messrs. Case and Shiller found, prices in Milwaukee more than tripled, about the same as in Los Angeles. The difference was that prices in Milwaukee rose steadily, while Los Angeles rode a roller coaster.

The consensus of the folks in the article was that nationally house prices would continue to rise this year, though some local markets may be see flat or declining prices.

Some see signs of bubble mentality in some of th e hotter markets. Here’s an opinion from some San Diego realtors:

Messrs. Case and Shiller, however, see signs that a bubble mentality has developed in some of the hotter markets. Last year they surveyed 700 people who had recently bought homes. The survey found that many of these people had very high — and probably unrealistic — expectations of how much home prices would keep rising. On average, respondents in the San Francisco area thought prices would rise nearly 16% a year over the coming decade.

Another sign of self-delusion: Some people surveyed thought prices in places like San Francisco and Boston should continue to rise faster than those elsewhere because they are such attractive places to live and there is little space for new housing. Those factors do explain why home prices in those cities are relatively high, the authors note, but they don’t mean that prices should keep on rising at a faster rate.

Alas, write Messrs. Case and Shiller, “the single-family home market is a market of amateurs, generally with no economic training.”

[via Asymmetrical Information]

SJ Business Journal: Bay Area Home sales surged at year’s end.

According to the SJ Business Journal, houses are still selling like hotcakes.

Home sales in the Bay Area experienced their strongest December in more than 16 years as prices moved to new highs, says DataQuick Information Systems, a La jolla-based real estate information service. Santa Clara County led the sales pace among the nine counties included in the report.

I thought this was interesting:

The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,045 in December. A year ago it was $1,913. The peak was in May 2000 at $2,124.

That’s the first time I remember seeing that statistic quoted. I’d love to see a graph of that. more on declining Bay Area rents has another another article on the decline in Bay Area rents, with a more detailed data on the decline. It also talked more about relationship to house prices.

Other economists think the discrepancy between falling rents and rising house prices can be explained. Expensive house prices boosted demand for rentals among new arrivals during the Bay Area’s late-1990s economic boom, said Steve Cochrane, an analyst for, a West Chester, Pa., firm. When the economy tanked, tenants moved out and homeowners hung on, so the rental market took the brunt of the slowdown, he said.

And cheap loans tilted the playing field further toward home purchases, said Christopher Cagan, an analyst for First American Real Estate, a title insurance firm: “Low interest rates have made a lot of renters into buyers.”

Michael Sklarz, an analyst for Fidelity National Information Systems, another title insurance firm, dismissed Baker’s bubble argument as “naive” and saw limited risks to homeowners. “You’d have to see substantially higher (mortgage interest) rates for the so-called bubble” to deflate, he said.

But Cagan saw another danger: home buyers relying on adjustable rate loans or introductory rates to leverage their buying power could be vulnerable to a downturn. A bubble, he said, is “a market driven by psychology” rather than economic fundamentals. Gimmicky lending has some worrisome similarities to a bubble psychology, he said. Affordability and Unemployment Will Spur California Foreclosures sees a rise in foreclosures in 2004

“Only one in four California households make enough money to afford a median priced home in this state,” said Alexis McGee, president of “In many California communities, the situation is worse.” Ms. McGee cited a January California Association of Realtors report that put affordability at 19% or less in several Bay area counties in the north and as low as 15% in Santa Barbara.

“California markets have stayed hot longer than anyone thought they would, partly because the state has gained more than 500,000 in population each year for the last four years,” said Ms. McGee, “but incomes are just not catching up.” She went on to say that the disparity between incomes and prices combined with rising interest rates would put downward pressure on home prices this year, and that, she said, would bring an increase in the number of foreclosures.

“We’re already seeing a rise in foreclosure activity,” said Ms. McGee. “Almost 16,000 California homes went into default in the third quarter of last year, a little over 3% more than in the second quarter.” She added that persistent and protracted unemployment was a contributing influence. Bay Area Rents Slump has an article about the slump in rents last quarter — down 4% Bay Area wide. Selected quotes:

Bay Area tenants saw further rent decreases in the fourth quarter of 2003 despite earlier evidence that prices — which have tumbled dramatically during the last three years — were poised to rise.

Those concessions seemed on the verge of subsiding in the second and third quarters of 2003, according to Latham. That’s when occupancy rates in some locales edged toward the 95 percent level — usually a turning point when landlords take the opportunity to boost prices.

Although occupancy rates in San Jose remain closer to 93 percent, in San Francisco and Oakland they hover near 95 percent. However, prices dropped further in the fourth quarter, due in part to anemic job and income growth.

“There’s a strong parallel between (rent) growth and apartment demand curve,” said Latham. “And when you realize that in October there weren’t any new jobs, and that we actually lost jobs in the Bay Area, that put a damper on the market.”

One landlord has an alternate theory: Low interest rates are enticing renters to buy homes.

Simply put, many housing experts say rents and home prices should generally move in the same direction, in part because the same economic drivers — unemployment and shrinking income — affect both.

In addition, the price of any asset — whether it is a stock or a condo — should reflect its future income stream. As such, the price of a home should reflect the income if the property were rented.

Therefore, the divergence between rent and home prices doesn’t make any sense, the experts say, and could mean that home prices are too high and due for a correction.

“When you buy a house, you’re placing a bet on future economic growth,” said Ed Leamer, director of the UCLA Anderson forecast. “But when rents are declining, as they are in the Bay Area, then placing a bet on economic growth isn’t a good idea.”

The rental expert quoted in the article expects rents to go up modestly this year, though they don’t provide a concrete explanation for why. Because rentals are hovering near 95% in some areas? I guess, though it appears the Bay Area is still losing jobs and people.

google and the price of IPOs

The Entrepreneurial Mind has an entry on Google and their IPO. The question in the post: is it worth it.

The IPO puts the company in a fish bowl. All of the decisions that were made in private must now see the light of day. Unique companies become quite common as a result.

The lure of the big pay day? entices many to consider an IPO. For Google, it could mean billions of dollars in market capitalization. It may sound strange to ask such a question when billions of dollars are on the line, but here it goes: at what cost? The corporate culture of Google will change over time once they go public. It will have to. It is an inevitable outcome of an IPO.

He goes on to question if they’ll be able to support their lifestyle (e.g. the Googleplex) after a bad quarter or two.

My IPO experience was that the corporate culture changes once you’ve decided to IPO, not after the IPO. It starts with the ramp up in hiring — standards for new hires in terms of ability and cultural fit decline, because every day the decision of who to hire moves farther and farther away from the founders. Inevitably, more people who are there just for the IPO start to sneak through the filter and the culture starts to focus more and more on the the IPO and public valuation.

By the time you get to IPO, the company has changed so much that many of the founders feel alienated. As their options vest, they cash out and leave for greener pastures or move off on to “special projects”.

After the IPO, because the investors and the new managers are focused on valuation, the business is optimized for near term stock price. That means delivering steadily increasing profits, if possible. You’d be surprised the games people will play to extend the curve just one more quarter.

This can be just as bad when things go south — stock driven execs pursue the numbers single-mindedly even at the expense of the companies basic ability to execute on its strategy. For example, at a software company, I understand trimming staff in some areas where the staffing requirements scale with number of customers. But why would you do across the board trimming? Why does it suddenly take you fewer engineers to meet the market requirements for next quarters release? It doesn’t. It takes fewer engineers to meet next quarters profitability because revenue has gone down.