January 28, 2004
TheStreet.com: 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.January 27, 2004
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]
January 22, 2004
Everest from the International Space Station
Over at NASA's Earth Observatory they have this article on the Many Faces of Mount Everest, which includes this cool picture of Everest:
Very nice. You can see a larger version here.
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.
Contracostatimes.com: more on declining Bay Area rents
ContraCostaTimes.com 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 Economy.com, 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.
Foreclosures.com: Affordability and Unemployment Will Spur California Foreclosures
Foreclosures.com 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 Foreclosures.com. "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.
SFGate.com: Bay Area Rents Slump
SFGate.com 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.
January 21, 2004
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.
January 20, 2004
a perspective on the Florida housing market
BusinessPundit offers a perspective on the Florida housing market, as someone who just sold a house there:
We put our house here in Melbourne, FL up for sale on Saturday. Sunday it was in the MLS. Monday we received our first offer. Today we received our second offer, full asking price. I think there is a real estate bubble here. I thought we were asking about 3-4% too much for our house already. We had planned to simply rent the house, and hope that someday we could use it as a winter home and split time between here and Kentucky. But I recently read this in the Economist.
_In 1929 John D. Rockefeller decided it was time to sell shares when even a shoe-shine boy offered him a share tip._
Everyone I know has been telling me you can't go wrong with real estate, it never goes down in price, and that my house will double in value over the next 4 years - especially people who know nothing about real estate except that they bought a house and it has gone up a lot. Real estate is a good investment, but it isn't that good. So we decided to sell. I think we are doing so near the top of a bubble, or maybe more like a plateau that is leveling off. I just don't think homes will sell in 3 days when interest rates go significantly higher.
The comments also raised some interesting points.
upgraded to MT-2.661
I upgraded to MT-2661 (from 2.63). The big new features are: * Atom support - see the Syndication section of the side bar. * Comment Throttling - prevents abuse by enforcing a waiting period between comments from the same IP address. * No URLs in comments - comment URLs are now handled via a meta redirect rather than including them directly. Not sure I like this.January 16, 2004
SD Union Tribune: house prices impact recruiting in SD
The San Diego Union Tribune ran a story today about how house prices are affecting companies abilities to attract new employees to the area.
"Pricing is now almost on par with the Bay Area," said Brad Little, an executive recruiter for San Diego's R.J. Watkins & Co. "San Diego is at a distinct disadvantage."
The county's median home price has more than doubled in the past five years, ending 2003 above $400,000 for the first time. Just 16 percent of San Diego County households can afford a median-priced home, according to the California Association of Realtors.
"Some people we just can't attract," said Phil Williams, director of corporate staffing for Science Applications International Corp. "They tell us, 'As great as it is, I just can't afford the housing.' "
One of the engines that drives house prices is demand -- sounds demand is dampening as salaries fail to keep pace and / or justify house prices.
January 14, 2004
Contra Costa Times: Bay Area Slips in Productivity
McKinsey and Co. did a study of productivity in the bay area, and found that local economic factors are costing us our edge.
Rising home prices, soaring premiums for workers' compensation, stubbornly high electricity costs and lengthening commutes have all eroded the Bay Area's ability to compete in the national and global marketplace, the McKinsey & Co. study suggests.
For decades, this region has had a high cost of living. But the problem is particularly acute now since home prices remain high, even amid the loss of more than 300,000 Bay Area jobs in recent years.
"The Bay Area is losing its competitive edge," said Lenny Mendonca, a McKinsey director.
The consequences could be dire if policy makers fail to remedy the workers' comp, housing, electricity and other woes that afflict the Bay Area.
"If nothing is done, the Bay Area would have a New Economy version of Detroit," Mendonca said. "You'd have people moving out, fewer jobs, falling home prices. You'd have deteriorating schools. It would remain a great tourist town, but I'm not sure that's where we would want to live."
January 12, 2004
apple refurbs are slow to ship
I've had an G3 iBook for over a year now. I love it -- a Unix based OS with clean look and real ease-of-use along with a suite of apps that feel like commercial software (Mail.app, iTunes, iPhoto, etc). But the G3 is a little slow.
I recently discovered the refurb section on the Apple store and decided to take the plunge one of the refurbished aluminum G4 PowerBooks.
They initially promised a ship date 3 days after the order was placed. A month later, I've been told for the third time that they are still not able to complete the order. In the process, I've had several unsatisfying customer service experiences after long holds on the phone (I needed to change the shipping address because of the delay).
I remember waiting a month and more for PCs from Dell -- so, it's not like I'm not willing to wait. But I wish Apple had given me an accurate ship date before I ordered. All in all, it's left me feeling less enthusiastic about doing business with Apple.
house prices and california's budget
Bay Area Housing prices were identified as a risk to Govenor Schwarzenegger's budget. The relevant text below:Ken Rosen, a professor at UC Berkeley's Haas School of Business, fears that the super-heated housing market in the Bay Area and, to a lesser extent, the rest of California could finally start to cool off this year and next. Rosen pointed out that statewide housing prices have soared about 37 percent in the past two years.
"Whether it's a home-price bubble or excess appreciation, there is certainly some risk that prices can reverse," Rosen said.
Suppose price increases do slow or flatten? Some economists warn that means homeowners might have less cash to extract from the equity in their houses, effectively slashing their spending power. And if interest rates rise, that could be a further threat to California's crucial housing market.
"There would be a weaker economy as a result," Rosen said. "There would be less home building and fewer real estate commissions. People would have less wealth."
But an industry executive counters that the California housing market still looks pretty strong.
"Demand for housing continues to exist, even with the tough economy," said Guy Bjerke, an executive with the San Ramon-based Home Builders Association of Northern California. "In the Bay Area, we are tremendously under-supplied for housing. The only thing that could rain on the parade for housing is if interest rates dramatically spike."
I buy the the under-supplied argument in the long run. It's important to remember, though, that prices are determined by supply *and* demand. So, although the supply-side definitely points up for housing prices, demand side is more ambiguous. The demand side is constrained by the ability of home-buyers to carry the mortgage given their current salary and the available interest rates.
January 05, 2004
bray on predicting technology success
Tim Bray has started a series of articles on predicting the success of new technologies. I will be interested to see what his predictor matrix looks like.
SJ Mercury News: More home buyers choosing ARMs
The SJ Mercury news had an article over the holiday about the increasing use of adjustable rate mortgages (ARMs) in California.In response to rising home prices and mortgage rates, an increasing portion of California home buyers are opting to finance their purchases with adjustable-rate mortgages, a real estate information company said Friday.
Santa Clara County had the highest percentage of buyers who financed their homes with adjustable-rate mortgages, or ARMs, of any area in the survey: 68 percent. The survey by DataQuick Information Systems looked at home sales that were completed in November.
I take this as evidence of two things: (1) people are looking at mortgage payments, not house price when determining what to pay for a house; (2) the market has pushed buyers to the limit of what they can afford -- now that interest rates have levelled off, buyers are taking on increasing levels of risk to match still-rising house prices.
It seems clear that the interest rates on these ARMs has nowhere to go but up; seems unlikely that buyers will be able to re-fi their way out of this later. I have a hard time seeing this as anything other than an act of desperation on the part of buyers.
January 03, 2004
AP: greenspan defends handling of 90s tech bubble
AP ran a story about a speech Greenspan gave recently defending his management of 1990s bubble as the only safe option for economy."There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences, rather than the bubble itself, has been successful," Greenspan said.
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Not quite true: he did make some effort to curtail the bubble with his comments about "irrational excuberance".
The alternative was to raise interest rates quickly to make saving an attractive alternative to investing. I can't imagine how high interest rates would have had to have gone to do that, but safe to say, it was high.
I believe, concurrently, he was trying to manage for Y2K by increasing the money supply (aka lowering interest rates). Some have pointed to Y2K spending and the flood of money as one of the root causes of the tech bubble.