Practical paranoia, part 3

The topic of this one is the housing bubble. Now it's possible that this is a false alarm. I don't think so, though.

This one's fairly easy, however. First, figure out if you're in a large or small bubble. (heh - easy. right). I've got a couple of rules of thumb for the size. First, what're the median prices in relation to the median incomes of the area. 20 years ago the ratio was 3 to 4. Heck, even a decade ago the ratio wasn't that far off. Now... in the
Atlanta Metroplex the margin is about 8.5. In Miami it's about 12. You get the idea. If your ratio is over 4 you're on the edge of a bubble. If it's double you're in a bubble. If it's triple or more start watching for the pop. I said a couple of rules of thumb, though, because that one might not be enough.

The second test is rent:price ratio. In a nominally perfect world price (monthly cost of the house) to rent is about 1:1. If it climbs over 1.1 you might have a bubble, though a lot of other factors might also apply. If it exceeds 1.25, you better have some really strange applicable factors to not have a bubble.

OK, but what happens when the bubble bursts? Here's where it gets different from other speculative bubbles. Basically you can expect two big results.

First, for the most part house prices will stagnate, not drop. That is, the price people sell a house for will be in the vicinity of what they paid for it. (Big ugly here is realtor fees. The effect will usually be a net loss. It's my opinion that realtor fees have been a big driver in house appreciation in the past decade as people want to at least 'break even' to include that cost - which is anywhere from 6 to 10 percent increase all by itself.) Oh, the top of the heap will decline, but the median will pretty much stay about where it is - at least till sales perk up again. Which takes us to the second and more significant effect.

There'll be a lot more houses on the market due to foreclosures. People won't drop their primary residence (for the most part, barring other effects). But that second house - the one for which they're paying principle and interest and taxes (especially taxes) and insurance plus utilities and maintenance - that one's going to go bye-bye. And if it can't be sold in what they consider a reasonable time, they'll foreclose. Sure, it'll hit their credit. But it'll free 20 to 30% of their regular income in exchange. Rent it? HAH - remember that price:rent ratio? They lose money with rentals at that level. And a landlord has a lot more costs and risks - more than just a homeowner even if it's a second residence.

The best indicator that the bubble is or has popped will be a large number of "stagnant homes" - 120, 180 or more days on the market for average, with some homes easily exceeding a year. Second best is a large spike in foreclosures, though this might also come in the third chicken little - something to beware, and I'll touch on it again then.

So what's the solution? The ideal solution is to rent till the bubble pops, and buy a foreclosure. The second ideal is to rent till the bursting is over (harder to detect) and buy at the bottom of the market. These ideals assume you can rent. Me, I can't.

See, I have pets - dogs AND cats. Landlords don't usually like these unless you've a special relationship, and even then there are problems. So I'm committed to buying. What's my answer? Don't buy speculatively. Instead buy on the old-fashioned spectrum of purchase solely for my residence. And do so with an eye toward staying in the house for AT LEAST five years and preferably a decade for a minimum. I'm buying for the decade and quite possibly for my retirement as it happens. The house is on the edge of being too big for the current family, and stands a decent chance of being definitely too big when the kid leaves - but it's not that much too big. I'm looking at retirement in about 22 years. I figure to pay off the house in 20-25 years. (A simple technique - I have a bit more taken out on each payment due, and that part's paid a bit early. This pays against principle which forces a recalculation of interest owed every few periods. Total result is that the house is paid off before the nominal due date 30 years from now.) Anyway, that means that if the house does turn out to be too much, the sale is unencumbered and totally equity and I can use the result to purchase something more appropriate - including assisted living if necessary.

I've hinted at this point of a critical point about all these chicken littles, and I'm going to make the point clear right now. Every one of these is a temporary problem. Peak oil - I don't know how, but we'll manage. Either we'll develop much greater efficiencies of use or we'll develop useful alternatives or both - they're there, we just don't have the incentive yet. We're lazy, but not suicidal. Same goes for housing - it may depress for a few years, even a decade, but not for a lifetime. And when I get to the next part - even if we use Japan as our example, we'll manage. The doom is not forever - it's not armageddon. I firmly believe and will plan on the assumption that the best plan gets you through the rough positioned to take advantage of the recovery. As I think the most likely chicken little is the next one, that's where you'll see me doing more positioning.

Later, all.

Practical Paranoia, part 2

As part one said, there are lots of chicken little warnings running around and I'm rather in agreement with some of them. However, I think it's right to not only run around warning of problems but to consider fixes as well. In this part I'm dealing solely with the Peak Oil problem.

As I said, we're not going to magically create new oil. Oh, biofuels will help reduce the pain, as will waste conversion projects of one sort and the other. In fact they may eventually make a difference. But to put it in perspective, if we covered all of our current wheatfields in biomass we'd increase our annual US production by (depending on the reference you read) 5 to 15% - and we import a lot more than that. And biomass is both seasonal and subject to all the other weaknesses of farm crops - a drought or other bad weather can wreak havoc. Waste conversion? Sure, eventually, if and after we put trillions into it we can probably meet almost half our current need. In short, we can slow the decline of supply if we're so inclined, eventually, but we're really unlikely to stop it.

Since we can't stop the decline in supply, we have two other avenues. Avenue one is to decrease demand. Avenue two is to prepare for and compensate for the failure to succeed in either other plan.

The problem with avenue one is that most folk aren't willing to take it. For that matter it might be a little too late. Consider for example the US transportation system. Sure, in dense urban areas mass transit is a possibility. But if you check the numbers you discover that mass transit in many if not most of those areas runs at well over 3/4 of capacity, and at the same time represents far less than half the total transitting population. In other words, the urban areas will have to at least double and more likely triple transit capacity. And that's of absolutely no help in moderately urban/suburban areas where there is little or no mass transit, nor does it give a reliable solution to the tranportation of goods. In most cases it's a last mile problem. That is, getting the trunk line is fine, but dealing with the four to five blocks from trunk line to house is really, really expensive.

Actually, let's be fairly honest about this. The reason avenue one suffers the most is what I'll call the "I want mine" syndrome. I sit here seeing what others had, and I want it. I'll have a sneaking suspicion that if I do the right thing you'll not - and so my sacrifice means you get to live high on the hog a little bit longer. Frankly, it's the prisoner's dilemna writ large. And the bad thing of the prisoner's dilemna is that if one party is purely self-interested then it matters not how enlightened the other might be - the best of the remaining bad choices is to be self-interested yourself. In other words, it takes us all to make a difference, and unless we're MADE to do it there're enough that'll ruin it for everyone that I might as well not act myself. Cynical, isn't it.

For this reason, I think the best option is to act under the assumption that peak oil is going to happen. I think it'll start hitting in the next year, though as noted it could be as long as a decade away. The consequence of peak oil is that everything will start costing more - either intrinsically if it's petroleum based, or due to the cost of transport.

1) Start working to be less petroleum reliant. Now on the surface this appears to be contradicting my cynicism of the preceding few paragraphs, and to some extent it is. But by focusing on greed instead of altruism I'm more likely to succeed - yay, cynicism strikes again. Anyway, less petroleumk reliant includes:

• more fuel-efficient transportation. Use, or lobby for, or whatever, mass transit. Get more fuel-efficient vehicles.


• local gets precedence. Go to local areas for vacations. Purchase local goods by preference. Grow or make if possible, but be wise enough to recognize the penalty cost of trying to do everything means nothing is done its best. Start working on local exchanges - what you do well in exchange for what others do well.


• Work to localize your own transportation needs. Shorten the distance you need to travel overall - whether this is by carpooling or by moving closer or by working smarter shifts or whatever. In this, recognize that if you can pass the cost of the necessary transportation on to others, you should really consider doing so.

Boy, I'm cynical. OK, let's look at me, specifically.

I just bought a house that's 25 miles from the main office and am selling one that is 2 miles from the same. There are a lot of really good reasons for this but it's going to cost me in gas. Now I've got two supplemental options going on. First, I've got a co-worker that will be going to work almost right past my door almost every day. If I'm smart (and I intend to be) I'll make arrangements to split the cost of gas for that distance - she comes to my house and either we jump into my car or I jump into hers, and on we go. Second, there's a branch all of 6 miles from where I'll live. 6 miles is a lot closer than 25, so I'll be doing my best to get my normal duty site moved to that branch.

I'll be starting a small vegetable plot. I'm not a good farmer, but I think I'd better get better. Foodstuff not produced locally is going to get real expensive. Heck, local foodstuff that has to be farmed by tractors or irrigation systems which all burn fuel are going to get more expensive.

Housing efficiency. Here, I'm ahead of the game. First, the normal air conditioner temperatures are too cold for my comfort. Now 92 degrees is a bit high (that's what it hit locally today), but I can make do with fans and open windows - and those are a lot more fuel efficient. I've got a good hvac system in the new house - much more efficient - so those time when I HAVE to break down and use it (for heat and for cold) I'll be a lot better off than most. Yes, it's electric. Yes, I know electric will go up. But it'll go up less than heating oil and propane and natural gas - the savings are inherent in bulk.

Now there are a few more things I can think of for me, but they start falling into the other chicken little calls so I'll save them for then.

Later, y'all.

Practical paranoia, part 1

I'm beginning to see more and more "chicken little" exclamations on the blogosphere - heck, I've got one myself. It dawns upon me that I'm violating one of my personal rules of behavior, and it would be a good idea to straighten out.

The rule is fairly simple. Don't just complain, start coming up with solutions. Solutions can be in the form of "how can I prevent the problem" and "how to recover from the problem", as appropriate.

As near as I can tell there are three chicken littles going on out there for us US kind of folk, though they're all rather related. These are: 1) Peak Oil; 2) Housing Bubble; 3) Extended Recession (Depression), possibly in its Stagflation form. I think in the interest of controlling length I'll post a quick summary of each and save the "what should I do" remarks for followon posts.

Peak Oil is, I'm sorry to say, a reality. It's not if, it's when. I don't think its eventual effect will be end-of-the-world, but for a while there's going to be a modicum of pain and suffering as things rebalance. In a nutshell, our demand for oil is bumping against our ability to supply oil, and every indication is that it's going to be harder and harder to sustain current demand much less the anticipated growth in demand. The consequence is rather simple: oil will be more expensive. We can't stop it, we can possibly delay it, but we had better (if we're smart) start planning what we're going to do to cope with it.

Housing Bubble. This one might not be a when. And there's every indication that even if it is a when instead of an if that it won't be (directly) a national problem - that to sorta reiterate what Greenspan and Krugman have said, it'll be a bunch of little bubbles popping, and some of those will pop others in cascade while some will remain a long time. Basically, the concern is that folk are buying houses as speculative investments instead of as property, paying a lot more than their intrinsic worth. As the number of people riding the edge get large enough they'll be unable to sustain that ride and 'dump' their properties. As those properties begin to saturate the market they'll in turn decrease the speculative worth of other properties not so close to the edge, and so on. I noted that the three scenarios can be connected. One way in which this is possible is if something drives up the interest rates. Those properties bought on the hopes/'expectations of interest remaining low enough long enough are the ones that fall when the edge moves from under their investors' feet.

Economic Doldrums. Again, an if instead of a when. Worse, there are two contradictory conditions in play. First, we need to recognize a recession, as both these problems are expanded versions of that. A recession by official measure is two or more quarters of falling GNP. That, unfortunately, tells most of us nothing. So let's break it apart a tiny bit. GNP is a consolidated measure of wealth production, measuring both individual and corporate gain. A recession is when some component is running negative. Consequently, any or all of the following can be significant contributing signals of an ongoing recession:

• Increased Unemployment - folk are put out of work and so can't pay their bills or buy new stuff - including food and shelter.;


• Restriction of Credit - getting loans is harder, and those who get loans face higher interest rates;


• Price Deflation - the reverse of inflation, goods and services cost less as businesses try to sell something instead of nothing to those folk out of work (fulltime or part-time). Unfortunately, the wages of those still employed tend to follow, eventually. [A benefit to the worker is, if they recognize the upcoming drop and are able to take advantage of it is that they can make preparations for the upcoming problems - they've a short-term surplus.];


• Increased bankruptcies - kind of obvious, of course, due to unemployment, credit, and deflation combined;


• Reduced trade and commerce (sales of resources and finished goods and services) - intertwined above, but basically if people don't have the ability to buy, they don't buy. Of course, since the business can't keep everyone employed they let more people go which potentially reinforces this vicious circle.

Now there are lots of candidates for differentiating a depression from a recession, and none are officially recognized, so I'll take a swing at a working definition. A depression is a recession that goes on for more than a year. Most of the protections we've got in place these days will tide folk over a recession, but as it reaches a depression the resources and such just flat run out.

I also threw in another economic doldrum, one which until the 1960s was thought to be impossible - stagflation. Basically it's a recession/depression with one change - price inflation replaces price deflation. Again wages follow suit eventually, though the lag this time works against the folk still employed - for a while they're desparately playing catchup.

Now as it happens, I think all three problems have a high probability of occurring within the upcoming year. So it behooves me to say what I think folk can do to prepare and cope - and it wouldn't hurt if I followed my own advice. One small point up front, no "stack supplies in a cabin and wait out the armageddon." See, the silver lining is that I don't think any of these are the end of the world. They're just some rough upcoming years. So to my thinking any plan needs to be one that allows me to stay in the midst of civilization, maybe even making things a little better. An ideal fix is one that helps me even if my predictions are wrong - kind of like tucking away savings over a period of time.

more on entry job numbers

The more I dig into this peculiar dataset, the more I'm sure I found something significant - but I'm not sure what and so I'm not sure it's significant. Tentatively, a hypothesis:

Economic "job health" has a strong indicator in the employment numbers of the initial entry people - mainly the 16-19 age group, and less blatant but still showing the same patterns in the 20-24 age group.

Some numbers based on the past decade. 16-19 year olds form about 5-6% of the total civilian labor force - the 'better' the economy, the higher the number. Yet 16-19 year olds form 15-20% of the unemployment force - the better the economy the lower the number. Surprisingly, about half this group is full-time (or unemployed looking for fulltime), but the worse the economy the lower this proportion goes. And then the kicker - in rough economic times the proportion of workforce (working or unemployed) to total age group population drops A LOT - ten percent in comparison to a 2-3 % drop in most other age groups. (And the other peculiarity but maybe not so peculiar - a 2-3% INCREASE in labor force participation in the oldest age group of 54+.)

As I said, the 20-24 numbers while not as large follow the same trends.

GUESS. In rough times, there are just flat fewer opportunities for the people just entering the workforce. Fewer new openings exist, and there is more competition from people with more experience for those same fewer openings. That explains it, and I think I can justify it.

The hard part is "so what"? What good is recognizing and watching these numbers? Tentatively, I suggest that it's a tool for watching the "job market" - one which is more discriminating and so giving a more qualitive answer instead of merely quantitive. Is it churn and stopgap, or is it career type jobs? Although the supportive question is which number or numbers is/are most relevant for this. hmmmm.