Month in Review, May 2012: Part 1, Here at home

July 19, 2012 | Bankruptcy, China, Global news, Greece, Homelessness, Housing, Innovations, LIBOR, Month in review, US News, Zoning

[Previous Months in Review available here: Apr 12, Mar 12, Feb 12]


By:David A. Smith


All gloom and no fun makes blog a dull read, so during May I offered a cheerful look at a disruptive pastime in Interoperability creates innovation:


Just slide the pieces around


Programs are designed in splendid isolation from one another, and certainly with blissful ignorance of what may come after, either in changing markets, new political imperatives, or new policies (nobody expected LIHTC).  Innovation is continuously required, and that means recombining old tools and using them alongside new ones in unexpected ways.


“We should be free to invent without having to worry about infringement, royalties, going to jail or being sued and bullied by large industries. We don’t want to see what happened in music and film play out in the area of shapes.”


If one cannot copyright the alphabet, one should be likewise unable to copyright a shape.


Uncopyrightable, and hence perfectly replicable


Information wants to be free – and as Woody himself said, toys want to be played with.


Object + Animating spirit = Invention


Similar imagination was needed to break through Zoning’s invisible corset:


That’s all the space you’re allowed


Though zoning is destiny, it wears a tight corset, the squeezing into which can lead to contorted inventiveness, as shown in this cheerful little mis-titled Wall Street Journal story:


Building Outside the Box


[Snip]  A normal house fits on a normal lot, and if the cubical spaces (rooms) are to be displaced from the normal stacking, a new foundational approach will be required.


Yes, we can configure you that way, at the cost of displacing your organs


The house cost $575,000 and took a year to design and build. Mr. Agarwala did much of the research himself to find the best prices for materials. He became a “fan” of many of the companies on Facebook, which got him discounts. He got the cabinets for the laundry room from IKEA. A similar-size house in the same neighborhood is for sale for $400,000.


Mr. Agarwala’s home is probably a mistake in pure real estate terms – overpriced for its neighborhood, and with a quirky configuration (no yard, many stairs) that will limit its universe of potential buyers – but then, Mr. Agarwala wasn’t building as a developer, he was building as an aspirational occupant who craved one thing in particular – a killer view, which he got:


Magnificent when it’s sunny (clip and save)


At the other end of innovation, I explored how burdensome regulation can lead to worse consumer conditions because it squelches market forces, as in Everything but the kitchen sink?:


This was state of the art when rent control came in, and it’s good enough for rent control today, right?


Intended as a consumer benefit, rent control also creates hidden consumer costs.  Imposition of judicial price ceilings also imposes non-judicial quality ceilings.  Once supply is blocked, and rents are set by collectivist struggle, landlords are disincentivized to improve their property’s quality.  So they don’t. 


Rent stabilized kitchen: note the excess plugs (antiquated wiring), absence of dishwasher, and archaic stove


In prewar buildings, dishwashers are not a given.


Only because the market tolerates deficient amenities, and that can be only because the market is inelastic.


During boom times, buyers are often willing to overlook inconveniences, figuring they can make all the fixes they need themselves and still turn a profit if they want to resell an apartment.


‘Making all the fixes they need’ is a hidden burden-shift.  In an open market, landlords would have to make these improvements to compete for residents.  In a supply-penalized market, the cost of upgrades in foisted upon potential buyers.


In the current market, buyers can afford to be choosy.


Frances Katzen, a broker at Prudential Douglas Elliman, says that there was a time when having a dishwasher in a prewar apartment would have been considered an anomaly. “Now it is expected,” she said.


My gosh, dishwashers in all apartments; everything’s up to date in renter city.


During May, I also dug into the under-analyzed direct connection between crushing levels of student debt (which have bought these graduates extra education that is not translating into extra income) and a sagging homeownership rate, in Houseless by degrees:


Do I get a do-over?


The deeper one digs into our current massive supply overhang of foreclosed or foreclosing homes, the more causes one finds, unexpected causes.  Beyond the securitization froth, Fannie Mae’s peccadillos and malfeasances, the end of the Baby Boomer Buyer Bulge, or even theEurozone’s starvation for yield, let’s add another one: a whole generation of Americans who have bought expensive and uneconomic educations and pledged themselves to make payments they would otherwise be using to buy homes.  The situation couldn’t be more clearly shown than by this Wall Street Journal article:


To Pay Off Loans, Grads Put Off Marriage, Children


Marriage, children … and housing.


Between the ages of 18 and 22, Jodi Romine took out $74,000 in student loans to help finance her business-management degree at Kent State University in Ohio. What seemed like a good investment will delay her career, her marriage and decision to have children.


Ms. Romine’s $900-a-month loan payments eat up 60% of the paycheck she earns as a bank teller in Beaufort, S.C., the best job she could get after graduating in 2008.


While the Journal doesn’t tell us the loan terms, a combination of reasonable supposition and some judicious arithmetic interpolation suggests she has a ten-year loan at 7½%.  (If the term is longer, I shudder to think of the interest rate, and Ms. Romine would surely refinance it.)  Ms. Romine is an extreme case (her current job pays her $18,000 a year net of withholding, so perhaps $25,000 a year as a salary), but her fiancé is more typical:


Her fiance Dean Hawkins, 31, spends 40% of his paycheck on student loans. They each work more than 60 hours a week. He teaches as well as coaches high-school baseball and football teams, studies in a full-time master’s degree program, and moonlights weekends as a server at a restaurant.


Mr. Hawkins and Ms. Romine are part of what in a decade everyone will recognize is an economically lost generation:


They can’t buy a house, visit their families in Ohio as often as they would like or spend money on dates.


Though Mr. Hawkins’ income isn’t stated, let’s assume it’s the same as Ms. Romine’s, which would mean he’s paying $600 a month in student loans.  Add them together and apply normal home-buying mortgage terms (5.5%, 30 years) and between them the Romine-Hawkins’s could have afforded a $265,000 mortgage, had they known that the jobs they would obtain after college could have been obtained after high school.


Maybe the car loan was too big also


In May, I flagged a scandal that exploded in July, in Name your own rate?:


If this were an antitrust case, proof of collusion would secure a conviction.


If true, that would have breached two principles.


1. Traders are supposed to be separated from staff within the same bank who estimate LIBOR.

2. Traders from different banks should not be aligning their positions in this way.


Aligning positions would be price-fixing, and that would be illegal.  Keeping an ethical wall between trades and analysts is fundamental – and, ever since Sarbanes-Oxley 2002, has been legally mandatory in the US, so if any of these traders were doing business in America, they’re looking at jail.


Jail?  Moi?


More globally, I looked at two societies facing challenges of dealing with special populations, first in China which may well become Old before rich? Part 1, too soon old, and Part 2, too late rich:


In purely Benthamite utilitarian terms, people spend their lives as either economic producers or economic consumers; either we are adding output to the economy (working at jobs, the middle of our lives) or we are consuming output from the economy (when we are children, students, or retirees, the beginning and end of our lives).


 (Yes, this is heartless, but then economics is the dismal science.)


The Great Dismal Swamp, 1825


For a nation’s wealth to increase, we’d like the majority of our population to be in their economic-producer years, with workers outnumbering children and retirees – but since workers tend to make babies in their spare time, and then workers evolve grow into retirees if given time to do so, we’ve got either to shorten old age (cigarettes, anyone?), or extend the interval of working years (hence delay onset of retirement).


Not only has China got a rapidly aging population with far too few young people to sustain its retirees, it also has a shortage of girls – or more properly, a surplus of boys.


By 2050, a Ming vase


Over the past 30 years, China’s total fertility rate—the number of children a woman can expect to have during her lifetime—has fallen from 2.6, well above the rate needed to hold a population steady, to 1.56, well below that rate.


Equally potent, the birth drought will continue for decades:


Because very low fertility can become self-reinforcing, with children of one-child families wanting only one child themselves, China now probably faces a long period of ultra-low fertility, regardless of what happens to its one-child policy.


Thus, if a current Chinese leader were transported back in time half a century, he would report:


I command reproduction to slow … and it slows.


Good news, Chairman Mao!  We have controlled population growth!

Bad news, Chairman Mao!  Our retirees outnumber our workers!

And it’s too late for government to do much of anything about it:


Wake up and smell the demographic crisis


[Continued tomorrow in Part 2.]