The myth of the $600 hammer vs. the Data Driven Life

The myth of the $600 hammer (12/7/98) -- www.GovernmentExecutive.com: "Bookkeeping based on congressional appropriations makes such cost-finding immensely difficult. Functions that in practice are inextricably intertwined are often paid for by totally separate line items in the budget. New weapons are bought with one 'color of money,' existing weapons are maintained with another, and the personnel who operate them are paid with a third. In fact, to save administrative costs, military salaries and pensions are all paid from one central office. As a result, said Eckhardt, among commanders 'there's a tendency to view military labor as free, because you're not making any expenditures from your installation [budget] to pay those people.'"

This is a fascinating article that, IMHO, should be required reading for every voter and taxpayer in the country.

In my household, we live the data-driven life. Our budget is updated to reflect actual fluctuations in income as well as risks to income. Our retirement plan includes a spreadsheet tab showing our assets and future income, with risk level specified (our home equity, for example, for a house east of Sacramento, is subject to employment trends at the major local employers, including the State of California). We break our budget down into monthly figures for both monthly costs and intermittent costs. For example, although we don't have a car payment, we have a monthly budget item for a car "payment" (the cost of our average car, divided by 5 years, because we typically replace one car every 10 years, and we have two cars). We budget for vacations and gifts and replacing the computer every few years and redecorating periodically.

The idea behind our budget is to 1) recognize the true costs of a daily latte or a Christmas splurge and 2) ensure that we set aside enough money for our day-to-day expenses as well as our year-to-year expenses. Most of our savings - in retirement accounts and taxable accounts - is earmarked for retirement and we hate to take money out of retirement for current expenses. It is, perhaps, an odd habit to try to account for both daily expenses and once-a-decade expenses in our monthly budget, but it encourages us to be honest about our expenses.

Let me give you an example. When we buy groceries, we multiply the per-meal cost by 30 to determine where it fits in our budget. If the meal cost is so low that eating it everyday would put us under-budget, that's a meal we can eat as often as preference and health considerations allow. For instance, $5 meal, if we ate it every day, would put our monthly dinner budget at $150, which is affordable. On the other hand, we make some recipes that use multiple fresh herbs. At $2 per herb, plus a pricey cut of meat and out-of-season vegetables, we have accidentally spent as much as $25 on a good, but unexceptional, meal. If we ate like that every day, our dinner budget would be $750, which strikes us as unreasonable. That's not to say that a $25 meal is out of the question - it's still cheaper than going out to eat, so it's a good value if it is at least as enjoyable as going out to eat. Our local restaurants don't use particularly fresh ingredients or especially creative recipes, so cooking something special at home is often more enjoyable for us than dining out. Expensive meals are relegated to occasional treats, not cut out altogether.

On the other hand, I agonized over replacing my laptop computer. I could get a fast, powerful computer for about $1,000, or I could get a functional computer that is much faster than my current computer, for around $500. That's a lot of extra money to spend. (In fact, I am still on the fence and holding out for prices to drop.) But we realized that we hadn't budgeted for computer replacement, so we added it to the budget. We replace the computer about every 3 years, so a $1,000 computer works out to about $30 a month. In other words, I should agonize over the $4 daily latte ($120/month or $4,300 over 3 years) and just go ahead and buy the better laptop computer.

See, without data, the latte seems like "it's only $4" and the computer - which is more useful and valuable - seems like a lot of money. Data is powerful stuff, useful stuff, and if it helps me spend money smarter and save money more often, imagine what it would do for the government?!

Ziprealty can kiss my price predictor

I've written before about the heinous algorithm used in Ziprealty's "Predict It" price "game." It still sucks.

There is a neighborhood that I track. I know this neighborhood pretty well. A house came on the market, bank-owned REO. Before it hit MLS, we spoke with the bank's agent about buying the house - but their price was crack-smoking high. When the house hit MLS, I "predicted" the selling price on ziprealty. The house has languished on the market, unsold at its unrealistically-high asking price. The bank finally lowered the price, but the price is still unrealistic. Another house on the same street came on the market last week, a smaller house on a larger lot, but in much better condition. The second house is priced realistically - although not low enough to drive much traffic, let alone a bidding war.

The listing agent decided to relist the property when he lowered the price. So although the asking price is now within spitting distance of my price prediction, my "Property IQ" for the property is calculated by comparing it to the asking price in the original listing. That's a bogus programming choice, and one designed to support the asking (wishing) price as the realistic value - in a market where the State budget crisis, continuing economic uncertainty, and the all-important employment rate are all dragging home prices down. The major local employers have announced cutbacks - or investment anywhere other than California - and the State of California keeps threatening to layoff State workers. These are not conditions that bode well for rising home prices anytime soon, so why design a price algorithm that is heavily weighted towards asking price, unless the intent is to subtly manipulate buyer sentiment towards the asking price in the complete absence of any validation of asking price?

Ziprealty has an "Offer Evaluator" tool that compares the offer price you enter to recently sold properties in the same area. I simply enter $1 as the offer price, and the Offer Evaluator tells me that $1 is unlikely to be accepted because most comparable properties sold within ___% of asking price. But that's the key piece of information - it tells you what percent of asking price (typically 95%-105% of asking) most similar properties sold for. And yet, the Price Predictor skews towards asking price, even when the Offer Evaluator shows that most similar properties sold well under asking price.

Another flaw in the price predictor is that it basically ignores user input. On several properties I've "played," all players entered prices well below asking price, yet the algorithm claims that the Community prediction is merely hundreds to a couple thousand below asking price. Which begs the question - how many users does it take to make the "Community Prediction" actually match the predictions entered by the Community? A thousand? A million? 4.6 Trillion?

If this was meant to be a useful tool, it would have been designed without so many major flaws in its algorithm. If it was meant to be a subtle marketing manipulation, well, it's perfect. Bankers weren't the only sleazebags that created the bubble, they're just the only ones who've had to stop being so overtly sleazy.

Is Saving Sexy? Is Talking about Finances Romantic?

Laura Crowley wrote an article about the romance of talking about finances. Oh, it seems silly - Happy Valentine's Day, honey! Let's talk about the budget! - but maybe not. In my house, we talk before holidays about what our gift expectations are, and what our budget is. It's unspontaneous, sure, but there haven't been any "how could you buy me a toaster when I got you a sports car?!" arguments, either. And the B word - budget - has been helpful for holiday spending choices, too. This is my second marriage. In my first marriage, I was always the bad guy because I tried to limit our spending to increase our saving. I got lucky this time around - I found someone I love and respect, and I also stumbled upon the perfect fall guy, Mr. Budget.

Okay, honestly, Mr. Budget doesn't get a lot of blame, but he gets to be the unromantic guy that says "Diamond tiaras for President's Day?! No way!" We agreed on a gift budget for the year, and our pre-holiday budget discussions usually go something like this:

"How much do we want to budget for [upcoming holiday]?"

"I dunno. How much do you want to budget?"

"I dunno. How much do you think is reasonable?"

"I dunno. How much do you think is reasonable?"

(Side note: Before we created a budget, this conversation would go on 5 minutes, get nowhere, and repeat every few days until the holiday itself. Now, thanks to the budget, we have an out.)

"Well, we've budgeted $__ for the year. We have $__ left. Will 10% of that work?"

"Gosh, that's not much. Do you want to just exchange cards and have a nice dinner?"

"Sure."

"Okay."

There are certainly holidays where we decide to exceed our budget. But looking at the budget first makes us mindful that the extra money has to come from somewhere - withdraw it from savings or cut some other expense. We both hate withdrawing from savings. Since we're honest with each other, we know that steaks and lattes are a luxury, and we know where we can cut back.

Chocolates and flowers are romantic gestures, but creating a way of dealing with finances that honors both partner's fiscal AND emotional needs in the long-term and short-term, that's more than a gesture. It's like getting the brakes fixed or buying clothes for the guy who hates to shop or doing the early feeding so she can sleep in. It's grown-up love, and it's romantic in a very boring, very loving way. It says "I hope I don't, but I could die. I want you to have a good, happy life without me," and then buys life insurance. It recognizes that "til death do we part" is a mighty long time, so we'd better build some savings. It puts more credence on keeping a healthy heart then on buying a fake diamond heart. This Valentine's Day, as I count my blessings, I'll spend a moment being grateful for the Hallmark-free gestures of love that sometimes get taken for granted.

Besides, a good budget always has room for chocolates.

Happy Valentine's Day!

Unemployment at 13.9%?

John Burns Real Estate Consulting publishes a newsletter on housing. This week's report says that unemployment is 13.9%. "The U-6 unemployment rate, which represents 13.9% of the total adult population who wants to work, also includes part-time employees who would rather work full-time."

There is a problem with saying that things are better (or worse) today than they were during the Great Depression. We have modified our data definitions so much that today's data really isn't comparable to 1930's data.

Meanwhile, California State workers are crying about mandatory furloughs. They take a day off without pay - but their pay rate isn't cut - and they keep their jobs. One of my concerns about the mid-term housing prospects in Sacramento County was State layoffs. It has been clear for several years that state spending was unsustainable. If the State can keep workers on at a lower rate of pay (via furloughs or pay cuts), that would be a positive for State employees, for the housing market, and for the local economy.

In fact, we might consider adding tax breaks for employers who avoid layoffs over the next three years, as an incentive for employers to pull together and help the economy avoid further contraction and decline.

Stimulus Brings Out City Wish Lists: Neon for Vegas, Harleys for Shreveport - WSJ.com

Stimulus Brings Out City Wish Lists: Neon for Vegas, Harleys for Shreveport - WSJ.com:

"Las Vegas, which by some accounts already glitters, wants $2 million for neon signs. Boynton Beach, Fla., is looking for $4.5 million for an 'eco park' featuring butterfly gardens and gopher tortoises. And Chula Vista, Calif., would like $500,000 to create a place for dogs to run off the leash.

These are among 18,750 projects listed in 'Ready to Go,' the U.S. Conference of Mayors' wish list for funding from the stimulus bill moving through Congress. The group asked cities and towns to suggest 'shovel ready' projects for the report, which it gave to Congress and the Obama administration."

Stimulating the economy back to 2005 would not be a good thing - we were wasting money we didn't even have, buying jewelry (bling) for our cell phones (!?!) and putting $50k/yr. families into $50k SUVs.

We need to stimulate HEALTHY spending. What's healthy spending? Investing to increase future earnings or to decrease future expenses. Building projects, though they sound good, will merely take workers off unemployment for the duration of the project, then put them back on the street when the project's done. Obama could take a page from Kennedy's book - putting a man on the moon gave us a surge of innovation and a huge psychological boost. It was ambitious, it was crazy, and it worked. President Obama needs his own "man on the moon."

How much is a Trillion?

The current porkulus package is just shy of $1 Trillion. Gosh, just a decade ago, we were hearing "a million here, a million there, pretty soon you're talking about real money." Obama isn't even proposing a whole trillion - just 8 or 9 tenths of one.

We have 300 million citizens in America. Go google "1 trillion divided by 300 million" and you'll see that this one little bitty trillion dollar package will cost every man, woman, and child in America $3300. The average family is about to add $10,000 to their debt load.

America has an unfunded liability - money we've borrowed from Social Security, promised Medicare benefits, and military/government pensions that haven't been funded - of about $40 Trillion. Our national debt is about $10 Trillion. We are $50 Trillion in the hole, and digging our debt grave ever deeper.

With $50 Trillion owed, every American owes $150,000. That is roughly half a million dollars per family. That's $150,000 per man, woman, child, bank executive, welfare recipient, student, dog trainer, social worker, engineer, and salesman. That's an average of $150,000 per person, but, truthfully, a huge population of Americans will never pay more than $5000 in taxes in their lives. The rich and middle class taxpayers will end up paying their own $450,000 per family, and then they will have to pay for one or two or a hundred other families' share of the debt. And, in the meantime, we'll be paying interest on the debt. Right now, $10 Trillion of the debt is owed to outsiders, and the other $40 Trillion is owed to Social Security beneficiaries and government retirees. As baby boomers age and retire, that unfunded liability will become an actual liability, and the government will have to borrow to pay out real dollars to retirees.

For every $1 Trillion borrowed, we owe $30 Billion a year in interest (at 3%) every year. Right now, we pay about $300 Billion in interest on government debt. If we don't find a way to reduce debt and pay off our liabilities, our yearly interest payments could grow to $1.5 Trillion in interest payments every year.

So to anyone complaining about the GOP holding up the stimulus bill, maybe you should thank your local obstructionist lawmaker. Or else put your money where your mouth is - send Obama a few thou to help "stimulate" the economy, and toss in a few extra thou to help break out of the debtor's prison the United States is building around ourselves.

Stand tall, speak up, make the world a safer place

New Haggard accuser: 'He really thought he was invincible' - CNN.com: "Grant Haas told CNN he began receiving text messages from Haggard in January 2006 that were 'out of the ordinary' -- questions about what sexual positions he enjoyed, what drugs he used. He said the approaches culminated in a hotel-room encounter in July of that year, when he said Haggard offered him pills and masturbated in a bed they shared."

It doesn't matter what gender Person A or Person B is; if a person in a position of power and authority over another person - adult over child, teacher over student, preacher over flock - uses that power and authority to manipulate or intimidate someone to engage in sexual relations of any nature, that person is a huge scumbag. Period.

Yet male victims vastly under-report incidents because we as a society throw 5 million kinds of bullshit onto the male sexual identity, and unreported scumbags typically go on to victimize someone else. So to every male victim willing to come forward and speak publicly about it, I say kudos. Speaking out and going public is a brave act and it will - not just hopefully, it absolutely will - help other men, and that will help other boys and girls and women and animals and the general mental health of our society. Eventually, we will reduce the stigma to a point that little boys will say something the first time someone does something bad - a key point, because abusers often test a victim first by doing small inappropriate things before they do big sexually inappropriate things. And to the fellows coming forward today, I think you stand on the shoulders of a group of men who finally broke the code of silence in the Catholic church and took a big stand against molester priests.

I know it's hard for bystanders to hear these tales, and I know it is tempting to avoid the messenger along with the perpetrator. It's easy to joke, to pretend it doesn't affect us, to hide behind gender stereotypes and lewd jokes about sexual orientation or "scoring." It's hard to admit that boys and girls and men and women cannot always protect themselves from predators, and it is disgusting to realize just how many predators there are out there. Just thinking about it makes me sick. But I realized something when I listened to those now-grown former Catholic alter boys on NPR however many years ago - every time I ignore it and hope it goes away, every time I turn away or turn off the TV or radio or click off to a less bothersome story, I am letting it go on. The only right answer to any victim of abuse is "that's terrible and it never should have happened to you." If we want a safe place for our children, our neighbors, our spouses, nieces, nephews, and friends, we've got to man up and tolerate the discomfort of hearing these stories and gulp down the bile and say "thank you. Thank you for being brave enough to speak up, so this doesn't happen to someone else." And then we have to stay there, not run away, and admit that we are powerless to fix it, that we are clueless about how to help it, but that we care enough - for the victim AND for our society - to stay and try to offer, if not comfort, then at least fellowship and acceptance.

Take your blood-pressure meds, Bobby, it's another Victims of the Housing Crisis story

"He called his lender last fall hoping for a hardship consideration and asking for a two-month postponement of his mortgage payments. He wanted to have them added to the end of his mortgage. Mobley says his credit rating was excellent, and he was merely trying to free up some cash for the holidays." (Now, perhaps this fellow is too proud to admit he needs the money, so he minimizes his situation by calling it "cash for the holidays," but, please, people, children read these stories and learn by example. Freeing up cash for the holidays is NOT a good reason to ask your lender to incur the expense of processing a loan modification.)

CNNMoney.com has a story about how Tough it is to get a mortgage loan modification. They have the hard-luck cases, like the fellow paralyzed in an accident who can't get a mortgage workout (the article didn't say whether the friend helping out had power of attorney or any other legal status to represent the homeowner - could the problem be a lack of authority for a mere friend to negotiate a loan workout?). They have the real estate agent, who just wants to keep her house of 15 years (okay, not to be cynical, but did they really have half-million-dollar homes in Las Vegas 15 years ago, that would only be worth $350k today?) They have the pitiful retiree, his equity locked in a rental property with an ARM that reset so that the payment is higher than his rental income (I know, it happens, but a retiree who can't afford the potential payment increase should get a fixed-rate loan or sell the house before it's a problem).

Then they have this guy:

But when it came to obtaining a mortgage workout, he wasn't getting anywhere -- even after months of trying. He finally wrote a letter to the president of his lender to try to resolve the issue.
...
After that, however, and after he was asked to send in all his paperwork for the fifth time, he didn't hear from them again for six months. Then, recently, he finally got a call back with a loan workout offer.

The lender offered an extremely low rate, 2.8%, which sounded great.

The problem was the value of his property has dropped from $840,000 to about $620,000 and the lender would do nothing to reduce the mortgage balance. Nash believed he would be upside-down on his mortgage, owing more than the house was worth, for years.
...
He looked around town and decided he could walk away from his house and rent another comparable place for half of what he would be paying his bank just for the mortgage payment.

He loves his house but he's choosing to give it up rather than shackle himself to a bad investment for years.

That's okay, Grandma, I know your supposedly-safe conservative retirement portfolio of bank stocks is worthless now, but at least you have the comfort of knowing that you're living on cat food for a good cause. We wouldn't want poor Kenny to go without cash for the holidays, and we surely wouldn't want poor Ronny to be "shackled to a bad investment for years".

It's a Bird... It's a Plane... Oh, Crap!

Warm, dry happy thoughts going out to the folks who survived the frigid waters of the Hudson River plane landing.

Funding retirement's peaks and valleys

As I project our required retirement income, it's not enough to say "we'll need $X a year." Costs will probably rise, and we'll want and need different income levels at different times in our retirement. Early on, we'll probably want to travel. Much later, there's a good chance that we'll need household help and, eventually, specialized medical care. Very early on - whether due to early retirement, job loss with little chance of finding an equivalent job before retirement, or other reasons - we might not have any social security income at all.

Traditional retirement advice says we should save enough so we can comfortably live off of 4-5% of our savings. So for every $10,000/year we want to spend in retirement, we need to save between $200,000 and $250,000. Yowza. But, if we can save enough, we should be able to withdraw 4-5% a year without reducing the principal; or we can give ourselves a raise to keep pace with inflation, and it will whittle our savings down very slowly; or, in the event of catastrophic medical expenses or other major expenses, we'll have a cushion.

I look at our retirement funding in phases. Phase 1, no social security, we live on savings. Phase 2, social security kicks in and, hopefully, we won't have to tap the 401k yet. Phase 3, The 401k gives us a little more money to weather inflation - or to live it up a bit while we still can. Phase 4, perhaps we have medical expenses, or we have difficulty doing our own housekeeping and home maintenance - for whatever reason, expenses rise.

To fund phase 1, our primary plan is to keep working until we can afford to live on savings without jeopardizing our retirement savings for the later years. For phase 2, again, the goal is to save enough/retire late enough to provide adequate funding. Also, careful budgeting - both to accurately predict our income needs and to avoid unnecessary waste - will help. As we enter phase 3, we can breathe a bit easier - since we plan to live without the 401k money for several years, the 401k should just be emergency/fun/inflation money. If we're just taking the minimum withdrawals from the 401k, it should last well into phase 4, when household help and possibly medical expenses increase our costs.

Housing plays an important role in our retirement plan. If we plan well and buy well, our home will be paid-off by phase 4, when we our expenses rise fastest. Now, some folks say that a paid-off house is just trapped equity, but that's certainly not true in retirement. The more income you need to support your lifestyle, the higher your tax bracket. In retirement, higher income means giving up a big chunk of social security benefits to taxes. So a penny saved is 1.33 pennies earned, or more. Plus, a paid-off house will give us an emergency backstop - we can borrow against the house if we need cash (though only as a last resort).

Investment property plays a part in our plan, too. Experts say an average couple needs to save $300,000 just for medical expenses in retirement. My goal is to acquire rental properties with a combined total of $300,000 in mortgages - with a very strong likelihood of appreciating at market rate over 30 years. As the tenants pay the mortgage down, we'll be building up $300k in equity for our twilight years, and the properties' values should (roughly) keep pace with inflation. Ideally, we'll acquire these properties by the time we're 45 - or else buy properties that can cash-flow with 15-year mortgages. Ideally, rents will increase faster than expenses, so the rental properties will provide some income during retirement, but the primary goal is simply to have properties with an inflation-adjusted, after-sales-expenses net value greater than $300k.

That's our plan in a nutshell. We may not hit every goal, but the closer we get, the better our odds of enjoying a retirement free from major financial stress.

Why am I so hard on real estate agents?

Example 1:

7524 LINDEN AVE, Citrus Heights, CA 95610

List Price: $134,500

55 days on market, 1 photo (front exterior)

Description: "Escrow fell! Your buyers gain!!!! Fannie mae owned. This home is a fixer and is located close to freeway, and shopping. A great investment opportunity!"



Yes, Mr. or Ms. Realtor(TM), let me just play phone tag with my agent who will play phone tag with you to arrange a showing, schlep three or four people across town, and waste an afternoon discovering that, no, it isn't actually a fixer, it's a tear-down. Because that is so much more efficient than YOU actually wasting YOUR time writing up a description of the property and/or taking a couple more photos. For your measly $2,000 cut of a measly $8,000 commission, yes, I can understand that you don't want to actually work more than an hour. My gosh, if you put in a few hours taking pictures and writing a complete and accurate description, you would only earn the hourly rate of a neurosurgeon, and no one wants you to lower yourself to the hourly wage of the riff-raff doctors.



Example 2:

7606 GRANITE AVE, Orangevale, CA 95662

Appears to actually be 7546 Granite Ave, which one can ascertain now that there are actual photos of the house in MLS.

List Price: $310,000

114 days on market as of today

1 Picture - of the chain across the end of the drive - when the house came on the market. First, the agent tried cutting the price, twice. Later - just a couple of weeks ago, after sitting on the market for about 100 days, the agent actually posted photos of the house.

I am unique - but you already knew that, didn't you?

I took the 43 Things Personality Quiz and found out I'm a Self-Improving Organized Money Manager

I thought I would come out a "Newness-seeking Self-improving Tree Hugger," I didn't. But what was much more interesting than the label they assigned me, was this little blurb:

"0% of the 45891 people who have taken this quiz are like you."

Well, I still think I'm one in a million, but at least I know for sure that I'm one in 45,891.

Budget is Not a Four-Letter Word, especially when buying a house

Around 2004, our house hunt was going poorly. We were looking for a moderate, middle-class house with a larger garage - or room to add a larger garage. We found a candidate in our price range, just a few blocks from our current home. As we toured the house, we noticed cracks in the walls - the entire center of the house was sinking. That was pretty typical of what we were finding in our price range. So we raised our price range. Then we raised it again. Eventually, we had raised our price range so high that there was not a house in the county that seemed worth the money - but there WAS a house just a couple hundred thousand more that we really liked.


How do you decide how much to spend on a house? We weren't comfortable having a real estate agent make such a big decision for us. I asked our banker what we would qualify for - she ran the application and asked how much we wanted. We didn't know, and she said she had to enter something, so I pulled a ridiculously large number out of the sky, thinking the computer would reject it and spit out the actual maximum. We qualified for the ridiculously high mortgage on a 30-year fixed rate loan. Well, great, but what do we need with such an expensive house?

Eventually, we decided to write up a budget, showing how much we were already spending on everything. We used that budget to write up a projected budget, showing how much we could spend on everything if we bought a more expensive house. In order to make the numbers work, we had to cut back on lattes and hobbies. Okay. We also had to trim our grocery budget - no problem. We had to reduce our savings rate substantially. Ouch. We had to give up 401k contributions. No way.

Voila. We now had a way to decide how much house we could comfortably afford. We put the savings and retirement contributions back into the budget. debated how many vacations and lattes we would need to feel like we weren't slaves to the house, and adjusted the mortgage figure down to accommodate what we felt was a reasonable budget for us. We saw some tempting houses, but then we looked at the budget and decided that having adequate retirement savings was far more important than having a dream house. Besides, most of the potential dream homes needed a lot of remodeling to be dreamy.

The real estate industrial complex marketers encourage a lot of emotional decision-making in the home buying process. It's easy to get caught up in the hype. But our projected budget brought us back to earth, and helped us avoid buying more house than we could comfortably afford. Unfortunately, in the midst of the housing bubble, that meant not buying any house at all. That was good for our budget, but bad for morale. Now, however, we are reaping the benefits, as Sacramento County makes the news for its high foreclosure rate, we are not one of the statistics. Several homes we considered buying in the bubble, are back on the market at $100k less - some as much as $300k less than they cost at the peak.

I would like to take a moment to thank our budget for keeping us out of trouble. I would encourage any would-be home buyer to draw up an estimated budget - including any increased utilities, insurance, and/or maintenance costs. We figured out our moving costs - including any new furniture, drapes, or remodeling we'd want for the new house. Little expenses add up - a new lawnmower, towels that match the new bathroom, blinds for the gorgeous half-circle window in the living room and extension wands for vacuuming cobwebs off the high ceiling can quickly add up to $1,000 or more. If your budget in the new house requires big changes from your current budget, you might give it a dry run - see if you can really live, happily, with cutbacks in dining out, fewer vacations, less lattes. A mortgage can be a 30-year commitment - it's important to feel comfortable that you can live with it for 30 years.

Market meltdown: Where did all the money go?

On the age-old question, where did the money go... Here is one idea:

Market meltdown: Where did all the money go?: "Charles Biderman, chief executive of TrimTabs Investment Research in Sausalito, has a different explanation.

He says that from the market's bottom in 2003 until its peak in 2007, the market value of all publicly traded stocks worldwide grew from about $20 trillion to $45 trillion.

During this period, only about $1.5 trillion in cash went into the market. Debt accounted for some of the remaining increase in market capitalization, but most of it existed only on paper."

Robbing banks is illegal?

"'As it stands now, they've turned [banks] into virtual cash machines,' New York
Police Commissioner Raymond Kelly said."

Golly, who's he talking about? Real estate agents? Mortgage brokers? Cash-back-at-close, zero-doc, no down borrowers? Naw, plain old bank robbers.

"In fact, bank robbers have simply handed tellers a note in a vast majority of
hold-ups in New York."

So, remember kids, its better to rob a bank with a mortgage (note) than with a hand-scrawled note. If you rob a bank with a real estate license, that's okay. If you rob a bank with a hood over your head, that's illegal. If you rob a bank by promising (via a "promissory note") to pay back money you have no intention or capability of repaying, you get a bailout. If you rob a bank by authorizing garbage loans that have slim chances of repayment, you get a fat bonus check and stock options. Confusing, ain't it?

Quotes are from: Is recession behind spike in bank robberies? - CNN.com

Happy New Year!

Health Care Flex Spending Account: Use it or lose it

If you have a balance remaining in a use-it-or-lose-it flex spending account, there is less than one week left in 2008. With over-the-counter drugs and first aid supplies now flex-spending eligible, there's no need to "lose it." Depending on how much you have left, you can clean out your medicine cabinet (replacing old, expired cold medicines and the like), pick up a first aid kit, even get a home defibrillator. Personally, I have been browsing drugstore.com's FSA store, seeing what is FSA eligible and gathering up receipts for things we bought earlier without realizing they were eligible. I've whittled our balance down to $26, which I'll use to restock the first aid kit before Dec. 1.

We've made a point of submitting receipts before year-end, allowing sufficient time for the administrator to process them and hopefully notify us of any non-approved claims while there's still time for us to use up our funds.

Hope you're all enjoying the holidays in good health and good cheer.

My Property IQ is 68: Zip Realty's new feature

Zip Realty has rolled out a new feature called Property IQ. This feature allows zip users to enter their best guess about what a property will ultimately sell for. In the absence of any other guesses, the list price is used as the "Community" prediction. Thus, if I guesstimate that an overpriced property will sell for less than asking - and there is not a community of other users agreeing with my guesstimate - then the algorithm deems me a nit wit. Even if I just entered the price that the agent told me the house actually went into contract for. The only "accurate" guess right now is the asking price.


The goal here seems to be to encourage, persuade, and peer-pressure buyers into the practice of thinking that homes will sell close to asking price, even when asking price is a pie-in-the-sky pipe dream. In our competitive society, we are well socialized to strive for high performance - high score, high net worth, low lap times, high status, rich networks. Games have power - pro racers play video games of unfamiliar tracks to gain familiarity, and even small-craft pilots have been known to fly three states over to pick up a good flight simulator. In striving for a win, an A, a certificate, an Attaboy, we learn over multiple attempts to perform to the grading scale rather than strive for real knowledge. Here, the grading scale is set-up out of the box to gently nudge users towards asking-price-is-the-real-value, despite launching the game in the midst of the worst real estate crisis since the Great Depression. Considering how many properties in Sacramento MSA are languishing on the market for a year and longer, the asking price is rarely ever the real value. But answering anything other than asking price, right now, is gently reprimanded through the insulting "Your Property IQ is 0!"


Yes, that's right, my property IQ was zero, because I guessed well-below-asking on a seriously overpriced property. But I was able to salvage my Property IQ by guessing well-above-asking on another property. So now I have a system - if a house sells, I bet at or above asking; otherwise, I only enter a Guess where the guess is well below asking price. I hate lazy programming and lazy algorithms as much as I hate the pervasive manipulation and bull$#!7 of the real estate industrial complex.

The End of Wall Street's Boom - What REALLY Happened?

The End of Wall Street's Boom - National Business News - Portfolio.com: "The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong."

This is a lengthy article, but quite an interesting read. If you don't know Michael Lewis, he wrote Liar's Poker, about his experience working on Wall Street in the 1980s. Liar's Poker is also the game the fellows at Long Term Capital Management played - the founder of LTCM worked at Salomon Bros. in the 1980s, too. Lewis also wrote a book about baseball, and one about the dot-com era before it became the dot-bomb era, and he writes an amusing column for Slate called Dad Again.

The article reaches some very interesting conclusions, which I won't spoil here. But one of them seems to be the same one I keep coming back to - Wall Street is run by idiots. Traders don't know anything about economics, and economists regularly admit that they're terrible traders.

I suspect that the art/science of economics is something of a crystal ball on Wall Street - yet, like all mystical sciences, the economic tarot can tell you what will happen, but not when. Trading is all about the when. If you get out too early, you'll never make enough gains to retire; if you get in too early, you'll drive yourself to an early stress-related death and won't get to retire, anyway (hey, maybe that's a good retirement plan - cheaper than the $200k they recommend you put away for retirement health costs alone!). Traders use the technicals (charts and pure market data) to try to get ahead of a curve - but charts, alone, don't warn you when an enormous wrecking ball like the housing implosion is heading your way. Which is why my broker laughed at me when I said I didn't want to touch anything housing related - not even funds holding Fannie/Freddie bonds. My theory is that good traders are neither traders nor economists - they are sufficiently detached to take the signals of both disciplines with a boulder-sized grain of salt. Throw in a healthy dose of market historian and psychologist, and you might actually have a trader who can turn the odds in his own favor.

Short of that (plus a lot of luck), Mr. John Q. Public is facing some looonnnggg odds. The SEC lets banks and brokerages hold off-balance sheet risks that an average investor doesn't know about until it sinks his share price. Even the on-balance-sheet holdings are sometimes sliced and diced and innovated to a point that finance professionals can't understand what they really are, let alone what they're worth, or how quickly they can sink the company. Index funds came about specifically because fund managers aren't superior traders - managed funds and index funds have roughly equal odds of outperforming various benchmarks. The market moves on rumors that can create the sorts of problems that were rumored to be a risk. And when Mr. John Q. Public throws his hands in the air, says the heck with it, and plows his money into the age-old safe haven - banks and big, stable Blue Chips, he finds out later that the banks aren't safe and the Blue Chips are dallying in risk loans. Even Money Market funds were "breaking the buck" and losing principal value, because the professional financiers invested in bonds that - despite being triple-A rated short-term bonds - went poof. Oh, yeah, that's because the ratings agencies are either inept, corrupt, or both. But what choice does a fellow have - Social Security is bankrupt, pensions are a privilege only the government-employee class can count on, and his 401k has to make up the difference. Good luck, Mr. Public. You'll need it.

Where's the Money?

jaycee commented on an earlier post:

"I am trying to understand what is going on and I found your post really interesting. But I still have a question: we are not making bets with Martians, so surely the money is staying in the system? If I make a bet with a sucker who says: Sorry, I don't have the means to pay you, it will not make me bankrupt, just a bit peeved."



It's an excellent question, and one I've been trying to figure out. I don't have an authoritative answer to jaycee's question, but I humbly offer an educated guess....

Winners and Losers, The Money's still there

For most trades, there's a winner for every loser, so the money is still in the system somewhere. If I buy Citibank at $45, the seller gets $45. When Citibank drops to $6, the $45 I gave the seller still exists. Ditto for a house - if I buy a house for $200k and it drops to $100k, the money still exists in the seller's bank account. Unless the money never existed - with fractional reserve banking, banks can lend more money than they have - basically "printing" vapor dollars. If the bank lends me money to buy a house or a stock, and I don't pay them back, the bank has to eat the loss. They lose real dollars.

Defaults suck the Vapor Dollars Out of Grandma's savings

The net losses are primarily in defaults. Suppose I'm a hedge fund trader, leveraged at 10-to-1, when I make a bad bet. I either have to eat the losses out of other gains/equity, or I'll default on the margin loan. The brokerage has to eat the defaults, and they can only eat so much. Banks are losing in mortgage defaults, and we're seeing increasing bankruptcy filings. Those are net dollars lost. As much as possible, the banks and brokerages dump the losses on shareholders.

Paper Losses Become Real Losses

Houses, stocks, and even business inventories are showing paper losses. To the extent that people have to pull cash, they are converting paper losses into real losses. That's why there's so much griping about 401k withdrawal requirements this year. Businesses have to sell inventories, even at a loss (due to tax rules, cash flow, inventory staleness/freshness, and cost of commercial real estate for storing inventory). Those losses take money out of the system permanently.
The risk is that leverage let us inflate asset values quite rapidly - doubling home values, for instance. As credit dries up and net losses on defaults accumulate, it creates a leveraged pop - that's why the government has pumped some $7 Trillion in liquidity into a $13 Trillion economy this year, and yet we're still in a recession.

Google Long Term Capital Management (LTCM) - they blew up in 1998 because they were highly leveraged and they were betting on derivatives. The government bailout in that situation was just persuading other brokerages to save LTCM, but it should have raised a red flag about the risk of leverage and derivatives.

Not Lost, Just Wandered Off

There's also the issue of money still in the system, but removed from investment assets. This is a little out there, but it does impact valuations. The money available to invest is not static. Every day, each consumer/investor decides whether to save/invest current income, or whether to withdraw/spend invested income.

Generally, a consumer invests the dollars that he or she perceives are "excess", above their basic needs. An investment dollar typically flows from investment to investment to investment; a consumption dollar flows from consumer to producer to employee/consumer to producer many times before possibly making its way back to investment markets. We are seeing net outflows from asset investments (stocks, bonds, real estate). Some of that outflow is from consumers just trying to pay the bills - some, for instance, flows to oil-producing nations, and much of that outflow won't come back. It's still in the system, but it's in the global system, essentially unavailable for domestic use. Other asset withdrawals are going to domestic producers, but as people lose their jobs, face income stagnation and cost inflation, fewer dollars are perceived as "excess" dollars to be saved/invested. Although that money is still in the system, it's a long way away from the investment assets whose valuations were based on how many dollars were invested.

Fast Money: Whoosh! It's Gone

Then there's the issue of the "velocity" of money. Middle class money is the best for stimulating economies, because middle class earners typically spend, spend, and spend some more, often spending a disproportionate amount on services. Services are almost entirely wages, which provides a second producer/consumer with money to spend - largely, on services, which provides a 3rd producer/consumer with money to spend. And so on. The exact same dollar changes hands many, many times - and each time, it counts as taxable income, it counts as GDP, it counts as someone employed, and it counts as another employee/consumer feeling a little more confident about the economy. I think of middle class money as slutty money - it gets around - well, that's velocity - the more a dollar gets around, the greater "velocity" it has. Poor folk don't have much money and rich folk keep a larger portion of their money than middle class folks do (that's why they're rich, and why an awful lot of rich folk got rich saving and investing off mere middle class income).

So if we go back to that Citibank transaction - if I buy a share for $45, the seller has the $45; it's still in the system. But I started with $45 of spendable money, $45 worth of earnings, $45 worth of wealth effect, $45 worth of net worth. If the share price drops to $7, well, there goes my spendable asset, my net worth, my wealth effect. There's a very, very good chance that my "velocity" of spending will decrease by the $38 the share dropped in value. If I was investing for a down payment on a house, that's $38 less house I can buy. If I was investing for a wedding, there goes the open bar. If I was investing for peace of mind and the satisfaction of securing my future - zoiks. Chances are, I'll pull $90 of spending velocity out of my budget to make up for the loss, and it still may not replace the lost peace of mind.

That's my best guess - we aren't suffering a mere shifting of assets, but a genuine implosion in some assets. Other assets are lost on the wrong side of the tracks, while others are dragging themselves sickly across the floor crying piteously, "help me, I'm hung over."

EcoWorld - Guest Commentary » Blog Archive » Sundown for California

EcoWorld - Guest Commentary » Blog Archive » Sundown for California: "The educational system, closely aligned with the Democrats in the legislature, accelerated its secular decline. Once full of highly skilled workers, California has become increasingly less so. For example, California ranks second in the percentage of its 65-year-olds holding an associate degree or higher and fifth in those with a bachelor’s degree. But when you look at the 25-to-34 age group, those rankings fade to 30th and 24th."

Rather lengthy, but interesting reading. I'm not sure why it's on EcoWorld, as the article isn't really about ecology at all.