Investing Curiouscatblog

Author: John Hunter

  • The Ever Expanding House

    Behind the Ever-Expanding American Dream House

    The average American house size has more than doubled since the 1950s; it now stands at 2,349 square feet. Whether it’s a McMansion in a wealthy neighborhood, or a bigger, cheaper house in the exurbs, the move toward ever large homes has been accelerating for years.

    Consider: Back in the 1950s and ’60s, people thought it was normal for a family to have one bathroom, or for two or three growing boys to share a bedroom. Well-off people summered in tiny beach cottages on Cape Cod or off the coast of California. Now, many of those cottages have been replaced with bigger houses. Six-room apartments in cities like New York or Chicago have been combined, because upper-middle-class people now think a six-room apartment is too small. Is it wealth? Is it greed? Or are there more subtle things going on?

    This is extreme wealth. It is also part of the reason housing prices take an ever increasing multiple of median income. Basically people are buying two houses (not just one). Average square footage of single-family homes in the USA: 1950 – 983; 1970 – 1,500; 1990 – 2,080; 2004 – 2,349.

    Related: mortgage terms defined – Trying to Keep up with the Jones – Too Much Stuff – Investing Search Engine

  • Emerging-market Multinationals

    It is not your parents world. In case you hadn’t noticed the economic power in the world has been changing quickly. Many are missing the magnitude of these changes. One visible example is explored by the Economist in Emerging-market Multinationals:

    By 2004 the UN Conference on Trade and Development (UNCTAD) even noted that five companies from emerging Asia had made it into the list of the world’s 100 biggest multinationals measured by overseas assets; ten more emerging-economy firms made it into the top 200.
    …
    By 2006 foreign direct investment (including mergers and acquisitions) from developing economies had reached $174 billion, 14% of the world’s total, giving such countries a 13% share (worth $1.6 trillion) of the stock of global FDI. In 1990 emerging economies accounted for just 5% of the flow and 8% of the stock.

    This is just one visible sign of shifting economic power. And it shows no sign of slowing down. Our 12 Stocks for 10 Years portfolio is heavily invested for overseas growth. Close to 20% directly in emerging markets (through Templeton funds). PetroChina, Google, Toyota and Tesco all are very well positioned to grow quickly in emerging markets. And other stocks are likely do do well too – I am not clear on how well Pfizer, Amazon and Dell are positioned at this time.

    Emerging stock markets will continue to be very volatile I believe. However looking decades out and at a pool of 20 countries it is hard to imagine they won’t do very well: China, Singapore, Mexico, India, Thailand, Brazil, South Africa, Vietnam, etc.

    Related: Growing Size of non-USA Economies – Why Investing is Safer Overseas – South Korea To Invest $22 Billion in Overseas Energy Projects – Changing Economic Clout and Science Research

  • Home Values and Rental Rates

    One way to evaluate the real estate market is to compare rental rates to home values. This can provide a comparison of an approximate cost of buying a house versus the cost to rent. As the ratio of monthly rent to home price increases, at least on this measure or real estate value, the market can be seen as becoming more expensive.

    Several points to keep in mind:

    1. This does not take into account things like tax rates (in higher tax areas the rents will be higher [since the owners will pass on that cost that is not reflected in the home price] – the ratio lower)
    2. This is only a comparison measure – it can be that rents also experience a bubble. So if rents experience a bubble then the ratio could stay low and fail to indicate an “expensive” market.
    3. Don’t rely on one measure – this is one useful measure there are plenty of others that matter for real estate prices (income levels, job growth, interest rates, zoning regulations…)

    The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing

    We show that the rent-price ratio ranged between 5 and 5-1/2 percent between 1960 and 1995, but rapidly declined after 1995. By year-end 2006, the rent-price ratio reached an historic low of 3-1/2 percent. For the rent-price ratio to return to its historical average over, say, the next five years, house prices
    likely would have to fall considerably.

    This paper is well worth reading. I would like to point out another factor here though. When those investing in real estate were focused largely on capital gains (say a few years ago) there could well have been an increased demand for rental property (which increased prices). That effect also moved extra supply into the rental market (that previously would have been sold to owners that would live there instead of investors). Those investors were more concerned with capital gains and it seems to me could well have been willing to accept lower rents just to have some cash coming in to help pay the expenses.

    As those investors no longer believe they will receive large capital gains in the short term it is possible they will be more focused on cash flow – and seek increased rents. I will not be surprised that rent prices increase as investors focus more on cash flow and stop assuming such large capital gains will be where their profits are made. Thus the ratio will close both by real estate value declines and rental price increases.

    Related: Explaining Rent-Home Price Ratios – True Rent-to-Price Ratio for Housing – articles on the real estate market – Real Estate Median Prices Down 1.5% in the Last Year – Rent Controls are Unwise

  • What is Economics?

    I have noticed that many of the stories I read and heard lately, about economists work, is not exactly what you would expect: Randomization in Sports, Violent Films May Drive Down Crime Rate, Study ties dropouts to violent crime rate, Seat Belts Still Best Hedge Against Injury.

    I understand that it is possible to see the economic interest in almost everything (though things like randomization in sports it gets pretty hard). It seems to me lately there has been an increase in economist studying interesting areas that really are not about the economy. It seems like the knowledge and skill to examine complex data sets and draw conclusions is really defining what some economists are becoming (instead of the study of economic matters specifically). While the majority of economists still examine traditional economy related data some others are increasingly studying other areas. But this may just be my perception.

    Some economics definitions:

    • Princeton WordNet – “the branch of social science that deals with the production and distribution and consumption of goods and services and their management”
    • Illinois State Water Survey – “The study of choice and decision-making in a world with limited resources”
    • American Economic Association – “Economics is the study of how people choose to use resources.”

    Related: Curious Cat Economics Dictionary – articles on economics – economics related blog posts

  • Prediction Markets at Google

    Another interesting experiment from Google: Using Prediction Markets to Track Information Flows: Evidence from Google

    In Google’s terminology, a market asks a question (e.g., “how many users will Gmail have?”) that has 2”5 possible mutually exclusive and completely exhaustive answers (e.g., “Fewer than X users”, “Between X and Y”, and “More than Y”). Each answer corresponds to a security that is worth a unit of currency (called a “Gooble”) if the answer turns out to be correct (and zero otherwise). Trade is conducted via a continuous double auction in each security.
    …
    Google’s prediction markets are reasonably efficient, but did exhibit four specific biases: an
    overpricing of favorites, short aversion, optimism, and an underpricing of extreme outcomes.

    Interesting paper. Prediction markets are an interesting attempt to use a market principles to gain insight into future prospects.

    Related: Google Experiments Quickly and Often – Secrets of the World’s Best Companies

  • Rent Controls are Unwise

    Response to: The desirability of rent controls

    I do not believe rent controls are wise, in general. There are some options I wouldn’t mind – some sort of affordable housing that has breaks from the government (tax…) in exchange for a commitment to keep rental rates down. But wholesale rent controls are very unwise I believe.

    A related issue I find amusing. You will hear don’t regulate at all state that it is regulation preventing housing being constructed (zoning regulations) that create rising prices which they imply is unfair. It seems to me the data shows the opposite of what those people claim. People are willing to pay more for the regulated housing markets. That means the market forces value the regulation and in order to increase the economic utility (which is represented by what people will pay) more regulation should be used not less.

    Related: articles on real estate investing – regulatory risk (for rent control that would be the risk that investment property rights were limited due to rent control)

  • Revised GDP Calculations for China

    The great fall of China

    World Bank, which published updated statistics on the economic output of 146 countries. China’s economy, said the bank, is smaller than it thought. About 40% smaller. China, it turns out, isn’t a $10-trillion economy on the brink of catching up with the United States. It is a $6-trillion economy, less than half our size.
    …
    Unfortunately, comparing hundreds and even thousands of prices in almost 150 economies all over the world is a difficult thing to do. Concerned that its purchasing-power-parity numbers were out of whack, the World Bank went back to the drawing board and, with help from such countries as India and China, reviewed the data behind its GDP adjustments.

    It learned that there is less difference between China’s domestic prices and those in such countries as the United States than previously thought. So the new purchasing-power-parity adjustment is smaller than the old one — and $4 trillion in Chinese GDP melts into air.

    Related: China Economy Report by the World Bank – Accuracy of Manufacturing Data – Manufacturing Jobs Data: USA and China – Curious Cat Economics Web Search

  • Paul Krugman Speaks at Google

    Paul Krugman, who was named Columnist of the Year by Editor and Publisher magazine, writes a twice-weekly column for the op-ed page of the New York Times. He is a professor of economics and international affairs at Princeton University, and the author or editor of 20 books and more than 200 professional journal articles. In recognition of his work, he has received the John Bates Clark Medal from the American Economic Association, an award given every two years to the top economist under the age of 40. The Economist said he is “the most celebrated economist of his generation.”

    Related: Google Tech Webcasts – Steven Levitt (Freakonomics author) – Income Inequality in the USA

  • Bad Practice: .05% Interest From a Stock Broker

    Unfortunately it is not uncommon to find companies that choose to line their pockets at the expense of customers. I wish we could find companies that want to provide good value and make some profit by doing so. My stock broker used to allow clients idle cash to be invested and earn a reasonably decent rate (not Vanguard money market fund but you know for a company that doesn’t want to provide the best customer value a least something remotely approaching fair). This year (or last year) they stopped doing so and switched to the following rate structure:

    Dollar Range Interest Rate Annual Percentage Yield
    $0.01-$4,999 0.04999% 0.05%
    $5,000-$24,999 0.04999% 0.05%
    $25,000-$99,999 0.29959% 0.30%

    You might think they make an error and mean 5% and just put the decimal in the wrong place but you would be wrong. It used to be leaving your money in money market accounts with the broker wasn’t great but the 50+ basis point hit was worth the convenience. Now HSBC pays 4.25% for online savings. So at 100 times what the broker pays they would be slightly higher than HSBC. Sorry paying 1/85 of what HSBC pays is not just talking a bit of your clients money for yourself. That is obscene. You can no longer trust that your stock broker will only talk 50+ basis points of you money market earnings. Take a look at your account and setup an account with HSBC, Vanguard (current yield 4.64%) or something similar that pays a reasonable rate for any short term savings.

    If your broker pays less than 2% on a money market account of $5,000 that is a scary sign. What else they might be doing that isn’t so obviously unfair is difficult to know. Getting above 4% for a cash saving account now is pretty good, in my opinion.

    Related: Customer Hostility from Discover Card – Frugality Versus Better Returns – Learning About Personal Loans

  • $8,000 Per Gallon

    $8,000-per-gallon printer ink leads to antitrust lawsuit

    For most printer companies, ink is the bread and butter of their business. The price of ink for HP ink-jet printers can be as much as $8,000 per gallon, a figure that makes gas-pump price gouging look tame. HP is currently the dominant company in the printing market, and a considerable portion of the company’s profits come from ink.

    The printer makers have been waging an all-out war against third-party vendors that sell replacement cartridges at a fraction of the price. The tactics employed by the printer makers to maintain monopoly control over ink distribution for their printing products have become increasingly aggressive. In the past, we have seen HP, Epson, Lenovo and other companies attempt to use patents and even the Digital Millennium Copyright Act in their efforts to crush third-party ink distributors.

    The companies have also turned to using the ink equivalent of DRM, the use of microchips embedded in ink cartridges that work with a corresponding technical mechanism in the printer that blocks the use of unauthorized third-party ink.

    Tip – by a printer from a company that doesn’t rip you off as much for ink: The Kodak 5300 All-in-One Printer, which uses ultra low-priced ink to help you save up to 50 percent. Kodak has made the strategic decision to compete with the entrenched printing companies by not ripping off customers as much.

    Related: Kodak Debuts Printers With Inexpensive Cartridges – Price Discrimination in the Internet Age – Zero Ink Printing – Open Source 3-D Printing