But as the history of debt in America shows, condemnations of extravagance can obscure more than they illuminate. The equation of debt and decline assumes that once upon a time Americans lived within their means and saved for what they bought. This is fantasy: there never was a golden age of thrift. Debt has always played an important role in Americans’ lives — not merely as a means of instant gratification but also as a strategy for survival and a tool for economic advance.

Yet our moral traditions have concealed this complexity. "Owe no man anything," St. Paul warned, and from the New England Puritans forward, legions of Protestant ministers made this their text. Indebtedness signified a sin against the Protestant ethic of self-control; it also threatened the ideal of independent manhood that underwrote the founders’ vision of a virtuous republic. The indebted man "must smile on those he hates, he must extend his hand where he would strike, he must speak pleasantly with a curse in his throat," a Harper’s contributor wrote in 1894. "He wears dependence like a yoke." Benjamin Franklin coined similar lessons in aphorisms later memorized by generations of Victorian-era schoolchildren: "The Borrower Is a Slave to the Lender." "Be frugal and free." The link with lost freedom was more than metaphorical: you could still be imprisoned for debt in many places (including New York City) down to the early 1900’s.

Still, the case against debt was more principled than practical. Every generation of moralists imagined the same fall from financial rectitude. In their novel "The Gilded Age" (1873), Mark Twain and Charles Dudley Warner mourned the disappearance of the antebellum "horror of debt" amid the speculative borrowing of the post-Civil War years.

NY Times

Bill Coppedge

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Widely seen as a forerunner in national real estate trends, San Diego County is being viewed “with some trepidation” by lending giant Fannie Mae as its housing market cools.

“San Diego is one of the areas of the country that has had incredible . . . price gains,” Fannie Mae Chief Economist David Berson said yesterday during an economic and mortgage market report. “There is no question that the San Diego housing market has slowed.

“Inventories have surged in San Diego and the surrounding areas,” he continued. “Home price gains . . . are certainly down from their peak and perhaps will fall.”

San Diego is one region that is experiencing low affordability after a rapid and unsustainable rise in home prices, Berson said. Major metropolitan areas on both coasts are experiencing their lowest affordability levels “since the mid-1980s, when interest rates were considerably higher than they are now.”

While San Diego County’s economy is basically sound, the strong presence of investors in the housing market makes it subject to price fluctuations, he added. “We view it with some trepidation. It is one of the areas we are concerned about.”

Berson said the condo market here is at risk “because the supply has gone up dramatically.” There have been “lots of condo conversions. The investor share probably has been far more active in the condo market.”

Investors favor condos over single-family homes because they’re considered to be easier to sell quickly, he said. “Condos are far more commodity-like than single-family homes.”

Berson said the national housing market will continue to slow.

“We have had five years of record home sales,” he said. “That is unprecedented in the modern era. New home sales this year will fall by 9 to 10 percent. . . . Existing home sales, we think they will fall this year by about 7 to 9 percent.”

Union Tribune

Past performance may not predict future results, but it certainly captures the assets required to obtain future management fees.

Futures on the Past

This little diversion into the nature of past, present and futures markets was prompted by a review of the Chicago Mercantile Exchange’s housing futures. All futures markets are based on the principle of indifference. If interest rates are at 5% and storage costs amount to 1% of the underlying asset’s price, then a one-year future should be priced 6% over the current cash market price. You should be indifferent to the choice of buying the asset now and storing it yourself or buying it in the futures market for delivery a year from now.

Futures markets also have a large measure of insurance built into them. Producers sell futures to lock in a price to be received, and consumers buy them to lock in a price to be paid. Risk management is understood, almost without saying, to involve events that will happen in the future.

This is not the case with housing futures. Each of the contracts is based on the S&P/Case-Shiller (CSI) home price indices. They cover metropolitan areas of Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Las Vegas, Denver and Los Angeles, as well as a composite national index. That in itself does not present a problem; we have close to 25 years of experience trading index-based, cash-settled futures on things such as stock indices.

Frequency becomes a problem. Unlike a stock index that is refreshed several times a minute, the CSI indices are released at 1:15 p.m. Central Standard Time on the last Tuesday of every calendar month. The release is of necessity for data collected for previous months. For example, the August report will cover the data collected for April, May and June in each reporting region.

Here’s a question for the philosophy majors in the audience: Can you be at risk for something that has happened in the past? Moreover, can you really work up a sweat trading something released just once a month that will not have an immediate impact on other markets? We are perfectly accustomed to trading monthly releases of government data or even quarterly releases, because we know they change our and others’ perceptions of reality. But does anyone remember how a change in the Miami CSI index in March changed their life, or, more importantly, their business plans?

The Risk Exists



This is not to deny that a risk exists in the residential real estate market. The Federal Reserve’s Flow of Funds data for the end of the first quarter of 2006 put household holdings of residential real estate at $20.364 trillion. For comparison, households and nonprofit organizations own $5.6845 trillion of corporate equities and $4.5374 trillion of mutual fund shares.

Read more…

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