May 10, 2017

If you were to read only one thing…

NYT – How Homeownership Became the Engine of American Inequality – Matthew Desmond 5/9

  • “There is a reason so many Americans choose to develop their net worth through homeownership: It is a proven wealth builder and savings compeller. The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter ($5,400).”
  • “People who are living in a middle- to-lower-class system, there’s no progressing. You’re stuck in that system. I don’t have subsidies. I work, but I feel stuck in this cycle and can barely make ends meet.’’ – Crisaliz Diaz, renter
  • Trying to get subsidized housing? Good luck.
  • “The last time Boston accepted new applications for rental-assistance Section 8 vouchers was nine years ago, when for a few precious weeks you were allowed to place your name on a very long waiting list. Boston is not atypical in that way. In Los Angeles, the estimated wait time for a Section 8 voucher is 11 years. In Washington, the waiting list for housing vouchers is closed indefinitely, and over 40,000 people have applied for public housing alone. While many Americans assume that most poor families live in subsidized housing, the opposite is true; nationwide, only one in four households that qualifies for rental assistance receives it. Most are like Diaz, struggling without government help in the private rental market, where housing costs claim larger and larger chunks of their income.”
  • “Almost a decade removed from the foreclosure crisis that began in 2008, the nation is facing one of the worst affordable-housing shortages in generations. The standard of “affordable” housing is that which costs roughly 30% or less of a family’s income. Because of rising housing costs and stagnant wages, slightly more than half of all poor renting families in the country spend more than 50% of their income on housing costs, and at least one in four spends more than 70%. Yet America’s national housing policy gives affluent homeowners large benefits; middle-class homeowners, smaller benefits; and most renters, who are disproportionately poor, nothing. It is difficult to think of another social policy that more successfully multiplies America’s inequality in such a sweeping fashion.”
  • In 2015, “the federal government dedicated nearly $134 billion to homeowner subsidies. The MID accounted for the biggest chunk of the total, $71 billion, with real estate tax deductions, capital gains exclusions and other expenditures accounting for the rest. That number, $134 billion, was larger than the entire budgets of the Departments of Education, Justice and Energy combined for that year.”
  • As a homeowner myself, I fully attest to the wealth effect. While I greatly appreciate the MID, I would understand if it went away.
  • “When we think of entitlement programs, Social Security and Medicare immediately come to mind. But by any fair standard, the holy trinity of United States social policy should also include the mortgage-interest deduction — an enormous benefit that has also become politically untouchable.”
  • “The MID came into being in 1913, not to spur homeownership but simply as part of a general policy allowing businesses to deduct interest payments from loans. At that time, most Americans didn’t own their homes and only the rich paid income tax, so the effects of the mortgage deduction on the nation’s tax proceeds were fairly trivial. That began to change in the second half of the 20th century, though, because of two huge transformations in American life. First, income tax was converted from an elite tax to a mass tax: In 1932, the Bureau of Internal Revenue (precursor to the I.R.S.) processed fewer than two million individual tax returns, but 11 years later, it processed over 40 million. At the same time, the federal government began subsidizing homeownership through large-scale initiatives like the G.I. Bill and mortgage insurance. Homeownership grew rapidly in the postwar period, and so did the MID.”
  • “By the time policy makers realized how extravagant the MID had become, it was too late to do much about it without facing significant backlash. Millions of voters had begun to count on getting that money back. Even President Ronald Reagan, who oversaw drastic cuts to housing programs benefiting low-income Americans, let the MID be. Subsequent politicians followed suit, often eager to discuss reforms to Social Security and Medicare but reluctant to touch the MID, even as the program continued to grow more costly: By 2019, MID expenditures are expected to exceed $96 billion.”
  • “’Once we’re in a world with a MID, says Todd Sinai, a professor of real estate and public policy at the University of Pennsylvania’s Wharton School, ‘it is very hard to get to a world without the MID.’ That’s in part because the benefit helps to prop up home values. It’s impossible to say how much, but a widely cited 1996 study estimated that eliminating the MID and property-tax deductions would result in a 13% to 17% reduction in housing prices nationwide, though that estimate varies widely by region and more recent analyses have found smaller effects. The MID allows home buyers to collect more after-tax savings if they take on more mortgage debt, which incentivizes them to pay more for properties than they could have otherwise. By inflating home values, the MID benefits Americans who already own homes — and makes joining their ranks harder.”
  • “The owner-renter divide is as salient as any other in this nation, and this divide is a historical result of statecraft designed to protect and promote inequality. Ours was not always a nation of homeowners; the New Deal fashioned it so, particularly through the G.I. Bill of Rights. The G.I. Bill was enormous, consuming 15% of the federal budget in 1948, and remains unmatched by any other single social policy in the scope and depth of its provisions, which included things like college tuition benefits and small-business loans. The G.I. Bill brought a rollout of veterans’ mortgages, padded with modest interest rates and down payments waived for loans up to 30 years. Returning soldiers lined up and bought new homes by the millions. In the years immediately following World War II, veterans’ mortgages accounted for over 40% of all home loans.”
  • “But both in its design and its application, the G.I. Bill excluded a large number of citizens. To get the New Deal through Congress, Franklin Roosevelt needed to appease the Southern arm of the Democratic Party. So he acquiesced when Congress blocked many nonwhites, particularly African-Americans, from accessing his newly created ladders of opportunity. Farm work, housekeeping and other jobs disproportionately staffed by African-Americans were omitted from programs like Social Security and unemployment insurance. Local Veterans Affairs centers and other entities loyal to Jim Crow did their parts as well, systematically denying nonwhite veterans access to the G.I. Bill. If those veterans got past the V.A., they still had to contend with the banks, which denied loan applications in nonwhite neighborhoods because the Federal Housing Administration refused to insure mortgages there. From 1934 to 1968, the official F.H.A. policy of redlining made homeownership virtually impossible in black communities. ‘The consequences proved profound,’ writes the historian Ira Katznelson in his perfectly titled book, When Affirmative Action Was White. ‘By 1984, when G.I. Bill mortgages had mainly matured, the median white household had a net worth of $39,135; the comparable figure for black households was only $3,397, or just 9 percent of white holdings. Most of this difference was accounted for by the absence of homeownership.‘”
  • “This legacy has been passed down to subsequent generations. Today a majority of first-time home buyers get down-payment help from their parents; many of those parents pitch in by refinancing their own homes… Differences in homeownership rates remain the prime driver of the nation’s racial wealth gap. In 2011, the median white household had a net worth of $111,146, compared with $7,113 for the median black household and $8,348 for the median Hispanic household. If black and Hispanic families owned homes at rates similar to whites, the racial wealth gap would be reduced by almost a third.”
  • “Racial exclusion was Roosevelt’s first concession to pass the New Deal; his second, to avoid a tax revolt, was to rely on regressive and largely hidden payroll taxes to fund generous social-welfare programs. A result, the historian Michelmore observes, is that we ‘never asked ordinary taxpayers to pay for the economic security many soon came to expect as a matter of right.’ In providing millions of middle-class families stealth benefits, the American government rendered itself invisible to those families, who soon came to see their success as wholly self-made. We forgot because we were not meant to remember.”
  • “So why do we keep this ‘poor instrument’ around, if the overarching goal of American federal housing policy is to create a nation of homeowners? Perhaps because the MID enjoys entrenched, unyielding support from a powerful real estate lobby. We often discuss the influence of the gun and pharmaceutical lobbies, but the real estate lobby has spent much more than either group. According to the Center for Responsive Politics, the National Association of Realtors spent $64.8 million in lobbying efforts in 2016, making it second only to the U.S. Chamber of Commerce in terms of dollars spent. And to 1.2 million Realtors, the mortgage-interest deduction is nonnegotiable. The association calls it a ‘remarkably effective tool that facilitates homeownership.’ Jerry Howard, the chief executive of the National Association of Home Builders, refers to the MID as ‘one of the cornerstones of American housing policy.’ Of course, industry groups have a responsibility to their members, who enjoy profiting from a government subsidy that increases the prices of homes they build and sell.”
  • Remove the MID or alter it by capping the value on the homes it applies to, etc. The article goes on to discuss the arguments – worth the read.
  • “In some markets, there are virtually no affordable units left. The median annual rent for a two-bedroom apartment is currently $39,600 in Boston, $49,200 in New York City and $54,720 in San Francisco. Families priced out of large cities have moved to smaller ones, and now those cities are experiencing some of the steepest rent increases in the nation. The poor used to live on the other side of the tracks. Now they live in different towns and counties entirely.”
  • Of course those different towns are jacking rents with all of this new demand.
  • “And yet we continue to give the most help to those who least need it — affluent homeowners — while providing nothing to most rent-burdened tenants. If this is our design, our social contract, then we should at least own up to it; we should at least stand up and profess, ‘Yes, this is the kind of nation we want.’ Before us, there are two honest choices: We can endorse this inequality-maximizing arrangement, or we can reject it. What we cannot do is look a mother like Diaz in the face and say, ‘We’d love to help you, but we just can’t afford to.’ Because that is, quite simply, a lie.”

Perspective

WSJ – Daily Shot: California Economy 5/8

  • “Other than the US, only these four nations have an economy larger than California’s.”

Worthy Insights / Opinion Pieces / Advice

The Reformed Broker – Into the teeth of the next bear – Joshua Brown 5/9

  • “What will happen into the teeth of the next 20% stock market decline?” …

Bloomberg View – Puerto Rico Must Not Waste Its Second Chance – Michael Bloomberg 5/9

The Registry – McNellis: The Death of Retail? – John McNellis 5/9

Markets / Economy

WSJ – Daily Shot: Apple Market Cap 5/8

  • And it keeps on getting higher…

FT – China: not such a champion of global trade – Silvia Pavoni 5/8

  • “China’s championing of globalization should be great news for exporters in Latin America, where trade with the Asian giant has ballooned since the early 2000s. But trade growth has stalled and, according to the Inter-American Development Bank (IDB), this is not only because of the bursting of the commodities bubble. High tariffs and other barriers both in China and in Latin America show that free-trade rhetoric has yet to be matched by action.”
  • “In a recent report, Uncovering the Barriers of the China-Latin America and Caribbean Trade, the IDB details tariffs and other ‘discriminatory’ policies afflicting the relationship. Their presence has contributed to a decline in trade between the two, which slowed to $247bn in 2016, a 7% drop from the previous year and the third consecutive annual fall.”
  • “According to the IDB, Latin America’s farmers have been hit particularly hard. Beijing imposes tariffs of 17.3% on agricultural produce from Argentina, 17% on that from Brazil and 16.1% from Mexico, compared with its average tariffs of 13.4% for the farm sector worldwide. The difference matters: soya alone represents a fifth of the region’s total exports to China.”
  • “’During the [commodity] boom years, Latin American countries were very passive, they just sort of expected Chinese demand to continue endlessly and didn’t do much to diversify exports, with [only a few] exceptions,’ says Carlos Casanova, Hong Kong-based economist at BBVA. ‘You keep on hearing ‘la fiesta se acabo’ [the party is over]. I think Latin America is coming to grips with the fact that the Chinese economy is rebalancing and that they need to diversify the export basket.’”

Real Estate

WSJ – Daily Shot: FRED – Tightening Credit Standards for Multifamily Sector 5/8

  • “In commercial real estate, the multi-family sector continues to struggle as banks tighten lending standards (chart below) while demand wanes (second chart below). These trends will be reflected in slowing multi-family housing starts.”

Finance

Bloomberg – A New Paper Just Took a Huge Shot at Some of the World’s Hottest Investments – Eric Weiner 5/8

  • “Looking at 447 supposedly repeating price patterns identified in the last few decades, academics from Ohio State and the University of Cincinnati contend that more than half are basically figments of their discoverers’ imagination. The study, ‘Replicating Anomalies’ by Kewei Hou, Chen Xue and Lu Zhang, attributed the findings to a statistical sleight of hand known as p-hacking.”
  • “While lodged squarely in the academic realm, the paper is a broadside against an area of research that has come to dominate financial economics and underpin both quantitative investing and smart beta exchange-traded funds. It joins a growing body of literature that suggests people looking for money-making opportunities within the market’s chaos often see what they want to see, or confuse profitability with luck.”

Asia – excluding China and Japan

Bloomberg – China’s High Rollers Are Phoning In Big Bets to Manila Casinos – Daniela Wei and Bruce Einhorn 5/3

  • “Philippine casinos reported as much as 110% increases in VIP revenue from high-rollers – from $27 billion in bets placed last year, and possibly far more if off-books betting were tallied. Phone betting, also known as betting by proxy, has grown to account for as much as 85% of the business at some VIP rooms used by big spenders, according to people familiar with the operations who asked not to be identified as they’re not authorized to speak publicly.”
  • “While the Philippine Amusement and Gaming Corp., the casino regulator also known as Pagcor, permits phone betting, many other gambling centers ban it because of money-laundering concerns. Macau eliminated betting by proxy last year citing the risk. Not all Philippine casinos engage in proxy betting.”
  • “Unlike banks, insurance companies and other finance-related firms that must comply with the Philippines’ anti-money laundering law, casinos are exempt from such reporting requirements – an issue the U.S. State Department called ‘an especially critical concern.'”
  • “Phone betting isn’t the only way the Philippines is trying to attract long-distance gamblers. The regulator issued 35 licenses for online betting operations restricted to foreigners outside the country, Andrea Domingo, chairman and chief executive officer of Pagcor, told a Senate hearing in February. The government expects to ‘make a lot of money’ from these licenses, Domingo said.”

China

Bloomberg Businessweek – China’s Booming Service Industry Can’t Keep Up With College Grads – Dexter Roberts 5/4

  • “Service industries, which employ 43% of all Chinese workers, are creating few jobs fit for college graduates.”

South America

FT – Hidden numbers reveal scale of Venezuela’s economic crisis – Valentina Romei 5/8

  • “A country that in 1980 had the highest GDP per capita in Latin America is no longer in the top 10 and its economy is smaller than those of Colombia, Chile and Peru, the IMF data show.”
  • A picture is worth a thousand words…

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