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No Property Tax Relief In Sight

More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.

The Journal’s Conor Dougherty wrote on April 24:

…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:

But the job expansion could later cause financial problems for governments that are spending too much.

“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”

Ain’t that the truth…

Sources:

“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty
Wall Street Journal, April 24, 2008

“Hiring leaps in public sector”
Dennis Cauchon
USA Today, April 29, 2008

Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

Boycott Chinese Goods? Get Real

Earlier today I came across the following comments on a blog post about “saving” the U.S. dollar:

Boycott chineese goods, all of our good paying jobs are being shipped over sea’s mostly to china and how do the expect us to buy anything when we have no good paying jobs beside we have nothing to sell back which weakens our currency.

Stop buying products made from China! American jobs and money is being shipped to that country everytime you purchase those cheap and substandard products.

Hey, I’m all for “Buy American” and do it whenever I can. But, the reality is that it’s darn near impossible. Don’t believe me? Back on August 19, 2007, I happened to read an article in the Chicago Tribune about a Louisiana family who tried to go without Chinese-made goods for an entire year. Sara Bongiorni of Baton Rouge came up with the idea on Christmas Day 2004 when she noticed that 25 of the 39 Christmas gifts were made in China. It was then she decided to boycott Chinese goods for the entire 2005 calendar year. She eventually went on to write a book about the experience.

The mother of three had this to say of her family’s boycott of products made in China:

It was really all-consuming… You realize the inconvenience factor was tremendous. We totally take advantage of these things from China.

When local stores didn’t have a non-Chinese product that she needed, she was forced to turn to catalogs and the Internet, which ironically didn’t make things easier, as she often had to make phone calls to see if “imported” stood for “made in China.” Customer service agents would place her on hold for an eternity as they researched the origin of products she inquired about. Even a task as simple as shopping for sneakers turned into a nightmare. Mary Ellen Podmolik, special to the Tribune, wrote:

… when Bongiorni found that her 4-year-old son had outgrown his sneakers, her hunt for a replacement pair took her to a children’s shoe chain, two department stores and a discount shoe warehouse, all to no avail.

Two weeks later and fearing that her son’s toes were starting to curl in his too-small shoes, she found a pair of Italian-made sneakers online for $68. Before ordering them- in a size one larger than he needed- she found herself running outside to get a neighbor’s opinion on whether $68 was too much to spend for children’s shoes.

Often, the family of five had to improvise to avoid buying Chinese goods. Podmolik wrote:

When they needed a mousetrap, for instance, they tried fashioning one from an empty milk jug and broken pieces of cookies and chocolate. The mouse won.

At the time the article was written, Sara Bongiorni said:

I absolutely could not do it permanently. You’d have to be able to give up a telephone and a cell phone, computers.

She noted that her family’s experiment was somewhat easier because she had small children. It would have been different, she surmised, had her kids been teenagers with their need for electronic gadgets.

So, the next time someone blurts, “Boycott Chinese goods,” you may want to tell them, “Get real.”

Source:

“A family tries 12 months without ‘Made in China’”
Mary Ellen Podmolik
Chicago Tribune, August 19, 2007

Pain In The Gas

Back on November 20, 2007, I wrote a post about the rising price of gasoline. Back then, prices were making headlines because the national average for regular unleaded gasoline stood at $3.10 per gallon, or 10% higher than a month prior. I also wrote that day:

CNBC noted that for a number of drivers, the cost of filling up their vehicles is hitting $100 or more. Based on calculations by Bankrate.com, it costs $108.50 to fill the 31 gallon tanks on your base model Chevrolet Avalanche or Suburban. If you own a base model Ford Expedition, you’re in luck, as the 28 gallon tank costs only $98 to fill up.

Fast forward to April 29, 2008. The national average for regular unleaded gasoline is now $3.60 per gallon, and U.S. presidential candidates are calling for a suspension of federal gas and diesel taxes. And the cost of refueling those vehicles referenced in my November post?

• Chevy Avalanche (31 gallon tank)= $111.60
• Chevy Suburban (31 gallon tank)= $111.60
• Ford Expedition (28 gallon tank)= $100.80

Welcome to the $100 club, Expedition owners. It could be worse. If you owned a Chevy Suburban or GMC Yukon with the 39 gallon tanks, you’d be looking at $140.40 per fill-up.

“Honey, could you gas up the Yukon for tonight?”

Bank Of Central Banks: Stagflation Risk For U.S. Economy

Malcolm Knight, the general manager of the Bank for International Settlements, told Reuters’ Brian Love last week that stagflation might occur in the United States, with weak economic growth lasting well into 2009, if not longer. According to Investopedia, stagflation is “a condition of slow economic growth and relatively high unemployment- a time of stagnation- accompanied by a rise in prices, or inflation.” The BIS is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks around the world, including the Federal Reserve. Established on May 17, 1930, it is the world’s oldest international financial organization.

Reuters’ European economic correspondent wrote:

“I see a certain amount of scope for stagflation in a number of economies and that usually tends to result in subpar economic growth performance for an extended period of time, which could go well into 2009 or even longer,” said Knight, a Canadian who worked for more than 20 years at the International Monetary Fund.

“I think the U.S. economy is likely to experience weakness this year and in much of 2009,” said Knight, speaking to Reuters at BIS headquarters in Basel, Switzerland.

“Stagflation is a definite risk.”

Love noted that Knight’s outlook contradicts the White House’s assertions that the U.S. economy will rebound later in the year as the result of economic stimulus initiatives.

Source:

“U.S. risks stagflation: BIS chief”
Brian Love
Reuters, April 29, 2008

FDIC Expects “Troubled Bank” List To Grow

FOX Business Network’s Ray Hennessey wrote today that Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said new data on the FDIC‘s so called “troubled bank” list will show an increase over the current 76 banks on the list. However, she added “that is not a big number” and the increase should not be construed as meaning a new wave of bank failures.

While speaking at the Society of American Business Editors and Writers annual meeting in Baltimore, the FDIC chairman said housing woes (in particular, local construction loans) have caused problems for a larger number of small banks. Yet, she noted that at the present time smaller institutions are in better shape than their larger colleagues.

The FDIC stands to benefit from new regulations proposed by the Treasury Department. Hennessey wrote:

“Free markets and some baseline level of regulation are compatible,” Bair said. But the key is fewer, not more, regulators, she said. One of the problems with the current system is “regulatory arbitrage,” where banks chose what regulators - often weaker ones - they fell under. Limiting the number of regulators these banks are accountable to is the key.

“Regulatory arbitrage is a problem in this country,” she said. “Some homogenization needs to take place.”

And a little less greed, it seems.

Source:

“Bank Troubles Expected to Grow at Manageable Pace”
Ray Hennessey
FOX Business Network, April 29, 2008

Dave Barry On Economic ‘Stimulus’ Payments

Well, it looks like the first of the economic ‘stimulus’ payments are arriving in the mailbox (and being spent at the gas pump). The other day I noticed that Dave Barry had added his two cents on the tax rebate checks. For those of you who aren’t familiar with Dave Barry, he is a humor columnist whose work appeared in more than 500 newspapers in the United States and abroad for 25 years. In 1988, he even won the Pulitzer Prize for Commentary.

Barry wrote in the Miami Herald on April 13:

…this year, filing taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up.

Source: Hong Kong Tourism Board

Source:

“Dave Barry: How your taxes turn into manure”
Dave Barry
Miami Herald, April 13, 2008

New Forecast: $1 Trillion In Losses From Credit Turmoil

According to Bloomberg today, former World Bank President James Wolfensohn is predicting that losses from the global credit turmoil may climb to $1 trillion. Wolfesohn, who was the head of the Word Bank from 1995 to 2005, said after addressing the European Pensions and Savings Summit:

“It does seem to be a major adjustment on any level. There may be a $1,000 billion worth of losses in it somewhere.”

He added that he “cannot recall anything similar, certainly in the last 30 to 40 years that I’ve worked.”

Bloomberg’s Brian Swint wrote:

The International Monetary Fund predicts that losses from the crisis, including those tied to commercial real-estate, may total $945 billion and says global economic expansion may be the slowest since 2003 this year. Wolfensohn said the fund’s loss forecast of about $1 trillion is now a “consensus estimate.”

Data compiled by Bloomberg as of this morning shows the world’s biggest banks and securities firms have so far reported credit losses and writedowns of about $310 billion linked to the U.S. subprime meltdown.

Now an advisor to Citigroup, Wolfensohn concluded:

I’d have to say in my working experience, this is a different sort of crisis, largely because of the extent of the overhangs in financial markets. I don’t think in my working lifetime, I’ve seen challenges to the major institutions in terms of writedowns and impact on market capitalization.”

Source:

“Wolfensohn ‘Pessimistic’ as Financial Losses Rise (Update1)”
Brian Swint
Bloomberg, April 28, 2008

When Juries Actually Work

Ever serve on a jury? I have, and didn’t enjoy one particular experience that took place in 1996. That year, I was picked to serve on a traffic court jury for Cook County, Illinois. The case was about a man who was arrested for drunk driving when he was stopped at a Chicago Police Department roadblock. According to witnesses, police officers at the roadblock motioned for the man to come forward with his car. Seeing that there was no response, one of the officers walked up to the vehicle and discovered the defendant incapacitated, his car wreaking of alcohol, and a nice, big bottle of booze by the man’s side. Police officers turned the vehicle off for the driver, helped him out of his car, and informed him of his arrest. However, the arresting officers turned their back on the man for one moment (big mistake), at which point he declared, “Well, if I’m going to jail, I might as well have another drink.” The motorist then proceeded to grab his bottle and down the remaining contents. After hearing the case, my fellow jury members decided to ignore the breathalyzer results, as the procedure was administered shortly after he chugged the bottle. And the rest of case? Open and shut, right? Wrong. A number of jury members started to feel “sorry” for the man, and argued that he wasn’t really drunk, he was just “scared” of the big, bad, policemen (which, they rationalized, would explain why he didn’t pull forward at the roadblock when he was instructed to). Never mind that he was a pile of crap at the roadblock, his car stunk of alcohol, and the smoking gun was on the seat right next to him. To make a long story short, the trial ended up in a hung jury, and a mistrial declared.

I often wonder if someone lost their life down the road because jury members felt “sorry” for this individual.

Well, I recently read something in the North County Times that helped restore my faith in juries… a little. You may have heard of Marty and Vernon Ummel, who sued their real estate agent because, they argued, the $1.2 million they paid for their Carlsbad home in 2005 could not be justified when other houses on the street were selling for much less at the time. The Ummels claimed their agent failed them and thus owed the couple $150,000, the amount they felt they overspent.

Well, on April 10 it took a jury less than two hours to unanimously clear the real estate agent, Mike Little. According to the North County Times’ Teri Figueroa:

After about a week of testimony at the Vista courthouse, the panel of 10 women and two men rejected Marty and Vernon Ummels’ arguments that they overpaid $150,000 for their home near the Four Seasons Resort Aviara…

“Mr. Little did what he was supposed to do,” jury forewoman Wendi Brick said. “The bottom line is that you (as a buyer) are responsible when you sign a contract and purchase something.”

Now, if only those who are pushing for a mortgage bailout could grasp this simple concept…

Source:

“CARLSBAD: Jury clears real estate agent”
Teri Figueroa
North County Times, April 10, 2008

In Love With Housing? Play Video Games

I’m still seeing a lot of signs these days that America’s love affair with housing is alive and strong. However, is the love a “good” kind of love (think “This Old House”) or is it a “bad,” money-based one (á la “Flip This House”). Personally, I believe our infatuation with real estate is still rooted in its profit-potential. Even in a downturn. For example, not like I watch a lot of TV, but I’ve noticed a significant increase lately in the number of “get rich through foreclosures” commercials. A couple of weeks ago, I was at a Borders bookstore in a Chicago suburb (I don’t buy anything in the City anymore— sales tax is too high) and saw that they were pushing Foreclosure Investing For Dummies. But the following takes the cake. Earlier today I read an article by Jonathan Lansner of the McClatchy-Tribune Newspapers, who talked about a video game for wanna-be real estate tycoons called “Build-a-lot.” According to the game’s website, where you can play the game free for one hour or purchase it:

Become a real estate mogul and take over the housing market as you construct, upgrade and sell houses for huge profits! You can flip houses for quick cash or sit back and watch the rental income pile up. Travel to scenic towns and perform special tasks for the local mayors. Buy blue prints of new buildings to build bigger and better neighborhoods! Can you build an ice rink for the Olympics? A new cinema for the local movie star? Find out in the new strategy game, Build-a-lot!

Despite the ongoing housing woes, the game’s popularity is actually growing. In fact, one of the creators said that the current real estate market:

… has only increased the popularity of “Build-a-lot.” Real estate is a hot topic. For those that can’t become a real estate tycoon in real life, they can also give it a shot by playing “Build-a-lot.”

Looks like a good way to practice home flipping techniques. After all, the housing market’s bottoming, right?

Just in case aspiring real estate moguls may be concerned their virtual world might suffer the same fate as the real housing market, Lansner wrote:

There’s no grand, overarching market force to throw a wrench in your plans. There are no foreclosures to worry about, either.

Whew, let the love affair continue…

Source:

“Virtual real estate resists market slump”
Jonathan Lansner
McClatchy-Tribune Newspapers, April 27, 2008

Quote For The Week

On Thursday, I read an article by MarketWatch’s Greg Robb that talked about how economists are differing in opinion regarding legislation sponsored by House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, that is intended to make it easier for homeowners to refinance their loans and stay in their homes. The program would substantially relax the Federal Housing Administration’s standards to reach struggling borrowers who otherwise would be considered ineligible for a government-backed mortgage. Homeowners would have to show they could make payments on a refinanced mortgage, and lenders would have to agree to take significant losses on the existing loans. The committee, which claims the program could help 1.5 million homeowners who are having difficulty paying their mortgages, is expected to approve Frank’s bill this week.

In his piece, Robb noted that many economists are arguing this housing “bailout” bill is unfair. In fact, Paul Kasriel, chief economist at Northern Trust Company in Chicago, said:

Once again we are punishing people who followed the rules. There is no such thing as a free bailout. To think that we can continue to simply issue more debt and the rest of the world is gladly going to buy it at attractive rates to us… I kinda doubt it.

Consumers Buying What They Need, Not What They Want

This afternoon I read an interesting article by the Associated Press’ Jeannine Aversa about consumer spending at a time when the U.S. economy is slowing and prices for items such as food and gas are rising. According to a recent government report on retail sales, clothing stores, furniture and home furnishing retailers, electronics and appliance stores, building materials and garden supply places, and health and beauty shops were among those merchants who saw their sales drop last month. Sales at bars and restaurants posted a modest increase from the previous month, as did sporting goods, hobby, book and music stores.

Aversa noted how consumers are changing their spending habits:

• 60% of the American public say they are now less comfortable buying a big-ticket item, such as a home or a car, than they were just 6 months ago, according to the RBC Cash poll conducted by Ipsos, an international polling firm, earlier this month. 12 months ago, 48% said they were less comfortable about making a major purchase.
• 53.6% of people surveyed focused more on what they needed, rather than what they wanted, when they went shopping over the last 6 months, according to BIGresearch, a firm that tracks consumer behavior. Pam Goodfellow, a senior analyst at BIGresearch, says the focus is more on smart shopping and bargain hunting.
• Because declining home prices and rising prices at the pump cannot be controlled, consumers are “controlling the little things… filling up the cart and putting things back at the check out,” said Candace Corlett, principal at consulting firm WSL Strategic Retail. She warned, “They are learning restraint and that is deadly for commerce.” Although, most Americans aren’t giving up things like medications, cell phones, and cable TV.

Photo by Ruth Elkin, stock.xchng

The research firms pointed out specific areas that were suffering from the pullback in consumer spending. 35.2% of people polled were scaling back vacation plans, according to BIGresearch. WSL Strategic Retail said fashion accessories, home decor items, premium brands of food and specialty coffees, eating at restaurants and take-out foods, and tickets to entertainment, are the top areas where consumers are cutting back.

Marshal Cohen, chief retail analyst at consumer and retail research firm NPD Group said video games, toys, and skin care products are the three areas he believes are least likely to see spending cuts.

Source:

“People’s decisions to cut back add up to weaker economy”
Jeannine Aversa
Associated Press, April 25, 2008

State Governments Battered By Slowing Economy

Earlier today, Bloomberg’s William Selway reported that state governments are projecting a $26 billion shortfall in the next budget year as the slowing economy erodes tax receipts, according to a national survey. The National Conference of State Legislatures study found:

With a few exceptions, state finances are deteriorating, in some cases considerably…

If the national economy continues to struggle and indeed falls into recession, the state fiscal situation will worsen.

While economists argue over whether or not the U.S. economy is in a recession, the group said:

Whether or not the national economy is in recession — a subject of ongoing debate — is almost beside the point for some states because their fiscal situations have declined so much that they appear to be in recession.

According to the survey, deficits are forecast in 23 states for the 2009 budget year. 16 states, including California and Florida, were forced to deal with shortfalls of $11.7 billion that appeared after their spending plans were already set. 33 states say they are concerned about the outlook for the coming year. Not surprisingly, states that benefited most from the housing boom are now seeing the most pain. The widest deficits for next year, measured as a percentage of the budget, are in Arizona, Nevada, California, Alabama, and Florida.

And how do the states plan to deal with the budget shortfalls? Selway wrote:

At least 16 states will respond to their shortfalls by cutting back spending, according to the report. At least eight, including California, are considering moves to raise taxes or fees. Massachusetts is considering a $1 per pack increase in the cigarette tax to raise $175 million, the report said. New York lawmakers balanced next year’s budget in part with a $1.25 per pack cigarette tax boost.

Others are looking at selling assets or using bonds sales to pay for projects. Illinois may sell its lottery, while Maine is looking at selling surplus land. Nevada is considering using bonds, instead of general fund money, for capital works.

More “pole taxes” to come?

Source:

“U.S. States ‘Deteriorating’ as Slump Curbs Taxes, Lawmakers Say”
William Selway
Bloomberg, April 25, 2008

Roubini Tells CNBC ‘Worst Is Ahead Of Us’

Earlier this morning, CNBC’s Carl Quintanilla and Becky Quick talked to Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York. His economic outlook: bleak.

According to Roubini, while a number of economists are calling for a mild, short recession in the United States, if at all, he sees a much more severe and protracted event lasting up to 6 quarters. He attributes this to the following:

• Worst housing recession since the Great Depression is getting worse
• U.S. consumer is “shopped-out, saving less, and on the ropes”
• Financial crisis that goes well beyond subprime

In effect, this will be no short and shallow recession. In fact, the NYU economics professor told CNBC viewers:

The worst is ahead of us rather than behind us.

You can access the 4 minute 25 second interview on the CNBC website here.

Source:

“Alphabet Soup Of Recession”
CNBC, April 25, 2008