Buying a house

We've been renting a house since we moved from SoCal to Penn last year. Renting was a good choice, as we needed to get to know the new area, and make sure the schools and neighborhood would work for us.

We rented our old house to a family moved down from NorCal to SoCal. They rented out their house too.

So for the first time in my life, I've become both a landlord and a tenant at the same time. It was quite an experience.

We tried to be open and communicative to our tenants, and stayed on top of all necessary repairs. I let them know all the things they should know to live in our house comfortably, especially anything that may become a safety issue. In turn, our tenants have done their best to take care of our property. We appreciate their paying on time and being proactive on any repair issue. In a difficult year, this relationship worked out quite well.

Our landlord, on the other hand, had been avoiding direct communication at the outset. If there is any repair issue, they would rather not be bothered... eventually, as one would expect, this kind of relationship ran into problems. We paid a generous above-market rent for them, in return we got almost no help from the owners who had lived here for a long time. Moreover, when it was time to renew the lease, they wanted to raise our rent, despite the softening market.

These problems pushed us towards buying. That aside, the economics appears to become more and more favorable for buying: home prices have been dropping steadily over the last year, mortgage rate has hit historical low and got lower. For a bigger house in the same neighborhood, our rent would more than cover the mortgage payment. With tax savings taken into account, we would be roughly ahead by the amount of principal payment we would pay against the house. That is, with a little bit of work as a homeowner, we would be building up equity every month. That equity would be totally gone to the landlord if we continue to rent.

In other words, if we buy the house we're renting now at market price, and rent it out as an investment property, we would be generating a small positive profit at year 1. Bear in mind this is one of the best neighborhoods in this area. Usually people tend to want to own, not rent. In such neighborhoods, it's usually hard to break even with rentals at the beginning. So this is a clear sign that it's about time to buy if one has a stable job. The housing may not have hit bottom yet, but it should be fairly close.

We found several houses we like. As we got into the market and started making offers, I quickly realized how thin the market was. You rarely see multiple offers. Very few buyers. At one point, our withdrawal on one house affected the pricing of some nearby properties immediately... Sellers have to price it right, or risk sitting on the market for months after months, and going through multiple reductions.

We didn't get the home purchase tax credit. Interstingly, the expiration of the tax credit have benefited us far more than $8000: The market had become markedly softer and the mortgage rate had gone down even more dramatically since June.

As I write this, we're getting ready to settle this week. After this local move, the turmoil of 2009 which had affected us in a big way will finally be behind us.      

Job creation as the leading indicator

Another Friday employment situation report, another disappointment.

Private-sector employers added just 71,000 jobs in July, according to a report released Friday by the Labor Department, fewer than the 100,000 plus jobs that economists were hoping for. Moreover, it also said private firms hired fewer workers in June than it had previously reported, as it revised that estimate down from 83,000 to 31,000 jobs.

The small increase in private-sector employment was more than offset by the loss of 143,000 temporary census jobs, and the nation's unemployment rate remained unchanged at 9.5 percent. Overall, the nation shed 131,00 jobs in July.

Remember when this measure, private job creation, fell off a cliff in May (reported early June) the stock market took a dive. Today's report also added pressure on the market which has been recovering quite well in July.

Recovery in housing market and consumer spending is now largely dependent on jobs. It's only logical that private job creation had become something of a leading indicator for the current economic recovery.

Corporate profit no longer seems to indicate job creation. And there aren't obvious leading sectors to point to that are creating many jobs.

Overall this year, private-sector payrolls have grown by 630,000 jobs, but about two-thirds of that increase occurred in March and April. After that, corporations have become more cautious in hiring.

Meanwhile, the strained state and local governments have shedded 48,000 jobs in July.

The sluggish job recovery is adding pressure to deflation.

Hedge Funds Not Knowing What to Do with Money?

May and June have been brutal for money managers. The volatility and conflicting economic signals made it very hard to stay the course or change the course. On hindsight, it would have been great to be 100% in cash since early May when S&P was at 1200. It's probably not a very good idea to raise cash after the 10% correction. But that appears to be what some of the big hedge funds have done, which has probably contributed to the market volatility and deepened the correction.

Barton Biggs, whose purchase of stocks in March 2009 gave Traxis Partners LLC a 38 percent gain last year (so?), said last week he sold about half his stock investments because of concern governments around the world are curtailing stimulus measures too soon.


“I’m not wildly bearish, but I don’t want to have a lot of risk at this point,” Biggs, who manages $1.4 billion, said in a telephone interview. “I’m not putting my money into anything. I’m raising cash.”


At the end of May, this same Big manager was voicing his opinion that the stock market was set to "pop" in days (yes, in no uncertain terms, "in a couple of days."). Apparently, he has been frustrated by June's continuing declines. But his earlier bullish call was a frustrating call at best. Did he actually know something or was he just wishing for something?

For more comments, see this Bloomberg article.

Nothing to Fear but Fear Itself?

There are a lot of talks about market psychology in recent days as the market went through a deep correction. For instance, the Wall Street Journal has a piece today that tries to argue that "[t]he biggest threat to recovery is the markets themselves." That is, the economic recovery would be back on track if the markets just believe it.

As if to confirm it, the market had a good rally today without any good news.

I do believe there is certain amount of truth in it, although I think there is far more than just investor psychology that's involved.

To a large degree, our modern economy is now very asset-based, in that consumers can spend based on the value of their assets such as homes and mutual funds. So if the markets for these assets are supported either by the Fed, or by optimistic views, we may see very positive effects on consumption and hence on recovery. That in turn may lead to higher asset values.

But that was how we got into the credit crisis, believing for example that home values would always go up. Consumers are now working hard to repair their balance sheets. In such an environment, we need actual income generation to support the economic recovery. That is, jobs.

This is probably why PIMCO's El-Erian thinks that unemployment has shifted from a lagging indicator to a leading one and is warning government policymakers to confront the structural problems in the economy. Eight millions of jobs have been lost since the beginning of the great recession. Despite historically low interest rate and trillions of dollars in stimulus spending, jobs are still scarce and are being added too slowly.

Investors have to ask, why these profitable corporations are not adding more jobs and who are going to lead job creation?

Rail and Retail

Rail traffic has been up over the past two months. Combined weekly traffic for new carloads and intermodal shipments is about 14% higher than a year ago, according to the Association for American Railroads.

U.S. retailers’ sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. This maybe a sign that consumers are overcoming concern about unemployment and depressed home values. Just maybe.

Rail volumn and retail sales are not leading indicators. They're contemporaneous ones. While encouraging, they offer no assurance for the economic recovery.

2Q earnings season is underway. But even good earnings may not be enough to lift the depressed market sentiments. Stocks are cheap, if the outlook of good earnings continues to hold up and perhaps improve. The fear of a double-dip recession, however, has called that into question.

Additionally, the uncertainty around November's mid-term election and consequently the tax policy changes may not give market good enough reason to start its recovery from the recent lows.

Best Time to Buy a House?

John Paulson said he is optimistic on the American economy. "I think we're at the tail end of the credit crisis," he said "We're in the middle of a sustained recovery in the US. The risk of a double dip is less than 10 percent.” Europe, however, “is the one soft spot in the world," he told an audience at the London School of Economics on Wednesday.

"It's the best time to buy a house in America. California has been a leading indicator for the housing market, and it turned positive seven months ago. I think we're about to turn a corner."

The housing market is probably in its worse shape: Both new and existing home sales have plummeted in June to new lows after the expiration of the federal home buyer tax credit. Mortgage rate has been steadily going down, which is an indication that housing demand is weak and getting weaker. All these are tightly linked to the weak labor market: Private job creation is anemic, and unemployment rate is expetecd to stay elevated for years.

The economy is so dark that economist/columnist Paul Krugman has warned that we maybe entering the "Third Depression."

But if you're a contrarian and you believe in the basic soundness of American businesses, then this is probably one of the best times to take a bullish bet, on housing and on U.S. economy in general.

See this article for the contrasting views of the hedge fund manager Joh Paulson and the academic/journalist Paul Krugman.

I've been looking for a house to buy in recent months as our lease was expiring. There are many good reasons to buy. Prices have been dropping over the last two years, and continue to drop. It's definitely a buyer's market. Renting now costs more in terms of after-tax cash flow. It's a good time to take advantage of the historically low mortgage rates and to start building home equity again...

But, there is no hurry! Unemployment is going to be a long hard problem to solve. Without massive job creation, there is very little real pent-up demand for additonal housing.

But, for the same reason, if job creation is getting in gear and we start to see hundreds of thousands of private jobs being created, a housing boom would not be far behind.

Cash Better Than Gold!

Gold prices are retreating. Investors are raising cash, lots of them. We raised some back in May and June, but not nearly enough.

Long rate is heading down. This is in stark contrast to the market expectation at the beginning of the year.

There is one important thing that the markets across asset classes agree on: risky asset prices are heading lower. We're headed to a deflationary environment. And that has been baked into the market expectations, which may become self-fulfilling.

Cash not only will not lose value, it will buy more if you just wait.

Companies, big and small, are holding back. Because they can buy more later.

People who worry about losing jobs don't want to buy homes now. Mortgage rates can't help but to go down. People who have stable jobs are probably better off renting, because they can buy more home later.

Is there value in gold? Not in a deflationary environment and major governments are pursuing austerity.

There is only one entity that can turn this vicious cycle around: The Bernanke Fed.