Year: 2002

In response to Stephen Wright’s famous line – ‘You can’t have everything. Where would you put it?’ – Kevin Roon writes: ‘Obviously, you’d put it everywhere.’

[Some of you had trouble getting to the Davis columns. If I get time, I will link them all.]

#

T. Hardy: ‘Our question concerns the reality of the ‘housing bubble’ that is being written about fairly regularly now. We are in the mid-west, own our own home outright at this point and we are considering buying a new house. We are considering waiting until next year to see what happens to the ‘bubble,’ but I am wondering if this is a real phenomenon.’

☞ I am flying back from San Francisco and Los Angeles. These are certainly different markets from Cincinnati, and Cincinnati is different from Milwaukee or Mapleton, Iowa, or Columbus – and I have no doubt that various parts of the Columbus real estate market are different from each other – so the first thing to say is that every market is different and there are no ironclad rules.

But the second thing to say is that, yes, I think in many places there will be a correction.

In San Francisco, a once-wealthy friend is thinking of selling his second home. (He’s still doing OK, but his dot-com bonanza blew up.) It’s worth about triple what he paid five years ago, he tells me as he drives me to the airport, and I am screaming SELL!

Yes, there’s only one California, and yes, the nation’s population will continue to rise. But the biggest drivers of the phenomenal real estate appreciation he seems to have experienced, it would seem to me, are:

1. Sharply falling interest rates, which makes the monthly payment on a $600,000 house no higher than the payment on a $400,000 house used to be. So what’s another $200,000? Well, yes – but rates could rise! Trouble! Or they could stay low, or go even lower. But if they do that, I fear it will be for ‘bad reasons’ – a terribly weak economy – which would not bode well for real estate prices.

2. Phenomenal new wealth in the San Francisco/Silicon Valley area, which obviously spun sharply into reverse . . . leading more than a few people to take money out of stocks and put it into something tangible and safe, that can only go up. (How comforting it was to know, a while back, that stocks could only go up. Now we’ve found the new thing that can only go up.)

So, on the one hand, I don’t imagine the nation’s basic housing stock will decline drastically in value, if it declines at all – we are not likely talking anything even remotely like the 80% or so decline in the NASDAQ. Maybe more like 20% if you had to sell your house . . . or 30% if you were really unlucky and had to sell it in a hurry . . . or no decline at all if you just kept living where you’re living and waited it out.

But a luxury home that’s tripled in value in 5 years? What’s to say it can’t go back much or even all the way to its price of five years ago? Has it gotten bigger? More beautiful? What has made it so much more valuable? All that wear and tear on the roof?

My San Francisco friend thinks maybe there’s a fundamental shift – that people are going to start spending a larger slice of their income on shelter. That’s where the extra juice could come from to sustain continued appreciation in home prices.

But the housing slice – especially in California – is already pretty thick.

Let’s think this through. What are the competing sectors for the consumer dollar? There’s food; people might spend a little less on that, I guess. And they might conceivably spend a little less on transportation, keeping their existing cars a little longer before trading up, and buying more economical models when they do. I rather doubt it, but it’s possible.

But what about health care? Isn’t that a huge slice that will give housing a good run for the incremental dollar? Much of it is covered by insurance; but with rising co-pays and elective therapies people may increasingly want . . . it just seems to me as if the health care slice could grow as technology offers ever more – and more expensive – new treatment possibilities.

And what about retirement contributions! Isn’t that a big one? With shrunken 401(k) accounts, and a diminished expectation for the rate at which those accounts can grow, won’t a larger slice of our dollars be going into retirement accounts to make up for the lower anticipated growth rates?

I’m not saying people will direct a smaller share of their resources to shelter; just skeptical that it will be larger.

And what of all those 3%-down homes now in, or headed for, foreclosure? Won’t they turn what was at least until recently a seller’s market in many places into a buyer’s market?

One more rich-guy example before getting back down to earth.

In Los Angeles, I was staying with a friend who rents a pretty wow house in the Hollywood Hills from a pretty wow movie star (who lives next door in an even more wow house). He feels silly renting, and gets no tax deduction for his monthly check. He has been thinking of buying it – please don’t hate me for knowing people like this – for $2 million. But he pays ‘only’ $5,000 a month, and I am screaming: DON’T BUY!

Right? If you figure the carrying cost of that $2 million at 6%, that’s $120,000 a year in interest, or maybe $75,000 a year after the tax deductions – versus $60,000 in rent. But he’d also have to pay the real estate taxes! And the repairs! And the insurance! And he’d be the one to suffer the $600,000 loss if he ever moved back east and had to sell it for, oh, say, just $1.5 million less brokerage commission and closing costs.

Back on planet earth, where people rent houses for $900 a month and buy them for $120,000 or $240,000 or $360,000, I imagine any correction would be less severe.

(Then again, the current administration is reserving the bulk of its economic assistance for those at the top – hundreds of billions in tax relief over the next decade – so, you’ll be relieved to know, the high-end homes may hold up somewhat better than I imagine.)

And some places could even defy any correction entirely. A friend just bought yet another beautiful 19th century mansion in Buffalo for $15,000. Maybe Buffalo is dying; surely it’s freezing; but this is the kind of real estate speculation that appeals to my contrary nature.

And now to the Hardys’s specific situation.

Actually, I don’t know their specific situation (or how to spell the possessive plural of Hardy), but I’d venture the following:

First, what they should do depends on whether they were thinking of downsizing, because the kids have finally flown the coop, or buying ‘more house,’ as sounds likely from their question.

If it’s the former, Mr. And Ms. Hardy – go right ahead. It would be like selling part of your position in what may be an overpriced stock.

But if you’re planning on ‘moving up’ to a more expensive home, then it would be like buying more shares in that possibly overpriced stock. I think the prudent thing to do would be to wait. In the next year or two you may find some truly motivated sellers (including a lot of banks) who will make you a better deal than they would today.

Second, I could be wrong about all this, especially for your particular real estate market, (whichever that is). And, in any event, as my father used to say, life is not a business. If you find a place you love and can afford, maybe you should buy it anyway. Not because it’s a brilliant investment move, but because it makes you happy.

Bottom line: I would go with your current instinct, which seems to be to sit tight and not rush into anything.

For some time now, when I’ve been short on stuff to say or time to say it, I’ve excerpted the wisdom of Dick Davis. There have been 35 items in all, taken from a lecture he delivered early in the year. The topics were:

1. What’s A Reasonable Return?
2. Groups Will Return To Favor
3. It’s Never That Urgent
4. The Durability Of Major Trends
5. Face It, It’s History
6. The Role Of Market History
7. The Income Buyer
8. Do It Yourself Investing
9. Any Approach Can Work
10. Negatives Of Being Totally Informed
11. Advice To Family
12. Investment Versus Speculation
13. Oldtimers Out Of Step
14. It’ll Always Go Lower
15. Brilliant Market Calls
16. Advice From Brokers
17. What’s A Reasonable Price?
18. Why Stay Fully Invested?
19. Index Funds
20. The Contrarian Approach
21. CEOs On Their Own Stock
22. The Insignificance Of News
23. Predisposition Toward Failure
24. Avoid Big Losses
25. Why Markets Go To Extremes
26. Stick With Your Winners
27. This Time It’s Different
28. Market Symmetry
29. Know The Downside
30. Behind The Moves In Stocks
31. Dollar Cost Averaging
32. When To Sell
33. The Market Has Its Own Agenda
34. A Critique Of CNBC
35. Stay Healthy

Herewith, the last. (To see one of the others, enter its title in the SEARCH field.)

Item 35: Stay Healthy

Most everything good that happens in the market requires the passage of time. By trying to stay stress-free, by giving time a chance to smooth out the wrinkles, by taking lots of vacations away from your stocks, by living the good life here at Boca West, and mostly by just staying physically healthy, you’ll be sure to be here when the time comes to collect your rewards. Equally important is staying mentally healthy, keeping things in perspective. The pursuit of financial gain can be challenging, exciting and gratifying. But, taken to extremes it can cause us to lose our balance and distort our priorities. Ross Perot, who at one time was the 3rd richest man in the world, says, ‘There is no worse way in this world to judge a human being than what he is worth financially.’ Comedian Stephen Wright puts it another way. He says, ‘You can’t have everything. Where would you put it?’

☞ Amen.

Bob Ridenour: ‘Looking on Google for ‘name sucks’ is a version of something that’s been going on for many years and which is probably a better metric. Check out http://srom.zgp.org for an example. You learn a lot more about something when you look not only at how many people think it ‘sucks,’ but also how many people think it ‘rules,’ too.’

☞ The first thing to say, for those who found 3,820 hits for ‘Tobias sucks,’ is that ‘single quotes’ are ignored by Google – you have to use ‘double quotes’ or else you get all the hits for Tobias and all the hits for sucks.

The second thing to say is that ‘Bush Rocks’ totals 398, and ‘Bush Rules’ totals 3,830 – but most of the latter seem to be ‘Bush rules out North Korea talks’ and ‘Bush Rules Out Meeting With Gay Supporters’ and ‘For now, lobbyists play by Bush’s rules.’

Have a great weekend.

Are you registered to vote? Is everyone you know registered? Seriously! Now is the time to do this – not just because so many people died for your right to vote, but because if we don’t all go out and vote 32 days from now, there’s a real chance the right wing of the Republican party will control all three branches of government . . . that John Ashcroft would be sending lifetime judicial appointments to Trent Lott for confirmation . . . that those like Chief Justice Rehnquist who believe the separation of church and state should be abandoned would get their way. (And forget about the stem cell research that might save your life, or the twice-passed Oregon assisted-suicide law, or the California-passed medical marijuana referendum that spares nauseated chemotherapy patients some of their agony.)

As I mentioned this summer, Chief Justice William Rehnquist, in his 1985 dissenting opinion in Wallace v. Jaffree, wrote: ‘The ‘wall of separation between church and State’ is a metaphor based on bad history, a metaphor which has proved useless as a guide to judging. It should be frankly and explicitly abandoned.’ Tom DeLay, in line to become House Majority Leader, told 300 Baptists in Pearland, Texas, April 12, that God had put him on this earth to promote ‘a more Biblical worldview’ in American politics. Justcie Scalia lamented to a divinity school audience in January that democracy deemphasizes the true authority by which we live – divine authority – and said that people of faith should do all they legally can not to accept that. Clarence Thomas is deeply religious as well and votes with Scalia. Senate Minority Leader Trent Lott, asked where he got the notion that gays are sick, like kleptomaniacs and alcoholics, snapped back, ‘I’ll tell you where I got that – I got it from the Bible.’ The Attorney General is deeply conservative in his religious views. Candidate, now President, Bush, asked what kind of Justices he hoped to appoint, said that the two he admires most are Scalia and Thomas. And all these guys are totally entitled to their beliefs. I just don’t want to see them controlling both houses of Congress and all three branches of government. Which they are one Senate seat away from doing.

So register to vote, get an absentee ballot NOW if you might not be in town November 5, and pester all your friends and relatives to do likewise. Many will be Republicans – and that’s fine. But would they really want a John Ashcroft Supreme Court for the next 25 years?

Gary Diehl: ‘I’ve noticed several recent messages regarding AOL’s infamous tricks to keep subscribers. Thought I would pass on a trick I use to find out if I want to deal with a company in the first place. Go to Google and in quotes type ‘<Name of Company> Sucks.’ I find this an excellent indicator of how angry the company has managed to make its customers. For example: ‘GE Sucks’ only gets you about 48 hits, ‘GM Sucks’ gets you roughly 136, but ‘AOL Sucks’ brings in 7,960 hits. Coincidence? I think not. Also notice how many of the hits are actual sites people have built just to vent their rage. This is also fun to try with political candidates.’

☞ For the record, Bush scores 6,390 votes by this standard versus just 296 for Gore and 523 for Clinton (using last names only). AOL, meanwhile, in the few short days since Gary sent this, has acquired 500 new detractors. (I am not one of them.)

Address at morning prayers
Memorial Church
Cambridge, Massachusetts
September 17, 2002

I speak with you today not as President of the University but as a concerned member of our community about something that I never thought I would become seriously worried about — the issue of anti-Semitism.

I am Jewish, identified but hardly devout. In my lifetime, anti-Semitism has been remote from my experience. My family all left Europe at the beginning of the 20th century. The Holocaust is for me a matter of history, not personal memory. To be sure, there were country clubs where I grew up that had few if any Jewish members, but not ones that included people I knew. My experience in college and graduate school, as a faculty member, as a government official — all involved little notice of my religion. Indeed, I was struck during my years in the Clinton administration that the existence of an economic leadership team with people like Robert Rubin, Alan Greenspan, Charlene Barshefsky and many others that was very heavily Jewish passed without comment or notice — it was something that would have been inconceivable a generation or two ago, as indeed it would have been inconceivable a generation or two ago that Harvard could have a Jewish President. Without thinking about it much, I attributed all of this to progress — to an ascendancy of enlightenment and tolerance. A view that prejudice is increasingly put aside. A view that while the politics of the Middle East was enormously complex, and contentious, the question of the right of a Jewish state to exist had been settled in the affirmative by the world community.

But today, I am less complacent. Less complacent and comfortable because there is disturbing evidence of an upturn in anti-Semitism globally, and also because of some developments closer to home.

Consider some of the global events of the last year:

There have been synagogue burnings, physical assaults on Jews, or the painting of swastikas on Jewish memorials in every country in Europe. Observers in many countries have pointed to the worst outbreak of attacks against the Jews since the Second World War.

Candidates who denied the significance of the Holocaust reached the runoff stage of elections for the nation’s highest office in France and Denmark. State-sponsored television stations in many nations of the world spew anti-Zionist propaganda.

The United Nations-sponsored World Conference on Racism — while failing to mention human rights abuses in China, Rwanda, or anyplace in the Arab world — spoke of Israel’s policies prior to recent struggles under the Barak government as constituting ethnic cleansing and crimes against humanity. The NGO declaration at the same conference was even more virulent.

I could go on. But I want to bring this closer to home. Of course academic communities should be and always will be places that allow any viewpoint to be expressed. And certainly there is much to be debated about the Middle East and much in Israel’s foreign and defense policy that can be and should be vigorously challenged. But where anti-Semitism and views that are profoundly anti-Israeli have traditionally been the primary preserve of poorly educated right-wing populists, profoundly anti-Israel views are increasingly finding support in progressive intellectual communities. Serious and thoughtful people are advocating and taking actions that are anti-Semitic in their effect if not their intent. For example: Hundreds of European academics have called for an end to support for Israeli researchers, though not for an end to support for researchers from any other nation. Israeli scholars this past spring were forced off the board of an international literature journal. At the same rallies where protesters, many of them university students, condemn the IMF and global capitalism and raise questions about globalization, it is becoming increasingly common to also lash out at Israel. Indeed, at the anti-IMF rallies last spring, chants were heard equating Hitler and Sharon.

Events to raise funds for organizations of questionable political provenance that in some cases were later found to support terrorism have been held by student organizations on this and other campuses with at least modest success and very little criticism. And some here at Harvard and some at universities across the country have called for the University to single out Israel among all nations as the lone country where it is inappropriate for any part of the university’s endowment to be invested. I hasten to say the University has categorically rejected this suggestion We should always respect the academic freedom of everyone to take any position. We should also recall that academic freedom does not include freedom from criticism. The only antidote to dangerous ideas is strong alternatives vigorously advocated.

I have always throughout my life been put off by those who heard the sound of breaking glass, in every insult or slight, and conjured up images of Hitler’s Kristallnacht at any disagreement with Israel. Such views have always seemed to me alarmist if not slightly hysterical. But I have to say that while they still seem to me unwarranted, they seem rather less alarmist in the world of today than they did a year ago. I would like nothing more than to be wrong. It is my greatest hope and prayer that the idea of a rise of anti-Semitism proves to be a self-denying prophecy — a prediction that carries the seeds of its own falsification.

But this depends on all of us.

Jeff Percival: ‘I saw your Parade piece last week, where you pointed out that someone in a tax-deferred plan is taxed on withdrawal as income, but someone not in a plan pays a lower (we hope) capital gains rate. This sounds great, but in thinking about it, I’m not so sure. I always thought that the key idea behind tax-deferred plans is that you hope to be taxed when you are retired, at a lower income bracket. Without this condition, I always thought it was a wash: after all, whether you tax your initial investment then double it, or instead double it first and then tax it, you end up with exactly the same amount of money. You only win if the tax rate at the end is lower than at the beginning.’

☞ Are you sure? For the sake of argument/simple math, say you’re in the 50% bracket now and will be at withdrawal. One way, you put in $1,000 now (pre-tax) and earn 10% a year (pre-tax) for 40 years. That $1,000 grows to $45,260 – and then half is taxed away, leaving you $22,630. The other way, outside a retirement plan, you put in $500 (what’s left of the same $1,000 of income after tax) and it grows for 40 years at 5% (not 10% because of tax) to $3,520. So it’s not a wash at all. In this example, you wind up, after tax, with more than six times as much. Why? Because for all those years you had the ‘government’s’ share of your money working for you as well as your own.

Using more realistic tax brackets and noting the likelihood of long-term gains treatment on appreciation outside the retirement plan, the gap narrows. But for most people, there’s definitely an advantage in tax-deferred growth, especially over long periods of time.

Did you read Paul Krugman’s column in the New York Times Friday? Click here. That California energy crisis may not have been so innocent, after all.

I hope this doesn’t become a habit. Next thing you know, the workers here will be demanding two weeks’ vacation.