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RSS FeedJune 30th, 2009
An 18.1 pc decline in home prices is an improvement?
A recent Forbes article screams: “..closely watched housing market measure showed hints of improvement. Home prices fell 18.1% in April, from the year-earlier period..”
The reason it says this is an improvement is because the home prices fell 18.7% in March! So, this fall is 0.6% lesser than the fall in March. Assuming constant acceleration, the home prices could stop falling in 30 months. That would be October 2011. Also, by that time the home prices would be 37% lower than the prices in March 2008 (that is, a home valued at 500,000$ in March 2008 would be valued at approximately $320,000 in October 2011) and about 15-16% lower than the prices in March 2009.
Now of course, the preceding simplistic analysis is just a bunch of BS coming from a computer scientist with no economic experience and you are free to discard it with a whiff of dismissal. And if you know any better, you really should. But in case you don’t, let us analyze it a bit further.
Prospective home buyers continue to hesitate to buy in a market with falling home prices. The reason is obviously that they don’t want to lose value. However, as the home prices continue to fall further and further, at some point of time, they simply go below the cost to live in the house (aka rent). A certain percent of home buyers at that time buy the property even if they think the property prices are falling, as they can simply compare the hard cost of rent with the hard cost of owning. In most circumstances this “certain percent” is enough to ensure that the cost of owning a home does not go below the cost of renting. There is no indication yet that today’s circumstances are any different.
So, where does that leave us? If we can check the prices of the home against the cost of renting, then we can cross check our rough calculation above.
In the DC metro area, the price of renting a 2 bedroom apartment runs between $1000 and $1600. The cost of owning a 3 bedroom townhouse has fallen from between $200,000 to $400,000 to between $ 140,000 to $280,000 depending upon the location etc. The monthly cost for the loan would be between $1100 and $2200. Assuming a further 15% loss in value from our previous calculations compared to March 2009, the projected cost of owning would run between $119,000 to $238,000 and the monthly cost to be between $935 and $1870, which seems to be nicely centered around the rent. Crosscheck seems to succeed, and also it appears that bottoming out could really happen well before October 2011, but does not seem to be before October 2010.
Since I like speculating better than equivocating, I will draw a stake in the ground and say that home prices should bottom around October 2010. There, you have it, my expert opinion after about 40 minutes of Excel line charts and blogger scribbling.
There is an insane number of assumptions in the calculations above, so don’t even bother to tell me about all of them. But overall, I have tried to do some concrete analysis, rather than leaving you with a very dry “it depends” answer.
December 7th, 2008
Economics of buying a new car vs. an old car
If you are like me, then the new car vs. old car is not a status symbol for you. It is merely a means of transportation from point A to point B, though certain conveniences in that process would not hurt, such as a CD player, quiet interior, etc.
So, my calculation between a new car and an old car rests entirely the economics. A new car (say Nissan Sentra) costs about $16,000, and say it lasts 200,000 miles. An older Nissan Sentra (say with about 60,000 miles on it) costs about $7,000. Thus, my options become:
(i) $16K for 200K miles (12.5 miles per $) or
(ii) $7k for 140K miles (20 miles per $)
What still needs to be factored in is the maintenance cost. My 1995 Nissan Sentra (that I bought in 2000) has led to 0 surprise maintenance costs, though I do understand that might be the exception rather than the norm. Still, for now, we can consider maintenance costs on par.
Another significant cost is that of insurance and taxes. For both of these factors, it is better to have a cheaper older car rather than a more expensive new car, as these costs are directly proportional to the value of the car.
So, it may be reasonable to ignore all 3 factors – maintenance, insurance and taxes – as they very likely cancel each other out between new and old cars. That leaves us only the cost per mile where we started from.
One new factor in all this is when considering a different car model such as Nissan Versa. Apparently, a new Nissan Versa can be bought for as low as $13,000. If that is indeed the case, and say it lasts 200K miles, then the mile per dollar cost of the Nissan Versa becomes 15 miles/$.
So, what is the conclusion? My conclusion so far is that it is still better to buy an older car with up to 60 K miles and costing about $7k, but buying a new Nissan Versa comes pretty darn close to that.
November 24th, 2008
Death of the Used Car Dealership?
This weekend, I finally took tangible steps to phase out my aging Nissan Sentra, and look for a newer (about 5-6 yrs old) car. The Sentra now has 200k miles, and is a 1995 model. Phew. Still gives me absolutely no major problem, but it is time now.
One of the better places to look for used vehicles on the web is Craigslist (or at least has been known as one of the better places). It does have a couple of issues – like not able to search by mileage, and since the search feature works only on Keywords, it is not easy to search for a model (say you search for a Civic, then even a car advertised as “better than a civic” will show up). This is simply because CL does not have a specialized model for cars, it is simply a generic ad posting website. On the plus side though, you can bookmark full URLs, such as: http://washingtondc.craigslist.org/search/cto/mld?maxAsk=10000&minAsk=5000&query=sentra which searches for all Sentras between 5000$ and 10,000$ located in Maryland.
So, how has the used car dealership changed due to the internet boom, and what are its future prospects? The car dealership was established to fill two main needs. Firstly, it serves as a collection point for many cars – sellers can trade in their vehicles, and buyers can buy those cars. Thus, it was much easier before the Internet era to match up buyers and sellers by inserting the dealership as the middle layer. Secondly, the dealer could review the cars, and provide some sort of soft guarantee that the car being sold is not a lemon. The dealer’s reputation hinges on the performance of the vehicles it sells, so it is not usually in dealer’s interest to sell bad cars (though, it is entirely in dealer’s interest to charge another 500$ as some “fees”, as people rarely remember that a few weeks after the transaction).
With the advent of the web, the first need has gone away to a large extent, and if it hasn’t gone away entirely, with adequate web sites and web applications, that really should go away. People should be able to go to a central website (such as CL), and sell and buy cars. The second need still remains as customers are extremely cautious before buying from other customers. Though in this regard, the customers have started bringing their own mechanic and using vehicle history reports (which mean so little or not at all by the way).
So, all factors considering, what is really happening – are used car dealerships going bust, or they actually growing? I will look at some statistics to answer that. But until I get down to doing that, I am going to take a “wild guess” that the used car dealerships are still growing and will grow, until the web applications can really make it much much more user friendly for people to find cars, and vehicle history reports can start meaning something more.
October 25th, 2008
What is wrong with Health care in America?
What is wrong with health care in America, you ask.
Well let me tell you what is wrong. A family member of mine who has Carefirst Blue Cross Blue Shield got some lab work done. This is what the explanation of benefits looks like:
Total charges: $934.00
Less non allowed amount: $803.27
Total paid: $130.73
Further it says in “Remark R033″, “Preferred providers agree to accept our allowance as payment in full. Therefore, the member is not responsible for this portion of the charge.”
Let me help you understand. Someone who has insurance, pays nothing, and the insurance pays $130.73 to the laboratory. But, if you did not have insurance, you would have to pay $934.00 – MORE THAN 7 TIMES! Add to this that $934 would be paid in cash, on the spot, while $130.73 would come 4 months later after much paperwork (so much in fact, that laboratories need to hire full time billing specialists). In case you think this is volume discount, consider that this amounts to an 86% discount!
In plainspeak, this is simply exploitation of the weak – laboratories charge more to who they can, those who have no leverage on them. The strong are those who have insurance. In this respect, the weakness (or the strength) is not provided by the law of the land (the rights), but by the insurance company. If your insurance company is strong, then it will pay $130.73. If it is second grade, perhaps it will pay $200. If it is a third grade insurance company, perhaps it will pay $300. But, on your own, you are the lowest of low, and will pay $934.
October 23rd, 2008
Newsflash! Greenspan made a mistake – No way!
The star boy of 2000s has finally admitted that there may be a flaw in his market ideology! That’s OK Alan, we have known it for a while.
In early 2000s, when markets were crashing, Alan came up with a novel idea – well, the economy is shrinking, but if we can keep the housing market booming, perhaps the net will be 0 or slightly positive. He enabled exactly that, by setting the interest rates to historic lows. People were offered ridiculous lending terms, bigger houses and dubious futures, and all working Joes were sucked into Alan’s ideology. Remarkable short sightedness from a guy who led the Federal reserve for 19 years!
Now, however, the US faces a different challenge. The economy is tanking (in much worse ways than in 2001), and the govt has no card to play – the interest rates are already low, the jobs are shrinking AND the housing market has crashed. I like to call the current meltdown the “Greenspun” meltdown.
September 23rd, 2008
Financial Bailout – and no salary caps?
Hearing Paulsen and Bernanke testify before the senate committee, it is hard to miss that their language is so basic, and their reasoning so unconvincing. The entire 700 billion $ bailout plan looks like a game to them – “Well, we can try it.”
The macro economics is complicated, the plan is complicated, so it is indeed difficult to comment upon all points, but one thing is shocking to me – that they want to use this plan to bailout some banks, and still put no restriction on the top management salary. So, the CEO of the bank could be walking away with millions of dollars, while the federal government is on the hook to bailout the depositors. GREAT, BRILLIANT MATE!
September 27th, 2007
Dollar still falling against Euro
Compared to the Euro, USD is now worth peanuts (70 Euro cents), having set a string of record lows this week.
One interesting effect of this rapid downfall of greenback is this:
1 EUR is now worth 10.58 RMB. While earlier, 1 EUR was about 7 RMB.
So, Chinese Yuan has fallen further in Euros, without either RMB or EUR being responsible for this change. That is of course, due to the fact that RMB is pegged to USD, which has fallen against EUR.
So, while the falling USD may or may not help the competitiveness of US exports, I am sure it is definitely helping the competitiveness of Chinese exports to Europe.
August 23rd, 2007
Stealing the wireless internet – man you got me!!
So, here is the thing. A guy in UK has been charged with stealing wireless internet! Apparently, the guy was walking around with his laptop, until he found an open wireless, and then he used it.
Boy, I sure am glad the Scotland yard guys have not made it to my northern virginia neighborhood. I have an unprotected wireless, all my neighbors do, and I don’t really know when my computer connects to mine, and when to someone else’s! I also don’t know when my neighbors connect to my router, and I don’t really give a hoot.
Anyone itching to tell me about the security risks with this, hold your pessimism to yourself. My laptop has a good firewall, a virus scan and has never been hacked. Can you say that for yourself? Also, I have never not had Internet. Now, can you say that for yourself?
August 6th, 2007
Curse of Free Email
I will not start my tirade by wasting sentences about the curse of SPAM (how much and what kind of SPAM I get, etc).
Rather, let me reminisce. In olden (pre Internet) times, if you remembered someone (or you were forced by parents to), you would send a post card to your relatives. Or a letter. Or a card. Something. You would take a stamp, wet it with your dog’s nose and put it on the letter. Then, send the post card on its merry way. Would get there in a couple of days.
If you had *lots* of post cards to send, you may wish, wow, if it cost only 3 cents to send a post card, that would be much better. Say, your wish was granted, then you could send 4 times as many post cards. But you wouldn’t start sending it to people you didn’t know.
Today, with the new technology, the cost to send mail (email) has gone down to zero. Zilch. Nada. Therein lies the problem. If technology makes something cheaper, that is good. Making something totally worthless, not so much.
Say we had to pay 1c everytime we send an email. Looking at my outlook sent times and my OExpress sent items and my gmail sent items and doubling that all, I would have paid 22c yesterday! About 7$ total for a month. I would really love to do that, if in return the SPAM is eliminated. Now at this moment, a bunch of you are pressing Ctrl-N to send me a new SPAM email raising this question: (i) 7$ not so little for everyone, (ii) who would the money go to?
Ok, I have gotten your email, and here are my thoughts:
(i) If 7$/month too much money, how about 0.70$/month? That is 0.1 cent per email. Remember the problem is with spammers who send tens thousands of messages a day. It would start costing them 10$ a day. Maybe not a show stopper from them, but worse than 0$.
Also, giving some basic free (like some cell phone companies give first 600 minutes free).
(ii) SMTP/IMAP server. Money can only go to mail server host. They are the only ones who know when an email message is sent. ICANN could regulate that and collect some portion of the money from the mail server owners (and perhaps give a portion of that portion to some charity). Many of these mail servers are owned by companies such as MSFT, Yahoo, Google etc, so they would get some money too. Perhaps that would put an end to the term “free email”.
Wow, going back from free email to “very cheap” email. Anyone with me?
.
July 28th, 2007
Metro vs Driving
My next door neighbor works across the town, east of DC, not far from New Carrolton metro station. I thought that best way for him to go there would be to take the Orange line directly from Vienna to Carrolton. Then, some complications arose:
Traveling in Metro:
Home to Vienna: 15 minutes
Wait at Vienna: 5 minutes
Vienna to Carrolton: 57 minutes (from wmata website)
New Carrolton to work: 20 minutes (assuming he has a ride from metro to work)
Way Back: Same numbers
Total Round Trip Time: 194 minutes
Cost: 13$ metro + 3.50$ parking = 16.50$
Traveling by Car:
Home to Work: 65 minutes
Total Round Trip Time: 130 minutes
Cost (Gas): 100 miles = 3.3 gallons = 9.9$
What?? This cant be right? Going on car is cheaper *and shorter* than going on metro?
Hmm. Must have missed something. Aha, the cost of depreciation and maintenance. Ok, if we consider a 20,000$ car good for 200,000 miles, that gives a 10c/mile depreciation. Standard maintenance cost for a small car is estimated at 3c/mile. So, that could push the cost of traveling by car to 23$ per round trip. That would also push the cost of metro trip (the car portions) up to
21.70$.
So, here we have the final numbers:
(Excluding depreciation and maintenance costs)
Metro: 194 minutes, 16.50$
Car: 130 minutes 9.9$
or
(Including depreciation and maintenance costs)
Metro: 194 minutes, 21.70$
Car: 130 minutes 22.9$
I am definitely inclined to take the car route in these two scenarios. What about you?