Time for another edition of “Welcome to the Economy”
There are a lot of fresh law grads out there, some with jobs, seemingly more without, despite recent reports such as this one:
“Legal Sector Adds 100o jobs!”
But you only need to go back a few months to read stories like this one:
“Legal Sector Loses 1100 jobs!”
Great, so things are at equilibrium – with the current equilibrium being the worst economy in over 70 years.
Something I’ve been wanting to touch on more often is the markets and economy in general. I get the feeling that many new lawyers are not clued into what is happening outside of their small legal sphere. Guess what? Time to start paying attention. You are responsible for your career, family, fortune, investments, etc. Here’s a bit of very, very important advice:
“No one cares more about your money than you.”
Do not rely on a friend, broker, money manager, standard 401k plan or anything of the sort. Set aside time for reviewing your personal financial status and the status of the economy (macro/micro global/local) as well. Run your finances like any other business. Set aside 4 vacation days or half-days a year for Quarterly reviews. Sit down with your loans, bills, transactions, investments, income, etc. Do you really know where all your money is moving or are you just winging it? Do you have a set plan with financial milestones and goals? If not, your ass needs to get one – fast.
With that in mind, I would like to think that many freshly graduated lawyers are probably looking to buy their first home, or perhaps upgrade from an old one. Probably just go out, look around, and buy what looks good. Which is pretty ridiculous considering that it’s probably the largest investment a person can make in their lives. Let’s briefly look at the housing market before you make that step.
First, let’s look at these graphs courtesy of David Rosenberg and Zero Hedge:
For the purposes of this post the takeaway is that there are very few new homes being built as A) there is still a glut of homes available, B) they are overpriced. Visit the link to Zero Hedge above to get a read on the rest of the graph and the economy in general. It’s not pretty. Short version – projected 50 months or so until employment gets back to 2007 levels.
Next over at Marginal Revolution, here is Tyler Cowen’s thoughts on the housing market:
Should we let housing prices fall?
Yet what happens if we let them fall? Arguably many banks would once again be “under water.” Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.
I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet…housing prices must not fall.
Barry Ritholtz at The Big Picture:
First, we must note that Housing can be a variety of things: Shelter, or an investment, a basic staple, or a luxury item. A $100k rural ranch has very different characteristics than a $750,000 suburban manse or a $2 million townhouse. When we discuss housing, we must remember that it is not only local, but very specific to each unique property. (This was part of the problem with the securitization of mortgages — it is very difficult to homogenize US housing, and the attempt failed in part for that reasons). The bottom line is we need to be cautious in generalizing housing — all houses are not all things to all people.
Second, I do not see Housing as 30% over-valued by my favorite metrics. (The article implies that number from Case Shiller data). It might yet fall that much as we mean revert, careening wildly past fair value — but that is not my expectation. An overvaluation of 5-15% has been my number since Q1 2010, and we don’t even have to drop that much — we could simply go sideways for a decade (or longer) and allow inflation to work off the excess.
E.D. Kain at the League of Ordinary Gentlemen:
I don’t see any other way around this conundrum – housing prices are going to fall. End of story. They were massively inflated during the housing boom, and people simply can’t afford the sticker price – hell, they couldn’t afford the price five years ago, but at least then we were all under the dizzying impression that somehow prices would just keep going up, up, up…
I’d bet we have at least a 25 to 40 percent decrease in home values still ahead of us, depending on how badly inflated various regions became during the boom years. No amount of government policy will change this, though it might soften the landing a little. I think there needs to be more of a coordinated effort on the part of lenders to help people get out from under water. It’s in the best interest of the home buyers, the lenders, and Unlce Sam to make this happen. But there really is no easy solution in a situation where the necessary compromises by necessity lead to someone losing a great deal of money.
Whether now is the time to buy is another question altogether. Interest rates are very low, and buying now – after prices have come down significantly already – might make sense if you plan on keeping a property for a long time. That being said, the very fact that there is so much uncertainty over whether or not to buy a house indicates the likelihood of falling prices in the near future.
All three opinions are in reaction to “The Bears and the State of Housing” by David Leonhardt in the NYT. Worth a read.
So should you buy that new home you’ve been looking at? Only you know the state of your finances and what you have planned for the future. If you don’t know the state of your finances or have a plan for the future, now is probably a pretty good time to start.
