Archive for February 10th, 2009

Put 2 trillion into education.

Revamp every school.

build more schools.

pay teachers very highly (pay based on college enrollment + post graduate employment)

any county not graduating 95% within 2 years loses funding.


We do not have the tools, concepts, culture and work force ready to take on what swirl exists.

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From a private email from Mahesh Johari:

If you find yourself agreeing with what is presented below, is there anything you can do that will make a difference?  Do you know a Senator, a Congressman, the President?  Don’t be shy to act if you agree.  


People have asked for my opinion of the stimulus bill recently.  Shortly after lunch today, I came to a definitive conclusion.  The current stimulus bill has no chance to solve our crisis.  People have also asked me what will solve the crisis, and this answer was also clear after today’s lunch.  Only one of two things will truly help: Either (1) we need to either increase the number of people in our country, or (2) we need to destroy some housing inventory.


By now you’re probably thinking… who did I have lunch with?  A banker?  A professor?  A Federal Reserve economist?


None of the above.  I had lunch with a dolphin trainer.


Professionally speaking she’s far removed from the world of economics.  As she asked me about the stimulus bill, I forced myself to explain things as clearly as I could.  In the course of doing so, I gained my own clarity.


Here’s what I told her (a small part of this you’ve heard before):


The fundamental problem is too many houses, and not enough people to live in them.  We have made a product that lasts 50+ years to great excess – to the point that there is too much of that probably to reasonably be consumed by the current population.  There are only two ways to solve that problem… if the light bulb hasn’t gone off already, read on to find out what they are!


First, let me make the case for too many homes: Turn your attention to tables 3 & 4 of this statistical release on housing: http://www.census.gov/hhes/www/housing/hvs/qtr408/files/q408press.pdf


You will see from table 4 that the home ownership rate for a long time was stable between 64 and 65%.  As the bubble accelerated, that figure climbed to 4%.  If we return to the long run averages it means that relative to 2004-2006 levels, 4% of Americans will be displaced from owning their home.  According to this data, we’re not halfway there.


You’ll see from Table 3 that the vacant units of housing comprise 15% of total inventory.  Similar historical tables show that a stable long term average is closer to 11.5%-12%.  That means we have almost 3% too many housing units in the country – roughly speaking near 3.9 million excess units.  Consider that the average household has 1.5 workers, and you see that we would need nearly 6 million new jobs to have enough households to fill all the excess housing units.


The bottom line is that even with varying assumptions and slightly different numbers, the conclusion is still that there are too many homes and not enough people to live in them.  All the economic stimulus in the world isn’t going to create more people, that requires… ahem… another kind of stimulus.  As you drive around your town over the next week, note the “For Rent/Sale” signs and empty new developments.  Intuitively you will realize that my simple analysis is absolutely correct: there are too many housing units.


Our population and labor force demographics simply cannot support all the homes we have.  In a theoretical economic model of supply and demand, when supply is too great, price falls and the quantity of product consumed increases.


Housing is a different animal – when demographics are such that there may not be enough people to fill all the housing units in the country,  almost regardless of price, housing prices will simply keep falling for a long time to come.  There almost isn’t a realistic price at which you could create enough housing demand to fill all the housing units we have – there aren’t enough people!  And, if prices fell that low, a vast amount of wealth and jobs would be destroyed in the process.


Think about it this way: a stimulus (tax incentive) to buy a home can get me to leave my apartment and move into a house.  Now my apartment is vacant… who’s going to live there?  Here’s a better one – let’s say I’m upside down in too much home and I have enough cash in the bank to buy a smaller home – I can walk away from my upside down mortgage (sending the home into foreclosure), buy a smaller home for cash down, and make $15,000 extra from the government in the process.  The damage done by one such foreclosure will outweigh the benefit of even 5 or 10 legitimate purchases.


Do you see?  All of the housing stimulus is like a giant game of musical chairs, with a few million extra seats.  The money thrown in that direction is literally a COMPLETE WASTE.


If home prices keep declining, guess what?  The banks balance sheets keep getting worse, the real estate & construction sector remain a mess, and we don’t get out of this morass.


The root cause can only be addressed by one of three things:

(1) The passage of time: which will allow for natural destruction of the housing inventory and an adequate increase in the population.

(2) Increasing the population dramatically: so there can be enough people to live in the homes!

(3) Destroying housing units: so there aren’t too many homes!


So besides waiting, what can we do to address the root cause?  How about these crazy ideas – which only seem crazy until you realize the porpoise they serve.  Ok that was a bad pun, but what do you expect after lunch with a dolphin trainer?


INCREASE IMMIGRATION: Smart, talented, motivated people all over the world want to come to the United States.  Let’s accelerate the process of getting them here so they fill some of our empty homes!  Let’s find a way to keep the immigrants who are here and being productive from leaving.


GOVERNMENT PROJECTS THAT REQUIRE THE PURCHASE OF PRIVATE RESIDENTIAL PROPERTY:  Does your city need a good public train system?  What better time for the government to buy up homes on critical urban traffic routes!  We can bulldoze the homes and put in those trains.  Creates jobs, reduces long term energy use, and reduces housing inventory.


COMMUNITY AGRICULTURE OR ENERGY COOPERATIVES:  Oh let’s take the insanity all the way, shall we?  Here’s a stimulus package – let’s buy a bunch of empty houses and turn the land into a solar farm, a wind farm, or heck… just a regular farm.  Let’s find a way to let people in the neighborhood use the land to generate energy, or to grow things.  Great long term benefits and an immediate destruction of huge amounts of housing inventory.


COMMUNITY CENTERS:  Let’s take the empty homes and turn them into community centers, 1 million centers, each with an annual budget of $50,000 for the next 10 years will only cost $500 billion.  I laugh at the usage of the word “only”, but you get my drift.


What happens if we don’t address the issue directly?  There is only one logical conclusion – property values continue to fall.  Home prices will fall to a point that is so low that people will buy them because (a) the land is worth more, (b) the materials in the home are worth more, or (c) the owner feels they can afford to carry the property for some time and still turn a profit.  Remember that home values tend to be set by the last sale price – the glut of inventory will determine that price, not the people who live in the homes.  We’re nowhere near that level now.


If we don’t address the issue directly, our national debt will spiral upwards as we waste money on ineffective stimulus.  Tax revenues will drop dramatically as house values fall.  Banks will continue to feel pressure from foreclosure and falling home prices.  The jobs that were lost in the real estate and construction, they will not coming back any time soon.


By now, I am hoping you understand what I think is the correct approach to dealing with our crisis: more people, or fewer homes.  It’s very simple… Take your pick!

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