The Chat Room

Money Talks

Daniel Gross takes readers’ questions about the economy, housing market, and credit crisis.

Slate columnist Daniel Gross was online on on Dec. 13, 2007, to discuss the National Association of Realtors’ sunny report on the housing market and other financial topics. An unedited transcript of the chat follows. 

Daniel Gross: Hi all—Dan Gross here, Moneybox columnist at Slate and the Money Culture columnist at Newsweek. Sorry for the delays in getting started—we’re having some weather issues here in the northeast. I’m looking forward to answering as many questions as I can in the next hour about the housing market, the credit crunch, the Federal Reserve, etc.


Marion, N.C.: Does anybody actually expect the National Association of Realtors to come out with an analysis of the actual condition of the housing market? NAR recently got rid of an “all is well” economist, but have they changed? NAR’s job is to help real estate brokers sell houses—period. Anyone who wishes to think differently is naive.

Daniel Gross: Hi Marion—I think your cynicism is well-founded. The column we’re discussing was about how the media—the financial media—always pays a great deal of attention to the National Association of Realtors’ forecasts. After all, NAR is the relied-upon source for things like home sales. The point of my article is that NAR’s economists have been willfully upbeat, even as the housing market plummeted. And, of course, as you point out, the NAR’s job “is to help real estate brokers sell houses—period.”

That’s true. But from an economics perspective, NAR serves one relatively neutral function—they produce the data on home sales from their members. Nobody really quibbles with the data they produce as being overly promotional—rather it’s the spin and the forecasting that is problematic.

I just think the media—CNBC, the wire services, etc.—have to be a little smarter in covering NAR. Use the data they provide—the real hard numbers—and report it, since those numbers do tell us something about the market, but be more weary of quoting the inevitable spin and take the forecasts with several grains of salt.


Two Times Your Income—Period: The vast majority of homeowners in this country are living beyond their means. The exact amount my husband and I make in a year is what we owe right now on our home. It is great. The problem is that people are making, say, $140,000 a year and they think they are flush. They are not. They should not have $60,000 in car debt, but they do. They should not have a mortgage for $400,000, but they do. It won’t end until people realize that more car and house debt—no matter how much you make—only imprisons you.

Daniel Gross: Two Times Your Income—you are correct that a lot of people are living beyond their means. And, ironically, one of the messages we get from our culture and our media is that doing so is somehow part of our patriotic duty. If we don’t buy cars, go to Disney World, and shop till we drop in December, our neighbors may soon be out of work.

And I think you’re spot on about debt. People have come to confuse liquidity—i.e. the amount of money you have on hand—with the amount of credit that’s available. They’re two different things. And people tend to get into trouble when they think the latter is the former.

That’s great that you and your husband have a combined income of what you owe on your mortgage. Unfortunately, in certain parts of the country, especially on the coasts, that’s a pretty tough benchmark to meet—especially if you’re a first-time buyer.


Princeton, N.J.: I am a mathmatician. Here is my take on the Social Security projections, although most of the comments apply to any economic projection: The demographics: Doom-sayers say: “In 1945, for every Social Security beneficiary, we had 42 workers paying in. By 2002, we had just 3.3 workers per beneficiary. By 2030, we’ll have only 2.2 workers per beneficiary.” So what? I presume they somehow want us to conclude that Social Security is going to pot just by looking at this one statistic (workers per beneficiary), suggesting it dominates all other inputs. Because they do not tell us the state of Social Security at any point, we actually can conclude nothing from this argument, and if we put in its current state, this argument shows exactly the opposite of what they want us to conclude!

Today Social Security is in the best state it ever has been—the yearly surplus last year was the largest in its history. The Social Security Trust Fund is $1.5 trillion, which is also its maximum. I don’t have the figures for 2006, but they are similar. So what we have is that from 1945 to 2002, the number of workers per beneficiary decreased by 92 percent, but the health of Social Security is vastly better. Clearly there are other factors that dominate this one demographic statistic. Furthermore, if Social Security could improve its condition with a 92 percent decrease in this statistic, why should we worry about the 33 percent decrease they predict for the period 2002 to 2030?

The projections: Dr. Steven Goss, the chief actuary of the Social Security Administration is careful to point out that what he makes are projections, not predictions. They are based on assumptions, i.e. he says that if this happens then this will happen. These assumptions cannot be computed, he says, because they are event-driven. You would have to be a fortune-teller to even make an estimate. Because of this, he actually makes three projections. The one most people quote is the “middle” projection. If you look at the record, you will see that his “high” projection consistently and significantly has been more accurate than the middle one. The high projection says that the Social Security Trust Fund will not go to zero during the next 75 years, that Social Security will be able to pay all promised benefits, and that there will be a surplus in the trillions at the end of the period.

An assumption: The middle projection of the Social Security Administration (the one you quote) assumes that the average growth in the GDP will be 1.78 percent in the next 75 years. If you just change this one assumption—keeping all the horrible demographics that you believe in—to 2.7 percent and do the exact same computation, then you find that the Social Security Trust Funds never will go to zero, all promised benefits will be paid and there will be a huge surplus at the end of the period. The average growth in the GDP in the past 75 years was 3.1 percent. I am not saying what the growth in the GDP will be (that would not be mathematics, but fortune-telling), I am just saying that the exact same mathematics that gives you the bad forecast with the very low assumption gives you a good forecast with a more reasonable one.

“We must act now”: In 1983, the Social Security Trust Fund was one year from depletion; the government convened a commission that looked at the problem, made a few minor changes in Social Security (can you even name them?) and behold, Social Security was safe for at least 30 years and maybe forever.

To sum up: The projections of the demise of Social Security are no more accurate than reading the entrails of a goat, and we would be foolish to make any great changes because of them.

Daniel Gross: Hey Princeton—are you hanging out with New York Times columnist Paul Krugman out there? Because he’s been delivering a shorter, more polemical version of your argument in his op-eds, and I have to say I agree with you both.

I find it very hard to get riled up about the “Social Security” crisis (especially when many of the same people squawking most loudly about it are the same folks who approved the unfunded prescription drug entitlement in Medicare). All things considered, Social Security is in pretty good shape. And given the long-term horizon of all these projections, altering your assumptions (shifting growth, or productivity, or inflation up or down by a few tenths of a percentage point can make a huge difference).

When I hear politicians complain that Social Security is in a crisis, and that we should therefore start cutting benefits, my response would be to pose two questions.

1. How much of the Social Security surplus have you spent over the past seven years?
2. What about Medicare?


Washington: In fairness, I think you ought to show us some forecasters who did get the timing and the scope of the housing slump correct.

Daniel Gross: Robert Shiller of Yale was pretty spot on. Also Nouriel Roubini of New York University (who has an excellent blog) has been pretty prescient in terms of the credit mess.

I concede—and I think I explicitly note in the column—that forecasting is exceedingly hard, and in some ways a fool’s errand. There are just too many variables, and too much human fallibility involved.


schuylercat (The Fray): Of course! As if a realtor can say anything negative? These people live for rose-colored glasses. How can they earn a living otherwise? This reads like high-voltage shtick from one-quarter of the imbecility that created this freaking mess in the first place. The developers: “The only thing worth buying is land!” Uh huh. Even worthless land, so long as it’s for pennies on the dollar.

The builders: “We offer more house for less money!” Right. Built like flimsy little cracker boxes, even the best of them. KB, Shea, Toll Brothers, Lyon, Standard Pacific—they all basically build junk. The lenders: “Just take this adjustable-rate mortgage and then fix your credit!” One of my favorite come-ons. That increase from 3 percent to 9 percent is just a refinance away, but after two years most people weren’t in better shape and couldn’t refinance.

And then the element missing from the above-mentioned alchemy that can turn a $125,000 pile of sticks in Riverside, Calif., into a $500,000 gold mine: may I introduce the realtor. “We are honored to present to you this delightful (insert size) square foot (insert style)-styled home. Loaded with tons of charm and features, in the beautiful (insert neighborhood name) subdivision. The expansive kitchen with updated appliances and ceramic tile floors will appeal to the gourmet owner, while the soaring great room is ideal for entertaining guests. Upstairs there are four spacious bedrooms including the romantic master suite with separate whirlpool tub and stand up shower.”

Accompanying photos for this type of ad typically show a mid-century rancher with beige stucco walls and dead grass, with bars on the windows and cheap paneling on the walls. As for “location, location, location”—have you ever been to Norco? Norco isn’t quite Hell on Earth, but you can see it from there … and smell it, too.

Alchemy requires collusion. For new homes, someone has to snatch up the land and get it zoned up, then someone has to build the house. For all homes, someone has to fund the buyer, and someone has to spew hysterical platitudes and masturbation about the place. There used to be a stigma attached to used-car salesmen, but realtors dodge that bullet every time. Why is that, I wonder?

Daniel Gross: Hey Schuylercat—I thought fraysters were generally imprisoned there and not allowed out. Good to see you here. I agree with you about the promotional aspect of the industry, but would quibble that the brokers aren’t getting hurt. They’re getting hurt bad. After all, they work on commission. And with volume and prices both down, that spells trouble. What’s more, the boom attracted literally hundreds of thousands of new people to enter the profession, so the competition is really intense.

Also, another way brokers are getting hurt—in a way that hasn’t been covered. I think in a lot of parts of the country, brokers themselves becomes investors, flippers, speculators. After all, they know the market, and can save on transaction costs by doing their own deals.

Finally, if you want some great examples of broker-speak and bad photographs, I’d recommend: the Irvine Housing Blog.


Jacksonville, Fla.: Why do I constantly hear optimism regarding the national real estate picture when what I see is a ton of jobs directly related to or complementary to that sector drying up so quickly? Don’t the Realtors, drywall-hangers, appraisers, big-builder office workers, etc., have mortgages, car payments and other bills that won’t get paid as a result of the financial downturn?

Daniel Gross: Jacko not Wacko—you’re spot on re: the job losses associated with real estate. One of the great things about the housing boom is that, in an age of outsourcing and globalization, so many of the jobs it created were, by definition, local. Think about it: mortgage brokers, real estate agents, lawyers, insurers, bankers, landscapers, roofers, decorators, Home Depot clerks. All of it local. Between Nov. 2001 and the spring of 2005, housing and housing-related finance and related industries accounted for something like 40 percent of private sector job creation in the U.S.

That’s definitely drying up now, and it is certainly having a broader economic impact.


New York: Hi Dan. Sorry to be slightly off-topic. I know that you frequently discuss the residual infrastructural and other benefits left behind in the aftermath of a burst bubble (loved Pop! by the way). As a couple shopping for a house in the next few months, my wife and I have realized our economic inheritance is declining home prices and an increased supply of purchase choices. What other legacies do you think the real estate bubble has left us?

Daniel Gross: Yo New York—thanks for the Pop! shout out. You’re right that I do spend an inordinate amount of time talking about the residual infrastructural and other benefits left behind after bubbles bursts (much to my wife’s chagrin). And I have been thinking, talking, and writing some about what possible good could come from the real estate bubble and bust.
So a couple of quick thoughts. I tend to think in terms of two types of infrastructure that get built during bubbles: physical (telegraph wires, fiberoptic cable, houses) and mental (mind-sets, new ways of doing business, consumer habits). And when you’re in a service economy like ours, the mental infrastructure can be just as important as the physical.

So in the Internet age, the physical infrastructure—all those servers, fiber-optic cable, cable modems, etc.—that were left behind were very important, because we continued to use them. But lots of money was spent by dot-coms building mental infrastructure—encouraging people to buy stocks and books online, to migrate from the phone to e-mail, to blog. That didn’t go away either. The habits we acquired in terms of living online in the 1990s stayed with us after the NASDAQ bust, and the whole generation of Web 2.0 companies was able to plug right into that. Think of Google.

So as far as real estate and housing credit. Clearly, this excess supply of houses and condos will stay with us, and so will all the renovations that were done. When a bubble burst, housing doesn’t get torn down. It gets taken over by new owners, or adapted for a different use.

But I think the lasting infrastructure may be more mental—the whole culture of refinancing and equity withdrawal that built up. For every person who got hurt refinancing or taking a HELOC to buy a Lexus, I’d be there were 5 or 10 who profited greatly by doing so. When interest rates were falling, people were refinancing every six months. And if you went from a fixed rate to another fixed rate, you could save yourself tens of thousands of dollars over the lifetime of a loan. Possibly more. So I don’t think that mental infrastructure of a large number of consumers who follow interest rates, understand the positives of refinancing and the ways to use a home as an asset will go away. And that will prove economically useful during the future.

Also, many of the services that were built during the bubble, which are very empowering to consumers, will stick around. And they form part of the infrastructure. I’m thinking here of websites like Zillow and Domania, which offer great info on home prices.


New York: Hey Dan—love your columns in Slate and Newsweek! While I agree that the predictions are silly, I think the national association is just doing what it’s supposed to do—show enthusiasm. I think this move is like a runner yelling at an ump or a point guard loudly protesting his foul… they know it won’t do a damn thing except make them look like a competitive player, dare I say a “winner.” So, once we acknowledge that this is silly but necessary bluster of optimism and drive to win, what then should the National Association of Realtors be doing with its time and energies?

Daniel Gross: Hi New York—I take your point. And I agree with you that we should expect trade association to promote their industry. But NAR has also become part of the data machine for Wall Street, alongside various government agencies, private groups that produce consumer confidence numbers. And as the nation became more real-estate obsessed—and as people now worry about the ability of a punk housing market to push us into recession—the hard numbers they product play a not unimportant role in the life of our markets. So they are something of a hybrid—a promotional trade association, yes, but also dispensers and keepers of an important monthly data point on housing.


Northern Virginia: I am not sure that the National Association of Realtors economists are the worst forecasters ever, but only because I don’t think they are forecasters. Any economic “forecast” coming from NAR is in reality a marketing piece aimed at two audiences: NAR members (who seek out reassurance that there will be a steady supply of clients) and homeowners (who seek out reassurance that their home equity ATMs will remain open or will reopen). I will listen to but remain suspicious of economic forecasts; I simply do not listen to NAR’s marketing pieces.

Daniel Gross: Hi Northern Virginia—shrewd comments, indeed. But again, the trick—and the challenge for people who write about housing, and who write articles based on data from trade associations—is to separate the highly useful hard data they provide from the perhaps somewhat less useful forecasts they make.

NAR is the source for data on existing home sales, since it comes from their members. And nobody questions the accuracy or utility of it.


A Novel Solution: It seems to me that economic projections are biased towards pre-existing viewpoints because the projectionists have no personal stake in the outcome. As a novel solution, let’s get Las Vegas involved, with economists making forecasts and then having to use their own money to pay off bets.

Daniel Gross: Novel—an interesting thought. I don’t necessarily agree, however, that people become more accurate forecasters when they have a financial stake in the outcome. Think about all the CEOs who have made shamelessly (and transparently wrong) upbeat forecasts about their own companies’ fortunes. I think there’s a tendency to conflate hope and desire with forecasts.

That said, the Las Vegas solution, which others might dub a market solution, does have its virtues. And with the advent of the tradeable Case-Shiller Housing indexes, investors, speculators, economists, even realtors have the ability to place financial bets on the direction of markets.

In fact, it might even make sense for realtors—who have their entire business and livelihood in a single market—to use futures contracts to protect themselves. If you’re in Washington, for example, and a sharp downturn in the local market would hit you hard financially, it might make sense to take out some insurance in the form of buying puts on D.C. area housing contracts.


Laurel, Md.: Could you address in general the quality of data put out by advocacy organizations? For instance, we hear a lot about how women make 23 percent of what men do, but not about differences in hours, education, experience and working conditions that make the figures non-comparable.

Daniel Gross: Laurel—a tough question, because it’s all over the map. I have to see that as a reporter, I rely a great deal on data produced by trade groups, associations, and advocacy organizations. And of course many of these groups have an agenda. That doesn’t mean we should assume they’re all cooking the books. I think it goes on a case by case basis—if you get burned by bad numbers as a reporter, you’ll hear from your readers, and approach the organization with a bit more suspicion.

I find in general that trade groups tend to provide good historical data—how much corn was produced in 2000, how many refineries have been built in the past 20 years, what percentage of electricity was generated by nuclear in 2003. But that when you get into the realm of projections and forecasting you have to be a little more careful.

I also tend to be a little suspicious of groups that put hard figures on things that are very difficult to quantify—like the costs of Sarbanes-Oxley, or, as you note, the degree to which women earn less than men. In some of these areas, there are lots of nuances and variables.


Denver: Historically, which tends to recover faster: existing or new home sales? I ask because of their prediction that existing has hit bottom, but new has not. We are looking for a house in the Denver metro, and it really seems to me that new homes here have been far more responsive to the changed markets, to the point that when all else is equal the new houses are a less expensive. I would have thought that if anything new construction would recover faster simply because overall it seems they are pricing new construction more aggressively, but maybe that is just here. Do you have an opinion on which will recover faster nationwide?

Daniel Gross: Hi Denver—I’m not sure which tends to recover faster, but it seems to me that new housing goes south before existing homes do, and that you’re far more likely to see sharp decreases in prices in new homes and condos than you are in existing homes. A developer of a new home is always racing against the clock. Every day he or she doesn’t sell a property is a day their interst cost rises. And they’ve got lenders looking over their shoulders—eager to get paid back or willing to step in should they falter. So when you get a motivated seller of new homes, you tend to get firesales—big discounts. One of the big home-builders (I forgot which one) had a big nationwide weekend firesale where it slashed prices on thousands of units by 30 percent.

By contrast, with existing homes, those are on a case by case basis. Sure, some sellers are really motivated. But most aren’t in such dire straits.

As far as recovery, in terms of activity I think new homes are likely to lag. After lenders and developers are burned, they tend to lick their wounds and only get back into building once the market has improved for a few years. So if I had to say, I’d say that existing home sales would likely recover faster.


Princeton, N.J.: Never met the esteemed Professor Krugman. Here my take on health care: Let’s just look at efficiency. Forget the immorality of the uninsured that lets poor people die; forget the burden on businesses that make them less competitive. Just consider health care financing as a business decision. Develop statistics for measuring how we are doing. Look at the competitors (other countries). Look at their cost. If you are honest, you will become an advocate of a single-payer system. Here are some facts. They can be checked at this Web site.

If you look at the 13 wealthiest countries and rank them according to the 16 basic public health statistics, the U.S. ranks 12th or 13th in each one—yet we spend 2.5 times as much per person as the average of these countries! Other countries get much better health care at much lower cost. (As a sanity check, the World Health Organization ranked the U.S. 37th in the world in health care, above Bolivia but below Slovenia.)

All of these other countries use some form of single-payer system. Of course, they have some problems, but most of these are because they are not spending enough—we would not have those problems. In spite of all these so-called problems, they get better care. Medicare is a single-payer system, and it is one of the most popular programs in the history of our country. The plan I like simply gives Medicare (without limitations, copays or deductions) to everyone. We could do this without spending any more than we are now.

The reason for this is that we waste at least $200 billion a year on excess paperwork by physicians and at least $100 billion a year on the high overhead (15 percent vs. 1.3 percent for Canadians) of private insurance, not to mention unconscionably high drug prices charged by companies that spend three times as much on marketing as on research.

Look here is a simplified example of what we are doing: Suppose you have $100 to give to 10 people. You could give $10 to each person. Alternatively, you could develop criteria that determine who is deserving, and then investigate each person. You might find that according to your criteria, only five people deserve the money—but you spent $75 on your investigations, so now you can only give $5 to the five deserving ones. We spend much too much money denying people health care.

The basic problem is that the rules are made by private insurance companies, the only goal of which is to make money, not be efficient or provide good health care. If they can save a buck by having a physician fill out a 40-page form, they will do so. What about choice? I am 69 years old and retired. During my career I had five HMOs and five indemnity health plans. I have much more freedom of choice under Medicare than I had under any of the private insurance plans. I have no more referrals, no more in-plan/out-of-plan nonsense. As for choice of insurance plan, why would anyone want choice if everyone had a plan that covered everything? In any case, you still could have private insurance for those who could afford it, as most European countries still do.

Daniel Gross: Hi Princeton—thanks for this. With health care, we’re venturing a bit beyond my comfort zone. But your suggestions are eminently sane.


Falls Church, Va.: Daniel, believe next year the biggest factor impacting the consumer spending (21 million Americans according to a CNN report) would be the alternative minimum tax, if Congress doesn’t fix it soon. My brother and his wife are projected to pay more than $4,000 extra on taxes next year after all the deductions. They have canceled plan to buy big-ticket items already. Do you agree ?

Daniel Gross: Hi Falls Church - as someone who gets hit with it every year, I’m tempted to agree. But taking a step back, I’m not so sure that it would be the biggest factor—rather than one factor. First of all, it’s highly regional. It really comes into play in places where you have lots of people with high income, relatively high housing costs and property taxes, and in states that have income taxes (because under the AMT you effectively lose the federal deductions for some of those items).

In Florida and Texas—big states, no income tax—the AMT is no big deal. In Mississippi, where income is pretty low, it wouldn’t be much of an issue. In New Jersey, New York, California—obviously much more of a big deal. What’s more, AMT tends to hit people in the middle- to upper income brackets. And while that hurts, a family making $150,000 having to pay an extra $4,000 in taxes isn’t going to hurt as much as a family making $60,000 having to pay an extra $5,000 a year on their mortgage when their ARM resets.


Daniel Gross: And I see our hour has passed by rather quickly. Thanks everybody for all your fine questions. Hope to see you all again soon.