"The C.O.D. Society?"

In G.O.D. ("Gold on Delivery") We Trust

What happens in a tough economy where more people are paying their bills late (and some, not at all)?

Creditors start insisting on being paid upfront.

I don't know about other fields, but for Realtors, "C.O.D." seems to be the order of the day -- and has been for about a year now.

So, instead of letting Realtors charge their marketing expenses, then deducting the accumulated balance against future commission checks, the brokers are invoicing Realtors monthly.

For the full balance owed.

"Pay As You Go"

Why?

That next commission check may be a ways off.

And certainly, some Realtors have gotten so deep in the hole on their expense accounts that they simply quit the business, leaving their Broker with a big -- and noncollectable -- balance.

The local Board of Realtors now seems to have adopted a C.O.D. policy regarding member dues as well.

Instead of billing Realtors through their broker, starting April 1 the Minneapolis Area Association of Realtors ("MAAR") will now invoice Realtors directly.

While that's certainly a more transparent way of doing things, you'd guess it also shines a brighter --and faster -- spotlight on delinquent balances. (Coming next: mandatory automatic debits??)

C.O.D. Writ Large

Of course, the ultimate COD policy is at the level of international trade.

As various sovereign debts start to reach nosebleed levels, creditors naturally look for ways to hedge their risk.

Unfortunately, the various currency hedges -- synthetic and otherwise -- favored by traders and speculators alike ultimately suffer from the same defect: they pay off in fiat (paper) currency.

Structured finance expert Janet Tavakoli assesses the problem thusly:

Credit derivatives now settle in euros -- after all, if the U.S. defaults, who will want payment in devalued U.S. dollars? However, with the euro now weakening relative to the dollar, market participants are calling for contracts that require payment in gold.

This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull’s-eye.

--Janet Tavakoli, "Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold"; The Huffington Post (3/8/2010)

Need the foregoing translated?

The ultimate pay-as-you-go customer potentially is . . . the U.S. government.

"Housing Market for Dummies"

Upper Bracket Squeezed by Jumbo Bottleneck

Mortgage Update: Jumbos Remain Elusive

At a time when some mortgage products are showing signs of life, jumbo mortgages are hard to get and expensive, making it difficult for many would-be move-up buyers to take action.

--Minneapolis Association of Realtors (6/22/09)

Want a quick, simple handle on today's housing market?

Take $417,000, the limit for conforming loans (vs. jumbo loans); then divide by 80% (that builds in a 20% mortgage, which is the typical threshold for avoiding mortgage insurance).

The result: low $500's.

Below that threshold -- especially well below, where first-time buyer incentives dominate -- the Twin Cities housing market is doing OK.

Above, well, things aren't so great.

Ritholtz: 'Affordability Index' is Worthless

Rebutting Ritholtz on "Housing Affordability"

The [Housing Affordability Index] as presently constructed is utterly worthless. It provides little or no insight into how affordable US Housing actually is. Further, what is omitted from the index is especially relevant to the problems occurring in the housing market today. The Index fails to account for -- or even recognize -- any of the out of the ordinary circumstances that are currently bedeviling the Housing market.

--Barry Ritholtz, "NAR Housing Affordability Index is Worthless" (The Big Picture; 8/13/2008)

If you don't read Barry Ritholtz's blog, The Big Picture, you should: his unvarnished take on finance and the economy is consistently superb.

That said, his relentless criticism of Realtors, and, in particular, their trade association, the National Association of Realtors ("NAR"), should be taken with a grain of salt -- just as NAR's pronouncements should be.

First, two stipulations:

One. NAR is a trade organization. Like the Investment Company Institute (stocks) or the National Association of Real Estate Investment Trusts (real estate), it can reliably be counted on to put the best possible face on whatever's happening at the moment. That's what trade associations do.

While I certainly wouldn't decide to buy or sell stocks based on the latest ICI press release, neither would I dismiss everything they say as unadulterated lies and spin. Ditto for NAR and housing.

Two. Most Realtors -- myself included -- don't sell real estate nationally, they sell locally. I focus exclusively on the Twin Cities market. So the HAI chart at the top of this post, and my discussion of HAI statistics generally, pertain primarily to the Twin Cities.

In that vein . . consider NAR's housing affordability index ("HAI").

To come up with a single gauge of relative housing prices, it takes three key variables -- interest rates, median family income, and median housing prices -- and puts them in a blender. The resulting number offers a relative measure of housing's affordability nationally (NAR actually puts out four regional calculations, but it is the national one that receives the most attention).

Back-testing the HAI, you'd expect it to be highest when housing prices were near their low, and lowest when housing prices approached their peak.

Locally, that's exactly what you find. After plateauing in 2003, the Twin Cities HAI deteriorated steadily until the third quarter of 2006. The chart's next installment, showing the change from January, 2008 through January, 2009, will show it skyrocketing (to over 192).

So what are Ritholtz's principal beefs?

One. The HAI remained well north of 100 -- its baseline measure of housing affordability -- throughout the period when the housing bubble was inflating, up to and including the peak (completely true, by the way).

Rebuttal: the HAI should be viewed as a relative measure of affordability.

In the stock market, a Price-Earnings ("P/E") ratio of 8 doesn't necessarily mean that stocks are cheap, just as a PE of 20 doesn't necessarily mean that they're expensive. It's also true that stock values tend to overshoot on both the high and low ends.

Historically, however, lower P/E's correlate with better value, higher with less. Ditto with the HAI and housing.

Two. The NAR methodology doesn't take into account today's much tighter credit conditions, weak economy, and tapped-out consumer.

Rebuttal: Wrong. Those factors are captured by two of the HAI's three inputs -- housing prices and interest rates.

Housing prices clearly are dropping now for all the reasons Ritholtz mentions (fewer Buyers have 20% downpayments, their credit scores are deteriorating, etc.). That feeds directly into the HAI's (shrinking) denominator.

Meanwhile, recessions crimp demand for money, which results in lower interest rates. That, too, is captured by the HAI (its numerator increases). The HAI may be a gross benchmark, but its very consistency means that it can be compared across time intervals.

Three. Regional variations in home prices and income are ignored.

Rebuttal: Wrong. The HAI is computed nationally, but also by region (Northeast, Midwest, South, and West). Even after huge price drops, the HAI in the West is quite low: 108.4. Meanwhile, it's setting records in the Midwest: 186.0 (both numbers as of November, 2008).

For Ritholtz to say that the national HAI ignores regional variations is like saying the Wilshire 5,000 obscures the fact that some market sectors (energy, consumer durables) have outperformed others (tech, small cap stocks). Undeniably true -- and meaningless.

There's no denying that Mr. Ritholtz's skepticism towards NAR is historically warranted. However, trashing a useful tool such as HAI -- without regard to context or application -- is effectively throwing the housing baby out with the bathwater.