Homes and cars
What are the two most expensive goods you're likely to buy in your lifetime? A home and a car, probably. And the news today on both is an indicator of how screwed up things are.
The Washington Post figures the country has about one million homes too many. And close to 30,000 of them are in Las Vegas alone. "The solution, local executives say, will come not from Washington policymakers but from the market itself," reports the Post. "When there are too many houses, builders stop building them. That has already happened, and many Vegas home builders have gone out of business."
But of course, that's not going to stop politicians from intervening anyway and trying to prop up home prices — that is, keep them unaffordable. There was Jack Kemp, that paragon of supply-side virtue, stumping in Florida this weekend for John McCain and his $300 billion mortgage bailout. Barack Obama's campaign has lambasted the idea, but by the same token I haven't heard any of his vaunted Chicago-school advisers come out and say housing prices have to come down before some semblance of balance can be restored.
Meanwhile, on the auto front, the big news to my mind is not that Treasury has spurned the idea of forking over money to General Motors for the purpose of buying Chrysler (I guess that sort of arrangement is reserved for banks), but rather the introduction of what's billed as "the lowest priced car in the country." It's a new model of Nissan's budget subcompact, the Versa. MSRP $9990.
Now if you're of a certain age, you probably remember the introduction of the Yugo in the United States — also billed as the lowest-priced new car available at the time — $3990 in 1986. The price was plastered all over the advertising. So what, I wondered, does $3990 then translate to today? The Minneapolis Fed's handy-dandy inflation calculator tells me it's $7547, rather a far cry from the $9990 Versa (destination and handling not included).
I'm sure the wonks at the Bureau of Labor Statistics would tell me I'm not taking into account "quality improvements," better safety features, standard equipment that was once optional, and all their other hedonic calculations that allow them to skew the CPI figures so grotesquely. And I'll concede Nissan builds a better car than the Yugoslavians of 20-odd years ago, teetering in a fragile decade between Tito's death and the breakup of the country. But that's not the point. The point is there's no car, good or bad, available today for the present-day equivalent of $3990 in 1986. End of story.
In any event, housing is getting its bailout, Detroit will get its bailout sooner or later, and at no time does anyone ask where the money for these bailouts will come from.
This can't end well. Prepare accordingly.
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This is one of the few arguments that I don’t really understand the connection between your logic and your final assessment. As you well know, and have touted before on your blog so many times, hedonic adjustments are meant to LOWER the published CPI. You mention ShadowStats somewhat frequently. So why are you using the Minneapolis Fed’s calculator? The $7,547 is a botched number to the low side, and you know it. What are you trying to prove? Not enough coffee yet this morning?
Comment on November 3, 2008 @ 11:29 am
Hey, my aunt had a Yugo. Fat people use to get stuck in the back seat because the darn thing was so small and cramped and then the underpowered engine would struggle like mad to get up the hill to the driveway with them stuck back there. And it was truly pathetic to watch them navigate a road with 4 inches of snow on it.
Comment on November 3, 2008 @ 1:28 pm
Good point, Chad. When it comes to a cost-of-living calculator, I take what I can get. At some point we have to work with the numbers we’re given or else there’s no way to have a discussion about the price of anything. What, for instance, would housing prices look like with an honest CPI? Or housing prices relative to wages? The possibilities are endless…
Comment on November 3, 2008 @ 2:24 pm
Buy a Tata Nano, only $2500. The whole ‘fatass’ thing though, like the Yugo, might be a problem.
Comment on November 3, 2008 @ 4:38 pm
The real question is how much would an old car cost to build today using yesterdays manufacturing techniques. Remember how much steel used to go into Detroit muscle? If they put that much steel into a car now how much would it cost. Plus steel is a lot harder to work. Whatever that cost is shows you the true cost of inflation.
Companies continually cheapen products with plastic parts instead of metal etc. Unfortunately the consumer does not see the cheaper product, due to inflation we see a more expensive one that is supposedly better but is in fact just plain different.
The government stats have confused a changing product with actual inflation. Goods use to be a lot more labor intensive. Why haven’t the middle class seen the benefit to the cheaper production costs. Deflation is after all a natural force in a capitalistic society. The government isn’t just adding inflation as a tax they are taking away deflation.
Comment on November 3, 2008 @ 5:32 pm
They better start making up more money out of thin air. All you guys worrying about inflation will be praying for a little inflation in a year or two. japan’s stock market is down 75 percent from it’s peak 25 years ago. We had all better pray for some inflation. the only chance we have for a long term recovery is to increase the velocity of money, make people afraid of holding on to money for fear of the risk (of inflationary loss). Get people scared enough to put it in the stock market, buy things with it, anything but save it, because due to the paradox of thrift if we all start saving we are doomed.
Comment on November 3, 2008 @ 6:11 pm
DOOMED!!!!!!DOOMED I SAY!!!!!
Comment on November 3, 2008 @ 6:11 pm
Hey HCN at 6 percent yield with 150 consecutive quarters of stable or rising dividends in a safe industry looks really good. Especially if you think we are headed to a deflationary time. In deflationary times if a dividend remains stable the PE of a dividend yeilding stock will rise. Revenge of the conservative investors. You guys better look at safe dividend paying stocks and not try to hit a home run or just sit on your cash.
Comment on November 3, 2008 @ 6:14 pm
A $3990 Yugo is your idea of a cheap car? You’re showing your youth, my friend, or else my advanced age. I recall, as a high schooler, ogling the shiny VW’s, Renaults and Fiats with price stickers in the $1200 range. If only I had kept my ‘64 Volkswagen..
Comment on November 3, 2008 @ 7:46 pm
Bob Wise may have missed an important point about the 1,200 VW in 64: who had $1,200?
And all these other critiques from tyros with gyros for brains, well screw ‘em. Keep at it folk, this is one of the best, most well reasoned blogs in the intertubes.
Comment on November 4, 2008 @ 1:02 am
Hey, I have a beautiful $1000 1987 Oldsmobile Delta Royale with all the bells and whistles including velor seats I bought off a little old Lady after her hubby died. I kid you not. It rides smooth as silk, goes fast if I need to, and gets 27 miles to the gallon on the highway. Only problem is the paint is crappy, but for a grand ya don’t get it all. Hmmm…That’s only 10% of a new version of a Yugo. I remember Yugos- you always had to clean the bugs off the back windows, never the front.
Comment on November 4, 2008 @ 1:38 am
I also have a 1996 Cadillac Eldorado with 50k miles on it and in immaculate condition inside and out. It cost me $10,000 for this $50,000 car. The paint’s better than the Olds but the mileage is worse. I guess I’ve been living the deflationary lifestyle for awhile now…
Comment on November 4, 2008 @ 1:50 am
Praying for inflation?? Is Dude the Ghost of Milton Friedman?
Comment on November 4, 2008 @ 3:13 am
To Walt. Good point. Though, if you did build a car the way they used to, you’d have to take out all the government imposed safety and emissions items that cost a hell of a lot to engineer. What year were seatbelts mandated, ‘70? Strip out belts, air bags, the cost of crumple zones, sensors all over the place, traction control, hell, the computer brain altogether, variable valve timing, etc, etc, etc. It might be a wash.
Comment on November 4, 2008 @ 9:53 am
Dude,
what’s the price of eggs in Japan?
I also like the idea of scaring the public into doing what they feel is not in their own best interests. Perhaps they could create a department of homeland insecurity with the mission of making the masses scared to hold onto their money. Combine hyperinflation with jack booted thugs intent on stealing cash…
Comment on November 4, 2008 @ 2:52 pm
For some reason after reading the various posts here my mind went to what I think will be the next bubble to burst.
I don’t know if you’ve noticed all the well fed people that are usually in Yugo sized cars or blocking the shopping mall isles but now due to the credit crunch their extravagent eating days are soon to be over. Pop!
Look to investing in manufacturers of smaller clothing lines or possibly tailors supplies, wrinkle creams should be quite popular in the springtime, stay away from fast food stocks especially Kentucky Fried Chicken or Round Table Pizza. Rice and soy sauce should be popular.
Disclaimer-I think the derivitives bubble might end up being worse.
Comment on November 4, 2008 @ 7:12 pm
gregroberts
Fatty and sugary prepared foods are far, far, cheaper than the more nourishing foods.
Price a can of soda versus and orange. I eat oranges as vitamin pill loaded soda. Not because they are cheaper.
Comment on November 6, 2008 @ 12:12 am