Paradoxes Now, Paradoxes Then

By Christopher Briem, on November 24th, 2010

For me the most intersting thing about the latest news on the real estate front is that there just isn’t anyway anyone could find to spin this as less than positive news.  As news on the real estate front nationally continues to be described as anemic at best, locally real estate prices have gone up over 6% in the last year.  6.6% exactly which is quite a remarkable annual price increase for Pittsburgh.  I wish I had a long term time series to compare, but net of inflation that must be a record of some kind.  Granted the Trib version lead with the downer: Sales of new, existing homes fall 26 percent in W.Pa..  Sales being a volume metric and reflective of the big tax credit last year. The nugget buried in that version however is that in the region ”New houses sold for an average of $304,841 last month”.  I am not sure folks in town will believe that… Over $300K!?  Tell your grandmother and see what she says about that.

It occurs to me that if there really was this mythical link between mortgage risk and Marcellus Shale it would only be the opposite as the news accounts described it the other day.  If Marcellus pushed UP real estate values, that would make the risk of future depreciation increase as well… our low risk of price drops in the future is really a reflection of anemic price apprciation in local markets. Anything that is pushing up prices is pushing us down on that ranking of safest markets looking at potential future price drops. So the last thing some would want to do is to take credit for our mortgage risk ’safety’.   OK, enough counterintuition for the day.

But I liked the phrase “Pittsburgh Paradox” as used in that story.  Here is my contribution to the world of equations.  This is going to be really deep:

People + Income = Real Estate Prices

So there isn’t that much paradox in a sense.  Regional migration has turned positive, incomes are trending up…  not included in the equation, but our housing stock is old and not exactly oversupplied across many markets.   The prices follow.

Ignore that for now.  I was curious how far back the “Pittsburgh Paradox” term has been thrown around here.  I came across this article on local public transit from 1976 that is curious in lots of ways, but really worth a read these days: Transit Scene here replete with paradox.  Of course that paradox may soon be gone as transit itself here may soon be gone.  Looks like the Port Authority has failed to get public sentiment raised enough to save its funding.  Not all that surprising. In fact they succeeded…. all too well.  They spent so long, and spent so much money on PR consultants, convincing the public that public transit had to be cut back in recent years that it really is no surprise that the public is not responding when they want to send out the opposite message now.



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Ownership and Governance of Critical Financial Infrastructure

By Ajay Shah, on November 24th, 2010

SEBI has released the Bimal Jalan committee report about the ownership and governance of critical financial infrastructure. We’re going to need a similar report on the questions about entry into banking also.



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On High Risk Investments

By Christopher Briem, on November 24th, 2010

So in reading the WDUQ snippet on the otherwise boring and esoteric machinations of public finance: 2 Votes move Bond Plan Forward, is a awfully important factoid.  In it there is a mention of the size and scale of the ‘illiquid assets’ held by the City of Pittsburgh combined municipal pension fund.  The line I note is ” some $50 million already in the pension fund in high risk investments that the PMRS did not use in previous calculations“.

So we have a $50 million number in the record now.  Progress is progress.

So the pension fund which is as woefully underfunded as a pension fund can be, that is at risk to need all of its remaining cash in the very near future, somehow has roughly a fifth of it’s assets invested in what are as kindly as possible characterized as “high risk”.   Can anyone think of a justification for that?  Can anyone figure why these assets are not being identified?  Can anyone verify that these $50 million in assets are actually worth $50 million currently??

So let’s be clear.  High risk and illiquid investments are not only not illegal, they are common enough that the GFOA has guidance on their use in pension fund investments.  So the existance of illiquid assets is not the issue, yet the magnitude of these investments in such a vastly underfunded pension fund is arguably malfeasance and I would be glad to argue the point.  That roughly $50 million of such assets exist in a pension fund holding give or take $270 million is a huge proportion for a fund as distressed as it is.

The GFOA guidance has what may be the most understated advice for these assets.  Footnote 5 in the previous linked reference is:

Due to the increased risk of misstatement inherent with these investments resulting from incorrect valuation, part of the increased due diligence could be to obtain a reasonable understanding of the procedures that may be applied to them during the independent audit of the financial statements.
There it all is in a nutshell.  “risk of misstatement”…  “incorrect valuation”… anyone have a warm fuzzy that the numbers being cited represent valid valutions of the assets involved?   If you read through to the end you get GFOA’s admittedly broad guidance on use of such investments which is that they should: “exercise extreme prudence and appropriate due diligenge.”  You can read the document to see the specifics of what that appropriate due dilligence should involve.  Since we have no idea the details, do we know what due dilligence has actually been implemented.

What is a bit scary in the context of all of this.  All I have been able to glean on this personally are some comments made to me that the pension fund has in recent years been bringing down their investments in these high risk, or illiquid, assets. I can neither verify or dispute that. If true,and if it still has $50 million invested this way, then it begs the question of how big big a percentage these high risk investments made up of the pension fund in the past?
and I know I am a broken record….. but will someone please please do a follow up of this story:  City acts to curb further pension losses.  I’ll stand on my head if it helps.  Do I need to wander around Downtown aimlessly wearing those big dual placards over my shoulders you used to see folks wearing… Are any of those folks still around?  Problem is that the placards would have to have messages written in tiny type to explain it all.  People would think I was walking around with the Rosetta Stone or something.


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Economic Events on November 24, 2010

By B.P.T., on November 24th, 2010

The Mortgage Bankers’ Association purchase index was released at 7:00 AM EST, and there was a week to week increase of 14.4% in the Purchase Index and a week to week decrease of 1.0% in the Refinance Index as interest rates continued to rise from near record lows.

At 8:30 AM EST, the U.S. government will release its weekly Jobless Claims report.  The consensus is that there were 435,000 new jobless claims last week, which would would be 4,000 less than the number released last week.

Also at 8:30 AM EST, the monthly Personal Income and Outlays report for October will be released.  The consensus for Personal Income is an increase of 0.4% over the previous month and the consensus Consumer Spending index change is an increase of 0.5%.

Also at 8:30 AM EST, the Durable Goods Orders report for October will be released. The consensus is that there was an decrease of 0.1% from September .

At 9:55 AM EST, Consumer Sentiment for the second half of November will be announced.  The consensus is that the index will be at 69.5, which is 0.2 points higher than the value reported in the first half of the month.

At 10:00 AM EST, the New Home Sales report for October will be released. The consensus is that 314,000 new homes were sold last month, which would be an increase of 7,000 from last month, but still remains near record lows.

Also at 10:00 AM EST, the FHFA House Price Index for September will be released, providing more information about the direction of the housing market.

At 10:30 AM EST, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.

At 12:00 PM EST, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

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