When it comes to investing, we often consider the extremes of performance in the U.S. stock market, at least as represented by the S&P 500. Unlike ordinary investing blogs, we often do it with a focus on the worst the market has ever delivered. Here's a quick guide to our posts on the topic!
- The Five Worst Months in S&P 500 History
With September 2008 showing promise, here's our ranking of the five worst monthlong periods for the stock market!
- The Five Worst Bear Markets Since 1871
The current market certainly qualifies as a bear, but then, it's not over yet so we can't say yet where it will rank. Unlike the five worst months, this analysis looks at the total stock market decline over a number of months and years.
- The Worst Returns Ever for the S&P 500
We found the worst ever recorded rate of return for investments made in the S&P 500 for periods of time ranging from one year to 50 years long!
- Visualizing the Worst Case Real Returns for the S&P 500
A graphic depiction of the worst rates of return on investments made in the S&P 500, after adjusting for inflation!
- Lemony Snicket and the S&P 500
What if you had the worst luck ever, and for each time you put money into the S&P 500, you were guaranteed to get the worst rate of return recorded for the length of time that you kept your money in it? Our tool shows you how bad that would be, which really turns out to be surprisingly good....
- S&P 500: Best, Average and Worst Returns Since 1871
Sometimes, it helps put market volatility in perspective if you can see the extremes over time!
- The Worst Returns of the S&P 500 vs The Safest Investment on Earth
Believe it or not, in all the turmoil in which the market is going through, there's real hope for the average investor who has the time and the discipline to see their investment through!
Finally, we'd be remiss if we didn't point out that we have a tool that you can use to find the rate of return, with and without inflation, with and without reinvesting dividends, between any two months for the S&P 500, from January 1871 through the near present: The S&P 500 at Your Fingertips!
Labels: index, SP 500, stock market
With the U.S. stock market plummeting today on news that the leadership of the U.S. House of Representatives failed to deliver a bailout package to ensure that banks and financial institutions would be able to resume lending to one another in the current panic, we thought we might present the following two charts to help place the stock market's reaction into better historical context.
The first chart will be familiar to regular readers of Political Calculations. It shows the average monthly index value of the S&P 500 versus the index' trailing year dividends per share since order initially broke down in the market beginning in January 2008:
Without the market action today, the average decline of the S&P 500 index during the month of September through Friday, 26 September 2008, would be sufficient to provide the two-standard-deviation decline early warning signal that we've identified as frequently occurring prior to historic breaks in order.
The next chart puts things in a much longer term focus. We've mapped the average monthly index value for the S&P 500 from January 1871 through August 2008, with a single data point indicating where the market closed on 29 September 2008, presenting both axes of the chart on logarithmic scales:
The portion of the chart with a trailing year dividend per share greater than $1.00 is consistent with the modern era of the stock market, which began in January 1952.
At present however, the action of the market would seem to more closely resemble the post-Civil War period, perhaps a result of the similarity between the current crisis and the banking panics of the late 1800's and early twentieth century.
Labels: dividends, SP 500, stock market
Now that GDP data has been finalized for the second quarter of 2008, we can now confirm that First Trust's Brian Wesbury and Bob Stein did an outstanding job in anticipating by several months where economic growth for the quarter would be.
In the change from the preliminary revision to the final revision for 2008Q2's inflation-adjusted GDP growth rate they narrowed the gap between their predicted value and the final figure to overshoot it by just 0.2%, having predicted 3.0% compared to the 2.8% finally recorded in the quarter. By contrast, at the time Wesbury and Stein made their prediction, the consensus among economists was for a growth rate of 2.2%.
And you can count us among those who were way off target from their forecast! Using our preferred forecasting techniques, we way overshot the final figure using the Climbing Limo approach and undershot by a wide but lesser margin using the Modified Limo approach. As a consolation prize however, our modified limo method was more successful, anticipating a Real GDP figure of 11,656.2 billion (in Year 2000 "chained" US dollars), $72.1 billion below the final Real GDP level of $11,727.4 billion recorded for the quarter.
But in these days of $700 billion banking bailout discussions, we suppose that we could call that miss chump change. We just wish we were the chumps with that kind of change! But does that miss mean that our forecasting techniques are toast?
Not necessarily! One of the neat characteristics of the GDP forecasting techniques that we use is that they're self-correcting. Even when they're off by a wide margin, they ultimately get pointed in the right direction and much more often than not, get pretty close to the target - particularly the Modified Limo method which only looks ahead to the next quarter once the data for the previous quarter is finalized. The Climbing Limo approach shows a lot more volatility, which is to be expected from a method that looks three quarters ahead in time.
The chart below tracks where Real GDP has been recorded with respect to where either the Climbing Limo or Modified Limo methods anticipated. We've also projected both forecasts ahead using the most recent finalized GDP quarterly data:
The chart illustrates that we have somewhat of a self-correction convergence coming on between the Climbing Limo and Modified Limo techniques for the level of Real GDP for the third quarter of 2008. The Modified Limo technique anticipates a level of $11,781.4 billion for Real GDP in 2008Q3 vs $11,817.4 billion for the Climbing Limo technique.
Given the current economic climate, we would anticipate that Real GDP will be finalized for 2008Q3 at or a bit below the Modified Limo forecast value of $11,781.4 billion.
No one said fortune telling was an easy business! But it sure is nice for the pundit industry that no one ever seems to remember the huge misses. Former chief economist for the National Association of Realtors David Lereah certainly hopes so!
Labels: gdp forecast
Welcome to the Friday, September 26, 2008 edition of On the Moneyed Midways, the only place you'll find the best posts drawn from the best contributions made by money and business bloggers to money and business related blog carnivals!
Bad behavior defines this edition of OMM! Things like paying for college by turning to prostitution and auctioning off your virginity. Or how about making money by day trading the most distressed stocks in the current credit crisis. And then, there's that matter of trading sex for fish (and AIDS) in Kenya.
To be fair, there are a number of highly redeeming posts in this week's edition as well. All the best posts from the week that was await you below....
| On the Moneyed Midways for September 12 and 19, 2008 | |||
|---|---|---|---|
| Carnival | Post | Blog | Comments |
| Carnival of Debt Reduction | If You're Not Using It, Get Rid of It: Ten Ways to Declutter and Put Cash in Your Pocket | The Simple Dollar | Have you ever looked at your closets and thought "What a lot of junk. I could make some money from that!" Trent did just that, and posts his action plan! |
| Carnival of Debt Reduction | Girl Selling Her Virginity to Pay for College | Broke Grad Student | Most people in Natalie Dylan's situation would pay off student loans with a portion of the income they earn after getting a job after graduation. The Broke Graduate Student finds her approach to be an unusual way to get money to pay for college. |
| Festival of Frugality | Frugality Trumps Return on Investment | Mighty Bargain Hunter | Absolutely essential reading! mbhunter's friend had both successes and failures in investing, but found that frugality was the key to getting the best return on his investment in his lifestyle. |
| Cavalcade of Risk | Teach a Man to Fish… and You Kill Off the Next Generation of Women | Health Business Blog | David E. Williams relates how old customs and poor fish catches are contributing to the spread of AIDS in Kenya. The Best Post of the Week, Anywhere! |
| Carnival of Real Estate | Phoenix Apartments Search Trends | My New Place | Matt DiChiara presents the results of his analysis of how the collapse of the housing bubble is affecting the Phoenix rental market. |
| Festival of Stocks | I Just Day-Traded AIG, It's Dangerous & Addicting | Blueprint for Financial Prosperity | Jim places his bets on the credit crisis-driven swings in volatility of insurance giant AIG, and wins. As he says "I'm such a fool." |
| Money Hacks Carnival | How to Make Your Child a Millionaire! | My Family's Money | Steward considers the Silicon Valley Blogger's idea to make a child into a millionaire through the power of compound interest, but wonders if the idea is really all that good. |
| Money Hacks Carnival | Invest in Future Top Models | Investment Internals | The phrase "Markets in Everything" comes immediately to mind in Sherin's post describing how to make money by investing in beautiful people. Absolutely essential reading! |
Previous Editions
- OMM's Running Index for 2008
- OMM's Running Index for 2007
- The Best Blogs Found in 2006 (and our full 2006 index)!
Labels: carnival
Do you think you have the solution to the current U.S. financial system crisis? Would you like to take it for a test drive?
Our latest tool puts you in today's hottest seat! We've borrowed a hypothetical balance sheet from Zimran at winterspeak, and worked up an interactive version of it so you can see the impact of the choices you might make to solve the credit crunch threatening some of the biggest financial institutions in the U.S. and world economy! We've input data that might be representative of an overleveraged institution, or number of institutions, and incorporated various options that you might choose to pursue (running the default data will produce a "current" balance sheet.) From here, it's all up to you. Choose wisely!....
A Quick Guide to the Bailout Proposals
The Paulson Plan: We'll let Zimran explain how Treasury Secretary Henry Paulson's plan would work:
The Paulson plan takes those $25 of bad assets, and substitutes them for $25 of good assets (or maybe $20 of good assets). The point is, for the bank to re-capitalize, he *HAS* to pay more than the assets are worth. By swapping good for bad, the balance sheet does not have to contract, and part of the Paulson/Bernanke plan is to combat deflation, and keep balance sheets from shrinking so lenders can keep borrowing.
Zimran makes an excellent point here. To avoid deflation (the destruction of money in the U.S. economy), the U.S. government and Federal Reserve would need to pump a considerable amount of money to fill in the gap that would result from writing off the bad assets now on the most distressed financial institutions books. We've previously noted that the Federal Reserve had chosen inflation as a means to pump up housing values to support their housing bubble induced valuations, but with the fall of high oil prices, that job has become much harder. For his part, Federal Reserve Chairman Ben Bernanke has been encouraging the distressed institutions to mark down their books as quickly as possible to minimize the gap for most of the past year, but they failed to heed his advice soon enough.
Swapping Debt for Equity: Luigi Zingales of the University of Chicago has proposed that transforming the debt owed by these highly leveraged institutions to their bondholders, customers and counterparties might be a more effective solution to restoring the distressed institutions to solvency. Zimran explains the details ("GS" refers to Goldman Sachs):
Zingales, to my understanding, says that instead of public gifts of cash, bondholders should have their debt converted to equity. If shareholder equity was say, -$10 (GS did not lose that much money) then this would work, and such a debt to equity conversion would reduce debt to $5, bring equity to $0, and debtholders would take an immediate 67% haircut and now have participation in any upside. I can see how this works if debt was larger than negative equity, but I don't think that's the case as firms were so leveraged, and floated on equity cushions that were so tiny. At any rate, I can see how that *might* be the case, which, to my understanding, would render the Zingales option as not feasible.
I also cannot see GS reducing liabilities by going after that "counterparty" line item, as that would trigger exactly the kind of contagion that Paulson & Co. wants to avoid.
New Market Investment: Marginal Revolution's Alex Tabarrok proposes something similar to the Paulson plan, but one that doesn't involve mass transfusions of taxpayer dollars into the institutions. Instead, he proposes establishing a new investment vehicle that would bolster the good assets held by distressed institution by directing millions of tax-free IRA contibutions from millions of individual investors toward them, with the incentive that the returns on these IRA investments made over the next twelve months would then be forever tax free for the investors.
Alex argues his case:
The increase in savings will help deal with our current problems by offsetting any credit crunch. (Some of the savings will also help to recapitalize banks.) In addition, the U.S. needs a higher savings rate regardless. During the 1990s as measured savings rates declined to zero commentators argued that rising asset values compensated. Well asset values are now falling so true savings are negative - thus we need to increased savings.
A big benefit of this proposal - lower taxes, higher savings and a savings bonus to those with lower incomes - is that it should appeal to both the right and the left.
As an added bonus, Alex's proposal would also have the benefit of being the least costly and least risky option for the U.S. taxpayer.
Frankly, our best guess is that whatever solution is adopted to alleviate the emergency in which the U.S.' major financial institutions find themselves in this week will be a combination of the first two options, although we believe Alex Tabarrok's new market investment proposal would be the most desirable as it would preserve the other options should it itself not be fully sufficient.
That consideration alone should drive the policy being made in Washington D.C. this week.
Labels: bankruptcy, economics, inflation, investing, risk, tool
We were inspired by King Banaian's recent Graph of the Day showing the post-peak change in employment to dig deeper into the most recent jobs decline. Specifically, we wanted to see if any one particular age group was being disproportionately impacted by the recent downturn.
Unfortunately, we couldn't dig very far into King's data - he was looking at the change in Non-Farm Payroll employment figures since they peaked in December 2007, for which the data is not broken out by age group.
But we could dig deeper using the BLS' archived data for the total employment figures, which specifically breaks out the employment data for those Age 16-19 in the monthly employment situation reports! Here, total employment in the U.S. peaked in November 2007 at 146,647,000 employed individuals, of which, 5,832,000 are between Age 16 and 19, or just under 4.0% of the total.
For reference, the U.S. unemployment rate in November 2007 stood at 4.7%. As of August 2008, the unemployment rate has risen to 6.1%. The chart below shows the post-peak employment change in the number of employed individuals for these months, and each month in between:
As of August 2008, we see that the total U.S. workforce has declined by 1,170,000 since peaking in November 2007. We also see that 269,000 of this figure is accounted for by a decline in the number of teens Age 16-19 in the U.S. workforce, or 23% of the total numerical decline in the recorded data. A pretty remarkable accomplishment for a group that represents just 4.0% of the total!
There's more to this story as teen jobs have been in decline since they peaked in May 2006, but we'll cover that in an upcoming post....
Update 24 September 2008: Corrected quantities and chart! Here's the original paragraph we've since edited:
As of August 2008, we see that the total U.S. workforce has declined by 931,000 since peaking in November 2007. We also see that 269,000 of this figure is accounted for by a decline in the number of teens Age 16-19 in the U.S. workforce, or 30% of the total numerical decline in the recorded data. A pretty remarkable accomplishment for a group that represents just 4.0% of the total!
The original chart is here....
Labels: demographics, unemployment
We're playing catch up today in tracking how well Brian Wesbury's and Robert Stein's lone early prediction for a much higher than anticipated GDP for the second quarter of 2008.
At the time, prior to the advance release of the 2008Q2 GDP data on 31 July 2008, the consensus among most economists was that the annualized inflation-adjusted GDP growth rate for the quarter would come in around 2.2%. By contrast, Wesbury and Stein anticipated that the annualized growth rate of Real GDP in 2008Q2 would be 3.0%.
GDP data is released in three stages by the U.S. Bureau of Economic Analysis at the end of each of the three months following the end of the economic quarter. The three stages are known as the Advance, Preliminary and Final release. Each release following the initial Advance release is based on progressively more complete data, which means that the data reported in earlier releases may be revised in subsequent ones. Beyond that regular process, the BEA also periodically revises data going back for several years, again as more economic information comes to light. The advance release of GDP data for 2008Q2 also revised GDP data going back to 2005.
Looking at just 2008Q2, the advance release of GDP data for the second quarter of 2008 did not look good for Wesbury and Stein. The recorded growth rate of GDP for the quarter came in at 1.9%, well below what they had predicted. That figure represents the annualized growth rate obtained in the U.S. economy's Gross Domestic Product growing from 11,646.0 billion dollars (adjusted for inflation to be in "chained" 2000 US dollars) to 11,700.6 billion dollars.
To have perfectly predicted GDP for the quarter, the level of GDP would have to have come in at 11,732.4 billion "chained" US dollars. So, it initially appeared that Wesbury and Stein missed the target by a very wide margin.
In response to this apparent miss, Brian Wesbury and Robert Stein held their ground on their initial forecast. They anticipated that strong U.S. exports would power the GDP figure to a much higher level in subsequent releases. He was rewarded as the preliminary release of 2008Q2 economic data supported his forecast. The preliminary release showed that Real GDP had grown to 11,740.3 billion "chained" 2000 USD, which corresponds to an annualized growth rate of 3.3% for the quarter.
And so here we are! A little over a week away from the final release of GDP data for the second quarter of 2008. We'll soon know, at least as well as we can pending some revision yet to be made years in the future, how well Wesbury and Stein's forecast have held up.
In the meantime, we'll end this post by presenting our latest GDP bullet charts, which provide a visual reference of the relative strength of the three most recently ended quarters against a temperature gauge backdrop indicating the performance of the U.S. economy since 1980:
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The one-quarter GDP Growth Rate bullet chart illustrates the data as it's most often reported in the BEA's reports and in the media. We provide the two-quarter GDP Growth Rate bullet chart as it better indicates the overall trends in U.S. economic growth over the preceding one-year period.
Labels: gdp forecast
Without realizing it until after the fact, we may very well have predicted last's week's economic turmoil in the U.S. a year ago.
To see that, let's turn to our chart showing the overall probability of recession as determined using our preferred method for calculating it, with the forecast probabilities matched to their applicable dates:
The chart above shows the forecast level of the probability of recession in the U.S. over the four year period from 21 September 2005 through 19 September 2009. As you can see, the U.S. has come down from the peak level of 50% from 4 April 2008 and is now at 28.6% (as of 19 September 2008).
But, we see that the decline from the peak probability of recession has not been steady, at least in the portion of the chart representing the time since 31 August 2008. Here, unlike in previous weeks, the ongoing decline in the probability of recession was interrupted and began rising instead. The recession probability level then peaked on 16 September 2008, right in tune with the biggest crisis point of the past week!
It seems bizarrely disproportionate, with such a small uptick coinciding with such a large financial crisis. But, if we go back to the historic data recorded for the Federal Funds Rate and the 10-Year and 3-Month Treasuries for the one-quarter period from 19 June 2007 and 17 September 2007, from which the recession probability level was determined for 16 September 2008, we find that the U.S. Treasury yield curve re-inverted during a portion of that period, which accounts for the uptick.
So it's very possible that this method of predicting the probability of a U.S. recession anticipated last week's economic turmoil more than a year in advance.
Looking ahead, the probability of recession will steadily decline until mid-November, where from 13 November 2008 through 20 November 2008, another similar, but smaller, uptick occurs before the decline in probability levels resume.
We'll see.
Labels: recession forecast
Welcome to this double-bonus edition of On the Moneyed Midways, where we make up for missing last week's edition by doubling down! This double bonus issue covers the weeks ending September 12 and September 19, 2008 and features the posts that we've identified as being the best money or business-related posts found anywhere in the past two week's worth of money or business-related blog carnivals!
To accommodate this double issue, we've also created a new top post category: The Best Post of the Past Two Weeks, Anywhere! We had previously considered naming just one post from each of the last two weeks as The Best Post of the Week, Anywhere!, but with one post standing heads and shoulders above all the hundreds of posts we reviewed, the new title was well justified!
So, which one is it? You'll have to scroll down for the answer to that question, not to mention the rest of the best posts from the last two weeks' worth of business and mone-related blog carnivals....
| On the Moneyed Midways for September 12 and 19, 2008 | |||
|---|---|---|---|
| Carnival | Post | Blog | Comments |
| Carnival of Debt Reduction | Will Creating a Repayment Plan With Your Credit Card Company Hurt Your Credit Score? | Ask Mr. Credit Card | How might setting up a credit card repayment plan affect your credit rating? Mr. Credit Card provides the answer! |
| Carnival of Personal Finance | Over Contributing to Your 401(k) | Money and Such | If you've changed jobs during the course of the year, you may be at risk of putting too much money into 401(k) accounts. Shadox provides a checklist to help you avoid the bureaucratic hassle of having to fix the problem after the fact! |
| Carnival of Personal Finance | How Having a Company Can Make More Money Through Tax Management | The Financial Blogger | Setting up your own business is one of the smartest things you can do to lower your tax bill. The Financial Blogger runs the numbers for Canada, which he believes to be one of the best countries in the world in which to launch a start-up. |
| Festival of Frugality | We Are Going to Cut Our Expenses in Half | Early Retirement Extreme | Jacob has a plan to free up almost $1000 per month - by buying an RV and shedding that fixed structure rent payment! |
| Festival of Frugality | How to Cut a Little Boy's Hair | Almost Frugal | Have you ever thought about saving money by cutting your kids' hair? Oddly enough, Kelly's instructions don't involve any sort of bowl…. |
| Carnival of Real Estate | How Much Would You Pay for Prime Real Estate? | Digerati Life | Would you pay $1000 per square foot? The Silicon Valley Blogger finds incredibly tiny condos in San Francisco and parking places in New York City carry some premium prices! |
| Carnival of Real Estate | Gambling at the Foreclosure Auction: High Stakes | Bigger Pockets | Jim Watkins shares the story of a client who thought they had scored the deal of a lifetime in buying a foreclosure property at auction. It turned out to be the most expensive mistake of the client's life. The Best Post of the Past Two Weeks, Anywhere! |
| Carnival of Money Stories | My Kids Tell Me Why We Pay Taxes | Free Money Finance | FMF's kids were watching TV while a presidential candidate's commercial came on, which launched a priceless discussion of taxes! Absolutely essential reading! |
| Carnival of Money Stories | Living on $34.01 a Week | Money Ning | With his wife away, Money Ning was finally able to test drive the most frugal lifestyle he's ever dared to attempt. |
| Investing Carnival | The Stock Market Improves Before the Economy | Disciplined Approach to Investing | David Templeton turns to the archives to find that stocks lead the economy by roughly five months after hitting bottom. |
| Festival of Stocks | Buy an Investment Property or Dividend Yielding Stocks | Money Ning | Money Ning works through whether it makes more sense to invest in a rental property or in the stock of cigarette manufacturer Altria (MO). Absolutely essential reading! |
| Festival of Stocks | Richard Russell: Sage of the Dow Also Confused | Trader's Narrative | Babak takes issue with Dow Theory expert Richard Russell's predictions, arguing that rather than turning 180 degrees in such short order, it might just be better to admit that you don't know which way the market is turning. |
| Money Hacks Carnival | Hassle-Free Oven Cleaning | Miss Thrifty | Can cooked-on brown grease stains come off with just a mixture of water and baking soda? Miss Thrifty provides the answer! |
Previous Editions
- OMM's Running Index for 2008
- OMM's Running Index for 2007
- The Best Blogs Found in 2006 (and our full 2006 index)!
Labels: carnival
Update 30 October 2008:
We hate to do it, but thanks to new information, this post is fully obsolete!
At a minimum, 2008 Democratic Party presidential nominee and current Senator Barack Obama (D-IL) paid $360,738 more than his house in Chicago was worth in 2005. At a maximum, he overpaid by as much as $468,502 for the property where his family now resides.
We base these figures on the results we obtained using the same analytical method we developed to determine that 2008 Democratic Party vice-presidential nominee Senator Joe Biden (D-DE) did not unduly profit from the sale of his previous home in 1996 to an executive with his primary corporate benefactor, nor did Senator Biden unduly benefit in purchasing the property where he currently resides from a political campaign contributor.
That method utilizes regional housing appreciation data from the Office of Federal Housing Enterprise Oversight (OFHEO) to project either the future or past value of a property based upon actual sale data and comparisons to the recorded sale prices of similar properties, or ideally, the recorded sale prices of the same property. Using this method, we can establish whether or not the sale price of a property in question is supported by the change in valuations of other properties in the area at any point in time for which data on the rate of appreciation on real estate exists.
Digging Into History
We began our process by first looking at the purchase of the Kenwood, Illinois properties that were involved in Senator Obama's by their previous owners, from whom he purchased his home, Dr. Frederic Wondisford and Dr. Sally Radovick. The couple purchased both the home and the adjacent property, perhaps now better known as the "Rezko Lot," for their family in 2000, with both properties closing in late August in advance of their beginning new jobs with the University of Chicago's University Medical School in September 2000. Frederic Wondisford was appointed to the position of Professor in Medicine and Chief of the Endocrinology Section at the University Medical Center, while Sally Radovick assumed her new role as Professor in Pediatrics and Section Chief of Pediatric Endocrinology at the University Hospitals. Both are now working at Johns Hopkins in Baltimore, Maryland. We're unable to establish precisely when Dr. Wondisford began his current position there in 2005 (a job offer from Johns Hopkins precipitated the house sale in January 2005), however Dr. Radovick began her current position in December 2006.
In the "very small world" category, we should note that Barack Obama's wife, Michelle, has worked for the University of Chicago Hospitals since 2002. At the time of the real estate transactions, she was serving as the University Hospital's executive director for community affairs. In May 2005, she was promoted to be Vice President for Community and External Affairs.
The Chicago Tribune's online public record database of real estate transactions in Cook County, Illinois indicates that Frederic Wondisford closed on the property with the 6,400 square foot Georgian-style home where the Obama family now lives (5046 S Greenwood Ave) on 25 August 2000 for a price of $825,000, purchasing the property from Alvin Foreman. Dr. Wondisford had closed on the "Rezko Lot" (5048 S Greenwood Ave) two days earlier, completing the purchase of the property from Leonard Budsock for $415,000.
In using the Chicago Tribune's real estate records database, we found that it was a bit touchy in that it would not return data if the selected date range was too narrow. We found the recorded Wondisford' transactions by searching between 08/01/2000 and 10/01/2000 for the 60615 zip code and paging through the results. This screen cap shows the 08/23/2000 transaction (Marker B) for what would later become known as the "Rezko Lot", while this screen cap shows the 08/25/2000 transaction (Marker L) for the 6,400 square foot house.
Bloomberg's Timothy J. Burger described Obama's bidding for the house in January 2005:
The Obamas submitted three bids: $1.3 million on Jan. 15, 2005; $1.5 million on Jan. 21; and $1.65 million on Jan. 23, according to a copy of the sale contract shown to Bloomberg News.
The terms of the sale contract specified that the closing date for the sale would occur on 15 June 2005, which coincides with summer vacation for Chicago's schools. We'll use this date as the point in time against which to project our valuation of the properties involved in Senator Obama's purchase of his current home.
Rates of Property Price Appreciation
Since we now have the property prices against which to compare our projected valuations, we next extracted the OFHEO's annualized rates of appreciation for real estate in Chicago for each quarter from 1976Q3 to 2008Q2. We've summarized that data in the chart below for the period from 2000Q3 through 2008Q2, as this period spans the transactions in question:
It occurred to us at this point that these rates of housing appreciation would represent the average rates at which real estate prices changed in Chicago during this period. Since Chicago is large enough to feature local hot and cold spots within its total real estate market, it made sense to attempt to establish if the neighborhood in which these properties are might carry a premium rate of appreciation, on top of the Chicago real estate market average.
For that data, we turned to NeighborhoodScout.com. The properties both fall in the south edge of the area identified as the Woodlawn Ave/49th St neighborhood, in which properties have appreciated at an annualized rate of 3.59% since 1990, well below the average for Chicago.
Because the properties lie at the south edge of this neighborhood, we considered that the price of properties in this zone might more closely follow the appreciation rate of the neighborhood to the south, the 52nd St./Greenwood Ave. neighborhood. Since 1990, that neighborhood featured an average annualized rate of appreciation of 12.16%.
Scanning down that page, we find that the site provides Chicago's city-wide rates of appreciation for a variety of time periods. Since the 5-year datapoint falls into the middle of the period of time in which we're looking at real estate transactions, we used its annualized rate of appreciation of 10.18% as being applicable. Taking the 12.16% rate and subtracting the 10.18% from it gives us an approximate neighborhood premium of 2.0%, which we'll add on top of the base rate for each quarter for the entire city of Chicago.
That's a half percentage point higher than the similar 1990 average annualized rate of appreciation for Chicago real estate, so this figure will likely overestimate the true rate of appreciation for the properties when added to Chicago's average base rate of property price appreciation.
We next created a tool to use Chicago's average quarterly housing rates of appreciation abd the neighborhood premium factor to allow us to project the value of real estate property in Chicago for any period of time from 1976Q3 to 2008Q2. To use the tool, just enter the sale price for the property and it's applicable date, the date for which you wish to project the value of the real estate and finally, the neighborhood premium. We've entered a neighborhood premium of 0.0% as a default value, so the tool will project the valuation for properties based on Chicago's average rates of property price appreciation.
The following chart illustrates how our method would project the value of Obama's home given the starting point of when the Wondisfords originally purchased the house, showing both the average rate of appreciation for Chicago and our 2.0% neighborhood "premium" added to Chicago's property price appreciation rate:
In using the tool, we find that with a 2.0% rate of appreciation, Obama's first bid of $1.3 million for the house is very reasonable, less than $2000 away from our projected valuation. But to get to Barack Obama's final bid and purchase price of $1.65 million, the neighborhood property premium would need to be set to roughly 7.85%. That would be 7.85% on top of the average annualized rate of property price appreciation in Chicago during that period of 7.85%, for a combined compound annualized growth rate of 15.7%.
It would then appear that the Wondisfords doubled their money on the property in the 4.75 years that they owned it. A phenomenal rate of return that well outpaces the average seen in all the surrounding properties.
The question is why is that the case with the house that Obama bought?
A Fixer Upper?
As we saw with Senator Biden's previous home, major renovations over the history of his ownership help fill the gap in explaining why the historic property grew more than six-fold in price from when he bought it for $185,000 in 1975 to when he sold it for $1.2 million in 1996.
Could major renovations explain the gap we observe in what Obama paid for the home and the valuation we project for it based on its previous sale price?
The answer is no. Here's the explanation in Senator Obama's own words, which he provided in discussing the circumstances surrounding his interaction with Tony Rezko in purchasing the property, as recorded by the Chicago Sun-Times on 15 March 2008 (emphasis ours):
... Michelle and I talk about it, and we decide is there somebody that we should - there are some people we should talk to who know more about the real estate market in Kenwood - because we had never purchased a house before. Tony was a developer in that area, was active in that area, owned lots in that area and had developed in that area. So, I don't recall whether I called him, whether we saw each other, whether it was something that was already scheduled, I don't remember the exact circumstances. But I did bring to his attention, we are looking at this house. We are interested in it. I'd love for us to give your opinion on it.
He got the address, and I think he may have looked at it separate and apart from me when he was in the neighborhood. . . . The upshot is that we found out the person who had renovated the house six years earlier was also the person who had an option on the lot, and that person had worked for Rezko, and so he knew him and was an active developer.
With Senator Obama shopping for the home in January 2005, "six years earlier" would place the major renovation work the house had undergone into 1998 and 1999, long before the Wondisfords purchased the properties. As such, the $825,000 that Dr. Wondisford paid for the house in 2000 would fully incorporate the value of the renovation.
Either Senator Obama is phenomenally wrong on when the renovation work occurred or he was taken to the cleaners in what could only be described as phenomenally poor judgment over his own fiscal matters. Alternatively, there may be an as yet unknown explanation for the discrepancy between what Barack Obama paid for his house and our projection of its value given what we know of its sale history and the rate of growth in Chicago's real estate market.
The Rezko Lot
By contrast, what we know of the transactions involving the "Rezko Lot" demonstrates the strength of our analytical method. We've already established that the property closed on 25 August 2000 for $415,000. As a coinciding part of Obama's transaction to purchase the house, the lot was purchased in Tony Rezko's wife's name, with the transaction closing on 15 June 2005 for $625,000. Here's Bloomberg's Timothy J. Burger description of the subsequent history of the "Rezko Lot":
In January 2006, Rita Rezko sold the Obamas one-sixth of the lot, for $104,500, to expand their yard. She later sold the rest of the land to Michael Sreenan, who said by e-mail yesterday that he bought it in late December 2006 for $575,000.
Using those figures, we did the math to project the value of the property both forwards and backwards in time from the respective transaction dates, taking the valuations for the pieces, as they were later sold off, to compare to the whole. Our results are summarized in the following chart:
Here, we see that the valuation of the chart closely follows our projected valuations. What's more, we find that the property does not show any evidence of any neighborhood premium beyond that we might expect for the average Chicago real estate property.
The contrast between the recorded sale prices of the "Rezko Lot" and our projected valuations and what we observe in the valuation of Barack Obama's house with what he paid for it is simply startling. More unsettling is the lack of a visible neighborhood premium in the rate of appreciation for the Rezko lot. With the lot being immediately adjacent to the lot with the 6,400 square foot house purchased by Senator Obama, and nearer the south edge of the neighborhood, the valuation of the lot should reflect a similar premium rate of appreciation. That it did not, nor appears to ever have, provides further indication that Senator Obama's paid far more for his home than he should have.
Without that premium rate of appreciation on the "Rezko Lot," we're more inclined to accept the higher figure of $468,502 as the amount by which Barack Obama overpaid for his property. At 28.4% of his apparently inflated purchase price, that's one hell of a markup. Without evidence justifying that high figure, the house that Obama bought and especially the price he paid for it are proof of phenomenally poor judgment involving the largest financial transaction of his life.
Previously on Political Calculations
- Barack Obama's Big Mac Attack
Our tongue-in-cheek look into the negotiations and transactions surrounding Senator Obama's purchase of his current home - kind of a fun introduction to the relative valuations involved, all in the context of a trip to McDonald's!
- Does Senator Joe Biden Have a House Problem? (Part 1)
We looked into suggestions that Senator Biden unduly benefited from the purchase of the property where he built his current home. We introduced our analytical method for projecting the value of real estate properties in this post.
- Does Senator Joe Biden Have a House Problem? (Part 2)
Here, we looked into long-standing allegations that have dogged Senator Biden regarding whether or not he unduly profited from the sale of his previous home in 1996. We originally couldn't make a determination, but thanks to one of our intrepid readers, we were able to find that he did not. Also, where we first built a tool to do the math!
Labels: economics, politics, real estate
We're going to begin this post by having some fun at 2008 Democratic Party presidential nominee Barack Obama's expense. Just imagine, if you would, that Senator Obama has walked into a neighborhood McDonald's with plans to buy a Big Mac(TM).
He looks around and sees that his fellow diners are all enjoying their own Big Macs, but before he orders, he looks up and sees that McDonald's has a new menu item: the Big Mac with Arugula.
Being a fan of arugula, the leafy salad green with a bit of a peppery flavor, which is being offered along with the two all-beef patties, special sauce, lettuce, cheese, pickles, and onions on a sesame seed bun that most Big Mac connoisseurs would find familiar, the Senator decides that he will order one, figuring that it would only cost just a bit more than a regular Big Mac.
That seems pretty reasonable. After all, it's just a regular Big Mac with just a little bit of arugula added to it, which should add some, but not a lot, to the cost that a reasonable consumer ought to be willing to pay.
And that's where Barack Obama's problems begin.
The Economist indicates that in mid-2008, the price of a regular Big Mac at any neighborhood McDonald's in the United States is $3.57 (USD). For the sake of our story, let's say that $3.57 is indeed the price of a regular Big Mac, but that the listed price of the Big Mac with Arugula is $5.38, which turns out to be quite a bit outside of the Senator's affordable price range for this kind of item.
Here's where the Senator makes his first mistake: instead of either walking away and going somewhere else for his meal, or selecting a regular Big Mac or some other menu item that he could afford at that neighborhood McDonald's, he decides that he *must* have the Big Mac with Arugula!
So he tries negotiating with the cashier. He first offers a price that seems pretty reasonable for what's pretty much just a regular Big Mac with just a little bit of arugula added to it: $3.60.
No sale. Not discouraged, Senator Obama ups his offer to $4.14. Surely that handsome amount will bring the mouth-watering goodness that is the Big Mac with Arugula into his possession!
But the cashier kindly declines. Talking with them, Senator Obama finds out that they might be willing to come down from the menu price for the Big Mac with Arugula from $5.38 to $4.55, but only if he agrees to also purchase an order of Large French Fries at their regular menu price of $1.79.
Unfortunately, this is where Barack Obama repeats his first mistake and makes his next mistake. Unable to resist the siren's call of the idea of feasting upon what must surely be the most supreme Happy Meal(TM) of all time and realizing that he would not be able to come up with enough money on his own to buy both the Big Mac with Arugula and Large French Fries, which are well outside his pay grade, he gets on his cell phone and asks his friend and political associate Tony Rezko to come to the neighborhood McDonald's.
Arriving with his wife, Tony Rezko quickly discovers how anxious Senator Obama is to buy the Big Mac with Arugula, as he now believes that this is the only menu item that could ever satisfy his hunger. In the spirit of the friendliness that characterizes the countless unnamed favors done for past and future considerations in Chicago, Tony Rezko's wife spontaneously agrees to buy the Large French Fries, so Senator Obama can buy his Big Mac with Arugula for $4.55!
Later on, Senator Obama realizes that he would like some french fries too and scrounges up some change to buy 1/6 of Mrs. Rezko's french fries. Mrs. Rezko eventually sells the remaining french fries to another customer at the neighborhood McDonald's while Tony Rezko ends up being convicted and serving time for unrelated considerations.
Which brings us to Senator Obama's newest problem with this transaction. It seems that all people can talk about is how much he was able to save by having Mrs. Rezko buy the Large French Fries as part of the deal. But has anybody else noticed that $4.55 was way too much to pay for a regular Big Mac with just a bit of arugula added to it in the first place? Especially in Chicago? Well before the big bubble in the arugula market?
We'll confirm that for you tomorrow. In the meantime, if you're considering entering into a similar transaction, we believe you're better off opting for the regular Big Mac!
Elsewhere on Political Calculations
- The House That Obama Bought
Our follow up to this post, in which we show that at a minimum, 2008 Democratic Party presidential nominee and current Senator Barack Obama (D-IL) paid $360,738 more than his house in Chicago was worth in 2005. At a maximum, he overpaid by as much as $468,502 for the property where his family now resides.
- Does Senator Joe Biden Have a House Problem? (Part 1)
We looked into suggestions that Senator Biden unduly benefited from the purchase of the property where he built his current home. We introduced our analytical method for projecting the value of real estate properties in this post.
- Does Senator Joe Biden Have a House Problem? (Part 2)
Here, we looked into long-standing allegations that have dogged Senator Biden regarding whether or not he unduly profited from the sale of his previous home in 1996. We originally couldn't make a determination, but thanks to one of our intrepid readers, we were able to find that he did not. Also, where we first built a tool to do the math!
Labels: personal finance, politics, real estate
Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:
ironman at politicalcalculations
Thanks in advance!
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