Category: Economics & Business

Absolutely nothing, say it again. At the Freakonomics Blog, Stephen Dubner quotes from a paper by an attorney for the federal government, Mark S. Nadel:

While real estate brokers have long set their fee as a straight percentage of a home’s sale price, this formula is an anomaly and a primary reason why such fees may be inflated by more than $30 billion annually. Although competitive pressures ordinarily produce a fee structure reflecting costs, real estate broker commissions are strangely unrelated to either the quantity or quality of the service rendered or even to the value provided. Rather, this fee has been based solely on the price of the home. (It is as if tax preparers set their fee as a flat percentage of a client’s gross income, irrespective of how difficult the return was to prepare or how much their efforts saved the taxpayer). Oddly, not only is there no evidence that it is any more costly to sell higher-priced homes than median-priced properties, but it is possible that the opposite may be true! Furthermore, the straight percentage fee formula creates little incentive for real estate agents to provide home buyers or sellers with additional value.

Wal-Mart, the nation’s largest retailer, said it would begin selling generic versions of widely prescribed drugs to its workers and customers at sharply reduced prices, a move that could force rival pharmacies to do the same.

The giant discount chain, which has used its size to knock down the costs of toys, clothing and groceries, will sell 300 generic drugs for as low as $4 for a one-month supply. On average, generic drugs cost between $10 and $30 for a 30-day prescription.

Wal-Mart will test the lower prices at 65 stores in the Tampa, Fla., area and, depending on consumer response, is likely to expand the program next year.

— The New York Times

The warehouse retail giant in its 2006 fiscal year, which just ended, sold more than 1.5 million TVs and $300 million worth of digital cameras on end-cap displays, said CEO Jim Sinegal. It also filled 26.3 million prescriptions, sold 2 million pairs of glasses, printed more than a billion photos and served up 63 million hot dog and soda combinations. The combo sells for $1.50, which has been the same price for 18 years.

“Forty-seven million people have Costco membership cards …

… It also sold $805 million worth of wine, a figure that included $390 million of fine wines.

“We are the largest wine merchant in the country,” Sinegal said.

Overall revenue for the chain for the first 52 weeks of fiscal 2006 (which ended Sept. 3) came to $57.8 billion, although the company cut the earnings forecast for the entire year. The average sales per store come to more than $125 million a year. The chain now has 487 stores and an online operation that accounted for $880 million in revenue the last fiscal year. …

The retailer, which is now fifth in the U.S. and seventh worldwide, in some ways thrives on surprise. In the public mind, the chain is associated with blue-collar or middle-class shoppers. In reality, the average Costco shopper in the U.S. has an average annual income of $72,000, higher than the $59,600 average for the nation as a whole. Over 50 percent of the women and men in the top 10 percent income bracket shop at the chain.

— CNET News.com

NewMexiKen just goes to Costco for the hot dog and soda.

Two excerpts from an article about Nightmare Mortgages from Business Week:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

Most of the pain will be born by ordinary people. And it’s already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down — meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double. “The number of houses for sale is tripling in some markets, so people are not going to get out of their debt,” says the Ford Foundation’s McCarthy. “A lot are going to walk.”

Jennifer and Eric Hinz of Somerset, Wis., are feeling the squeeze. They refinanced out of a 5.25% fixed-rate, 30-year loan in June, 2005, and into an option ARM with a 1% teaser rate from Indymac Bank. The $1,483 payment for their original mortgage dropped to as low as $747 with the new option ARM. They say they had no idea when they signed up, however, that the low payment adds $600 in deferred interest to their balance every month. Worse, they thought the 1% would last three years, but they’re already paying 7.68%. “What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we’re getting now?” says Eric, 36, who works in commercial construction. Refinancing is out because they can’t afford the $15,000 or so in fees. “I’m paying more, and the interest is just going up and up and up,” says Jennifer, 34, a stay-at-home mom. “I feel like we got totally screwed.” They say their mortgage broker has stopped returning their phone calls. Indymac declined to comment on the loan’s specifics.

Chart from Detroit Free Press.

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s. UBS, the investment bank, recently described the current period as —the golden era of profitability.”

Real Wages Fail to Match a Rise in Productivity – New York Times

As he always seems to do, Malcolm Gladwell has written a provocative piece in The New Yorker. The current article discusses the burdens that worker pensions and health coverage have placed (particularly) on America’s older heavy industries, for example, GM. He notes that in most other countries these matters are centrally funded (i.e., government) and businesses are better able to rise or fall on their own merits without regard to the age of their workforce. It’s well worth reading.

Gladwell discusses some of the reaction to the article and elaborates here and here.

Despite denials by those involved, speculation persists that Candy Spelling, the widow of the recently deceased TV mogul Aaron Spelling, is planning to place the family’s famous 56,500-square-foot Holmby Hills mansion on the market. The price for the 45-room, six-acre property? According to one gossip Web site: $150 million.

Los Angeles Times

In case you want to run some comps, that’s about $2,650 per square foot (discounting the land value). Or more than $3 million a room.

Click to see the aerial view.

From Fortune Magazine:

[Warren] Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world’s largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett’s (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).

At the current Berkshire stock value, Buffet, 75, plans to give away $37 billion, the largest philanthropic gift ever. In reality it may prove to be even more, as he is planning to give 5% of his current holdings each year — the total cash value of his holdings could well appreciate more than that annually.

If you’re 18 today and saved the same $3 a day, by the time you’re 65, with the same 6% assumption, we’re up to $264,000.

Of course, if you’re 18, you’re thinking you’ll never be 65. But actually the chances are that you will be – with an an extra $264,000 after tax in today’s dollars in your Roth IRA, for being a bit frugal.

It’s cheating – but fun – to assume more than 6% above inflation, but it’s not impossible, either. So if we go wild and assume 7% instead, the $264,000 jumps to $360,000.

And remember, this is still just on $3. You could double that if you found a second way to save $3 a day – say by buying one fewer gallon of gas a day by (in the short run) driving more carefully and (in the long run) switching to a car that got better mileage.

Andrew Tobias

NEW YORK (Reuters) – A full-time stay-at-home mother would earn $134,121 a year if paid for all her work, an amount similar to a top U.S. ad executive, a marketing director or a judge, according to a study released Wednesday.

A mother who works outside the home would earn an extra $85,876 annually on top of her actual wages for the work she does at home, according to the study by Waltham, Massachusetts-based compensation experts Salary.com.

To reach the projected pay figures, the survey calculated the earning power of the 10 jobs respondents said most closely comprise a mother’s role — housekeeper, day-care teacher, cook, computer operator, laundry machine operator, janitor, facilities manager, van driver, chief executive and psychologist.

Yahoo! News

According to a story in today’s New York Times, it costs 1.4¢ to make a penny (.8¢ for the metal, mostly zinc, and .6¢ for the production). The mint is producing pennies this year at an annual rate of 9 billion.

So, to put it another way, the taxpayers are going to take a $36 million loss on pennies.

Why not eliminate the penny (and the nickel) and round everything to the tenth of a dollar?

Except for gasoline, of course, which should still be priced in tenths of a cent.

From an article in The New York Times:

SANTA MARIA, Calif. — Like many American teenagers, Julissa Vargas, 17, has a minimum-wage job in the fast-food industry — but hers has an unusual geographic reach.

“Would you like your Coke and orange juice medium or large?” Ms. Vargas said into her headset to an unseen woman who was ordering breakfast from a drive-through line. She did not neglect the small details —”You Must Ask for Condiments,” a sign next to her computer terminal instructs — and wished the woman a wonderful day.

What made the $12.08 transaction remarkable was that the customer was not just outside Ms. Vargas’s workplace here on California’s central coast. She was at a McDonald’s in Honolulu. And within a two-minute span Ms. Vargas had also taken orders from drive-through windows in Gulfport, Miss., and Gillette, Wyo.

Ms. Vargas works not in a restaurant but in a busy call center in this town, 150 miles from Los Angeles. She and as many as 35 others take orders remotely from 40 McDonald’s outlets around the country. The orders are then sent back to the restaurants by Internet, to be filled a few yards from where they were placed.

The people behind this setup expect it to save just a few seconds on each order. But that can add up to extra sales over the course of a busy day at the drive-through.

The internet changes everything.

A thoughtful, worthwhile piece today from FunctionalAmbivalent on whether intellectual property law is going too far. An excerpt:

The purpose of patent protection, as laid-out in the Constitution, is promoting progress, not stifling it. By allowing companies to patent basic ideas like one-click ordering — rather than the underlying technology that makes one-click possible — we’re guaranteeing that improvements will reach consumers more slowly. It’s not, after all, possible for Amazon’s competitors to come up with a “zero click” technology.

There may not be a better example of how ridiculous this is getting than Netflix’ suit against Blockbuster.

Meet the typical American family. It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can’t manage to pay off a $2,200 credit card balance.

That is the portrait of the median American household as painted by the Federal Reserve Board’s Survey of Consumer Finances.

The Washington Post

The new (top) and former (bottom) ten-dollar bill.

At the Freakonomics Blog, Steven Levitt talks a little about his project to study cheating in online poker. NewMexiKen doesn’t gamble but I have grown somewhat addicted to computer poker (myself against the software). I found Leavitt’s closing paragraphs amusing.

Because of these two projects on poker, I figured I better play a little myself to understand the game better. I was surprised how much fun it was. I was a big loser initially, even in low stakes games. Now I’m still a loser, but not as much, and at much higher stakes. I’ve even had the honor (??) of losing to the guys who just got caught cheating.

But the best news is that my wife Jeannette quickly picked up the game and now does not consider her day complete if she can’t slip in a few sit-n-go no limit hold ’em tournaments after the kids go to sleep. I married well.

Earlier today NewMexiKen read a report by an individual who — several years ago — essentially refused a Best Buy Receipt Check. He was challenged repeatedly to the point of having his car blocked from leaving. His report led to an apology from Best Buy and correspondence from others interested in the issue.

According to the author, a store has no legal right to check your receipt. Once you pay for an item it is yours and you may leave the premises. Any attempt to detain you can only be based on an accusation of shoplifting. And, of course, a false accusation of shoplifting is cause for a tort. (NewMexiKen wonders whether a membership store such as Costco has a different legal standing to check receipts. I was pursued at Costco once for blowing off the receipt check.)

I’ve been kind of bored lately and I have business to transact at Best Buy. I think I’ll experiment.

More fun than a computer game. Type in an address and in a few seconds get an aerial view of the neighborhood with an estimate of the value of the house and that of all its neighbors. One wonders how correct the numbers are, but NewMexiKen was pleasantly surprised. In any case, it’s fascinating.

Zillow.com – Your Edge in Real Estate