Does the MIT transactions based commercial real estate index imply that commercial real estate is at bottom?

I was surfing the MIT CRE web site this afternoon, and the following picture caught my eye:



The MIT index is a hedonic transactions based index based sales from the NCREIF index, and it attempts to find price movements of a "typical" property. The interesting thing is that the Moody's Commercial Property Index is still falling:



So the question is whether the MIT TPI is a leading indicator. My sense is actually that Apartments and Industrial Real Estate will come out of this thing earlier than other generic types, but I am not sure that anything is really at bottom yet. In particular, the MIT folks are showing that demand and supply are coming closer to lining up, but there is still excess supply nationally in the industrial, office and retail sectors.

The problem with Goldman bonuses

Beyond the generic problem that bonuses are usually based on an un-risk-adjusted IRR, the problem with bonus for banks in general, and Goldman in particular, is that the government is backing short-term bank borrowing, and so banks can borrow at very depressed rates and make a lot of money on spreads. This seems more like playing the government than playing the market.

Fighting the last war

At the ULI meetings, I am hearing that banks are not willing to repeat their behavior in the last down market (the early 1990s): they are afraid that if they sell their assets--commercial real estate loans--at a discount, they will miss out on upside opportunity. Instead, they are "extending and pretending," in the hope that values will rebound to levels above mortgage balances. I overheard one person say, "cap rates have to go back down again. right?"

Not necessarily. This paper by Phillip Connor and Yougo Lang shows that cap rates tend to stay in the eight range over the long term--to think they will return to the fives is almost certainly unrealistic. Even if net operating income had stayed constant--and it has fallen--the increase in cap rates from 5 to 8 implies a 37.5 percent reduction in value. It is going to be a long time before loans with LTVs at origination in excess of 75 percent will be right-side-up again.

We may be in bad shape fiscally, but at least we're happy (h/t Richard Florida)

According to Gallup, six of the country's 10 happiest congressional districts are in California. The happiest, the California 14th, is between San Francisco and Silicon Valley.

I live in the 49th happiest district; the least happy is the Kentucky 5th, in Appalachia. Makes sense.

Never thought I would live to see the day...

..that a politician would present a powerpoint that included a slide on the "lemons problem."

The Vice-President of Taiwan, Vincent Siew, was discussing the problem of trying to get that country's financial institutions to disgorge their bad assets. Amazing. No wonder it is such an impressive place.

Taipei has among the best public transit systems in the world

The MRT (heavy rail) system is fast, comprehensive and clean. It is busy in the middle of the day, suggesting feasibility.



The buses are very good too, and cost only about $0.45 US to ride. There are also lots of reasonably priced taxis. Of course, the fact that Taipei is among the world's densest cities helps make this all work.

Ten Facts about California

For pictures, go here. Thanks to Matt Moore for research assistance.

(1) Family of four median income in California ranks 15th among the states. Regardless of how income is measured, in California it is somewhat above average, but not extraordinarily so.

(2) Among the 50 states, California ranks 4th in per capita spending; add DC, and it ranks 5th.

(3) Per capita spending on K-12 education is about average.

(4) California's high school graduation rate is 10th from the bottom.

(5) This can be explained partially by the fact that California leads the nation in foreign born population.

(6) But even after controlling for foreign born population, educational attainment in California is average.

(7) California's incarceration rate is a bit above average, but not extraordinary by US standards.

(8) California relies less on property tax revenue to finance its government than the average state. Economists generally find the property tax to be less distortionary and unstable than other types of taxes.

(9) in 2005-06 (the last year for which I have data), California had more net business creation than any other state. After scaling for size, California's business creation was comparable to Texas'.

(10) California relies disproportionately on Information Technology and Professional and Technical Services for employment. These are high paying jobs that require a well educated labor force.

Is the Tax Credit + FHA a toxic combination?

It would be churlish not to think today's strong existing home numbers were good. But there is an aspect of it that worries me.

The tax credit is $8000. FHA loans require 3.5 percent down payments. Consider the position of an unscrupulous investor in housing. He gets someone to front for him as a first time buyer on a $200,000 house. He puts $7,000 down, and then collects the $8,000 credit. He pays the front person a commission of $500. So the investor gets $500 plus the house. If the house goes up in value, he sells; if not, he walks.

Of course, we have no recent experience with this kind of behavior....

I guest post at Paul Romer's charter city blog

The post begins:

Hong Kong, Singapore and Korea experienced great economic success: all have per capita GDP that is at least seven times higher than in 1960 (see Penn World Table for more information). All three economies also came to be relatively well housed. While we cannot draw a uniform lesson from their experiences, it is worthwhile to examine each case for clues about successful housing development...

Why government spending makes people angry

I was listening in to some proposals for building Section 42 Low Income Housing Tax Credit housing the other day. I heard three proposals: the construction cost per unit being proposed was between 400K to 500k.

It is expensive to build in LA, but downtown has luxury condos selling for less than 400K right now. The median price of a house in Southern California is around $275,000. I am all for providing poor people with good housing, but we could do it a lot more cheaply by buying existing houses and renting them out then building new units whose prices are beyond what a median income household in LA could ever expect to afford.

The reason this sort of thing bothers me is because I do think there is a role for government to do things, such as provide education, health care and networks (roads, sewers, etc.). But for this to happen, government must demonstrate that it spends money well. Building "low-income" housing for $400K a unit does not inspire confidence.