Wednesday, February 17, 2016

Housing now

From HUD's The Edge.

This past fall, the state of housing reached something approaching normalcy in some dimensions (new construction and price) but continued to worsen in others (rental affordability and the homeownership gap between underrepresented minorities and others).

When President Obama took office in January 2009, residential construction in the United States was at its lowest level since World War II; only 490,000 units were built that month (on a seasonally adjusted annualized basis). By November 2015, that total had risen to nearly 1.2 million units — an increase of 139 percent over the course of the administration. This total has still not, however, reached the average level of new construction over the past 55 years of 1.4 million units.

The below normal (if substantially improving) levels of construction explain why housing prices have recovered substantially from their troughs. Prices in all 20 Case-Shiller cities are well above their troughs, in part because the paucity of construction has led to falling vacancy rates nearly everywhere. In two cities, Dallas and Denver, prices are at all-time highs, and Portland, San Francisco, and Boston have recovered all of their losses. A particularly noteworthy fact is that prices have recovered while the homeownership rate has declined. The price story is an absence of supply story.

Although the demand for owner housing has been stagnant, the demand for rental housing has soared, pushing up rents even in the face of strong multifamily construction. Rental demand has risen sharply for several reasons.

First the marriage rate in the United States has been falling steadily. According to Pew, 65 percent of the “greatest generation” were married by the age of 35; among millennials, the marriage rate is only 26 percent. After taking into account age, education, race, ethnicity, and geography, married couples are 22 percentage points more likely to be owners than singles. If millennials continue to postpone (or avoid) marriage, the ownership rate will continue to fall.

Second, racial and ethnic minorities, again after taking into account the standard list of demographic and economic characteristics, have lower ownership rates than non-Hispanic whites. The population of African Americans, Asians, and Hispanics is growing much faster than the population of non-Hispanic whites. African Americans, for instance, have a homeownership rate that is 17 percentage points lower after controls than it is for non-Hispanic whites. If homeownership rates among the groups whose population is growing fastest continue to lag, the pressure on the rental market will become even greater.

The reasons for lagging ownership among minorities are doubtless varied and complex, but part of the gap almost certainly results from continued discrimination in housing markets and issues with access to credit. Turner and Yinger have demonstrated the continued existence of discrimination, but we will say a few words about access to credit here.

One group of Americans, now very large, does not have access to mortgage credit at the moment: those whose homes went into foreclosure during the global financial crisis. RealtyTrac puts the number of homeowners who were foreclosed upon at [nearly 7] million, or about 5.5 percent of U.S. households. These households overwhelmingly became rental households (some doubled up with other families or moved back to their parents’ homes), and this phenomenon alone put sudden pressure on rental markets.

They also became ineligible for mortgage debt for at least 3 years (the number of years the Federal Housing Administration requires to have followed foreclosure for borrowers to become eligible for a loan) to 7 years (the minimum number of years post-foreclosure government-sponsored enterprises require before issuing a loan). Many of these potential borrowers are about to become eligible again for mortgages, and should thus relieve pressure a bit from rental markets. But many, having been traumatized by the homeowning experience, might decide to remain renters. As it happens, minorities bore a disproportionate share of the foreclosure burden.

The other access to credit issue involves access to wealth and credit scoring. Many researchers have shown that children’s wealth is highly correlated with parents’ wealth. African Americans, who as a group were stripped of wealth and who were over generations systematically denied access to credit, have less wealth than non-Hispanic whites even after controlling for income and education. The absence of wealth among older generations means that it is more difficult for younger generations to accumulate downpayments and establish excellent credit scores. This puts generation after generation of minorities at a disadvantage when it comes to owning a home.

The combination of diminishing numbers of married couples, the fallout from the recession, and access to credit issues have pushed rental demand and therefore rents as well. While there are many methods for measuring rental affordability, perhaps the most telling is that in the vast majority of American metropolitan areas, median-income renter households must spend more than 30 percent of their gross income on the median rental unit. Economists like to talk about “choice,” suggesting that people “choose” to live in expensive housing. But both within and across our cities, affordable rental housing is not a choice that is available to the median-income renter.

Tuesday, October 13, 2015

A book that changed my life

"We believe that the confounding of the aggregate with the individual is as dangerous as it is pervasive...."  Page 81.

Sunday, August 16, 2015

Apartments, Energy and Bad Incentives

I am spending this academic year working in Washington working at HUD, so I am renting an apartment here.  When I signed the lease, I understood that I would pay utilities; what I didn't understand, because I did not read the lease carefully enough, is how I would be charged for utilities.

Even though I live in a professionally managed building that has something like 400 units, and even though each unit has its own circuit breaker the units are not metered individually.  Instead, utility costs are allocated on a pro rate basis based on unit square footage and number of residents in the unit.

Since moving into this place, I have been very conscientious about setting the air conditioner at 80 degrees F. before leaving the apartment for the day.  I will do my best to continue to do this, but the fact is, my principal motivation for doing so was thinking that I could reduce the very expensive cost of cooling an apartment in the hot DC summer.

Of course, as one of 400 units, my influence on electricity usage for the complex is small.   There is essentially no financial reason to avoid blasting the AC all day long.  It must be the case that how one consumes air conditioning has a large impact on how much one spends on air conditioning.  In fact, people who like Bikram Yoga could drive their air conditioning costs to nothing.

A Google search on the cost of individual metering implies that the cost of installing meters for electricity would be about $300-$500 per unit.  Summer electricity costs in my unit are about $100 per month, so if price incentives lead to a 10 percent saving, each unit could save about $60 per year on electricity (I am applying the savings to six months).  Beyond this, of course, energy use produces negative externalities, so the social benefit of metering would be greater than the private benefit. This implies the benefits of metering exceed the costs. [If I am completely wrong about either the cost of metering or the savings arising from it, I would be happy to hear about it].

So why don't landlords do this?  The answer might be that they can't get enough extra net rent from tenants to justify paying for metering.  The only private cost they bear is not being able to charge as much rent as they otherwise might.  It might be worth doing serious analysis to determine the social benefits of metering in the context of individual apartments, and whether such metering should consequently be subsidized.


Sunday, April 26, 2015

Is Free Trade Good for Everyone?

Greg Mankiw implies that it is, and that all economists agree that it is.  But it actually isn't.  Who says so?  Economists.

In particular, the workhorse theory of International Trade, the Hecksher-Ohlin Theorem, leads to the Stolper-Samuleson Theorem, which shows that when countries start trading with each other, the relatively abundant factor of production in each country becomes better off, while the relatively scarce factor becomes worse off.   In the US context, this implies that opening up trade will leave capital better off relative to labor, and skilled labor better off relative to unskilled labor.

Does trade increase the total size of economies?  Yes--this is something that economists do agree on. But in the absence of redistribution--something that seems to be anathema to we Americans--more open trade will make low skilled laborers worse off.

In my ideal world, we would pass the Trans-Pacific Partnership (TPP), a potential [quasi]-trade agreement among the US and 11 other countries of the Pacific Rim, and redistribute its bounty such that everyone would be better off.  There is no evidence that our political system would allow this to happen.

Despite all this, I do and will continue to support trade agreements such as the TPP because that there is some evidence that they prevent wars.  Of course, as someone who has had nothing but good fortune in life, it is easy for me to think that the abstract prevention of war is more important than the tangible reduction in other people's already low wages.  

Thursday, March 12, 2015

LA has zoned itself out of the ability to house its residents (h/t Matthew Glesne)

Once upon a time, the zoning in Los Angeles would have allowed for 10 million residents to live within its municipal boundaries.  Greg Morrow, in his UCLA dissertation, "Homeowner Revolution: Democracy, Land Use and the Los Angeles Slow Growth Movement 1965-1992," documents how this was eroded over time:

So LA really did create a moat around itself and pulled up the drawbridge.  For those of us who think the blessings of cities should be shared widely, this is a shame.

Thursday, February 26, 2015

It is hard to feel urban form sometimes.

I have spent a fair amount of time in Sao Paulo over the past 3-4 years, and always thought it sprawled more than LA, because it takes forever to get from one side of the place to the other.  So was I surprised when I went to Google Earth and looked at both of them from the same elevation.

Here is LA:

Now here is SP:

It is far more compact.  Metro LA has about 18 million people; SP has about 20 million. But it takes about 2 hours to get from Santa Clarita in the west to San Bernardino in the east--the distance between the two is 85 miles; it can take four hours to go just 30 kilometers in SP.  Sao Paulo feels much larger to me.

Wednesday, February 18, 2015

Should Finance Departments Pay Pigou Taxes?

The purpose of this paper is to examine why financial sector growth harms real growth. We begin by constructing a model in which financial and real growth interact, and then turn to empirical evidence. In our model, we first show how an exogenous increase in financial sector growth can reduce total factor productivity growth.2 This is a consequence of the fact that financial sector growth benefits disproportionately high collateral/low productivity projects. This mechanism reflects the fact that periods of high financial sector growth often coincide with the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low.  
 Next, we introduce skilled workers who can be hired either by financiers to improve their ability to lend, increasing financial sector growth, or by entrepreneurs to improve their returns (albeit at the cost of lower pledgeability). We then show that when skilled workers work in one sector it generates a negative externality on the other sector. The externality works as follows: financiers who hire skilled workers can lend more to entrepreneurs than those who do not. With more abundant and cheaper funding, entrepreneurs have an incentive to invest in projects with higher pledgeability but lower productivity, reducing their demand for skilled labour. Conversely, entrepreneurs who hire skilled workers invest in high return/low pledgeability projects. As a result, financiers have no incentive to hire skilled workers because the benefit in terms of increased ability to lend is limited since entrepreneurs’ projects feature low pledgeability. This negative externality can lead to multiple equilibria. In the equilibrium where financiers employ the skilled workers, so that the financial sector grows more rapidly, total factor productivity growth is lower than it would be had agents coordinated on the equilibrium where entrepreneurs attract the skilled labour. Looking at welfare, we are able to show that, relative to the social optimum, financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large. 
Maybe the lesson is that finance departments should subsidize physics/chemistry/engineering departments.