Hoffmann once asked Richardson, who has studied the 1956 Suez crisis in depth, to suggest some relevant readings because he was preparing a lecture that dealt with it. “I recommended five books,” she recalls. “And he read all five!—even though the Suez crisis was only a small piece of the lecture. Stanley takes scholarship and teaching very seriously. He reads an extraordinary amount.”
In true European style, he is also happy to ask his students to do the same, and compiled impressively long reading lists for full-year courses like “War,” which had three lectures per week, plus a section. War and Peace could be the assigned text for just one of those lectures. When asked if that was unreasonable, and if an excerpt from Tolstoy’s magnum opus might not suffice, Hoffmann asked, “Which part of War and Peace summarizes the themes?”
Friday, June 29, 2007
Hoffman was among my two very favorite professors in college (my Shakespeare professor, G.B. Evans, was the other) and this article does a nice job of capturing him.
Everyone in my vocation should aspire to be as good as Hoffman, and nearly everyone will fail to do so.
Wednesday, June 27, 2007
Tuesday, June 26, 2007
From today's Washington Post:
When Edward P. Lazear, chairman of the White House Council of Economic Advisers, broached the idea of limiting the popular mortgage tax deduction, he said he quickly dropped it after Cheney told him it would never fly with Congress. "He's a big timesaver for us in that he takes off the table a lot of things he knows aren't going to go anywhere," Lazear said.
Lazear, who is otherwise known as a fierce advocate for his views, said that he may argue a point with Cheney "for 10 minutes or so" but that in the end he is always convinced. "I can't think of a time when I have thought I was right and the vice president was wrong."
Wednesday, June 20, 2007
First is expected growth in prices. Places that are losing population (Detroit, Cleveland) will not see prices go up, because they have excess supply of housing, and will for the foreseable future. They must therefore have igh rent-to-price ratio (or low Price-Earning ratios for housing). Places that are gaining population but have no brakes on development will also not see prices go up, because house prices will not rise above replacement cost. For example, when house prices in Dallas go up a little bit, developers rush in to supply the market until prices fall back to construction cost. The only exception are places like the Park Cities, which have excellent schools that are not easily reproducible. Because prices don't go up in Dallas, the rent-to-price ratio is high.
Conversely, San Francisco and Maui are not replacable, so while they are somewhat volatile, the underlying house price trends are upward. As Gyourko, Sinai and Mayer point out, as people in the upper reaches of the income distribution get richer, they outbid each other for these unusual places: they can be viewed as the Monets of real estate. But these places are unusual.
The other thing that can influence rent-to-price ratios is the tax code. Because mortgage interest is deductible, owning is relatively more valuable in places with high federal and state marginal tax rates (i.e., Cailfornia, New York, New Jersey, Maryland). The large place with the highest combined Federal and State Tax Rate is likely San Jose; that with the lowest is El Paso. Sure enough, rent-to-price ratios in San Jose are very low; in El Paso they are very high.
Saturday, June 16, 2007
Friday, June 15, 2007
Wednesday, June 13, 2007
Saturday, June 09, 2007
The story is of interest to me for its own sake, but also because I brought Francois to Madison when I was Chair of the Real Estate Department there. It was one of the smartest things I ever did.
Tuesday, June 05, 2007
Mera and Renaud (2000) demonstrate that the phrase “Asian Financial Crisis” was misleading. Green’s (2001) review of the book noted:
[Asian Financial Crisis] suggests homogeneity: that “Asia” is one place, and that the financial crises faced by various countries there in the late 1990s were fundamentally similar. The fact that so many countries that were geographically close faced crises that were temporally close makes it easy to conclude that the crises had common roots.
Nevertheless, real estate did have a role in many of the countries that experienced a crisis, and the size of that role likely explains differences in the relative magnitudes of the crisis. In Japan, crises resulted in part from changing demographics and central bank regulatory and monetary policy, but also because of poor commercial real estate underwriting.
In Taiwan, land prices rose and then stabilized, and never crashed as they did in other Asian Economies. In Hong Kong, land prices fell, but because of the lending system there, which required property investors to use substantial equity funding, real estate had little effect on the overall health of the economy. The Chinese office market became badly overbuilt—especially in Shanghai—but the economy there continues to chug along, at least for now. But in Indonesia and Thailand, poor understanding of real estate fundamentals, along with collapsing currencies, caused real estate markets to fail. In contrast, Korea’s crisis arose largely from an unsustainable system of corporate lending. Real estate likely played a fairly small role in Korea’s crisis, and the country recovered almost immediately. It is worth spending a little time talking about the large real estate crises in Japan, Thailand and Indonesia, as well as the ability of Korea to avoid such a crisis.
Edelstein and Paul (2000) explain the sources of the extraordinary run-up in land prices in Japan in the 1980s, and the government’s response to that crisis. They maintain that the run-up in land prices from 1984 to 1991 was not the product of a speculative bubble, but rather of fundamentals of the Japanese economy. As Mera (2000) points out, Japan managed to survive many challenges to its economy quite well, including the second oil shock and the Plaza accords of 1986, which caused the yen to appreciate substantially and thus rendered Japanese exports less competitive. At the same time that Japanese incomes were rising sharply, interest rates in the country remained quite low. If we think about the Gordon Growth Model, i.e. R = i-g, where R is the capitalization rate, i is the discount rate and g is the growth rate, we would expect rents to be capitalized into high property values.
Moreover, as Edelstein and Paul point out, land in Japan is much scarcer than it is in other places: Japan’s population is a little under half of the United States’, yet its land area is only 4 percent that of the United States, and its habitable land in an even smaller percentage than that. Japan’s population density is thus 25 times larger than the United States’, and its GDP per square mile is 15 times large. Again, this is entirely consistent with Japanese land price levels being substantially higher than in the United States.
The property bust arose, according to both Mera and Edelstein and Paul, because of changing and with government policy.
With respect to fundamentals, we know that the Japanese economy slowed sharply in the 1990s. Part of the reason for this had to do with real estate related problems in the banking system, but part of the reason for this had to do with broader issues facing the Japanese economy. As to the former, Edelstein and Paul note that banks in Japan were allowed to count corporate stock holdings as reserves. This, of course, is the exact opposite of how banking is supposed to operate: reserves are supposed to be assets in which the financial institution has a risk-less position, such as cash and high quality government securities. Instead, Japanese banks counted very risky assets--equity--as reserves. Much of the underlying value of that equity was in the form of real estate, some of which was highly leveraged. Consequently, even a small downward turn in real estate markets had a profound effect on the banking system, which in turn had large repercussions for the financial system as a whole.
Making things worse was the fact that Japanese banks failed to recognize their real estate losses on their balance sheets: non-performing assets effectively drove equity levels in Japanese banks to levels below zero, and consequently created perverse incentives for Japanese bank managers.
At the same time, as the Japanese economy slowed, changes in expectations led to an increase in the underlying capitalization rate for real estate and other assets, and has therefore causes the values of all those assets to decline sharply. The existence of leverage has exacerbated this phenomenon further.
The most spectacular failures in the banking system with respect to real estate: Thailand and Indonesia, and especially Indonesia. Chapters by Bertrand Renaud (on Thailand) and Dominique Fischer (on Indonesia) give us harrowing stories of how poor underwriting, abetted in part by the “unholy alliance” between lenders and developers, can lead to a full fledged financial crisis.
The US has no cause to be smug about this, of course, as it invented the process with the Savings and Loan crisis of the 1980s. Both the Renauld and Fischer stories can be told simply enough: lenders assume rent and property value growth at some extremely high rates, which in turn produces very low capitalization rates. This in turn causes appraisers to assign high values to properties. These high values provide the support lenders need to advance loans, which typically have higher loan-to-value ratios. The high-loan-to-value ratios are justified by the fact that property values “always” rise, and that therefore the equity in the loan will quickly get sufficiently large to discourage default. At the same time, the financial institutions had reason to believe that governments (or NGOs) would prevent them from failing, meaning that the downside risk to the risky loans was attenuated. This led to a classic moral hazard problem, where risk was not appropriately priced.
The problem with this, of course, is that sometimes values and rents stop rising, particularly when building outpaces demand. All that needs to happen is for the real estate sector to grow more rapidly than the economy; at that point, everything can come unglued. And so it did: interruptions in rising rent trajectories caused real estate loans to become delinquent. But then things got even worse. The embryonic financial crisis in Thailand and Indonesia caused foreign, and especially Japanese, capital to flee. This led to currency devaluations. Because real estate loans were often denominated in foreign, rather than home currencies, the debt obligations of borrowers got much larger, which in turn led to more defaults. It was thus the combination of poor underwriting and a lack of understanding of currency risk that contributed to the downfalls of the two economies. In Indonesia, GDP fell by a stunning 15 percent in just one year.
 Much of the discussion of the Asian financial crisis below closely follows Green (2001).
Monday, June 04, 2007
Note that as we discussed in class today, Marriage makes people happy, and unemployment makes people REALLY unhappy. All else being equal, people in Venezuela, Honduras and Costa Rica seem to be the happiest in Latin America, while Peruvian, Ecuadorans, and Bolivians are least happy.
You might want to check out the GINI coefficients for these countries (and also try to find what a GINI coefficient is).