Tuesday, July 31, 2007

Are the Average SATs for your school really that high?

Have you ever wondered how so many Universities can have such intimidatingly high SAT scores? Well, perhaps they can't. I was reading one of the many brochures colleges are sending to my kids nowadays, and I noticed that the SAT range it presented was for those who were admitted, not for those that matriculated. So I looked at another. And another. And what I found was that in their literature, almost all schools report SATs of admitted students.

Self-sorting on the part of students should mean that in general, average scores for matriculants will be lower than average scores for admits.

If you really want to know how students who enter a university performed on the SAT, look to see whether it publishes a "Common Data Set" (here is University of Nebraska-Lincoln: http://irp.unl.edu/pdfs/CDS2006-07.pdf). It reports only scores of entering degree candidates.

Understanding the Mortgage Interest Deduction

Homeowners get a tax advantage relative to rents. But those with mortgage are not at an advantage relative to those who finance with equity. From an article I wrote for the Encyclopedia of Tax Policy (Cordes and Gravelle, eds.):

In the popular press, the mortgage interest deduction
is often characterized as being the principal tax
benefit accruing to homeowners. This is certainly
not correct. First, fewer than 50 percent of homeowners
itemize on their tax returns; the remainder
use the standard deduction. This is because the value
of itemized deductions for low- to moderate-income
homeowners in states with low marginal tax rates
will almost certainly be less than the value of the
standard deduction, which in 2003 was $9,500 for
married couples filing jointly. Also, according to tabulations from
the Survey of Consumer Finances, many households
with elderly heads own their homes entirely with
equity (i.e., do not have mortgages), and for these
households, the mortgage interest deduction has no

Second, even for those who do itemize, the
mortgage interest deduction does not necessarily
produce the largest tax benefit arising from owning.
The imputed rent that households earn from their
owner-occupied housing (i.e., the rents that households
are not required to pay anyone else because
they own) goes untaxed. This rent is therefore
favored relative to most other types of income,
including ordinary income, taxable bond income,
dividend income, and capital gains income, which,
while favored and deferrable, is still generally taxed.
The average loan-to-value ratio in the United States
is less than 50 percent. Thus, even if all owners with
mortgages itemized on their tax returns, the value of
the nontaxation of imputed rent would be larger than
that of the mortgage interest deduction.

Effect of the benefit on choice of financing

One could argue that the effect of the mortgage interest
deduction is to put debt on a level playing
field with equity as a way to finance housing. This
contrasts with the tax treatment of corporate income,
where interest is deductible and the opportunity cost
of equity capital is not. Many analysts have shown
that the U.S. tax system encourages corporations to
take on debt. Capozza et al. (1996) have shown
how the combination of nontaxation of imputed rent
and the absence of a mortgage interest deduction
would discourage households from financing housing
with debt. In Australia, imputed rent is not taxed
and mortgage interest is not deductible, and households
there generally pay off their mortgages more
quickly than in the United States.

Friday, July 27, 2007

Fixed rate mortgages vs ARMS

Floyd Norris's NYT column today is good:


I have long held a view that hosueholds should look at themselves as financial intermediaries, and match the duration of assets and liabilities. Houses are an asset of long duration, and as such, have values that are sensitive to changes in interest rates. Thus people who plan on living in a house for a long time should match it with a liability that has long duration--a long-term fixed rate mortgage.

If people know they will be in a house for five years, a hybrid 5 year ARM is fine. But it all cases, households should make sure they can afford a house based on a long-term mortgage before they buy. If the only thing that gets them into the house is a variable rate interest only loan, they are looking for trouble (FWIW, these thoughts occured to me at the time Chairman Greenspan was recommending ARMs to people in 2004).

Thursday, July 26, 2007

Means and medians

The popular press seems to have a hard time understanding when a median (the 50th percentile) is better, and when to use a mean (the sum of everything in a population divided by the size of the population) is better. Both are measures of central tendency.

If one worries about large mistakes exponentially more than small mistakes, means are better. To give one example, if one is underwriting an 80 percent loan-to-value ratio loan, a small mistake in valuation matters little, but a big mistake matters a lot. Predicting house values based on a mean (likely a conditional mean, i.e., a mean based on knowlege about the characteristics of this house) thus makes more sense for underwriting than predicting house values based on a median. But if one just wants to know what someone in the middle of the homebuying pack would pay, the median is far better.

Median income is a much better reflection of middle class living standards than mean income. Reporters seem to have a hard time understanding this. But then so do some business school professors I know...

Trigger events

During past mortgage default spikes, having an "in-the-money" default option (that is, having a house that was worth less than the mortgage balance) was not always sufficient to bring about default. Usually, households that defaulted had also faced a "trigger event:" a job loss, a divorce, or a serious health issue. The high default rates in Michigan and Ohio in the late 1970s and in Texas in the mid-1980s were a function of both falling house prices and high unemployment.

The open question is whether people have become more ruthless about default. We'll know for sure after the next few years...

Tuesday, July 24, 2007

Brad Delong channels Jared Bernstein who channels Timothy Egan


I was eating at the bar of a restaurant in San Francisco a few weeks ago. The bartender, a Russian, had moved from New York to SF. I asked her why she moved (and figured she would say something about weather). She said it was because the minimum wage in California was higher. I wondered then and there whether this anecdote revealed anything about the larger economy. Perhaps it does.

What is it with these people?

I happened upon a poll on CNN last night. 79 percent of say they are Americans are OK with a woman president, 86 percent (I think) say they are OK with a black president. This means that somewhere between 21 and 35 percent of Americans think race or sex is a disqualification for President. Who are these people????

Monday, July 23, 2007

The Excellent Ken Small on Transportation Policy

This is really good:

I think his points about more heterogeneous urban highways (not all arterials need to be freeways; not every highway needs to be designed to carry trucks) are particularly good.

Thursday, July 19, 2007

Research and Teaching

A smart colleague of mine, James Bailey, argues that teaching excellence and research excellence are uncorrelated. Specifically, he cites work that shows that research productivity is not a good predictor of teaching evaluations or peer review. That doesn't particularly surprise me. But I do think there is both reason behind and evidence for the idea that a research environment produces a richer intellectual environment for students.

For starters, those who do research are being kept honest on a regular basis. When one sends a paper off to be refereed or presents a paper at a conference, he is exposing himself to the possibility of getting beaten up intellectually. But if one's ideas can survive scrutiny, and have foundation in evidence (there I am, going all positivist on you), then one is probably reasonably well qualified to teach.

Second, research almost forces one to keep current. I am not saying that everyone needs to print a refereed paper every year--but one every five years is not unreasonable, and would help people stay current (BTW, my mother was an English professor at a "comprehensive" teaching university, and she still managed to crank out an article every now and then. She wasn't particularly rewarded for doing so, it was just important to her.)

Third, I don't think it is an accident that the greatest University in England was home to Newton and Keynes, among others; nor is it an accident that MIT, Stanford, Berkeley, Chicago, etc. attract the best motivated and brightest students from all over the world.

So I am curious about what the (likely small number of) people who look at this blog think. Do (did) they get a better classroom experience from faculty who produce research. Or at least from those that produce well-known research?

Wednesday, July 18, 2007

It's the ARMS, stupid

Aleablog cites the Fed:


Prime mortgages are doing fine; fixed-rate subprime mortgages are doing fine. ARMS with rate resets are not. Many 2/28 and 3/27 ARMs, that started with low teaser rates, have prepayment penalties, meaning borrowers can't get themselves out of trouble by refinancing into a FRM. Prepayment penalities are, in principle, fine--they allow borrowers to get mortgages with lower coupon rates. But in current practice, they may be a leading source of a lot of problems in the next few years...

The Great Divide

I liked this piece in Slate:


I was struck by the divide while in San Francisco last weekend (I was there teaching in the Wharton Executive MBA program). One the one hand I talked to a waitress who had moved to California because of its (relatively) high minimum wage and a bartender who was extolling the virtues of an employer who paid $15 per hour before tips. On the other hand, I was at a party where a woman was saying how her mother would find it hard to get by on a nest-egg of $3-4 million. If I were more creative, I could weave these vignettes into a novel about contemporary America.

Monday, July 16, 2007

Cap Rates and the Ten-year Treasury Rate

The current 10 years treasury rate is 5.1 percent; Cap Rates on San Francisco office buildings are running around 5.5 percent.

On the one hand, rents rise, meaning that the expected IRR on a San Francisco office building is higher than 5.5; on the other hand, buildings depreciate and need to be recapitalized, meaning that net stablized net cash flow growth will be less than market rent growth. While office rents in San Francisco rose smartly last year, they had been stagnant for serveral years before, and office buildings always have the potential for substantial vacancy. So would I buy an office building at a 40 basis point spread over Treasuries? I don't think so...

Friday, July 13, 2007

The Savior of Capitalisim, or its End?

Marx argued for the tendency of the rate of profit to fall:

The progressive tendency of the general rate of profit to fall is, therefore, just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour. This does not mean to say that the rate of profit may not fall temporarily for other reasons. But proceeding from the nature of the capitalist mode of production, it is thereby proved logical necessity that in its development the general average rate of surplus-value must express itself in a falling general rate of profit. Since the mass of the employed living labour is continually on the decline as compared to the mass of materialised labour set in motion by it, i.e., to the productively consumed means of production, it follows that the portion of living labour, unpaid and congealed in surplus-value, must also be continually on the decrease compared to the amount of value represented by the invested total capital. Since the ratio of the mass of surplus-value to the value of the invested total capital forms the rate of profit, this rate must constantly fall. - Karl Marx, Capital Volume 3, chapter 13.

At the Wynn Hotel in Macao, the rooms have a copy Wynn magazine, which gives evidence that Marx was wrong about profits. Exhibit A was an advertisement for a pair of $700 Puma sneakers.

I will confess to liking nice things. I am, for examble, the rare Ph.D. economist who likes neckties, and I own way too many of them (my only defence is that I only buy them when they are on sale, but even so). But there are things that are just grotesque in their conspicuousness. It is hard to believe such things are good for social stability.

When agglomeration makes things worse

I have just returned from the Asian Real Estate Society conference in Macao. The conference was very good, as was the food. The small, historic center of Macao, is very beautiful.

But Macao is largely about gambling--the claim is that it has higher gambling revenue than Las Vegas. There are already lots of glitzy casino-hotels. The conference venue was at one of them--the Wynn. Given the construction cost of the place and the posted room rates, it must be the case that it makes its money on the casino.

I have a (small) libertarian streak in me; that streak tells me it is none of my business is people want to blow their money on gambling. I myself go to Santa Anita every other year or so and bet as much as $18 on horse races. But there is a well established literature (http://scholar.google.com/scholar?hl=en&lr=&q=addictive+gambling) that there are gambling addicts--and it is here that there is an agglomeration problem.

Around the casinos of Macao, one finds large numbers of two kinds of retail outlets: pawn shops, and ATM machines. This makes complete business sense--if people need to feed the gambling beast, places that provide money should cluster near casinos. The problem is that it is like putting free booze into the hands of an alcoholic. Even worse is the fact that some casinos have ATM machines on the premises.

I have no illusions about the possibility of eliminating problem gambling, but it might be worthwhile to make it a little less easy to do. Limiting the number of ATM machines and banning pawn shops within a certain radius of a casino might be a start.

Monday, July 02, 2007

Brad Delong on Academic Blogging

The hope of all of us who blog is that we will become smarter, do more useful work, be happier and more productive, and will also impress our deans so they will raise our salaries. The first three hopes are clearly true: Academics who blog think more profound thoughts, have a bigger influence on the world — both the academic and the broader worlds — and are happier for it. Are we more productive in an academic sense? Maybe. We will see when things settle down.
Are our deans impressed? Not so far, but they should be. A lot of a university's long-run success depends on attracting good undergraduates. Undergraduates and their parents are profoundly influenced by the public face of the university. And these days, a thoughtful, intelligent, well-informed Web logger like Juan Cole or Dan Drezner is an important part of a university's public face. Michigan gains in reputation and mindshare from having a Cole on its faculty. Yale loses from not having an equivalent.
A great university has faculty members who do a great many things — teaching undergraduates, teaching graduate students, the many things that are "research," public education, public service, and the turbocharging of the public sphere of information and debate that is a principal reason that governments finance and donors give to universities. Web logs may well be becoming an important part of that last university mission.

Sunday, July 01, 2007

You know you're a mortgage geek when...

You are taking a walk with your wife on a beautiful Sunday morning:

You: deep sigh

Wife: what's the matter?

You: just thinking about the subprime market

Wife: geez--from that sigh I thought something was wrong with one of the girls...

A really awful SCOTUS decision

The decision overturning the Seattle and Louisville desegregation plans, plans that used race as a tiebreaker after many other considerations for school assignments, reflected a naiveté about the state of residential segregation in the United States that is appalling.

In Seattle, nearly 60 percent of black households would need to move for the community to be integrated; in Louisville, the percentage is nearly 70 percent. (see http://www.censusscope.org/us/m4520/chart_dissimilarity.html for details, which come from the fine work of Frey and Myers).

Moreover, the best evidence we have is that these patterns of segregation arise from continuing discrimination in the housing market (John Yinger, Marge Turner and Reynolds Farley do the heavy lifting on demonstrating continuing discrimination). Given that SCOTUS has ruled out the ability of school districts to remedy the fact that housing discrimination leads to school segregation, the only way to move forward is to enforce fair housing laws far more rigorously--sending rental agents and Realtors who discriminate to jail for a Paris Hilton type sentence might not be the worst way to start. Not that I expect to see this anytime soon...

At least when people of my generation and older are dead and gone, things should get better. A Pew poll on attitudes toward race shows that Gen Xers are far more enlightened than the rest of us--91 percent think inter-racial dating is OK, while only 77 percent of my generation (boomers) think so (who are those other 23 percent?) . Those older than I are are even less likely to think it is OK.