Thursday, October 25, 2007

A paper on Homeowner's beliefs and how they affect behavior

This is by Sumit Agarwal in the most recent issue of Real Estate Economics.

Using a unique dataset of 81,943 house value estimates by the homeowners and their financial institution, I find that homeowners overestimate their house value by 3.1%. After controlling for homeowners’ socioeconomic characteristics, I find that ex-ante homeowners who rate (cash-out) refinance an existing loan to increase savings (consumption) are significantly more likely to underestimate (overestimate) their house value. Moreover, overestimators (underestimators) are more likely to increase (reduce) their spending ex post. Finally, I also find that underestimators are more likely to prepay their loans and overestimators are more likely to default on their loans.

Yet something else to worry about...

James Baughman has a new book

It is on the history of the infancy and adolescence of television. It gets a nice review here in the New Yorker:

Jim was a dear colleague of mine when I was at Wisconsin. His two earlier books, Republic of Mass Culture and Henry R. Luce and the Rise of the American News Media, are absolutely terrific--Jim is a wonderful scholar and a wonderful story teller. If you want to learn about "old" media, you should read his stuff.

I hope he writes a book about the blogosphere someday...

Housing and Leverage

As they try to sell houses in a poor market, some real estate brokers are advising that housing is a good investment because on a leveraged basis, its return is higher than the stock market. This is true, but it is also true that when levered, housing is more risky than the stock market.

If someone takes a long position in a Vanguard Blue-chip fund, the chance of losing his entire investment is remote. Of he buys a house with just ten percent down, however, and house prices fall ten percent, he loses his entire investment.

I would still not discourage someone from buying a house if they know they will live in the same place for more than five years. There is a cash-flow benefit to owning (the fact that you don't pay rent) and there is a real benefit to having control over one's living environment. But if I were to move right now, the chances would be pretty good that I would rent out the house I now own (I wouldn't want to give up my very low-interest rate mortgage) and then rent for awhile in the place I am going.

A stunningly bad Existing Home Sales Number

The September Existing Home Sales number came out yesterday, and it is off by roughly 20 percent from a year ago (it is a little less than that when seasonably adjusted, a little more when not seasonally adjusted). At the same time, inventories and the month's-supply measures continue to rise.

There is also a chance things will get worse. I was at a Homer Hoyt conference that I helped organize on subprime yesterday. Two participants, Dave Crowe and Marsha Courchane, made the point that of the subprime loans that have gone into default, 91 percent did so without a rate reset.

Mark Zandi and Steve Westley both presented data that showing subprime originations from the first quarter of '07 were performing even worse than the '06 book, although that could be because of changing housing market conditions, rather than deteriorating credit quality per se. In any event, it is possible we will see a lot more inventory dumped on the market through the REO process, which will further depress demand.

My colleague Vanessa Perry (as well as others) have an intriguing idea--simply let everyone with an ARM about to reset refinance into a reasonably priced (what this means is not clear) fixed rate mortgage. Among other things, this might separate out those who really want to stay homeowners from speculators (who will want to dump houses they were planning to flip anyway). But no matter what, it is hard to see where a housing recovery is going to happen over the next three years.

Sunday, October 21, 2007

No one is better at defending himself than...

Paul Krugman. David Kennedy had a silly review of his book in the NYT. Krugman's pithy response,

was perfect.

I am sometimes told I am a good writer...for an economist. That is kind of like saying I am a good basketball player...for a slow guy who can't jump with a lousy outside shot. Krugman is a terrific economist AND a terrific writer.

I remember reading in my second year of grad school his wonderfully innovative paper (with Helpman) on increasing returns and patterns of trade. It was elegant, easy to follow for anyone with a small grasp of calculus, and profound: it showed that country size by itself could explain part of why countries traded goods with others. It was a major step beyond the classic Ricardian model. That someone can do scholarship that well and write the best column in the New York times inspires admiration...and envy.

Thursday, October 18, 2007

Cost-Benefit Analysis: What is the correct discount rate? Growth rate?

I was working on a paper with Chris Redfearn last week, and he raised one of the most interesting puzzles in economics: how to we think about environmental/infrastructure issues in the presence of discounting? With a real discount rate of, say, 3 percent, a dollar of benefit to our great-great-grandchildren, who might be born 100 years from now, is worth only 5 cents to us in present value terms, assuming that a benefit to our progeny is equal to a benefit to ourselves.

This creates all kinds of policy problems. The example Chris gave is that on an ex-ante basis, removing lead from gasoline did not pass the cost-benefit test. Yet I think almost all of us are grateful for unleaded gasoline. Similarly, I find myself puzzled every day when I ride the Washington Metro that the system does not pass the cost-benefit test. Washington is becoming an increasingly difficult place to live as it is; it would be hard to imagine what traffic would be like in the absence of Metro (where the cars are jammed to capacity during rush hours).

Maybe the problem is that we get potential growth wrong. If people's earning potential increases 2 percent per year, then maybe the way to do cost-benefit properly is to use a Gordon Growth setup with an r-g term: we discount net of growth. Such a change would increase the present value of the dollar to our great-great grandchild from 5 cents to 37 cents.

Wednesday, October 17, 2007

Forecasting the Housing Market

I was reading the NAR forecast this morning. They say that improvements in the mortgage market will cause a turnaround in the housing market. If I were them, I wouldn't say anything.

I do admire the REALTORs for putting out numbers every month that play it straight down the middle (full disclosure, I helped the group design their benchmarking system: see$FILE/FinalDocumentationForWebsite_reviewed.pdf)
Particularly useful is the pending sales index as well as the month's inventory supply measure.

Both of those numbers are not encouraging at the moment: pending sales continue to decline, and month's supply continues to increase. I understand why people whose business is selling homes do not want to hype these numbers, but for credibility sake, they should avoid making pronouncements that fly in the face of their numbers. REALTORs want to be thought of as professionals, and trusted advisors, rather than sales people. This means telling people about the reality of the market. In fact, if they could use market information to convince sellers that they need to lower their prices (admittedly, a difficult task), they could help the market reach bottom faster.

I am not saying that the market won't recover next year. As Bob Shiller pointed out in his Jackson Hole paper, prices in London began to dip a few years ago, only to start back up soon after. What I am saying is I don't know when the market will begin its recovery--and neither does anyone else.

Tuesday, October 16, 2007

Where is the Greatest Research University Agglomerationin the US?

One would think it is in Boston, and in a sense, one would be right: there is nothing comparable to having MIT and Harvard down the street from each other.

But if one looks at the top 50 research Universities as measured by The Center for Measuring University Research Performance at Arizona State, the leading metropolitan area for number of top research institutions is not Boston, nor is it Chicago, Philadelphia, or New York. It is LA, which has four in the top 50 (UCLA, USC, Cal Tech and UC-Irvine). If one stretches another 100 miles or so, UC-San Diego and UC-Santa Barbara get added to the mix.

Southern California rarely gets credit for being an intellectual mecca, but after spending a pleasant morning at UCLA and a pleasant afternoon at USC last week, I couldn't help but think that it is. Then again, Thomas Mann, Arnold Schoenberg and William Faulkner all managed to enjoy life in LA. Randy Newman might have been onto something...

Thursday, October 04, 2007

Research University Rankings

Here is a nice compendium of fun facts about research Universities:

One thing the surprised me is that in 2005, my old University, Wisconsin-Madison, raised half-a-billion dollars, placing it second among all universities in the US.

I am not surprised that people show the place a lot of love--it is a very wonderful place that I think has transformed many lives for the better. But I am curious as to how it happened to have such a great year.

This paper is a lot of fun

It ranks concert halls by acoustical quality. Concert halls are, after all, a type of real estate.

I agree with the Boston ranking. But I think San Francisco (now) has a nice hall, and am surprised it does so badly. Three halls I like not mentioned here are the new Strathmore Hall in North Bethesda, Maryland (so shoot me, I'm a homer, but it really is good), Uihlein Hall in Milwaukee, and Orchestra Hall in Minneapolis. Perhaps I am especially fond of the last, because it was my first "real" concert hall. I was 15, I think, and I remember hearing Martha Argerich play the Chopin F-minor Piano concerto with the Minnesota Orchestra. It was amazing.