Monday, April 28, 2008

Joe Cortright says that higher gas prices are hurting suburbs and places without strong urban cores

He writes:
...high gas prices are not only implicated in the bursting of the housing bubble, but that the higher cost of commuting has already re-shaped the landscape of real estate value between cities and suburbs. Housing values are falling fastest in distant suburban and exurban neighborhoods where affordability depended directly on cheap gas. In metro areas around the country, housing prices are down most on the fringe, while close-in neighborhoods are holding more of their value--or in several cases, still continuing to see price appreciation.
And the analysis also shows that those metropolitan areas with the strongest close-in neighborhoods--as measured by the core vitality index we developed in our 2006 City Vitals report--have weathered the housing collapse far better than other metros. House prices have performed best and foreclosures have been lower in those metropolitan areas with vibrant core neighborhoods.

Far from being a short term or transitory event, our view is that this shift in real estate market valuations implies a fundamentally different path for future urban development in the years ahead. As my colleague, CEO's for Cities President Carol Coletta puts it, "In short, vibrant cities just became a whole lot more valuable."

There are tremendous opportunities for the nation's cities to build on this shift in value, promoting redevelopment, mixed uses, higher densities and better transit. These strategies will also play a key role in helping reduce energy demand (and the trade deficit) as well as putting us on a path to dealing with the challenge of global warming.

The paper has lots of interesting pictures relating location to changes in house prices. But I think a key policy question is whether "strong urban cores" can be created by design, or whether they are organic phenomena.

Sunday, April 27, 2008

Peter Gordon on Phillip Roth (Zuckerman) on George Plimpton

Peter Gordon writes:

Philip Roth's Exit Ghost is enjoyable for many reasons. Roth even gives us a thumbnail definition of happiness. Nathan Zuckerman had been on self-imposed exile in the Berkeshire's and, on re-entering New York city life, is stunned to discover that George Plimpton had died.

George escaped his glamour without losing his glamour, only
further enhancing it in autobiographical books seemingly driven by
self-deprecation. Climbing into the ring with Archie Moore he is
simply practicing noblesse oblige in its most exquisite form -- a form,
moreover that he had invented. When people say to themselves 'I want to be
happy,' they could as well be saying 'I want to be George Plimpton': one
achieves, one is productive, and there's pleasure and ease in all of it. (p.

I remember reading Paper Lion when I was around 10. At the time, I thought it was the best thing I had ever read.

(Vertical) transportation and urban form:

Nick Paumgarten in the New Yorker:

In New York City, home to fifty-eight thousand elevators, there are eleven billion elevator trips a year—thirty million every day—and yet hardly more than two dozen passengers get banged up enough to seek medical attention. The Otis Elevator Company, the world’s oldest and biggest elevator manufacturer, claims that its products carry the equivalent of the world’s population every five days. As the world urbanizes—every year, in developing countries, sixty million people move into cities—the numbers will go up, and up and down.

Two things make tall buildings possible: the steel frame and the safety elevator. The elevator, underrated and overlooked, is to the city what paper is to reading and gunpowder is to war. Without the elevator, there would be no verticality, no density, and, without these, none of the urban advantages of energy efficiency, economic productivity, and cultural ferment. The population of the earth would ooze out over its surface, like an oil slick, and we would spend even more time stuck in traffic or on trains, traversing a vast carapace of concrete. And the elevator is energy-efficient—the counterweight does a great deal of the work, and the new systems these days regenerate electricity. The elevator is a hybrid, by design.

Admissions Advice

This week I read Susan Coll's Admissions, which reminded me of my time as MBA Dean at GW. We had an excellent admissions staff with fine judgment, but they would sometimes ask my opinion about close calls. I remember one mediocre candidate who began his essay with something along the lines of "when people work for me." He then proceeded to describe what everyone would do for him--nothing about what he would do for them. He basically showed himself to be the sort of person with whom no one would wish to work.

So my advice to those writing admission essays: don't be a putz.

Saturday, April 26, 2008

The New York Times is (some days) a National Treasure

Barry Bearek's story of his imprisonment for trying to cover the elections in Zimbabwe is both harrowing and informative. The final two paragraphs:

I had left the cells with a case of scabies, an infestation of microscopic mites that swelled my hands and wrists to nearly twice their size. But I am better now, back in Johannesburg, with Celia, with our sons, Max, 17, and Sam, 12.

In the meantime, Zimbabwe is beset with paroxysms of violence. Thuggery, torture and murder are familiar implements in Robert Mugabe’s tool kit. Political opponents are being brutalized, as are everyday people whose voting defied him. The presidential election results are still unannounced.

A blogger whom I esteem often entitles his posts "New York Times Death Spiral," and then gives examples of the paper's shortcomings. But all journalism is compromised by tight deadlines; journalists also need to play a repeated game with sources, which means they cannot be heroic and write whatever they are thinking every day.

To me, the Times balances the need for timeliness and access against its moral obligation to be courageous as well as any newspaper. It gets the balance wrong from time-to-time. But I remain grateful for its existence.

Friday, April 25, 2008

A Pox on All Three (but the biggest, grossest on McCain)

All three candidates are pandering about gasoline prices. McCain is the worst, having called for a gas tax holiday in the summer, when pollution is at its worst.

Now comes a story from Businessweek that suggests that, contrary to the findings in David Austin's work, higher gas prices are leading to less driving. It would be hard to list all the policy benefits that result from this.

We do need to be careful about the association here--people may be driving less because they are less likely to be working, or because they are not going shopping or out to eat as much. If the reduction is driving owes more to the likely recession than to the price of gasoline, the effect will not be permanent. We won't be able to figure out which it is until and unless the economy bounces back at the same time that the price of gas remains high.

The regressive nature of high gas prices is also a problem. But this would be better solved through increases in the minimum wage and/or the earned income tax credit than a reduction in the federal gasoline tax.

Thursday, April 24, 2008

It is going to be awhile before the economy recovers

From the Washington Post:

Sales of New Single-Family Homes at 16-Year Low

I wrote ten years ago that residential construction was THE leading indicator. And Ed Leamer says housing IS the business cycle. Yikes!


My Wall Street Journal subscription is about to expire. I don't know whether to renew. One the one hand, I hate sending money to Rupert Murdoch. On the other, I would miss Greg Ip, David Wessel and Scott McCartney. And the editorial page is one of two places I allow myself to be exposed to right-wing nuttery (Bill Kristol's column is the other).

[update: I've decided to renew].

Wednesday, April 23, 2008

Polonius on Subprime

Hamlet, Act I Scene III

Neither a borrower, nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

Of course, Polonius was an ass.

Twelfth Night Commercial 3

With the Green sisters. Successors to the Coen Brothers.

Diane Swonk Waxes Poetically about Falling House Prices

She writes:

[The housing downturn] not only represents a hit to the American economy, but it represents a hit to the American psyche. It is a straw that breaks the back of working class households who feel they have already given more than their fair share in an economy that penalizes manual labor relative to educational attainment.

A more prosaic way to put it is that home equity is often the only wealth that people in the lower half of the income distribution have. According to the 2004 SCF, 40 percent of those in the bottom quintile of the income distribution have some home equity; only 12 percent own stock.

The prescience of JM Keynes

This via Brad Delong:

The outstanding ground for cheerfulness lies, I think, in this -- that the system has shown already its capacity to stand an almost inconceivable strain. If anyone had prophesied to us a year or two ago the actual state of affairs which exists to-day, could we have believed that the world could continue to maintain even that degree of normality which we actually have? This remarkable capacity of the system to take punishment is the best reason for hoping that we still have time to rally the constructive forces of the world.


Tuesday, April 22, 2008

Schools and Property Values

One of my good GW friends, knowing that my daughters had just finished navigating the college admissions process, lent me her copy of Acceptance, a novel about crazed parents and their slightly less crazed children going through the college application process in a fictitious Maryland county that just happens to contain the National Institutes for Health. The novel is quite funny, and one passage stood out:

Her public school might as well have been a private school, and in a way, it was. There was no tuition, per se, but irrational real estate prices served to filter out most of the rabble and ;end it a somewhat exclusive air, or so she'd heard her mother say.

This paragraph summarizes why I support school choice. Affluent people have school choice--they can pay for private school, or they can move to places with excellent public schools (whose excellence is capitalized into land prices). Meanwhile, kids of poor families are stuck in dysfunctional school districts with no place to go. Just spending money on these schools doesn't seem to solve the problem--DC has among the highest expenditures per pupil of any school district in the country, yet by any reasonable measure, their performance, particularly at the high school level, is dreadful. Kids in DC should be allowed to attend schools in Montgomery and Fairfax Counties.

Sunday, April 20, 2008

Mark Thoma gives George Will a deservedly hard time, but..

I agree with Mark that for George Will to accuse someone else of elitism is too rich. For Bill Kristol also to do so is the ultimate in Chutzpah (I would call Will guilty of Chutzpah too, but I would guess George doesn't know what it means).

But Will's basic point about the Fed is not as ridiculous as it might seem. Will says:

The Fed's mission is to preserve the currency as a store of value by preventing inflation. ... The Fed should not try to produce this or that rate of economic growth or unemployment

My problem is with the use of the word "should." The more interesting question is whether the Fed can influence long-term economic growth or unemployment. Kydland and Prescott's model of credible commitment and central bank behavior (Journal of Political Economy 1977), which produced a Nobel prize in 2004, suggests that the Fed can only credibly commit to fighting inflation; that issues of time consistency prevent it from both fighting inflation and maximizing employment, and that if it commits to something other than zero inflation, it will produce socially undesirable levels of both inflation AND unemployment. This has spawned a literature on credible commitment on the part of central banks. And while I am not a macroeconomist (and won't play one on TV--when reporters ask me to forecast interest rates, I tell them to go away), my reading of the literature suggests that it is within the realm of possibility that Kydland and Prescott are correct.

Twelfth Night Commercial 1



SCENE II The sea-coast.

[Enter VIOLA, a Captain, and Sailors]

What country, friends, is this?

This is Illyria, lady.

And what should I do in Illyria?
My brother he is in Elysium.
Perchance he is not drown'd: what think you, sailors?

It is perchance that you yourself were saved.

O my poor brother! and so perchance may he be.

True, madam: and, to comfort you with chance,
Assure yourself, after our ship did split,
When you and those poor number saved with you
Hung on our driving boat, I saw your brother,
Most provident in peril, bind himself,
Courage and hope both teaching him the practise,
To a strong mast that lived upon the sea;
Where, like Arion on the dolphin's back,
I saw him hold acquaintance with the waves
So long as I could see.

For saying so, there's gold:
Mine own escape unfoldeth to my hope,
Whereto thy speech serves for authority,
The like of him.

Twelfth Night Commercial 2

Directed by Morgan Green. Starring Hannah Green as Olivia. Shakespeare at his comic best. And it's free. What could be better?

Jumbo Conforming Spread

I was looking at the Wells Fargo mortgage web page this morning. The jumbo conforming spread for prime mortgages is around 125 basis points. The spread implies an expected default probability for jumbos, and so I started fooling around with a few simulations.

I used the following assumptions: 12 percent prepayment each year, 30 year term, jumbo rate of 7.35 percent; conforming rate of 6.1 percent, constant conditional default rate (this is the least realistic); loss rate conditional on default of 35 percent. Given these assumptions, the implied conditional default rate is in excess of 3 percent per year, which is extraordinarily high for prime mortgages.

If I raise loss conditional on default to .5, the implied expected default rate becomes 2.5 percent per year. I will do further refining of this, but it seems to me that prime jumbo mortgages are a good investment opportunity.

Greg Mankiw Writes about Education and Income Inequality

But in doing so, he focuses on the top end of the education and income distribution. It seems to me that the problem lies on the bottom end, where according to Heckman and LaFontaine, educational attainment levels are falling.

Americans without high school diplomas simply cannot compete in the global economy.

Saturday, April 19, 2008

Novels about Academia

I just finished On Beauty by Zadie Smith. It reminded me that my little professional world makes a good backdrop for novels. Others that I have liked include Moo by Jane Smiley, Gaudy Night by Dorothy Sayers, most novels by Robertson Davis, and Talk Talk by TC Boyle.

The economics professor in Moo hits a little to close to home for me sometimes; among Davis' stuff, I especially like the Lyre of Orpheus.

I couldn't say it better myself

And why did ABC think it was OK to let a Clintonista referee a debate that included HRC?

Friday, April 18, 2008

A more recent article on Rail Transit in the US

Abstract from Clifford Winston and Vikram Maheshrim
On the social desirability of urban rail transit systems, Journal of Urban Economics Volume 62, Issue 2, September 2007, Pages 362-382

Despite a decline in its mode share, investment to build new urban rail transit systems and extend old ones continues. We estimate the contribution of each U.S. urban rail operation to social welfare based on the demand for and cost of its service. We find that with the exception of BART in the San Francisco Bay area, every system actually reduces welfare and is unable to become socially desirable even with optimal pricing or physical restructuring of its network. We conclude rail’s social cost is unlikely to abate because it enjoys powerful political support from planners, civic boosters, and policymakers.

When I have a little time, I will produce a more comprehensive bibliography. My reading of (a fairly extensive) literature is that rail makes sense only in the densest places, such as New York, Boston, Tokyo, Paris, London, Seoul, etc. I would build metros in Indian cities that do not have them. But I have never seen a socially compelling case for light rail.

BTW, I personally love rail. One of the best things about living in Bethesda and working in Foggy Bottom is that I almost never drive to work. Metro is great for me. But should low income taxpayers in Kansas (or Frederick, Maryland, for that matter) be paying for a professor to be able to read in comfort on the way to work in Washington?

Thursday, April 17, 2008

My Problems with Light Rail

(1) It is the worst of two public transportation technologies; it has the inflexibility of rail, and the speed of buses. It also has low capacity.

(2) The capital cost alone per passenger mile is very high.

(3) In practice, light rail systems cannibalize bus systems, and so lower overall transit use.

My guru on this was John Kain. A short article of his on the topic is: John F. Kain, The Use of Straw Men in the Economic Evaluation of Rail Transport Projects, The American Economic Review, Vol. 82, No. 2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association (May, 1992), pp. 487-493. You need a subscription to get to it.

Wednesday, April 16, 2008

An Anonymous Comment on Meaurement of CPI Owner Rents

Thus just came in:

Both the Rent and OER indexes of the CPI are moved by inflation in market rents. As long as "location-location-location" holds, rent on owned properties will rise at about the rate as rent on nearby rental properties, after controlling for differential effects of aging, which the BLS does. The "how much would your home rent for" question is only used in generating weights

Whoever sent this in: I would like to know more. What do you mean by weights? How exactly is the OER calculated? I want to fix this if I got Turley's comments wrong.

Reverse Snobbery

Having just bashed intellectuals (see below), I now feel the need to bash Maureen's Dowd's column today on what it takes to be a "regular guy (gal)." Apparently John Kerry's disdain for Cheez-Wiz and Barack Obama's concern for the healthfulness of the food he eats disqualify them from relating to working class people, whereas Hillary Clinton's ability to toss down a boilermaker gives her street cred.

Leave aside for a second whether or not the President needs to be "regular." People--including Presidential Candidates--should be able to eat what they want without fear of ridicule and condemnation. It is my observation, moreoever, that lots of different kinds of people like lots of different kinds of food.

The Chinese think they can learn from US Suburbs

There is a nice piece about it in USA Today.

One line in the story, though, really caught my eye.

"Most intellectuals say [suburbanization is] horrible. Most environmentalists say the same thing," says Nora Libertun de Duren, urban planning professor at Columbia University and an expert on suburbs in developing countries. "But developers say it's good business, and architects say it's good business."

And so we see a congenital weakness on the part of intellectuals: the need to look down on how other people choose to live (I am afraid I suffer this weakness myself from time-to-time, although my family does a good job of calling me on it when I display it). The fact is that many people enjoy the privacy, greenary, and sense of order that comes with suburban living, and there is nothing wrong with that. Moreover, as the Chinese have figured out, suburban planned communities often can self-finance infrastructure, and therefore provide a technique for community upgrading.

The environmental issue is more serious, but is solvable. If people were required to pay the social cost of driving, the settlement patterns that would emerge would be environmentally sustainable too. In many places, private automobiles would be very efficient forms of transport if (1) they got reasonable gas mileage and (2) if someone would sit in the front right seat everyday. The idea that light rail will solve environmental problems is just silly.

Tuesday, April 15, 2008

Paul Krugman has a good point about Big Cities

This is so nice:

OK, actually I was born in Albany, and grew up on Long Island. But here’s my question: I understand why it’s political poison to show disrespect for small-town values — dignity is precious to all of us, and often trumps material interest. But why is it OK to disrespect big city values, even to suggest — as Bush has — that big-city dwellers aren’t part of the “real America”?

I mean, I get a lump in my throat when visiting the Lower East Side Tenement Museum. The big-city immigrant experience is as much a part of what made America as the rural, small-town experience. It deserves the same degree of respect.

I'll go a step further (and BTW, I grew up in a small Midwestern town called La Crosse, Wisconsin--the epitome of the "heartland"). Cities are where things get accomplished, and where people need to learn to get along with others who may be different from themselves. New Yorkers have to cooperate more with others every day than any other place in the US (with the possible exception now of Los Angeles). This reflects values that we should celebrate.

The Trouble with House Prices.

A few months ago, I wrote this:

Now comes a story from the AP saying that people's expectation of PI is negative 1/4 of the time. This all by itself will substantially decrease house prices, and may cause them to overshoot below their fundamental values. Ed Leamer has a proposal to use the tax code to prop up values, but because it is temporary, I am not sure it would be sufficient. More important is the rapid expansion of the FHA program, which explicitly places the US Treasury behind housing markets. We'll see whether it is sufficient...

Friday, April 11, 2008

Ivory Park, Gauteng, South Africa

This is one of the 40 square metre houses. I am on the right.

Planning type just can't seem to get behind suburbs

Yesterday I gave a presentation at a World Bank workshop in Pretoria on urban spatial structure and housing (yeah, I'm a lucky SOB). My job was to talk about successful models of housing development for low income workers, and I gave praise to the evolution of housing development in Hong Kong, Singapore and the post WWII United States. No one complained about the first two examples, but a planner complained that I would praise "sprawl" development.

But the fact is that houses in places like the Levittowns offered veterans returning home from war inexpensive, sanitary housing that could be modified and upgraded as their incomes rose. Density patterns in South Africa are also more similar to the largest American cities than to East Asian cities, and I met a group of women who were developing detached single family 40 square meter houses for around $4000 in construction costs, so to rule the detached house model out of hand does not make sense to me. I do think some Americans are needlessly fearful of density at times, but there is nothing wrong per se with constructing lower density houses in places with relatively ample land. And the snobbery some planning types show toward suburbs is just as disturbing to me as the fear some suburban types show toward dense cities.

Alice Rivlin has sold me

In previous posts I have expressed skepticism about bail-outs. Then along came this via Mark Thoma:

The Fed’s Money Well Spent, by Alice Rivlin, Commentary, NY Times: One benefit of the Federal Reserve’s rescue of Bear Stearns is that public outrage has aroused the political system to action in mitigating the foreclosure crisis.

Never mind that the supposed conflict between Wall Street and Main Street is a false one — Main Street runs on credit and cannot prosper if the financial system is in shambles and credit dries up. Never mind that the supposed Fat Cat “bailout” was a disaster for Bear Stearns stockholders, and that the idea of a “moral hazard” risk — that other investment banks will be tempted to emulate Bear Stearns — is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing.

In the end, the Fed’s action was not aimed at rescuing those who made bad decisions out of greed or stupidity, but at protecting the rest of the country — and indeed the world — from the possibly devastating consequences of a financial meltdown.

Nevertheless, the outrage is both understandable and useful. Public money has been put at risk...

Like the failure of a financial behemoth, spreading foreclosures engulf the innocent as well as the imprudent and unwise. To be sure, many homeowners were shortsighted and greedy. Like their Wall Street counterparts they borrowed too much and got caught when the music stopped. Like the Bear Stearns shareholders, they should take losses. But putting them out of their homes does not merely harm them and their children, it endangers whole neighborhoods and drags down the assets of their more prudent neighbors.

Congress and the Bush administration should move quickly ... to enact laws to ease the renegotiation of mortgages and keep homeowners who are able to pay the new charges in their homes. Public money will have to be put at risk, but it is worth it. The deals should be structured so that the taxpayer shares in the gains if markets recover...

When the immediate crisis is past, however, we must turn to the difficult task of reducing the chances of a replay. It will not be easy to design regulations that do more good than harm, but at the very least all financial institutions that stand to benefit from Federal Reserve help in a crisis must be subject to regulatory scrutiny to make sure they are managing their risk prudently. There must be higher capital requirements and limits on excessive leverage. ...

After that, we must take on the even harder job of sorting through the explosion of financial instruments ... and deciding which belong in our kit of tools and which should be relegated to the waste heap. If they genuinely spread risk and help move capital into more productive uses, they should stay. But some exotic derivatives ... may entail more systemic risk than social value.

The folks who devise these exotica are talented enough to create something useful. We would all be better off if they were productively employed in the “real” economy — or pursued wealth in Las Vegas, where the risks the smartest gamblers pose to the house are carefully controlled.

The world is a second best place. Sometimes I still need to learn to live with it.

Wednesday, April 09, 2008

Paul Krugman and Brad Delong have an argument about Rents

Krugman argues that house prices are fundamentally still too high, because CPI real rents have been flat. Delong says he is not sure what to make of CPI Rents. As I noted in a previous post, Ralph Turley, who knows more about these things than most all of us, argues that CPI rents are in fact measured incorrectly.

In a paper I did with Cutts and Chang (for which I must get around to doing the final revision), we performed hedonic regressions showing that quality adjusted rents during the 1990s in many cities did rise more rapidly than the CPI suggested. And when I look at rent to price ratios for comparable properties (i.e., condos and apartments) in, say, Los Angeles, the financial argument for owning seems pretty reasonable right now. Again, because we don't know how people are forming their expectations at the moment, it is difficult to say when a bottom is coming. But I do think equilibrium house prices are higher than Krugman thinks.

Friday, April 04, 2008

Rachmaninov - 2nd suite

Other than an untidy beginning, this is remarkable....

Thursday, April 03, 2008

Whence Systemic Risk?

William Poole's departure from the St. Louis Fed calls to mind a speech he gave in 2003 on Fannie Mae, Freddie Mac and systemic risk. In Poole's view, the concentration of mortgage risk in the two institutions was per se dangerous. I think it is fair to say that Poole's view was at least partly grounded in the idea that the implicit subsidy the two institutions received created alarming moral hazard issues. It was (is) a view shared by many fine economists, including Dwight Jaffee and Larry White, both of whose work I admire.

My view--and it is one that has led me to feel lonely at times in the company of other economists--is that the benefits of the GSE subsidies outweigh their costs, and that the GSE subsidies are not materially larger than those received by, say, Citigroup. Indeed, the pool of financial institutions with an implicit guarantee has recently moved beyond GSEs and commercial banks to include investment banks.

I think it is worth noting that Fannie and Freddie's core business--prime mortgages--is doing ok. To the extent the companies are having trouble, it is because they were pushed into buying subprime and Alt-A loans by a set of misguided regulations known as affordable housing goals. I don't know whether it is a coincidence or not, but Fannie and Freddie market share of mortgages declined dramatically between 2002 and 2007; they gave up their market share to private label institutions. So if Poole was correct, systemic risk should have declined between 2002 and 2007. The prediction didn't work out too well.

I should disclose that I worked at Freddie for 15 months in 2002 and 2003. While I learned a lot there and met some wonderful people who remain my friends, I pretty much knew I wanted to leave the place within a month of arriving. How this biases my views on GSEs is not entirely clear to me. But I do sometimes wonder if some of the GSE's most vociferous opponents, such as the American Enterprise Institute and the Wall Street Journal Editorial page, just can't stand the idea that government created institutions have spread the benefits of capital markets to a broad swath of ordinary people in a very responsible way.