David Leonardt buys a House

He explains that the rent-to-price ratio is now sufficiently high in Washington is sufficiently high to make owning an acceptable financial choice. He also notes:

Of course, owning also brings benefits that have nothing to do with money. You can settle into your home, confident that no landlord will kick you out. You can repaint the walls and redo the kitchen. All else being equal, owning seems far preferable to renting.

Where I am moving, Los Angeles, still has a high rent-to-price ratio (about 50 percent higher than DC), yet when I find a house I like, I will buy one. Rent-to-house price ratios are always relatively high in LA, because high nominal incomes and the California tax code make tax preferences for owner housing in California higher than in other places. At the same time, housing affordability in SoCal has improved dramatically, meaning that more people can buy a house using standard mortgage products.

I still don't know when the bottom of the market is coming--until inventories begin to taper off (in terms of months of unsold property) it will be difficult to know. Even the inventory figure is difficult to parse; to the extent defaulted homes were stripped by their erstwhile owners, they no longer remain competitive in the market. On the other hand, there may be many potential sellers who refuse to test such a cold market.

But for me, if I can find a house I like in a neighborhood where I wish to live at a price I can afford, the security of tenure (and the knowledge that my rent can't go us) is sufficient reason to buy.

Lifted from Comments: My Friend Leslie Appleton-Young writes:

In 1996 E. Digby Baltzell published a book that addresses some of the differences between the two cities going way back -- Puritan Boston and Quaker Philadelphia. Here is an excerpt of a review.

Digby Baltzell uses the history of Philadelphia and Boston as very real examples of two types of leadership. In Boston, the "Boston Brahmin" elites formed a strong upper class that was not tolerant, certainly, but took responsibility for community life and exercised a tremendous influence on American culture, politics, arts, and science. In Philadelphia, the "Proper Philadelphians" were charming, tolerant--and deeply irresponsible, abandoning any role in governing the city and making it by common agreement the worst run city in the United States. When Philadelphia needed a mover and shaker, it imported some one from outside, like Ben Franklin.
Baltzell takes these difference back to the colonial period and the dramatic differences in the viewpoints of the Puritans who founded Boston and the Quakers who founded Philadelphia. He also sees these changes working forward as the old upper-class socialize immigrant elites into their respective patterns, producing the Kennedy clan out of Boston, and Grace Kelly out of Philadelphia. Many of the points here can also be seen in David Hackett Fischer's Albion's Seed.

Then again, given a choice between getting to have dinner with Grace Kelly and getting to have dinner with Joe Kennedy, I don't think it would be a tough choice...

Differences in Urban Development: A Mystery

I spent the past weekend in two of my favorite cities: Philadelphia, where I taught Wharton Executive MBAs, and Boston, where I attended a wedding.

Over the past 25 years or so, the Boston MSA has done quite well, while the Philadelphia MSA has not. Among the 25 largest MSAs, Boston ranked 3rd in per capita income in the 2000 census, while Philadelphia ranked 11th. While neither area has rapid population growth by US standards, Boston has been growing more rapidly than Philadelphia. And while more than 40 percent of those over the age of 25 who lived in the Boston PMSA in 2002 had completed a bachelor's degree, only slight more than 30 percent of those in the Philadelphia PMSA had done so.

Yet the two cities have much in common: rich histories, great colleges and universities, large manufacturing bases that largely disappeared, some very beautiful architecture. The weather in Philadelphia is, if anything, better than in Boston; Boston has slightly better air service. Both cities live in the shadow of New York, although the shadow is probably darker in Philadelphia. I personally prefer the restaurants in Philadelphia.

But Philadelphia's impoverished neighborhoods have continued to deteriorate, while
Boston's have been gentrifying. The poverty rate in Philadelphia is also substantially higher than it is in Boston. My informal polling of students suggests that while those who go to school in Philadelphia enjoy doing so, they are looking to leave upon graduation. Those in Boston seek to stay.

Exploring how these differences came to be would make for an excellent book. Someone should write it.

My new Governor may be OK

From Thinkprogress:

Speaking in San Francisco yesterday, Gov. Arnold Schwarzenegger (R) said he hopes that the state Supreme Court’s recent ruling allowing gay marriage will lead more couples to come to the state to be wed:

You know, I’m wishing everyone good luck with their marriages and I hope that California’s economy is booming because everyone is going to come here and get married.

The San Francisco Convention and Visitors Bureau also expects a tourism boom this summer, and its website now “promotes a gay travel section” and “explains that same-sex couples are ‘officially allowed to marry in the state of California.’” Schwarzenegger has promised to oppose any amendments banning gay marriage.

One reason I'm so looking forward to USC

Ignore the lyrics about Chicago and New York though. In fact, Daughter H is going to college in Chicago; Daughter M in NYC. The family will have America's three largest cities covered!

Get Well, Senator Kennedy

His politics are to the left of mine, but I still think him to be among the greatest Senators of my lifetime. It is too soon to lose him.

Home News

As of August 16, I will have a new job.

Urban Densities Around the World

Paul Krugman this morning was contrasting Atlanta and Berlin for Urban Density. That ain't nothing: check out Atlanta vs. Mumbai. The graph comes from Alain Bertaud.

A Former Student of mine writes from Sichuan

From Yanmei Xie

INTO THE MOUNTAINS

It seemed luck was compensating me after a sleepless night stranded in Shanghai. The cab driver who picked me up at the Chengdu Shuangliu Airport told me he had been driving into earthquake stricken towns a lot and that he knew ways to by pass the government's traffic control.

We set off immediately after I dropped off my luggage.

The cabbie's name is Lai Si, and I call him uncle Lai. He told me he had been working as a volunteer, sending rescue supplies to disaster zones and shuttling victims out in the fast few days.

We drove into the mountains. The road became narrower and steeper, some portions partially blocked by boulders or giant piles of mud. The force of the quake had stripped some of the cement surface, pushed some parts up and pressed others down. A four-inch crack split the road in the middle. Uncle Lai deftly navigated on this terrain and tried to stable the vehicle to accommodate my attempt to videotape the scene.

We picked up a villager on our way. A few more miles up in the mountain, he said we had arrived in Hongbai village, or what's left of if—piles of smashed bricks, broken wood columns, pieces of clothes, dangling concrete frames. Abandoned chickens and pigs were roaming in the debris looking for food. For miles and miles, not a single building was standing. The village used to sit in a valley. The villager pointed across the valley and showed us a mountainside covered by a yellow blanket of mud and rocks. "More than a dozen families," the villager said, "were buried by the landslide over there."

Some survivors moved to government supplied tents, but there were not enough for everyone. On the roadside stood a makeshift tent haphazardly cobbled together with wood columns and tarp. A woman stooped outside of the tent, washing some odd pieces of frying pans and bowls. I walked over and said: "Hi, sorry for interrupting." She looked up, eyes swollen, and stared at me blankly.

"Could you, could you tell me what happened?" I stuttered.

"My house was here." She murmured, raised one arm slightly and gestured towards the tent. The gesture seemed to be too much for her. Her arm collapsed into her body, her head dropped, lower than before, and started to scrub a pan again and again. It was too much for me, too. I turned my video camera away and walked back to my car.

Many soldiers and volunteers had arrived. They were busy distributing food and water and spray the debris with disinfectant. No one could tell how many died in the village.

Some told me more than a thousand had perished. One villager said the death toll was much higher than that. All said that the local government tried to understate the casualties to higher ups initially. They believed it delayed rescue and relief for them as attention was turned to other hard-hit counties and villages.

Uncle Lai called me back to the car and told me that we'd better head back before it turned dark. Deeper in the mountains, there are still towns that haven't been heard since the earthquake.

On our way back, a medical team stopped us and sprayed our car and ourselves with disinfectant.

Four quick takeaways from a subprime conference in Florida

Your's truly just returned from a conference he organized (with help from Susan Wachter, Marsha Courchane, Carol Reynolds, Bobbi Bernardini and Ron Donohue) on the subprime crisis the Weimer School of the Homer Hoyt Institute. I will speak in more detail about some of the issues later this week, but in the meantime, I want to put out four quick takeaways:

(1) Dennis Capozza says that defaults will not peak until around 2011.

(2) Amy Cutts says that the optimal statutory foreclosure period is something like 4 to 6 months--enough time to allow borrowers who can be saved to fix their problem, but not so long that they like the benefits of free rent.

(3) Something like 30 percent of subprime borrowers who used subprime to purchase a home put none of their own money into the transaction.

(4) Charles Leung has a nice model that shows that Central Banks are better off targeting the general price level, rather than asset prices.

More to come...

Freddie Mac's losses--worse than they look

Charles Duhigg has a good explanation in today's New York Times. The really scary part is that the company's capital has been reduced to about $16 billion, which puts it at a 50-to-one leverage ratio. They need to raise capital now--I am guessing they will find their common stock offering to be expensive for their current shareholders.

My kid's music teacher is clever and good.

What makes liberal economists...liberal?

I like economics a lot. Every time a new issue of The Quarterly Journal of Economics (my favorite journal right now--AER is a strong second)comes out, I am very excited.

Yet I am a liberal. I think incentives are important (I support Welfare Reform and School Choice), but I also think that all working people should be able to live at a reasonably decent living standard (so I also support a generous EITC and minimum wage), and that we as a society as a whole should provide all manner of social insurance, including Social Security and universal health care. I therefore find myself disappointed when smart people like Kenneth Rogoff and Anne Krueger support McCain's economic policies--particularly since I took a class in graduate school from Rogoff and had the same dissertation adviser as Krueger.

But while I learned a lot from Rogoff, it struck me when I was a student that there was a fundamental difference between us (beyond the fact that he is an order of magnitude smarter than I), a difference that hit home when he lectured on his political business cycle work. While I think economics helps give us powerful insights into how humans behave, I think he believes that economics by itself explains how humans behave. And while I think that random shocks (such as being born smart, or in the United States) are at least as important as individual effort in determining our fate in life, I think he believes the converse.

We as a society do want to encourage effort, because it leaves us all better off. But as the recent natural disasters in Burma, China, and, yes, New Orleans have shown, we never will have anything like complete control of our lives. Those of us who have gotten good draws should have some empathy for those that haven't.

Did Old-School Management Work?

George Szell is here conducting Fritz Reiner's Chicago Symphony. Neither Szell nor Reiner was a nice guy--they would use humiliation and fear to get musicians to play well. But boy, did they play well--listen to the precision of the ensemble.

I remember having a few profs who scared the s**t out of me--and did I work hard to prove myself to them.

We as a society don't tolerate this kind of behavior in bosses and teachers anymore--and overall it is almost certainly a good thing. Some people are just sadistic for the sake of being so, and so we have rightly reduced our tolerance for having them in positions of authority.

But there were the rare cases of authority figures who used toughness to assure remarkable ends. I am not sure we allow them to exist anymore, and we may have given up something as a result.

A Wonderful Piece that isn't quite a Warhorse (yet)

I sat down at the piano for the first time in a long time today, and I bulled my way through the first movement of the Schubert B-flat Sonata (the last one). It is surely not as well known as the famous Beethoven Sonatas (Moonlight, Appasionata, etc.), but it is surely as good. In fact, it is as satisfying a piece of piano music as any I know.

There have been some wonderful recordings of the piece: the last two by Rudolph Serkin and a 70s vintage recording by Alfred Brendal are my favorites.

Do Ratios make sense for Underwriting?

A former colleague of mine (who is not on the record) at Freddie Mac says that using ratios to do mortgage underwriting makes little sense; that lenders should focus on residual income after debt service instead.

Consider two households, one of which earns $30,000, the other of which earns $100,000. If the first household pays 25 percent of its income for housing, it has only $22,500 gross income left over for everything else. Of the $100,000 household pays 30 percent of its income for housing, it has $70,000 of gross income left over for everything else. Clearly, the first households is under more financial stress, and is at greater risk for delinquency than the second. And yet lenders persist in using ratios to determine who gets mortgages and who doesn't.

The Frank Dodd FHA Proposal is Probably Good Policy

Because house prices have fallen (nearly) everywhere, it is hard to make a case that underwater mortgages are now principally the fault of irresponsible borrowing. Something like an exogenous event has affected many homeowners who bought houses they could actually afford. These homeowners have an incentive to walk away from their mortgages, and as a matter of policy, we really don't want to do so.

A proposal where FHA insures mortgages that borrowers can afford at 85 percent of house value gets the incentives more or less right going forward. Lenders take a haircut, but not an acceptably large one, and borrowers have an incentive to keep paying. At the same time, because the government would recoup any unexpected profits arising from the scheme, it does not provide borrowers with the potential for a taxpayer guaranteed windfall. In the overall scheme of things, the proposal is clever, and may be quite helpful.

Richard Arnott finds a conundrum for making housing policy in developing countries

The abstract for his paper for the Commission on Growth:

All countries have a formal economy and an informal economy. But, on
average, in developing countries the relative size of the informal sector is considerably larger than in developed countries. This paper argues that this has important implications for housing policy in developing countries. That most poor households derive their income from informal employment effectively precludes income-contingent transfers as a method of redistribution. Also, holding fixed real economic activity, the larger is the relative size of the informal sector, the lower is fiscal capacity, and the more distortionary is government provision of a given level of goods and services, which restricts the desirable scale and scope of government policy. For the same reasons, housing policies that have proven successful in developed countries may not be successful when employed
in developing countries.

Particularly problematic is the fact that the best static housing policy would be to provide water and sewage infrastructure for informal settlements. But the provision of such services reduces the incentives for the settlement to become formal. Until the settlements are formal, the fiscal capacity of governments will remain low, so their ability to provide infrastructure will be limited.

Best Line on Russian History I heard today

My daughter Hannah on Lenin:

"His greatest success was dieing while he was still ahead."

I think they're going to like her at Northwestern next fall.

Bad News from Fannie Mae today

The GSE lost another $2.2 billion. It is not clear to me whether this includes new accounting treatment for bad loans--if it is no long considering loans that are 120 days late to be impaired, the number is even worse than it looks.

At least this will compel Fannie to cuts its dividend and raise capital.

If Hillary really cared about low income workers...

She would call for a temporary reduction in the payroll tax, rather than the gas tax (hat tip to an anonymous friend who wishes to remain that way). This would reduce the burden of higher gas prices, while continuing to discourage gasoline consumption, something that is obviously desirable for both the environment and national security.

Worse than her bad policy is her recent fusillade against "experts." I liked her sleazy husband's administration because it actually relied on experts for making policy, and so made the country stronger economically. Moreover, low-income workers did better during the Clinton administration than in any other since the 1960s (and according to Joseph Stiglitz (link coming), better than the 60s, but according to Eric Olin Wright, not quite as well as the 60s). But to have Clintonian ethics without expertise--no thank you.

If Clinton does by some miracle win the nomination, I will hold my nose and vote for her. But the clothespin I will need is getting bigger every day.

A Nice, Clear Critique of Hypothesis Testing

Students at times come to my office to tell me that their professors in research methods courses emphasize the importance of null hypotheses and hypothesis testing. It always brings to mind the last words Gary Chamberlain said in his econometrics class: "I didn't mention hypothesis testing, because I don't like it. And don't ever use those damned stars." [I am, of course, paraphrasing, as I took the class 25 years ago].

In any event, I ran across this nice critique of hypothesis testing. The point of statistics, after all, should be parameter estimation and prediction, not some arbitrary test of statistical significance. In large samples, statistically significant parameters can be unimportant; in small samples, statistically insignificant parameters can simply mean that we don't really know what is going on.

Much of the confusion underlying how medical information is conveyed in the media arises from the hypothesis testing tradition: the media infer that if x is a statistically significant predictor of y, then x must be important in determining y. This is not necessarily so.

Worth Contemplating as Ethanol Subsidies contribute to Rising Food Prices

Time's What the World Eats.

Check out the family from Chad. Consider what happens to them when grain prices double.

USA Today says College Students are Spending More--without getting more

Yesterday's story is based on this report. The change is particularly pronounced at public universities, in part because cuts in state funding have required sharp increases in tuition.

I am personally conflicted about how much to subsidize students at State U. One of the things I loved about the University of Wisconsin when I taught there was that it provided access to a great education to anyone in Wisconsin who qualified academically. (when I began on the faculty in 1990, tuition was very inexpensive at about $2,000). Now in-state tuition there is about $7,000 per year. At this price, it is still a bargain, in the sense that it provides extraordinary value per dollar spent, but it has become sufficiently expensive that it turns some students away because of financial considerations. And this is a shame.

On the other hand, the life-time income of UW grads is, on average, much higher than the life-time income of Wisconsin taxpayers. It is reasonable to ask whether lower income people should be subsidizing higher income people. But on the other hand (again) the spillover benefits of having college graduates is large (see Ed Glaeser and others on this point). As I said, I am conflicted...