Wednesday, March 31, 2010

I wonder if we will see a discontinuity in mortgage rates tomorrow

It should only happen if the market didn't believe the Fed would stop buying. Otherwise expectations should have already been built into pricing.

Tuesday, March 30, 2010

A little more on Mortgage Debt and Aging

I did a quick comparison of average household income for 1989 and 2007 (using the census) and average mortgage debt for those that has mortgage debt (using Survey of Consumer Finances data). In both cases I looked at 45-54 year olds.

In 1989, average household income among 45-54 year olds was $39,934; average mortgage debt outstanding among those who had debt was $39,300, so the ratio was about one-to-one.

In 2007, average household income among 45-54 year olds was $83,100; average mortgage debt outstanding among those who had debt was $154,000, so the ratio was just under two-to-one.

In 1989, the share of households in the age group with a mortgage was 58.3 percent; in 2007 it was 65.5 percent.

The only good news: interest rates have dropped from about 10.5 percent to 5 percent. So in 1989, an average income household that wanted to amortize an average mortgage in 15 years would need to pay 14 percent of gross income to do so; in 1989 it would need to spend 19 percent. So putting this all together, the ratio of debt service to income for amortization by retirement has increased by (.19*.655/.14*.583)-1 = 52 percent. Not good, but not quite as bad as I thought, either.

Saturday, March 27, 2010

The long-term impact of the mortgage crisis--and why it keeps me awake

My parent's generation behaved differently than mine in all sorts of ways. A paper of mine with Hendershott shows that they spent less, controlling for education, etc., throughout their life cycle than any other generation. One of the reasons for this is that they paid off their mortgages. According to the American Housing Survey, 70 percent of households headed by someone over the age of 65 have no mortgage at all. Loan amortization became a mechanism for forced saving, and as a a result, those born during the depression are in pretty decent shape financially. A Pew Survey shows that those over the age of 65 feel much more in control of their finances than younger people.

My generation is different. Even under the most benign circumstances, we refinance in a manner that slows amortization. I refinanced in Madison twice to take advantage of lower interest rates--this was, of course, the right thing to do financially. But each time, the amortization schedule reset, and so it extended the period at which the mortgage would pay off. Now yes, one can take the money one doesn't put into home equity and put it in other savings vehicles, but it is not clear that everyone does that. Forced saving is slowed.

But this is not the worst of how people have handled their mortgages. A substantial fraction of borrowers pulled equity out of their houses, putting themselves on a lower savings path even in the absence of falling house prices.

I am going to run some American Housing Survey data on this, but it is hard for me to imagine that 70 percent of my generation will have no mortgage debt when we are elders. My parents' generation has used housing wealth to, among other things, finance long-term care. I hope I am missing something here, but the lack of housing wealth in the future could become yet another challenge as we seek to fund the needs of the elderly.

Tuesday, March 23, 2010

My Colleague Gary Painter writes about the Impact of Immigration on Midsize City Housing Markets

The abstract:

The recent trend of immigrants arriving in mid-size metropolitan areas has received growing attention in the literature. This study examines the success of immigrants in the housing markets of a sample 60 metropolitan areas using Census microdata in both 2000 and 2005. The results suggest that immigrants are less successful in achieving homeownership and more likely to live in overcrowded conditions than native-born whites of non-Hispanic origin. The immigrant effect on homeownership differs by geography and by immigrant group. Finally, we find evidence that immigrant networks increase the likelihood of becoming a homeowner.

Those who thought the housing tax credit would simply shift sales forward....

...rather than increase sales are probably being vindicated. February was another bad month for existing home sales.

Monday, March 22, 2010

The ultimate in branding?

I was recently at a meeting where all were instructed to turn off their Blackberries. Not iphones. Not cell phones. Blackberries. Everyone knew what was meant, though.

Has Blackberry become the new Kleenex? If so, they need to be careful. Aspirin was once a brand, but it became such a strong part of the lexicon, that Bayer lost the ability to retain it.

Tuesday, March 16, 2010

Clarification on Sprawl and Zoning

Zoning is not the only reason we are spreading out--as my colleague Peter Gordon shows (go to minute 50), people are spreading out around the globe. Our increasing affluence and rise of the automobile have also led us to spread out. The fact that gasoline is so much cheaper in the US than other places has led us to spread out faster.

But our particular brand of single-use zoning has doubtlessly had an impact on settlement patterns. At minimum, we have insufficient land zoned for apartments. We know this because land zoned for multifamily use often sells for more (controlling for location) than land zoned for single-family use. This is not the market--this is local government holding back the supply of a certain type of land use. Moreover, minimum lot size, set back and street width requirements mean we use more land than necessary to build even single-family housing.

Sunday, March 14, 2010

US sprawl is not a market outcome.

A discussion is going around the internet about John Stossel's "libertarian" piece on the virtues of sprawl. John Norquist, on the other hand, labels sprawl a "communist plot," and Matthew Yglesias notes how bulk zoning requirements promote sprawl.

A point John likes to make is sprawl is at least in part the result of government housing finance policy. The New York Times this morning:

I.R.S. requirement keeps the agency from acquiring mortgages made in buildings where more than 20 percent of the square footage is commercial — space that is used for, say, a hotel or a doctor’s office.

Mixed use development is not going to happen if it can't get financed. Most of Paris, London, large swaths of San Francisco (i.e., some of our best urban places) would not qualify for US housing finance rules. And of course, single use zoning would ban them all.

But most insidious is that zoning is used as a tool to keep low-to-moderate income people out of suburbs. The town next door to mine--San Marino--has zoning requirements so onerous that it is not possible to build small housing there. Even my town, Pasadena, which at least has a bunch of apartments, prevents construction of granny flats on lots smaller than 15,000 square feet. These rules keep out the poor, which reduces expenditures on social services, which makes property values higher, which keeps out the poor, which...

Of course poor people must live somewhere, and so they live in cities with old housing stock that was built before the era of stringent zoning. So cities with old housing stock are placed at a fiscal disadvantage, which induces people with means to leave, which puts them at a greater fiscal disadvantage, etc....

Saturday, March 13, 2010

My Colleague Lisa Schweitzer wonders whether anyone understands the Macro Economy

She says so in a note at the bottom of a blog posting.

Macroeconomics is unsatisfying to me, as well. In one sense, we can't really understand it, because our degrees-of-freedom (number of data points) are limited. We have had ten business cycles since WWII, and if we think seriously about these things, that means we have had only ten data points from which to draw inferences. Leaving aside Manski's issues about identification in general, this means we can only estimate the impacts of at most nine casual factors on economic performance, and only then with an enormous amount of imprecision.

Unfortunately, those making policy need to do the best they can anyway. It seems reasonable to me that when private sector demand falls off a cliff, the public sector should fill in the gap. It also makes sense to me in times of high unemployment to help the unemployed eat and stay in their house. But that has less to do with macroeconomics than it has to do with decency, an issue too many macroeconomists seem to be uncomfortable with considering.

I continue to like micro a lot, though.

Wednesday, March 10, 2010

Business Schools do teach Modigliani-Miller and Sharpe Ratios. Why does no one remember them?

The New York Times had a disturbing story about pension fund investments the other day. One paragraph is typical:

Wisconsin, meanwhile, has become one of the first states to adopt an investment strategy called “risk parity,” which involves borrowing extra money for the pension portfolio and investing it in a type of Treasury bond that will pay higher interest if inflation rises.

Officials of the State of Wisconsin Investment Board declined to be interviewed but provided written descriptions of risk parity. The records show that Wisconsin wanted to reduce its exposure to the stock market, and shifting money into the inflation-proof Treasury bonds would do that. But Wisconsin also wanted to keep its assumed rate of return at 7.8 percent, and the Treasury bonds would not pay that much.

We teach that IRR rules are bad rules because they don't take into account risk. Net present value rules, where one needs to explicitly pick a risk adjusted discount rate, can prevent the sort of woe we have seen over the past few years.

Whenever I meet a senior executive from a company that got in trouble because of too much leverage, I ask (nicely, I hope) whether they know MM, which implies that investment decisions should not be made based on capital structure. Most say no, but they are very interested to hear about it.

This is stuff that has been known for a long time. One would think the most recent crisis would teach pension funds not to go down the same path they and others followed before. Alas this seems not to be the case.

Monday, March 08, 2010

Tracy Gordon says that the Total Government Spending (Local, State And Federal) did not grow very much.

She writes:

eanwhile, Joshua Aizenman and Gurnain Kaur Pasricha showed in a National Bureau of Economic Research paper that, using either measure, ARRA’s “net fiscal impact” was zero.

What gives? Did Paul Krugman’s prognostications about Fifty Little Hoovers come true? Not so fast. The NBER study asked not whether ARRA boosted the economy but merely whether it stimulated government spending. (Tax cuts are completely out of the story.)

There is no doubt federal outlays grew – to the tune of about $160 billion through last December according to the CBO. But, the NBER authors say, belt tightening by state and local governments almost completely offset this increase.

As the NBER authors note, “the counterfactual of the performance of the US economy in the absence of the fiscal stimulus is hard to ascertain.” In other words, no one knows what would have happened to government spending without the stimulus. They assume it would have chugged along at typical post-World War II levels, while others think we were headed for The Great Depression 2.0. In any event, it’s certainly not hard to find a governor who says that, but for those extra federal funds, their budget situation would be a lot worse.

So was ARRA a flop? No more so than usual. States and localities generally save federal dollars for a rainy day if they can get away with it, much like individuals save tax cuts. This tendency also frustrated Washington architects of General Revenue Sharing during the 1970s and 1980s.

Tracy is on target, but my take is a little different in one respect: almost every state has a balanced budget requirement, which means that all the Feds did was allow states to cut less spending than they otherwise might have. And as it is, they still cut a lot.

Sunday, March 07, 2010

My Father sends me to Alan Tonelson and Kevin L. Kearns

He asks me whether their op-ed, Trading Away Productivity, in the New York Times this past week was correct.

I'm pretty sure that they are not correct, for reasons I am about to give. But the topic is really not within my wheelhouse, so I went searching for critiques on line. The only one I could find is on CafeHayek; the fact that it is there doesn't exactly reassure me. I also wasn't crazy about the argument.

Anyway, Tonelson and Kearns argue that labor productivity in the US has not gone up, because much more manufacturing assembly is done abroad, and that therefore the division of GDP by US work hours to get productivity is misleading.

But the only aspect of output that goes into GDP is value added. GDP is thus measuring value created in the US divided by hours worked in the US, which is as good a measure of average labor productivity as I an think of. Indeed, the whole point of trade is that different nations produce different things based on what they are comparatively good at doing. This even works within nations, within states and within cities.

Let me stipulate that I have long thought that trade was a good thing, and impediments to trade were generally bad things. My dissertation was on US commercial policy in the 1970s, and to me the evidence showed that protectionism created a lot of bad outcomes without a whole lot of good ones. I can't help but notice that a lot of places over time have become rich because of trade, from the Hanseatic League of Cities in the 13th century to Singapore today. I should note that Swati Dhingra, a Ph.D. student who is finishing her dissertation at Wisconsin, has done sophisticated work merging industrial organization theory with trade theory to show the benefits of trade might not be quite so large was we think. But Tonelson and Kearns seem quite crude by comparison.

But I have not studied these issues in depth for some time, so if I am fundamentally wrong, I would welcome correction.

Another Book for the Pile: Scott Patterson's The Quants

One of the problems with quantitative analysis in finance is that a lot of it relies on calculus. Calculus is a beautiful thing, but it also involves small changes--and when I say small, I mean infinitesimal.

This makes for a good approximation when analysts are dealing with movements of a few basis points. It becomes a big problem, however, when the economy goes through major structural shifts. The point came home to me some years ago, when I was trying to estimate the impact of changes in the tax code on house prices. I was using regression coefficients (which are essentially first derivatives), and got changes in prices that seemed way too big. The problem is that the relationship between house prices and taxes is non-linear, so simulations involving large changes in tax policy cannot be approximated with a linearization.

Wednesday, March 03, 2010

Why we need an independent consumer financial protection agency, and why Elizabeth Warren should run it

I know it is too late now, but I want to make the point anyway.

I remember the first time I heard Elizabeth Warren speak. It was at a conference on consumer credit hosted by Georgetown and the estimable Mike Staten--I think it was in 2002. Elizabeth Warren spoke about consumers getting steered into mortgages--and in particular high balance mortgages and long-term mortgages. She argued that this was bad for consumers; she argued low balance, short maturity mortgages would mean consumers would pay less interest, and that this would leave consumers better off.

My reaction was that she was nuts. After all, my economist's brain told me, present value is present value. She was ignoring the opportunity cost of equity. She was, I thought, offering consumers horrible advice.

Now her advice looks pretty good. Lower leverage means lower risk, and households--particularly those without financial assets--are not in a good position to manage risk. Moreover, low balance short amortization mortgages nudge people into saving, and may explain why people of my parents' generation (who paid off their mortgages by the time they were in their 50s) are in better shape financially than people of my generation (who kept taking equity out of their houses).

The problem with the Fed is not that people there aren't smart and well-intentioned--they are. The problem is that most people there were trained to think like me. I hate to say it, but there may be times when a smart, caring lawyer understands how the world really works better than a smart, caring economist.

Chile, Earthquakes and Los Angeles

An explanation (and probably a correct explanation) for why the earthquake in Chile did not produce even more fatalities is that it is a relatively rich country with decent building codes.

This prompts a few thoughts about Los Angeles. First, many of us who worry about the cost of housing worry that land use regulations and building codes drive up the price of houses to a point where low-to-moderate income households can't afford them.

But clearly making housing seismically appropriate is important in LA, and this will drive up the cost of housing for good reason, and in particular will drive up the cost of high rise buildings, which in turn means that unit density in Southern California will be low relative to population density (and so it is). To some extent, then, our sprawl reflects an appropriate allocation of resources. It also explains (among other reasons) why housing will also be somewhat more expensive here than other places.

According to my colleague Lisa Schweitzer, our sprawl might do even more good. Specifically, a spread-out city such as ours is more "diversified" with respect to natural disasters, because no more part of the metropolitan area dominates economically, There is no one central job center here--there are many: downtown, Century City, Santa Monica, Pasadena, Burbank, Santa Ana, Newport Beach, Long Beach etc.

Finally, the need to prepare against earthquakes has strong implications for the ability to redevelop downtown. Broadway has magnificent buildings that are empty above street level. One of the most important reasons for this is that seismic retrofitting is so expensive, redeveloped old buildings are not competitive with new buildings. This is sad, but likely appropriate.

Tuesday, March 02, 2010

Megan McArdle writes: Jim Bunning Plays Chicken with Unemployment Benefits - Business - The Atlantic

Megan McArdle says it perfectly:

Jim Bunning Plays Chicken with Unemployment Benefits - Business - The Atlantic

Unfortunately, Bunning's mind doesn't seem to work so well any more (which is why even the GOP wanted him to step down from his Senate seat), so he is immune to persuasion.

Monday, March 01, 2010

Yet another study I wish I could do

I was listening to rap while driving down the 210 on Saturday. I don't listen to rap very often, but when I do, it is always while I am in the car. I notice that something always seems to happen when I do--my speed gets faster--sometimes much faster--and I need to slow down (because I do not wish to incriminate myself with the CHP, I will not get any more specific than that). On the other hand, when I listen to, say, Winton Marsalis, I seem to drive more slowly. I have noticed no clear pattern when I listen to news or classical.

So the study is--do people drive different speeds depending on what they are listening to in the car? It would be fun to test.

The Cluelessness of Harvard

Tim Noah sent me to:

Super-active students are over-scheduled | Harvard Magazine Mar-Apr 2010

The article is, to me, horrifying, in that it suggests that Harvard has, with respect to undergraduates, completely lost its liberal arts roots (I am sure the Ph.D. programs in Arts and Sciences are another matter). But two passages in particular bother me. The first is from Admissions Dean Fitzsimmons:

"....but there’s no question that this place has many more people from the bottom quarter and bottom half of the American income distribution. Now, about a quarter of the class comes from families earning less than $80,000 per year.”

But median household income in the US is $50,000 per year; at $80,000, a household is somewhere in the second highest quintile (and about the same distance to the top of the quintile as the bottom). A more accurate statement, then, is that 75 percent of Harvard students come from the top 25 percent of the income distribution, which is better than 90 and 10, but is still hardly an indicator that Harvard is an engine of social mobility. For that, one needs to turn to places like that Cal State schools.

Even more annoying is

Harvard may or may not be the greatest university in America,” says Howard Gardner, “but it is clearly the greatest one in the world” in that it’s known from Malaysia to Chile to Sri Lanka, whereas references to Yale, Stanford, and Princeton draw only blank stares even in western Europe.

I want to know where in Western Europe Yale, Stanford and Princeton draw blank stares. Hell, in most places I go, people have even heard of the University of Southern California.

Harvard has so much wealth and such extraordinary faculty and students, it survives its insularity. But to see such insularity put on display in its own alumni magazine...