Should Academics Blog?

A class post from Dan Drezner on this is here:

http://www.danieldrezner.com/archives/001936.html

I am lucky, in that I am past tenure. But the question is whether blogging detracts from doing "serious" work. The answer is perhaps, but not necessarily.

First, one can't help but note that some great academics, such as Gary Becker, Richard Posner, Brad Delong and Jim Hamilton, blog regularly. I learn a lot from these blogs (much more than I do from Atrios or Dailykos or Huffingtonpost), and am grateful that they are out there. Among other things, they help inform my choice of reading, and therefore lead me to knowledge I care about more efficiently.

Second, unlike, say, Ed Glaeser and John Quigley, who are seemingly incapable of intellecutaly exhaustion, I am not able to do "serious academic work" 24/7. Sometimes I just like to put ideas out there and see if I get any response. When I do, it helps me think things through, and therefore makes me a better professor.

Menzie Chen on the Credit Crunch

http://www.econbrowser.com/archives/2007/11/the_credit_crun.html

A couple of points. First, the fact that the yield curve is upward sloping again is probably good for the mortgage market (at least the prime market), because short borrowers can earns returns on the term structure. When I did my recent paper with Wachter, it was striking to me how bad an inverted yield curve seems to be for the mortgage market.

Second, while lots of home equity has been destroyed, I am not sure how important this is to the macroeconomy. I never bought the idea that home equity loans had a long term effect on aggregate demand, because they did not generally improve the household balance sheet (in exchange for cash, the household took on a new liability). Moreover, people tend not to sell their houses and cash out home equity until they are old. Consequently, the "wealth" effect arising from high house prices should largely have an impact on the elderly. For those who continue to consume the same quantity of housing, house prices are not so important.

The problem as I see it is largely from spillovers. To the extent credit spreads in general widen because of an absence on confidence, the economy will be slowed.

Edward Elgar is 150 this year

Colin Davis' new recording on the Enigma Variations is something to behold.

Should you be near Rockville, MD this Friday

Go see the Richard Montgomery High School production of Lend me a Tenor. It is great--seriously. The kids' sense of comic timing is remarkably mature--I was reminded of Preston Sturgis' movies.

Ok--full disclosure, my daughter is in it (as Diana) but...she actually surprised me with her brilliance, and I have lived with her for 17 years.

Cuomo, WAMU and Fannie/Freddie (cont.)

I have it on reliable authority that Fannie/Freddie do in fact use automated valuation systems to place a reality check on appraisals. So Cuomo is grandstanding (and not for the first time). In the meanwhile, he may be doing genuine harm to the mortgage market when it is already crippled enough.

Fudged Appraisals

From Calculated Risk: http://calculatedrisk.blogspot.com/2007/11/ny-ag-wamu-improperly-pressured.html

Here is the press release from NY AG Cuomo. A couple of excerpts:

“Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”
Attorney General Cuomo, Nov, 7, 2007

And from the Appraisal Institute:

“I wish I could say I am shocked by the discoveries made by the Attorney General and his staff. Sadly, what allegedly happened between First American and Washington Mutual is not an isolated incident. Rather, it is symbolic of a problem that has plagued the appraisal industry for years. As the allegations against First American show, the mortgage industry’s dirty secret has been that banks exert tremendous pressure to extort appraisers.”
Terry Dunkin, President of the Appraisal Institute Nov 7, 2007.

One thing puzzles me about this. Cuomo wants Fannie and Freddie to verify that the WAMU loans they buy do not have inflated appraisals underwriting them. But I thought that when Fannie/Freddie bought loans, they used an automated valuation model to keep the appraisals honest. I could be wrong about this, but if I am not, Cuomo's calling the GSEs on the carpet is grandstanding. But this whole episode also shows why home mortgages should be underwritten using automated valuation models. They are not perfect, and they are what they are, but they can't be fudged.

Rhetoric and Success in Economics

This is a seriously cool paper by Hugo Mialon:

http://userwww.service.emory.edu/~hmialon/Poetry.pdf

The abstract:

Is economics an art? I address this old, but important, question empirically by examining the impact of rhetorical features of the titles of published economics articles on the ultimate success of these articles, as measured by their cumulative citations over the six-year period following their publication. Twenty-eight percent of articles in the sample have a fresh figure of speech in their title. Surprisingly, adding a rhetorical device to the title of an empirical article adds more than four citations to the article's "lifetime" count, which represents about twenty percent of the lifetime citations of the average empirical article. This result testifies to the continuing power of rhetoric and poetry in economics science.

Robert Shiller's recommendations on mortgage policy

From testimony he gave to Congress

The FHA, the GSEs, private mortgage investors and mortgage servicers should be
incentivized to further assist the lower-income and minority borrowers and others who
have been victimized by fraudulent and predatory lending practices in the recent boom.
We should create, along lines advocated by Harvard Law professor Elizabeth Warren, a
Financial Product Safety Commission, patterned after the Consumer Product Safety
Commision, to deter poor lending practices in the future. Formal safeguards against the
practices and influences that generate systematic home appraisal inflation are also long
overdue in the mortgage lending industry. We should, at the same time, promote other
risk managing innovations in housing, such as home equity insurance, shared equity
mortgages, home price warranties, and down-payment-insured home mortgages. All of
these risk-management vehicles will help mitigate the severity of impact on individual
homeowners when we next encounter a boom-bust cycle in home prices.

The Financial Product safety commission might be worth a try, but I am skeptical about how effective it would actually be. It would run into exactly the same problems that regulators have faced over the past decade: how does one develop mortgages that are "safe" without shutting certain categories of people (low-FICO borrowers, the elderly) out of the housing market altogether?

Shared equity mortgages and home price warranties are ideas that have been around for a long time, but run into practical difficulties when people attempt to implement them. For instance, people in a house do not want to have to get permission from the shared equity partner to redo the kitchen.

The call for appraisal reform is long overdue, however.

The Presiden't Commission on Tax Reform and Housing

Andy Reschovsky and I just wrote a paper on this. Here is part of the conclusion:

The United States government currently spends about $175 billion per year to subsidize homeownership. The lion’s share of these subsidies operate through the tax system, with the largest single tax subsidy being the mortgage interest deduction. Despite these subsidies, ho-meownership rates for certain groups of Americans, notably African Americans, Hispanics, and households with modest incomes, are substantially below the average homeownership rate. For several decades now, economists have argued that the use of a mortgage interest credit instead of the current deduction would both encourage homeownership and more equitably distribute ho-meownership tax subsidies across the income distribution. In fact, in their final report, issued in November 2005, the President’s Advisory Panel on Federal Tax Reform recommended eliminat-ing the mortgage interest deduction and replacing it with a non-refundable 15 percent mortgage tax credit.

In this paper, we estimate a model of housing tenure choice and housing expenditures using data from the one-percent PUMS from the 2000 Census. The model allows us to determine the impact of alternative tax policies on the user cost of owning relative to renting. Because of our large sample size, we are able to estimate quite precise effects for individual racial/ethnic groups. Our results are very robust, with the tax variable proving to be highly significant in re-gressions using data for both 1990 and 2000, for recent movers, and for various racial/ethnic groups. The results of our housing model are used in a tax simulation model that we have con-structed based on 2004 federal and state tax law. Our simulation model allows us to calculate federal income tax liabilities of all taxpayers under existing tax law and under a variety of alter-native tax policies aimed at increasing the rate of homeownership.

Specially, we simulate the impact of the housing credit proposal made by President Bush’s Advisory Panel on Federal Tax Reform. Because we are convinced that the elimination of the mortgage interest deduction is politically impossible, we also simulate a plan that involves a refundable mortgage interest tax credit that provides every household with the option of utilizing the credit or the existing mortgage interest deduction, whichever one provides the largest tax savings.

The striking thing about the housing proposals of the President’s Tax Reform Panel is how little they do beyond redistributing the homeowner tax subsidy. The net result of replacing the mortgage interest deduction with a credit would actually be a decrease in the overall ho-meownership rate (by half a percentage point). This decrease would occur because the additional homeownership among low- and moderate-income households would be insufficient to offset the decrease in homeownership among middle- and high-income households, some of whom would choose to rent in response to a reduction in the size of the mortgage tax subsidy they would re-ceive, Although a credit is more beneficial than a deduction for low- and moderate-income families, its impact on the homeownership rate is limited because the proposed credit is non-refundable, and therefore provides no homeownership incentive to households who pay no in-come tax.

On the other hand, because many homeowners who are not itemizers become eligible for the credit, the Tax Reform panel’s proposal does not do very much to increase federal income tax revenue. Much of the benefit of the proposed plan flows to households who are already owners in the form of reduced housing costs. We estimate that if there were no changes in how households finance their housing, the Treasury would gain $4.9 billion in revenue, about 1.6 per-cent of total 2004 income tax revenue. However, if there is a substantial shift away from debt toward equity for the financing of homes, the net revenue impact of the proposal will be much smaller.

Statistics and the WSJ Op-ed page

There is an embarrassingly bad piece in today's WSJ op-ed page:

http://online.wsj.com/article/SB119397079767680173.html?mod=opinion_main_commentaries

The two writers follow the number of executions and the number of murders across time, conclude that there is a strong correlation between executions one year and number of murders the next, and then say the fact that they haven't controlled for anything is probably OK, because of Occam's razor.

Aside from the fact that they don't deal with the special issues presented by time series data (correlations produced by two series of data with strong trends in them will be spuriously high), their Occam's razor approach pretty much ignores how serious people do social science research. Richard Freeman, the Harvard Labor economist, says something like: "it had better be there in the correlation, it has better be there in the OLS regression, it had better be there in the IV regression, and it had better be there in the high-tech Maximum Likelihood estimate.

I am open minded about the possibility that the death penalty is a deterrent. But this morning's piece does nothing to pursuade me; worse, by polluting social science, it undermines social science.

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:

http://www.newyorker.com/arts/critics/books/2007/04/30/070430crbo_books_lemann

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.

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,

http://krugman.blogs.nytimes.com/2007/10/20/continuing-the-tradition/

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.

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.

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 http://www.realtor.org/Research.nsf/files/FinalDocumentationForWebsite_reviewed.pdf/$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.

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...

Matthew Kahn has a blog

And it is good:

http://greeneconomics.blogspot.com/

Research University Rankings

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

http://mup.asu.edu/research_data.html

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.